Q1 2021 International Flavors & Fragrances Inc Earnings Call
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I would now 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 first quarter of 2021 conference call yesterday evening, we issued a press release announcing our financial results for the first quarter as well as our outlook for the full year 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.
During the call we are making forward looking statements about the Companys performance and outlook based on the current state and our expectations for 2021 day.
These statements contain elements of uncertainty, which we have laid out on slide two under the cautionary statement.
For additional information concerning the factors that can cause actual results to differ materially from our forward looking statements. Please refer to our cautionary statement and risk factors stated in our press release.
Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect the comparability.
Conciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we'll be using the combined historical results for the first quarter as defined as three months of legacy Iaff results in two months February and March of NMB results in both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February one two.
'twenty one.
With me on the call today is our chairman and CEO Andreas Good day, and our executive Vice President and CFO Bruce from Gillard will begin with our prepared remarks, and then 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 to everyone for joining us today.
We'll begin today's call by providing an overview of our first quarter results, including a review of our performance by region and segment.
I would also like to share with you an update regarding our efforts to integrate the <unk> business, which continues to progress well following the completion of all of transaction in February.
Wilson will then provide a more detailed financial review of the business highlight the segment level of business dynamics and performance and cover cash flow and leverage as well.
Yes.
Two of strong start in 2021, and I am confident that the momentum we have built will continue for the remainder of the year and beyond.
No the beginning with slide six I would like to review our performance and notable developments in the first quarter.
We achieved 3% of the combined sales growth of 1% and currency neutral basis compared to the first quarter of 2020.
Also because of all the change to the fiscal calendar rather than the traditional for.
The five calendar, we have had less two days less.
In first quarter, if we were to normalize for that our combined currency neutral growth in the first book.
Water.
Have been approximately 3% and on the two year average basis. The affected all of a strong 7% year ago comparison growth would be strong at approximately 5%.
Our adjusted operating EBITDA margin of 30 basis points.
Reflecting our team's diligent execution of our cost management strategy.
Iff's also continues to generate strong free cash flows and we remain on track to meet our deleveraging targets for the first quarter, our leverage ratio was four three times.
I'm also pleased to say we have reached an agreement to divest of food preparation business to fool locked with specialized us of fruit preparations for the food and beverage industry.
The divestiture is expected to close of the third quarter 2021, pending customary closing conditions, including regulatory approvals.
The food preparation business contributed approximately 70 million U S dollars to Iff's newer segment pro forma sales in 2020.
This is our first step in terms of our portfolio optimization strategy.
I expect more news as we progress sort of 2021.
As you can see with established a solid foundation to carry us forward.
With solid momentum thanks to all of our disciplined focus on execution.
As we have said before the opportunities in front of us and our mission is to execute on all of a plan to deliver industry, leading returns for our shareholders.
As we move into the second quarter, we remain squarely focused leveraging our new capabilities to reach of our business objectives and further establish ourselves as an innovation leader in the global value chain for consumer goods and commercial products.
Now on slide seven I would like to briefly discuss the regional sales then that makes that have influenced our first quarter financial results.
As you all know the notably significant differences and how the different countries of managing the continued impacts of the pandemic. So we wanted to talk to the dynamics, we are seeing in our business across the world.
We are pleased to report that most of our operating regions saw sales growth in Q1 and.
In North America, we achieved solid performance across our portfolio with growth of nearly all of our segments.
This performance of North America reflects the impressive results in a sense segment.
We continue to see healthy performance across all of our Asian markets, achieving a 6% increase in combined currency neutral sales, primarily driven by double digit growth in China and India.
While we are pleased to see growth across many of these key markets, we must recognize that our growth in India could be challenged in the near term as the country is grappling with hardship related to the pandemic.
We wish everyone in India, our Indian colleagues and their loved ones, the very best and hope to see a rapid improvement in conditions.
In Latin America, we saw an 11% increase in all of our sales for the region.
With growth, primarily driven by local currency sales of two highlights that I would like to call out in Brazil at <unk> Cohen for both grew double digits in Q1.
COVID-19, net related ongoing restrictions continue to heavily impact western and central Europe, which have resulted in challenges across the entire.
EMEA region, and a 5% decline on overall sales net said, we remain optimistic about the region's recovery as global vaccination rates increase and related restrictions ease.
As we pressed ahead, we will continue to work diligently with our regional teams and communities, particularly those that remain on the most pandemic related pressure to debt all supply chain ensure that our customers continue to receive the leading solutions they have come to expect.
Let's move to slide eight.
I would now like to review of our cross border sales performance across Iff's key business segments. So you can get a more granular view.
We are pleased to report solid growth across our newish pharma solutions and scent divisions.
Our largest group Newark achieved combined currency neutral sales growth of 1% led by a robust performance in flavors.
We continue to see pandemic, driven headwinds and put design, which is driven primarily by continued declines in foodservice.
This channel while the approved for the fourth quarter trends was down mid single digits in the first quarter.
<unk> continued its strong performance achieving combined currency neutral sales growth of 5% the largest growth driver across our four divisions led by continued strength in consumer fragrances double digit growth in cosmetic actives and the strong rebound in fine fragrance.
For the pharma solutions Division, we achieved combined currency neutral sales growth of 3% with continued strong performance across the entire division and all subcategories.
For health <unk> Biosciences Division combined currency neutral sales decreased 3% against the strong double digit vehicle yeah.
The comparison, Inc.
The increase is the bolus health and home and personal care were offset by pressures in microbial control and grain processing.
Together, we have an in demand and diversified portfolio of that is meeting the needs of of core markets I feel that we are very well positioned to continue executing our ambitious growth initiatives and the complexity of the global marketplace.
Now turning to slide nine I want to show a summary of the highlights of our business performance, particularly with regards to the segment level adjusted operating EBITDA margin.
As you know we are focused on driving overall group operating efficiencies as we execute on our integration plans.
Rustin will cover our first quarter segment performance in much more detail, but I wanted to present the slide as it will be included in our standard earnings package going forward, specifically focusing on year to year performance.
Some highlights for Q1 that are worth mentioning was in our largest division north I am very pleased to see early progress on margin expansion.
We achieved strong results in our scent division the team did a great job driving higher volumes benefiting from the rebrand the fine fragrance with growth favorable mix and continued the effort to capture productivity savings.
And <unk> pharma solutions adjusted operating EBITDA margins were pressured by increased raw materials, and logistics costs, which overshadowed the strong cost discipline. The team has accomplished.
Now on slide 10, I would like to provide you with an update on our integration progress with NMB.
Since completing our combination of February we have achieved several financial organizational integration milestones, which reflect the incredible efforts of our global team from an organization of perspective, we have established a comprehensive operating and leadership structure for our combined company, having identified and announced rules all the way from.
CEO, Don just sort of level lead us. These leaders are working closely with the integration management office to ensure that all of release of provided for the tools and resources. They need to succeed. We've also completed all IP migration from Dupont of ISS.
And are on schedule regarding exiting many of our transition service agreements with Dupont.
On the revenue synergy front, we have the robust pipeline of projects, including both cross selling and integrated solutions that we expect will accelerate our ability to meet our $20 million synergy target. This year. This quarter, we achieved a significant cross selling wins within our house of Bioscience divisions.
While the detergents and we of invoice of cross sales in April were pleased with our project pipeline and with the effort. So far and continued expressions of demand from customers. We are confident in our ability to meet the three year run rate synergy target of $400 million.
From a cost synergy perspective, we are underway and already seeing modest P&L benefits. Given we are in early days. We expect these cost savings to increase over the course of the year, putting us well on track to meet our $45 million cost synergy targets for the full year 2021.
Three of run rate cost synergy target of $300 billion U S dollars.
I would now like to pass the call over to <unk>, who will provide more detailed review of our financial performance in the first quarter.
Thank you Andreas.
First let me go a bit deeper into our consolidated financial results.
In the first quarter ISF generated $2 5 billion in sales of 3% combined year over year increase including foreign exchange benefit.
Or up 1% on a currency neutral basis.
Primarily led by strong performances in our scent and part of our solutions Division.
As you May recollect from 2021 onwards, we are applying prior year average FX rate to our current tier non U S dollar revenues to derive currency neutral growth range.
This is the more common practice and makes us more comparable to our competitors.
Our gross margin was impacted in Q1 at an average <unk> and pharma by higher raw material and logistics cost headwinds arising from input cost inflation and higher freight rates tight inventories and weather related plant disruption.
Meanwhile, our aggressive cost management program led by headcount and other expense reductions enabled us to improve our receipts of sales by 120 basis points and deliver year on year adjusted operating EBITDA growth of 4%.
As an aside Q1 2020 was our most difficult comp with 7% combined currency neutral sales growth and strong adjusted operating EBITDA growth.
Assets also delivered adjusted earnings per share, excluding amortization of $1 60 for the first quarter.
Now on slide 12.
I'd like to discuss the first quarter performance of nourish, which now includes the enhanced capabilities of <unk>, former food and beverages business.
<unk> sales totaled $1 3 billion for the quarter, representing 1% growth on the combined currency neutral basis.
Adjusted operating EBITDA grew 6% with the 60 basis point margin expansion led by strong cost management.
Looking at non interest performance by business flavors drove growth in nearly all of our region.
We didnt ingredients, which was flat year over year protein solutions grew double digit, but this was offset by softness in emulsifiers and sweeteners.
Continued pandemic related challenges impact the food design, particularly the foodservice, which declined mid single digits year over year.
As the effects of the COVID-19, pandemic lesson and retail and away from home channels continue to recover returning to growth in this area, while maintaining a strong performance of nurses. Other segment will remain a top priority for the remainder of 2021.
Moving to health <unk> Biosciences on slide 13.
As Andreas losses, <unk> had a combined currency neutral sales decline of 3%.
But this was against the robust 11% positive year over year comparison.
It should be noted that in the two year average basis currency neutral growth was solid at the 4%.
Adjusted operating EBITDA was also pressure and operating margin declined by 70 basis points, primarily driven by lower segment volume and higher raw material and logistics cost.
Our home and personal care business grew strong double digits. This quarter supported by evolving consumer buying trends related to the pandemic that has persisted through Q1.
The decline to the animal nutrition this year when compared to mid teen growth from the prior year period offset debt performance at impacted overall year over year growth.
Microbial control and grain processing were also impacted by continued pre COVID-19 cycling.
The impacted each of these overall growth by approximately five percentage volume. We are pleased to say that over the course of the first quarter of these businesses showed improvement and we're positive in April as recycle of the comparable we are encouraged by the tremendous performance of home and personal care, which is a testament to evolving consumer trends that <unk>.
<unk>, the individual health more than ever before.
Turning now to slide 14 to discuss the results of our sense of division.
Overall, we are very pleased with <unk> strong performance, which has been a significant contributor to our company wide growth authentic division generated 569 million and total sales representing 5% combined currency neutral growth against the strong 7% growth in the year ago period as well on the two year basis growth.
As exceptional net approximately 6%.
Adjusted operating EBITDA improved 8% with the 70 basis point margin expansion predominantly driven by volume growth across the entire segment as well as favorable mix from fine fragrance recovery and continued productivity.
As we began to see last quarter.
Fine fragrance business experienced a solid recovery is away from home restrictions continue to lift and consumer behavior returned to more traditional levels.
Coupled with this rebound continued strength in consumer fragrances and mid teens growth in cosmetic actives resulted in another quarter of strong performance for the entire division driven by volume recovery in new business wins across the segment on the.
The call is solid for providing strong contributions with all three customers growing double digits in the first quarter.
Now on slide 15, I would like to discuss the results of polymer solutions for the division.
As previously mentioned the pharma solutions had an impressive quarter of broad based growth and made a solid contributions of assets overall higher Q1 sales.
Flow solutions delivered of 162 million of net sales, representing 3% and combined currency neutral growth.
While the adjusted operating EBITDA grew 2%.
Is it in the context of the 11% growth in the prior year periods of growth is impressive on the two year basis average basis at approximately 7%.
Looking at pharma solutions performance by business core pharma and industrial pharma led the division with volume growth for metal sales Tvs and coatings, providing proving instrumental to qualify the farmer and global specialty solutions. The nitrocellulose supporting the success of industrial pharma.
While the very pleased with Palmer solution sales performance in the first quarter, we saw adjusted EBITDA margin declined due to higher cost of goods related.
The factors more specifically gross margin was hurt by higher raw material and logistics costs related to supply the supply chain challenges in force materials due to the bad weather in the Midwest earlier this year.
We had two plant shut down temporarily which impacted raw material availability and caused higher distribution costs.
Now turning to slide 16, I'd like to review, our cash flow dynamics and capital allocation, which remain a top priority.
As you will see our operating cash flow was very strong at $368 million.
We are quite pleased with Q1 cash generation for legacy ISR Q1 is usually the lowest cash flow quarter of the year. We typically have net working capital headwinds as we reset all of Q4 of those and we make annual bonus payments in March and this year. We also had large deal related cost such as cost to achieve investment banking fee.
<unk> consulting expenses et cetera.
A large part of our Q1 success came from core working capital, where we generated $193 million.
The great job by our global team and a great outcome, but we don't expect this quarter after quarter as we'd like to build inventory up in some of our legacy <unk> business in the areas to support future growth.
In the first quarter Capex was approximately 93 million for three five percentage of sales up from last Q1, combined comparative $76 million or two six percentage of sales.
Free cash flow generation was therefore, a strong $265 million and we distribute the $82 million in dividends to our shareholders.
Average, which is net debt divided by credit adjusted EBIT.
Ended at four three times as Andreas noted back on slide six. This is ahead of our expectation of four five times per quarter post merger leverage.
Now to provide some full year context legacy isf's generated $520 million of free cash flow in 2020, and combined we expect to generate $1 billion in 2021 and.
In 2021, we will invest more in legacy <unk> production capacity to meet the expected strong future demand, but will only be slightly above our original full year capex projection of approximately four five percentage of sales.
The dividend payment this year will be this quarter will be $197 million, reflecting a higher post merger of share count and we remain on track to meet our long term deleveraging target of three times net debt credit adjusted EBITDA in 24 to 36 months from the deal close.
Turning to slide 17, I'd like to provide an update on our full year 2021 consolidated financial outlook.
But before doing so I want to remind everyone that in mid April we provided sales and adjusted EBITDA metrics for each of the assets for segments of the 2020 pro forma and combined basis and the additional detail on our segment level why a learning lab series. We are now in the appendix of the presentation, providing an additional book.
At the combined company's historical quarterly results for 2020, as part of our commitment to transparency and helping our shareholders understand the new eye of that.
On the combined basis, I'd say the generated $10 6 billion of revenue for the full year of 2020 with currency neutral growth of approximately two per se.
In our combined adjusted operating EBITDA margin for 2020 was approximately 22%.
Please remember the combined include 11 months of A&D and 12 months of <unk> in 2020 and 2021.
In our fourth quarter conference call in February we gave initial pro forma guidance, which assumed the full 12 months of ISS and ANV.
In order to the directly comparable to our previously provided for.
Moving forward to be more aligned with actual results and reporting we are transitioning to guiding on 11 months of the NMB, which excludes January and 12 months of <unk> in the 2021 year in light of the merger of completing onset quest.
Also please note that in January 2021, and then the actual sales of approximately $507 million and adjusted operating EBITDA was $107 million.
Given our first quarter results. Our April preliminary sales are rest of your FX expectation incremental pricing to recover costs and the fact that Q1 was the toughest comparisons at the end of quarter, we are forecasting stronger sales growth through the rest of 2021.
We have therefore increased our sales expectations for 2021 to be approximately 11, two 5 billion in combined revenues.
Plus 6% growth with an approximately 23% adjusted operating EBITDA margin.
Since the beginning of the year, we have seen the rise in the cost of goods driven by input cost, including raw materials from logistics.
In terms of raw material cost, we are seeing a large increase in selected commodity soy Lucas being total vegetable oil turpentine and propylene glycol. In addition freight costs the higher as a result of greatly increased rates. For example, the global freight index is up three times due to none of the hit ability of containers.
Or is that the contracted rate.
And we're also seeing an uplift in the airfreight volumes due to strong demand and supply chain challenges like the force of material earlier this year.
This has required us to go back to have additional pricing discussions to cover our exposure.
While we are confident that overtime, we can fully pass along the increase there is the time lag before pricing is fully realized which can pressure gross margin in the short the.
Ultimately by the end of the year, we are confident that through pricing and our ongoing focus on cost reduction we can achieve our full year adjusted operating EBITDA growth on the combined basis.
With regards to Q2, we are pleased that we've started the quarter strong of nice growth acceleration versus where we ended the first quarter.
Optimistic that for the full second quarter revenue growth, including currency benefits should be in the high single digit range with an adjusted EBITDA margin also of around 23%.
To assist with the understanding and modeling of the new ISS. We're also sharing of expectations with regards to depreciation amortization interest expenses capex.
The effective tax rate, excluding amortization and a weighted average share count all of the combined basis.
While most of these metrics probably total needs to be elaborated upon its worth noting that we expect moderately higher capex in 2021, as we invest for growth and look to exit some of our ICT related transition services agreements with Dupont more quickly than planned.
We're also providing of 2021 adjusted effective tax rate, excluding amortization for the first site and the 21, 5% is broadly in line with our early expectation. This.
This is still the preliminary and will change as we finalized the purchase accounting and intangibles by jurisdiction.
The equivalent of the heritage of assay for the similar basis for the full year 2020 was approximately 18, 5%.
Collectively these metrics and decisions and decisions reflect our confidence in assets ability to deliver solid results even in this volatile global environment.
With that I'd now like to turn the call back to Andreas <unk>, who will provide some closing remarks.
Thank you Rusty and thanks again to all for joining us today.
I would like to wrap up today's call by first giving an enormous. Thank you for our Sullivan's of employees around the world who have worked tirelessly over the last quarter to successfully execute our business initiatives deliver for our customers and achieve solid top and bottom line of business results, all while making exceptional strides integrate.
And then b to B.
Emily.
It has truly been a busy quarter and we all have much to be proud of especially as this all was accomplished during a global pandemic.
Looking beyond our solid Q1 financial results I want to re emphasize the important first step that we took in tightening of our business and optimizing our portfolio strategy by agreeing to divest our food preparation business by divesting non core business.
We will be more efficient organization was the greater capacity to focus on growth and innovation across our key businesses.
Ultimately generating greater value for our shareholders.
As we enter Q2 together, we are confident that we have the right team of the REIT structures in place to ensure that our newly combined company will meet our financial and operate operational goals.
As I mentioned, we are targeting strong year over year financial improvement was accelerated sales growth over the coming quarters back for our commitment to delivering industry, leading innovative products and services to our customers around the world and as <unk> stated. We are pleased that we have started Q2 strong.
Optimistic that our full second quarter sales growth should be in a highest single digit range.
I'm tremendously proud of all we have accomplished and I firmly believe that the best is yet to come way of taking each and every learning from the NMB integration process to create a stronger more agile and diversified company that define the future of our industry and showcase of what it means to be of leading ingredients and solutions part now.
With that I would like to open the call for questions. Thank you.
At this time, if you would like to ask a question. Please press the star and one of your Touchtone phone you may withdraw your question at any time by price and the pound Keith once again to ask a question. Please press the star and one on your Touchtone phone.
One moment, while we queue.
And we will take our first question from Mike <unk> with Wells Fargo. Please go ahead.
Hey, guys nice a nice start to the year.
Hum.
In slide eight I thought that was really helpful. You do show some businesses at that sort of 5% sales growth range.
If you think about you've owned the business for about three months now.
Maybe talk about what needs to happen to the other businesses below that five 4% to 5% and and your confidence for keeping on the business now that you can get each of these product lines sort of in that range over the next couple of years.
Yes. Thank you Mike for the question.
First of all the I think what we really expect that the growth will accelerate over the course of the year and that has driven us.
Most of them said as well was a good start into the into the second second quarter, which was actually.
The first quarter was our toughest comparison. So that's the reason why we raised our sales expectations for the year I think that's important so now coming to the different parts of the of the business.
I would say first of all we see if you look at the the sensor business unit of real good recovery on the on fine Fragrances, which is really fantastic in the first quarter of also start in the second quarter, which is good we see still.
A great growth on the cosmetic actives, so thats thats basically.
<unk> for us as well and the consumer consumer fragrances stay on the elevated level. If you go to the health of the Bioscience business.
You see a couple of elements you see the health of the cultures of food enzyme business.
Should grow mid single low single digits, and you will see a recovery of the microbial control business, which was very much hurt by the situation last year. So that's.
That's important as well and then on the lower side.
Very solid performance on taste, particularly of the the legacy flavors doing very well, but on the new parts of protein solutions via alternative proteins proteins.
Going very well and then you will see a turnaround in the foodservice as well of the countries and the economies are opening opening up and Thats probably of general remark. We are seeing good growth as you've seen in the presentation and most of the regions, but in Europe and.
Turnaround as soon as these economies are opening up after the pandemic as well so I hope that gives you a bit more color yet.
We will take our next question from Mark Astrachan from Stifel. Please go ahead.
Yes, thanks, and good morning, everyone.
Okay, I guess broader question, it's something that we hear probably most frequently from from folks out there asking about your company is why what gives confidence that ISS can sustain the share gains implied by the 4% to 5% currency neutral long term targets that you have.
Have win growth has been below peers in recent years, even even adjusting for.
FX changes and I guess related to that first quarter growth was.
Below peers, who also had tough comparisons not as tough as yours, but could still tougher comparisons. So what gives confidence that you can see the.
Acceleration implied by the Guy of the guidance over the balance of the year as well as longer term and I wanted to just kind of squeeze in a related question, which is just.
How do we.
Measure of how do you measure of maybe your peer performance.
The group that you use to measure your share performance versus peers of traditionally it's been <unk> and Sim right now it's early the next Christian Hansen, who should we all be paying attention to.
So let me let me start with the last question first of I think you basically named all of the companies, which are relevant for US maybe you should put the carry of the mix as well in particular.
Particularly for foodservice and some of the ingredients and then you have a <unk>.
Actually a very nice nice peer group together, so we won't be wanted to do.
On the on the midterm is actually of what we're doing we've done a complete the strategic assessment of all of the categories, where we believe that we have growth and margin potential.
We certainly will emphasize in terms of our resources behind these categories. Some of these categories are just for example line sales like the probiotics business for example, where we put a good good resources behind them to make sure that we can outgrow the book.
The competition here.
And I think if you look at our.
For the started the year into the year.
It is 3% growth.
You adjust for for the days and there was a very strong comparison of the 7% in the last year. So we're actually quite quite happy with the start and we have seen some of the portfolio of pieces of performing performing very well like the flavors of flavors business is coming well you'll see it in.
The everything which is plant based protein protein related and we see some let's say of turnaround as well as I mentioned before in the <unk> on the microbial control, which was which is coming back we see the foodservice business are coming back of these are all good good signals that we are on a really.
Our solid track now two are to accelerate our growth and that's the reason why we said we raised our expectation for the rest of for the rest of the year.
And we will take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
<unk>.
Let me so I was hoping to.
You asked about some of the color on raw materials and cost trends.
Obviously, a very dynamic kind of raw material environment the.
The increases in freight of our noted.
I'm just trying to make sure I understand kind of the magnitude of how much that has increased relative to your.
Your initial look at the year.
Provided a few months ago, how much incremental price youre, calling for or expecting and it's the.
The <unk> formulation and how we think we end the year.
On that kind of price cost per ounce.
Right.
Interest income let me, let me take for next year.
So we started 2021 expecting inflation to be low single digits, okay with some modest increases mostly offset by cost declines right. Some cost declines, but since then we've seen some large increases in raw materials.
Talked about them sort of local has been kind of a whole bunch of them also.
Also higher freight costs due to sharply increased rates plus higher airfreight volume in specific areas, where the of strong demand coupled with the inventory in the supply chain challenges. The in any case to answer your last part of your question. We do now expect raw material and logistics inflation combined to be in the mid single digits. This year.
And obviously this requires us to go back to our customers.
Yeah.
Most of next with John Roberts with UBS. Please go ahead.
Hey, guys. This is Lucas spotlight on for John.
Thanks for the learning lab.
On the website for the four segments the extra day channels that were quite helpful.
On the fifth one on R&D day could you provide some breakdowns of the new R&D budget.
Can you spend roughly the same percentage of sales for each segment.
And how much of the R&D centralized versus how much of in control of the four segments. Thanks.
Curious Lucas. Thank you for the question. So the combined the company budget for R&D is approximately six.
621.
$1 million, it's vulnerable fine for now.
5% of all in your annual sales.
And we are certainly a leader in terms of RMB, which was within the industry. What we have done. This we went through all of the different categories of technologies and look where we can put actually.
The best R&D dollars behind so we are prioritizing our and the investment towards the highest return opportunities.
And that means debt.
We spent actually a fair amount of money on Hilson Bioscience, I think thats very very important so the biotech area.
It's one of the.
The main investment areas for example of probiotics enzymes and cultures of.
<unk> just to name one and then we have suddenly of centralized R&D R&D approach and.
We have probably at least half of it on the on the centralized R&D and the rest scores into the application of an application labs, but as I said.
A big piece of our investment goes into the buy of biotech area, which I think of Super important for our customers and certainly for the development of some of our our technologies going forward.
I hope that helps.
And we will take our next question from Faiza <unk> with Deutsche Bank. Please go ahead.
Yes, hi, good morning.
So I wanted to ask about in of where in a timeline of lot of CPG companies are looking to reduce their cogs and I know for legacy flavors and fragrances business. These only comprised about two 5% of Cogs. So.
Often we've seen customers leaning in on these ingredients to differentiate their product small cutting some more expensive items.
The more expensive maybe active ingredients, but how should we think about the sort of in context of the combined business.
Designs can be used to lower the other more expensive of ingredients, but just would be great to get some more color from you on day, one that there are any sort of early examples of how <unk> is being impacted so far by our customers need to treat all of our costs that are there any sort of areas of the business that the stand to benefit versus the.
Then to get hooked.
Thank you good question and it ties very well with the R&D question previously so certainly.
We are not just the offering.
Let's say the the flavors and fragrances. So we have now a much broader set of product set of technologies and innovative solutions. So we can play with it and let Ken first of all of differentiate us in the marketplace.
But also can help to reduce to reduce costs for example.
On the on the legacy <unk> side.
We can partner with our customers, we formulated allowing them to reduce costs. For example, we can sell a modulation technology for debt to reduce cost for sweeteners in the products, but also in terms of.
Our new platforms, we have no really the leading biotech platform.
It gives us really endless opportunities to use of fermentation technology reduce input cost and basically.
It creates some of the of the ingredients of our biotech parkways, so actually bringing everything together gives us a very synergistic approach to help our customers not not justifying we super innovative solutions, which are helping them to when they own their own clients and customers, but all.
So reduced costs I think we are in the.
Very very good spot and position here.
We will take our next question from Matthew Deyoe with Bank of America. Please go ahead.
Hi, yes so.
The timing made some comments about.
In the exposure in the legacy <unk> business on its <unk> earnings call.
Just kind of wondering.
If you could walk through what your exposure is to India, and what what Youre seeing there is it.
The commentary you made it seem like there was some elevated exposure, perhaps is relative to their current portfolio, but.
We did receive the number of questions on it at the into the quarter yes.
Yes, Matt. Thank you for the question of India, We are probably a lot of about 5% of all of our business in India are actually the Q1 was up double the double digit sort of it wasn't very good good performance and.
It's interesting that you're asking because it's such a let's say of desperate situation in terms of the pandemic right now so I talk on a regular base with our country manager.
We haven't seen any slowdown of the business, which is kind of interesting but.
We are cautious with within the us so so far.
We haven't seen any any negative impact on the business, but we're cautious in the business volume about 5% of our total business.
Well move next with Ghansham Panjabi with Baird. Please go ahead.
Thank you good morning, everybody.
Andreas as vaccines get deployed in the mobility has improved in regions such as the U S and China are you seeing the related increase the new product development of the customer level as they sort of position for per.
Perhaps a broader recovery and then also separately to clarify of the early question on raw material cost inflation.
The positive offsets as it relates to the updated EBITDA guidance given your cost inflation has been raised from you know from the low to mid single digits. Thanks, So much.
Let me get started and then I'll hand, it over the rest of them for the raw material of apart. So we see more of demand coming in from from our customers, which is really good. So you of product development is happening and we don't see just with our big customers, we see it with some of the small customers coming back as well, which as I said.
It's a good day and excellent excellent sign and we see it and many of them many of our categories. Even on the fine fragrance side, which has shown actually very strong development in the first quarter and the good start of our excellent started into the second the second quarter as well so.
The short answer yes, we see an uptick.
The second part of it and we see it also with smaller smaller customers as well first of if you go on enrollment.
Absolutely so we do expect.
The negative pressure on the on our gross margin this year.
And that's because it takes us time to go back to our customers. The students have the additional pricing discussions and all of the rest of it. So we do not expect to be able to in this fiscal year to be able to recover the full extent of the enrollment either of the increases that the that makes in the end of that we're seeing and we envisage okay.
However, I mean, we do have positive policies coming from FX coming through.
Do have positives from higher sales volume and we do have the positives from the lower RSA as a percentage of sales. So so on a operating margin perspective that reduces the the negative down down quite a bit ahead of that.
And at the end of the day of EBITDA combined with our focus on you know everything we've talked about the cost reduction of the rest of it we're confident that we can achieve the full year adjusted operating EBITDA growth on a combined basis the dollars.
I think that's an important point for customers, just saying because we have now with the integration good flexibility on the <unk> side basically the two both of these developments.
And we'll take our next question from Gunther Fishman of with Bernstein. Please go ahead.
Hi, good morning on Azure estimate of Mike can I, just ask on your organic sales growth outlook, you're having the.
The slide on page 17, 6% and the effects reported sales of credit can you first of all split out how much of that is like for like played and then coming back with them into the discussion around raw materials.
How much of that with the.
Pricing because I believe when you last gave guidance still with the 12 months you gave of 3% organic sales growth guidance, but most if not all of that would have been volumes. Thank you.
The look.
Maybe I'll get started and then.
There was some debt comment on the enrollment of the organic sales growth will be 4%, that's what the currency neutral that's what we're planning.
Okay. So I mean that was the.
I was going to say the same thing that effectively FX is helping us as well in the in the 6 billion.
Scent number has received for the whole year so.
On the the going to the other part of your question was just in terms of recovery rates and the.
And we do expect to recover parts, but not all we havent quantified that yet in specified but the part but not all of the.
The increase in material costs.
Does that clarify.
And we will take our next question from Jeff Zekauskas with Jpmorgan. Please go ahead.
Thanks, very much I was wondering.
Whats the magnitude of the divestitures that you contemplate.
$500 million and sales of our $700 million in sales for $1 billion.
What's the scale.
And secondly in looking at your global sales for our view it seems that the the issue was from western and Central Europe, which contracted 5%.
What is it about your business in Europe, that's so different than your businesses in the other region such that you have a negative growth rate and how does that reach and look for the remainder of the year.
Yes, let me.
Thank you for the for the questions the magnitude of the of the divestitures.
For the non core businesses might be around about 5% of total sales growth.
What we are what we're targeting right now and in terms of Europe I think what is really important that you see the COVID-19 impact on Europe and Thats.
Probably the biggest impact we see right now because the composition of the business has a lot of foodservice in for example, we have the.
And at least up to the end of last year of fine fragrance was impacted because a lot of it comes out of out of Europe as well and.
That was probably the main impact and now with the hopefully opening up of the economies in Europe, and increasing vaccination rates.
We expect actually a good turnaround on the.
With our European business and actually we have seen the first signs are already in April which is really really good for us I hope that helps to answer the question here.
Well move next with J P. J <unk> with Citi. Please go ahead.
Yes, hi, good morning.
Good morning.
Andrew as you've talked about foodservice business in fine fragrances to businesses that cannot took a hit.
During the pandemic as the economy opens up and people start going out how quickly can they get to pre pandemic levels.
And then one question for us from you.
Mentioned sort of your top raw materials of rattle them off but can you talk about sort of your top five or six rank order them. So we understand what is the.
Raw material exposure of the combined company.
Thank you Okay. Let me get started first of I would say on the fine fragrance side of faster than we had expected I believe we expect at the end of last year is still that it takes us until 'twenty two to get back to two of pre.
Pre pandemic levels, but the.
Now I will be more optimistic than what we're seeing right now which is really good for.
Service might take a little a little longer and particularly out of all of Europe.
To get back to the pre pandemic levels I think we will hit it probably <unk>.
Next year, but.
I would say, it's very very dependent.
What's happening now in the second and Vanessa as third quarter, but as we said fine more optimistic than the end of last year foodservice.
We'll see and the focus here is on Europe.
I'll hand, it over to you.
Yes, I would say that soy.
And the Lucas to be internal do do stand out as two of the largest in there.
The venture and the vegetable oils are much smaller and several of them.
And.
And the and then I mean, it doesn't tie in is something we haven't been but much smaller and I mentioned and of the last one that we mentioned the propylene glycol that one is the is fundamentally it was force majeure related and we will work its way back.
We will take our next question from Brian Jenkins with Jefferies. Please go ahead.
Thanks, very much Hello, everyone. Yeah, I was just wondering if you could give.
Now that you've secured the first invoice.
Cross selling and solution selling of what you might think the profile of the customer will be of who you are getting better traction maybe in terms of size geography product any information would be interesting, Matt and then just more of a housekeeping one.
I noticed since Q for the DNA guide has gone up the little bit and it looks like the tax rate guidance for is quite a bit higher than what was implied in Q1, but that we could just have a comment about that that would be I. Appreciate the thank you very much.
Sure absolutely I'd take the first one was some takes the second one so on the first.
We are seeing in cross selling is.
Debt, we had the first big win with the big customer and it was actually of cross sell and but we know.
Scent business Nols of Bioscience business. So it's the combination.
Basically we get something on the enzyme side, because we have good access.
Our scent business, so bigger customer of <unk>.
European but the global customer.
Yes.
I think on the product side.
As I said, it's in the detergent.
Here, which I think is very very good in the.
Very promising because we see a good pipeline. The also on the food side coming in so Paulo are numerous north division, so it's going actually.
Very very well and I think we can can make the the $20 million. We were promised for this year actually.
<unk> quite nicely in 'twenty, one and I'll hand, it over to most of them. Thanks Andreas.
Yeah. There is no change really I mean, we had never before actually specifically guided to the P&L ex <unk>, we thought that it would be more useful because as people have pointed out to us that when doing the modeling I mean, we are talking about the EPS ex amortization bida all of the rest of that so that's really what we did I mean, if you look at 2020 to clarify.
The adjusted P&L number that we had for the whole year was 17, 5% in the P&L <unk> 18 in the half right and so the the number this year, what we're going to of 21 and a half is reflective of the rough.
Lastly, about 100 basis points simply for the difference between those two and then the and then the rest of it is just the fact that the NMB came with the higher tax profile, which we had communicated unexpected.
We will take our next question from Mark Connelly with Stephens. Please go ahead.
Rest of it if we look past the the nice progress on working capital do you think thats the normal progression of working capital has changed very meaningfully.
Leaving out any discrete benefits you continue to get from the merger integration.
No look for the for them.
For the rest of the year I wouldn't be.
Working capital of two to.
To improve the same way at all I mean, we had a very very strong for first.
First quarter.
I mean, we had.
Roughly an eight day improvement in working capital days rates and that was driven by <unk> inventory net legacy assets inventory and legacy and NB payables driving performance.
As we go forward in the year will actually be building inventory at the legacy NMB to satisfy demand the messenger the screen and our supply chain and also the raw material cost increases we're talking about are going to increase the the.
On hand, right I mean, DSO pretty stable through the rest of the year and.
So we haven't specifically forecast core working capital.
But basically by the end of the year I would think we'd expect it to go up at the debates and that's all factored in we still we're still pretty much able to deliver.
Deliver the.
$1 billion of free cash flow that we have in mind for the year as well.
And thats with the working capital with the Capex with everything.
We will take our next question from Lisa de Neve with Morgan Stanley.
Hi, guys I'm, just two from my side, Sir what's.
I'm talking about the other side of the coin I mean, which segment should we perhaps consider normalized.
Normalize let's work on for the coming quarters, especially as it relates to for example, the consumer fragrances immunity expense sales, which some kind of great to have done incredibly well.
Some of your peers of flat quite the level of stocking in some categories in the first quarter. So it would be very helpful to sort of get your view on the thank you.
Sure Lisa.
<unk>, if I look at the different categories here the.
Good news is if.
If we look at our forecast actually almost all of the categories. We will see some of some growth going going forward, which is actually a great situation, where we are being I agree with you on the consumer fragrance side, where we had double digits developments in the last.
Last year, we might see a bit of of normalization, but we still expect good growth in maybe single digit growth and thats the very important important category another.
Let's say category, where we have very strong comparable sales probably optics.
You might have seen this for a couple of months of was.
For legacy NMB double digit growth.
As of last year, So we will see a normalization of the year, but still a growth in the mid single digit range going going forward. So these are the these are the two categories, which I would call out all of the others are looking actually quite strong going forward in terms of growth.
We will take our next question from James target with the Lindbergh. Please go ahead.
Hello, Good afternoon.
Just wanted to go back to pricing and just asked about.
Is there anything about the U S.
<unk> business, which makes pass price through harder or easier.
From legacy artifact thinking in terms of how long the pricing.
Input costs may take a pause from.
And just to follow up on the I think on the last question for you just Didnt meet you in the health and Biosciences Division, you're flagging sort of the growth and health of negative and culture of some food enzymes.
Not just down to the.
Tough comp or was there anything sort of underlying in terms of the market demand.
Yeah, Let me let me take it.
Start with the second question. The first is basically tougher comparisons that's what it is because last year end of first quarter and then into the second quarter. It was very very very strong and very double digit and that was hard to.
Let's say two to.
To make up for this year, we have seen let's say in Q1 for example.
All of them on the on the health of Bioscience piece of really double digit growth and.
As soon as it normalizes, we will see good growth coming out of out of <unk> as well because of the underlying business is actually very.
Very good.
And the demand is strong on the on the pricing side.
It's basically a pass through as you were saying, it's easier to the waste prices compared with some of the legacy <unk> businesses and so that the timeline is not as.
As long as it is for some of the FNF businesses I hope that the answer the question of the first part.
And we will take our final question from Lauren Lieberman with Barclays. Please go ahead.
Thanks, Good morning.
I know we've covered a lot one more thing I was curious about was the free cash flow guidance.
Being in it of $1 billion for this year. It just strikes me as a bit low given that.
I think the ISF the management case for and then B was originally calling for something closer to like one three.
Liam for 'twenty, one I know that's the 12 month number behind that kind of 11, but that wasn't really explain all of the different. So I was just curious.
Kind of thoughts on why that lower free cash flow.
Guidance for the year. Thanks.
Oh, yes, the salone Heidi the 12 months versus the 11 is the factor of course right.
Coming through the number of.
We expect slightly higher capex than we originally envisaged as the as we invest in the business.
The integration capacity of normal run maintenance all of the rest of debt right.
We're also building. We're also building as we said a little bit more inventory than we than we expected too.
In the legacy MB and of the business and so that's going to add as well.
And fundamentally I mean, the rest of it is strong the strong the strong EBITDA and then the business just flow through.
Yes.
And it shows that we have no further questions at this time I would now like to turn the call over to Andreas the big for any closing remarks.
Thank you for for the participation certainly.
Sorry, busy and good quarter for us because of what the first two months.
The combined company and you've seen lots of moving parts also in the external environment, but I believe.
And of the well and I would like to thank the employees again, while that first the first robust first quarter and then and also we see actually a.
Positive sales development of expectations for the rest of the year was that I will wish you a productive and good day and talk to you soon thank you.
This does conclude today's conference. Thank you for your participation and you may disconnect at any time.
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