Q3 2021 International Flavors & Fragrances Inc Earnings Call
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At this time I would like to welcome everyone to the Iff's third quarter 2021 earnings conference call. All participants will be in a listen only mode until the formal question and answer portion of the call to ask a question at that time. Please press star one on your telephone keypad, if you would like to remove your name from the queue.
You. Please press the pound key participants will be announced by their name and company.
Order to give all participants an opportunity to ask their questions. We request a limit of one question per person I would now like to introduce Michael Deveau head of Investor Relations you may begin.
Thank you good morning, good afternoon, and good evening, everyone welcome to Iff's third quarter 2021 conference call Yes.
Yesterday, we issued a press release announcing our third quarter financial results and our outlook for the remainder of 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 take a moment to review our forward looking statements.
During the call we are making forward looking statements about the company's performance and business outlook.
These statements are based on how we see things today and contain elements of uncertainty.
For additional information concerning the factors that 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 affect comparability.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please also note that we'll be using combined historical results for the third quarter defined as three months of legacy ISF results and three months of <unk> results and for nine months year to date defined as nine months of legacy ICF January to September and eight months with NMB February to September.
In both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February one 2021.
With me on the call today is our chairman and CEO Andreas <unk> and our recently appointed executive Vice President and CFO Glen Richter.
We'll begin today's call with our prepared remarks, and then we'll take any questions that you may have at the end.
I would now like to turn the call over to Andreas.
Thank you Mike Good morning, good afternoon, and good evening, everyone and thank you for joining us today.
Before I dive into our performance results I would like to take a moment to thank all of our dedicated colleagues around the world who have continued to work tirelessly in a challenging environment to fuel the global consumer goods supply chain and meet our customers' needs.
Thank each and every one of you for your hard work dedication and focus.
I also wanted to take a moment and welcome Glenn.
Who is joining us on today's call for the first time as you know Glenn joined US a little over months ago, as our new executive Vice President and Chief Financial Officer, I Am sure you will all find that his experience aligns perfectly with our strategic goals, making an incredible asset to our team.
I also want to thank <unk> for his leadership and contributions during his time as CFO Russell plays an important role in our combination with Dupont and then beat and for that we are immensely grateful he has been important in putting <unk>.
In a strong position it is today and we wish him all the best in his future endeavors.
On today's call I will begin by providing an overview of year to date performance, including the progress we have made so far on our integration.
I will then turn it over to Glenn who will provide a more detailed look at our third quarter financial results before we conclude today's call with a question answer session. Glen will also speak to our outlook for the remainder of the year.
Now as I mentioned I'd like to kick us off on slide six by discussing our financial highlights for the first nine months of 2021.
Throughout the third quarter, we remained laser focused on extending the momentum <unk>.
In the first half of 2021.
In the first nine months.
2021, that's achieved $8 6 billion in sales, representing 10% growth was 7% on currency neutral basis, our strong reflection of the strength of our market leading platform and a compelling position we have established with our customers as a combined company.
We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5% as we will discuss in more detail. We continue to confront meaningful meaningful inflationary pressure due to higher raw material logistics and energy costs.
We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strength, having achieved $884 million of free cash flow.
<unk>, 10% of our trailing nine months sales driven by strong cash generation.
This cash generation enabled us to stay on track to meeting our deleveraging target.
Finally, as Ive mentioned in previous quarters continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts.
Pleased to share that we have complete the divestiture of our food preparation business and are on track to complete the divestiture of our microbial control business in the second quarter of 2022.
Whether these two important divestitures will create a more focused iff's, allowing us to hone in on the strengths of our core business segments and it creates a stronger more focused business, we will continue to evaluate and optimize our portfolio as we move forward with our integration looking for opportunities to rapidly diverse.
<unk> other non core businesses.
We started this year with a simple commitment to focus on execution to deliver on the potential of the <unk>.
I'm pleased to say that even in a very challenging global environment, while our team has met our integration objectives, while delivering strong results with continued sales momentum and profit growth.
Now turning to slide seven I'd like to walk you through some of the regional sales dynamics underpinning our results for the last nine months first I am excited to share that we continue to experience strong growth in all four of our key operating regions, despite ongoing and unique market uncertainties.
Have persisted across each geography in North America, we achieved 7% growth across all four of Iff's business divisions led by high single digit growth in <unk> and these two divisions have continued to perform exceptionally well quarter after quarter.
In Asia, we experienced a 7% increase in sales led by continued double digit growth in India as well as a low single digit growth in China, even though it's particularly a strong recent market complexities in the region.
While a business unit perspective, newish sent in pharma solutions continue to carry the region's growth throughout the year to date.
Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth largely fueled by double digit growth.
And sent divisions and continued local currency strengths.
Perhaps most impressive is a 7% sales growth at our EMEA region achieved to date, which does give us a robust double digit increase in the third quarter impressive performance ill send the north divisions drove this encouraging rebound with sent delivering double digit growth led by fragrance business <unk> delivering high single.
Is it growth led by our foodservice business.
We expect this momentum to continue through the remainder of the year and we will stay diligent to ensure our business remains positioned to perform against any new supply chain challenges that may arise.
Moving now to slide eight I'd like to take a closer look at our nine months year to date sales performance across key.
Key business segments.
Our largest division <unk> <unk>.
Strong performance throughout the year, achieving currency neutral sales growth of 9% was broad based strength from all flavors ingredients at full design businesses.
<unk> has had a similar strong year delivering 8% currency neutral growth to date led by impressive double digit growth in fine fragrance as.
As well as strong growth in consumer fragrance and ingredients.
Edison Bioscience is seeing strong demand in key focus areas, including home and personal care animal nutrition, and Cogs and food enzymes. As you know we are in the process of selling all microbial control unit, which has continued to experience headwinds.
Through this year, but has rebounded from COVID-19 impacted lowest with growth in both Q2 and Q3.
This divestiture should further enhance the performance of this important division.
Pharma solutions. Despite a significant challenge is flat so far for the year the supply chain challenges have had an outsized impact on this division throughout the year.
We have seen encouraging growth in our industrial business the division still struggle to meet customer demand future raw material availability challenges and logistics issues.
Now on slide nine you will see that we have outlined some of the factors influencing the growth of profitability of each of all four divisions. So far this year.
As I previously mentioned northern had had a strong year with flavors and ingredients experiencing double digit growth.
We've been working hard and our execution to manage volume and cost to limit margin impact from higher raw material costs, which continued to be a headwind on our profitability. While we have seen some margin impact of about 20 basis points in the year. We are proud of how our execution has mitigated much of the negative headwinds while.
During meaningful growth.
Our team is does an exceptional job increasing prices to combat inflationary pressures something that will continue to be critical as we move forward.
It Hasnt Bioscience, we mentioned broad based growth across our markets, but here, we are seeing significant margin impacts from higher logistic costs as shared on our second quarter call part of this that freight rates have increased significantly but also we are having higher logistic costs to balanced robust customer demand and.
Variable capacity.
We have increased capacity investments in this business to support long term growth investing in R&D at Thorn technology to increase output later this year and into 2022.
The Centre Division is certainly realized the strongest all around bounced back as consumer demand wise across end markets, notably fine fragrances alone as realized 36% growth year to date with double digit growth in cosmetic active and continued solid performance in consumer fragrances.
At the time.
Profitability expansion of 110 basis points has been led by higher volume favorable mix and higher productivity.
As I mentioned.
Our solution was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demand these challenges, including supply and logistic constraints and ongoing inflation have been turned significantly pressured our margins compared to the first.
Months of 2020.
Moving to the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics, and we will continue to prioritize returning our pharma solutions business.
Profitability, we know it's achievable and in the fourth quarter, we are expecting year over year top and bottom line performance to improve.
As we have been.
Talking about today is realizing very strong sales momentum across our business. This is a reflection of the powerful new position, we have created through our combination with the <unk> business and a compelling compelling value proposition, we can offer to our customers. While we are pleased to put many of the growth has been related to.
The pandemic behind us it is important to understand that our growth. This year is in fact meaningful above pre pandemic results.
If you look at the total business you will see that on it.
Apparel nine months pro forma basis, the new Iff's realized 9% sales growth over 2019 results.
This strength was broad based to each segment is realizing strong growth above pre pandemic levels.
<unk> is a business that was particularly hard hit with the pandemic is not a strongly growing with sales growth of 9% compared to pro forma 2099 months period.
Important, especially given that much of the integration work is coming from within this division.
These results showcase showcased how our position in the market has been fundamentally strength through the merger and how our teams are delivering the full potential.
All of our customers.
Moving to slide 11, I would like to discuss the strong progress we've made in terms of synergy realization.
Or just nine months since completing our merger with FBR synergy progress reaffirms the tremendous opportunity we have in front of us as a combined company.
We received significant and highly encouraging positive feedback from our customers along with persistent robust customer demand. We are confident in our ability to meet our revenue target to date revenue synergies have started to contribute to our top line performance and we are pleased that our project pipeline is strong and growing.
The first nine months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target was one quarter to go.
This was largely a result of the comprehensive savings programs, we have implemented where we are leveraging our increased scale and optimizing our organization.
I am confident that we will more than exceed all.
$45 million year, one synergy targets and I am encouraged by the continued progress we are making towards achieving our three year one ways.
Cost synergy target of $300 million.
Now before I turn the call over to Glenn I want to spend a second really underscore what he brings to us. He had his background is perfect. But there are two areas I think really stand out first he brings a tremendous tests with private and public companies and leading finance teams to enhance disciplined and built.
Assesses that drive towards our goal of shareholder value creation.
He has time and time again shown an ability to help businesses accelerate topline growth, while driving margin expansion in this way and he consistently implement productivity initiatives was lasting impact.
He has been through several large scale M&A integration.
The track record of strong strong success as we continue to execute on our multiyear transformational integration. This experience was invaluable with us.
Like to turn the call over to Glenn.
Thank you for the warm welcome Andreas and good morning afternoon, and evening to everyone.
ISS in late September I've had the opportunity to briefly meet many in our investor community and the most common questions I've been asked is why did I join <unk>.
What are my near term priorities.
Sequentially before I review, our financial results I thought it would be helpful to briefly provide these perspectives as an introduction.
There were three very compelling reasons for me to join <unk>.
First and perhaps most importantly.
<unk> is a company that is truly making a difference in helping solve some of the world's biggest challenges.
We are delivering reliable innovative and sustainable solutions that are directly helping address issues, such as improved nutrition and wellness, reducing greenhouse gas emissions and creating a more sustainable environment.
Second the industry has very attractive organic growth characteristics.
Fitting some continued strong consumer tailwind.
From increased consumer focus on wellness and natural and sustainable products increased demand in emerging markets and new consumer needs presented by aging demographics and developed markets.
Also believe that scale will become an important basis of competitive advantage as customers demand, leading ESG platforms increased innovation and speed to market.
Global supply chain resiliency.
And help them navigate an increasingly complex regulations.
Third I firmly believe that the combination of ISS with the pumps legacy MB business has uniquely created an industry leading platform.
And since joining ISF I've tried to immerse myself in the business completely visiting.
Visiting sites meeting with our business and operations teams and spending time at our R&D and creative centers.
We've also prioritized hearing from you our investors and analysts.
Today, I'm, even more bullish on the strength.
ISS global capabilities.
And the tremendous long term potential we have to drive strong top and bottom line growth.
Relative to my near term priorities I have four primary areas of focus.
How far our most pressing priority to tackle the challenges on the global inflationary environment.
And to successfully execute broad based pricing actions across all of our businesses.
Second I'm also focused on enhancing our core financial processes and metrics.
Clothing better forecasting.
Proved business level return metrics.
Tighter disciplines for our investment decisions.
So that we're maximizing our growth potential and return on invested capital.
A third area of focus is ensuring we fully deliver on our merger synergies.
Also accelerating our focus on sustainable productivity.
Finally, while we have made very good progress to date on our portfolio optimization.
Significant opportunity remaining.
In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you.
With that I'd now like to provide an overview of our consolidated third quarter results.
Q3, <unk> generated approximately $3 1 billion in sales.
Representing a 12% year over year increase.
Mainly driven by the continued double digit growth in our Europe Division.
Strong increases in both <unk> and <unk>.
<unk> Biosciences.
In terms of contribution volume performance was the primary driver of our growth is.
As pricing represented approximately two percentage points in the quarter.
So our gross margin continued to be challenged by inflationary pressures. It was somewhat offset by our strong cost management focus which resulted in adjusted operating EBITDA growth of 4%.
And while we had solid year over year EBITDA growth.
Margin was down by 210 basis points as our pricing actions recovered only about 65% of our raw material increases.
Or approximately 50% in the third quarter. When we include raw material logistics.
And energy increases.
As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis.
But expect that in the short term specifically the fourth quarter.
We'll see a similar pressure given the time lag price realization.
Let me finish on this slide by saying that we achieved strong earnings per share excluding amortization of $1 47.
On the next few slides I will dive deeper into the third quarter financial results for each of our four divisions.
Yes.
Turning to slide 13, I'll start with our Nourish division, which had an exceptional quarter.
In Q3.
Achieved 17% year over year sales growth or 15% on a currency neutral basis.
By robust double digit growth in flavors for the second consecutive quarter.
Ingredients also grew double digits with all subcategories.
<unk> solutions.
And seaweed extracts emulsions.
Emulsifiers and sweeteners and Cellulosic LPG in soup protection, increasing double digits.
Food design also grew double digits led by foodservice, where pandemic related restrictions continue to be listed with away from home consumer behaviors returning to more typical levels.
As a result of strong volume growth.
Price increases and our focus on cost management.
<unk> achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points.
On slide 14, you'll see that our health and Biosciences division, so year over year sales growth of 7%.
We're 5% on a currency neutral basis.
Led by double digit growth in home and personal care and high single digit growth in cultures and food enzymes.
Our health category was soft this quarter due to a particularly strong double digit year ago comparison.
So we are pleased with the results when we look at it on a two year basis.
As Andreas mentioned earlier inflationary pressures and higher logistics and energy costs to keep up with the robust customer demand.
Challenged our margins across our business with.
With HEB, particularly impacted.
Which drove an operating EBITDA decrease of 12%.
Impacting this a bit deeper.
<unk> or 70% of our year over year EBITDA decline came from higher airfreight volumes, where we have increased intercompany shipments to manage available capacity.
As we shared last quarter.
We have increased capacity investments in this business to support long term growth.
<unk> also invested in R&D and plant technology to increase output.
Until then we will be incurring higher costs to support our customer demand and this will impact our EBITDA margin.
Turning now to slide 15, our scent division continues to perform extremely well and experienced strong growth.
Cheating, 10% year over year growth.
Our 9% growth on a currency neutral basis.
This performance was driven by fine fragrances continued rebound.
<unk> grew approximately 36%.
Led by new customer wins.
And improved volumes.
Our ingredients category also continues to perform well.
Contributed to <unk> overall success.
Double digit growth for the second consecutive quarter.
Led by strong performance in both cosmetic actives and fragrance ingredients.
While our consumer fragrances business saw modest low single digit growth against a strong double digit year ago comparison. This is a marked improvement from Q2 and.
And we expect further growth as we move forward.
On a two year average basis consumer fragrance remains strong at 9%.
In the third quarter.
<unk> also experienced adjusted operating EBITDA growth of 10% driven.
Driven by strong volume growth and favorable mix.
Margin was down modestly due to higher raw materials and logistics costs.
Trend, we see continuing I.
I will provide more context shortly.
Lastly, in our pharma solutions business.
We saw a currency neutral sales decrease of 2%.
Due to continued supply chain challenges related to raw material availability.
And logistic disruptions.
Which have made it challenging to meet persistent and growing customer demand.
While industrials has continued to recover from COVID-19 lows, our core pharma business saw soft performance against the solid year ago comparison.
The division's adjusted operating EBITDA and margin also continued to be impacted by higher sourcing logistics and manufacturing costs.
We also continue to see the impact of force matures and raw material shortages with suppliers and shutdowns due to hurricane Ida, resulting an unplanned outages in some of our product lines.
We expect the current market environment and macro supply chain problems to continue challenging the segment.
We remain optimistic.
And as Andreas mentioned earlier, we remain focused on returning the division's profitability as these Andrew shade conditions stabilize.
Now on slide 17 I.
I would like to review, our cash flow position and leverage dynamics for the first nine months of 2021.
Both of which remain a top priority for us.
So far this year.
<unk> has generated $884 million in <unk>.
Free cash flow with.
With cash flow from operations totaling approximately $1 1 billion.
As the team as mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities.
Year to date, we have spent $242 million or approximately two 8% of sales on capex and expect a significant ramp up in fourth quarter as our annual spend is traditionally more back half weighted.
From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target with our cash and cash equivalents, finishing at $794 million, including $122 million restricted cash with gross debt reduced by 446 million.
Versus the second quarter to $11 5 billion due to our debt maturity schedule is part of our deleverage plan.
Our trailing 12 month credit adjusted EBITDA.
Totaled approximately $2 7 billion with a four one times net debt to credit adjusted EBITDA.
With our continued strong cash flow generation, including proceeds from divested non core businesses. We remain confident that <unk> is on track to achieve our deleveraging target of less than three times net debt to EBITDA.
Within 20 to 36 months post transaction close.
Turning to slide 18.
Like to take a moment to discuss the cost inflation trends that have been impacted our business. This year.
As I mentioned earlier.
And the industry at large has seen significant year over year inflation increases, which have been accelerating in the recent quarter.
Inflationary pressures, we are seeing today are significant John.
Just as examples vegetable oil prices hit a record high after rising by almost 10% in October.
The price of wheat is up almost 40% in the last 12 months through October.
Brent crude prices have more than doubled over the past 12 months the highest level since October 2018.
In the U S natural gas prices are up 100% from a year ago and in the U K throughout the about 500%.
And transportation rates have increased significantly given the high demand and limited capacity to ship.
Our cost of raw materials logistics and energy markets like many industries around the world, we have seen cost accelerate each quarter, which has led to our margins being adversely impacted.
For example in the first half of 2021.
Gross margin was down about 150 basis points.
Although in the third quarter, we were down about 210 basis points.
As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022.
Consequently, this will require us to successfully implement significant pricing actions across each of our businesses as.
As well as improve our sourcing efficiencies.
Accelerate operational improvements and capture targeted integration synergies to drive profit growth.
Now moving to slide 19, I would like to share what this means for our consolidated financial outlook.
For the full year 2021.
We are maintaining the increased total revenue forecast, we announced in September to account for the strong demand.
For the full year 2021, we are targeting 11, five 5 billion in total revenue.
For approximately eight 5% growth.
From the forecast of 11 4 billion or 7% growth.
We disclosed in the second quarter.
We also expect our sales growth to continue in the fourth quarter.
Q4 quarter to date sales trend is solid.
As mentioned unprecedented macro supply chain challenges and inflationary pressures continue to impact our industry and we do expect this to continue in the foreseeable future.
While we are intently focused on offsetting these inflationary pressures through pricing actions. These are lagging the inflationary pressures and as a result, we have further revised our adjusted EBITDA margin to be modestly below 21%.
Down from approximately 21, 5% that was forecasted in September.
About half of this reduction is due to lower gross margin in the third quarter and the other half stemming from higher cost trends, we see in the fourth quarter.
For the full year, we are targeting low single digit EBITDA growth.
A solid improvement in light of the external challenges.
We also adjusted our Capex spend outlook down as.
As we have been very thoughtful and balancing near term operating priorities with the need to add capacity to support accretive growth across our businesses.
Overall, we are pleased of the progress we've made to date.
Strong topline growth and a commitment to meet near term macro cost pressures.
And we're confident that <unk> is on the right path and poised for continued success across our core business.
Now I'll turn the call back over to Andreas for some closing remarks.
Thank you Glenn before I wrap it up I'd like to reiterate how proud I am of <unk>.
Thousands of employees around the world will showcase a remarkable resilience sort in evolving and continuously uncertain industry environment.
Continued to deliver strong year over year sales and profit growth and I am confident that with our top notch financial and operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile, while continuing to deliver for both our shareholders and our customers Q.
Q4 is off to a solid start and I know that our momentum will propel us to achieve strong sales growth for the full year and bring us another step closer to achieving our synergy targets.
In some it is clear to me that <unk> is an incredible strong position renew entering this year that the new Iff's was poised to change our industry, but to do so we have to execute as we look at industry, leading sales growth for the full year I'm just so proud of how everyone. He has stepped up.
And executed on our vision and deliver against our potential.
<unk> has once again the clear leader of this field, creating another iconic chapter in this company's 132 a year legacy.
This core strengths of the business is why it felt now was the perfect time to start to transition to find Iff's next CEO I have every confidence that now is the right time to let the next chapter of Iff's legacy begin.
We announced the search has begun for my successor, and we expect that person to be in place by early 2022.
I'm fully committed to a seamless transition and look forward to talking to you all about this more in the near future. Thank you all for your support with that I would like to open the call for questions. Thank you.
To ask a question. Please press star one on your telephone keypad, if you would like to remove your name from the queue. Please press the pound key in order to give all participants an opportunity to ask their questions. We request a limit of one question per person.
Our first question comes from Heidi <unk> with Exane BNP Paribas. Your line is open.
Good morning, everyone.
I have a question for Glen I'm, Cindy and outcomes for the info on why you joined.
Even if thats too long term targets.
Yes. Good morning, Thanks for the question.
Strengthen down relative to the component parts first of all relative to top line as we mentioned, we're very pleased we're tracking extremely well versus the long term targets and then when you take a look at how we're tracking versus competition, which is another great indicator. We're actually very pleased concerns. We are so we can sort of check that we would say relative to.
Our deleverage target getting below three times by.
By year, three we're feeling very comfortable with that combination of the cash flow generation from the business remains strong and as you know.
We've announced a couple of divestitures and we'll continue to look at other non core businesses. So I would check both of that both the deleverage as well as our free cash flow the area that really needs to work is around our long term margin objective as you know we have a 26% EBITDA margin target that was.
Easier when we started off with a higher number at the beginning of the year versus and versus the most recent guidance. We are now about 500 basis points of that relative to the guidance. This year. So as we approach our 'twenty two plan, we're spending energy sort of thinking about that multiyear target I think structurally there are a couple of factors that we think.
Still a play in the favor of not only increasing where we are from an EBITDA margin, but essentially getting us back to that one is clearly the biggest impact this year unexpected has been the inflationary environment.
We'll probably talk more about this but we lost about 200 basis points this year.
At our margin relative to inflation net of what we expect to price and in addition, we've had some pockets of higher use of freight costs and a couple of our business. So that's about 200 basis points, we still feel very confident on achieving the long term synergy objective. So the cost synergies and I would submit that there is sort of.
Additional productivity in the business that we if you strip out the <unk>.
Cereal side of our business, we have over $4 billion of cost between our manufacturing operations, and then Rs and he and I think we've just begun to scratch the surface relative to that with our synergy targets and that being said we are working.
Very intently right now to sort of think about and actually our pricing initiatives and also think about a longer term approach.
With me as well.
Thank you.
Thank you.
Our next question comes from Matthew Deyoe with Bank of America. Your line is open.
Yeah.
Good morning.
Appreciate all the added detail in the slides on the cost side, but just trying to understand better the margin contraction a bit and how we got to the point, where we're cutting the guidance again so.
So.
I look at <unk>, and then moving into <unk>.
Could you talk a little bit about how costs are coming in versus where you had budgeted them and on.
On that and can you push price to offset logistics costs for businesses that you've just won recently or is this kind of just a cost of doing business in that margin component is going to come down improvement when cost and capacity come out.
Yes. So good morning, Matt This is Glenn I'll start with answering and then maybe turn it over to Andreas in general the biggest hit as I just mentioned our business. This year has basically been material costs broadly impacting our business.
200 basis points.
It has impacted us and anticipated impact is about 200 basis points in terms of margin about two thirds of that is related to rate increases. So thats, a combination of our raw materials, our energy and our logistics costs.
Happening relative to each of those buckets is earlier in the year, we were thinking.
Mid single digit relative to inflation and raw materials, it's now high single digit approaching 10% in terms of the annual inflation, we're seeing logistics costs continue to accelerate that to the mid teens and in energy as everyone is well aware have been extremely volatile and it's been trending up about 30% a year over year by the way the planning posture for 'twenty one is.
We really had relatively flat inflationary pressures. So we didn't expect any of our material cost to go up.
We have a much much more significant impact relative to what we'd anticipated just a couple of quarters ago I would say the rest of our cost structure is working quite well.
Actually delivered strong results against our R&D sales and administrative expenses expenses were actually exceeding plan relative to our cost. So we're actually lower at that point and general manufacturing is working on productivity, although constraints in our system have limited some of the capacity gains we can get into.
The efficiencies out of the system. The pricing dynamics are that we are working very very aggressively on capturing the pricing but to date, we are capturing and expect to capture only about 50 on the dollar from inflation this year and Thats simply a lag factor relative to our ability to go to market and <unk>.
To implement.
I will note that as we look out in 2002, we are anticipating those inflationary trends to continue into next year and we are basically planning our pricing actions Accordingly I E.
Each of our businesses are thinking about that only what is hitting us this year, but what we anticipate to hit next year and we're executing against that to your last point on pace.
It depends by business.
Some but not a lot of multiyear contracts and a lot of in most cases, we have annual contracts and then many of them are if not most of those cases, they tend to run on a fiscal cycles. So at the beginning of the year forward.
Last comment I would make is we're sort of I'd say unprecedented environment given the level of inflation. So it is affording us the opportunity to go back in almost all cases to our customers and discuss the inflationary.
Environment vis vis our pricing going forward, even when we had sort of contractual relationships in place. So let me maybe turn it over to Andreas.
Thank you. Thank you Glen I think it's a very comprehensive answer just on one aspect you asked Matt on the logistics, obviously, we go back on logistics as well either with price increases or surcharges and it's a bit tougher for our newly won contract obviously, but we probably what we can do because that has a huge huge impact on us.
Our business in particular on the health and Biosciences business, but I think there is another element and it is working to increase capacity because there's a lot of demand for in particular for our enzyme business and we are building. We just installed a new for members and Henkel in Finland, and Theres more to come for the first half of next year, which will.
Help us to decrease logistic costs as well and pull through when we get in terms of demand from our customers.
We're very optimistic on this one because.
The technology is superior and then certainly a good growth driver for us going forward.
We'll take our next question from Mark Astra Chen with Stifel. Your line is open.
Yes, thanks, and good morning, everyone.
I guess just building on the last question Glenn you, maybe specifically if youre willing to talk about it and obviously you're early in the process but.
How do you currently see inflation for 'twenty, two and how should we think about.
When do you expect to have enough pricing implemented to cover inflation. Obviously, you talked about 50 cents on the dollar, but what's the timeline for more pricing to be in place and also how do you think about.
Offsets in terms of dollars versus margin recovery and the timing therein.
Yeah. Thanks, Thanks for the question Mark.
You'd sort of semi answered it with the intro is we're in the early phases of locking down the 'twenty plan, we desire to go out early in the year with it.
Much as we can relative to our pricing actions.
The pace at which we're able to implement that these will be the pace of inflation. We're not sure. If you will when that when the the curves will crossover from our standpoint, it's likely to be sort of.
<unk> second quarter ended the second half of the year, but I would say stay tuned we're really still working on that.
Okay.
The next question comes from Adam Samuelson with Goldman Sachs. Your line is open.
Hi, Thank you good morning, everyone.
I guess.
First on <unk>.
Sure as.
You talked through some of the regional and business sales trends, a little bit more on a year to date basis.
I was hoping you could kind of frame that kind of from the third quarter and into the fourth whereas some of the pluses and minuses are.
And specifically within that kind of organic sales guidance kind of where pricing was in the third quarter and where you think it's going to be in the fourth as we.
Valuation kind of what the tailwind 'twenty two could be as you go back to customers.
On price and if I could just sneak a quick other one and on on synergy realization can you just help us think about the cadence of cost and revenue synergy realizations in 'twenty, two especially on the cost side, where would seem like an inflationary environment makes it harder to achieve some of the procurement savings that had been previously targeted.
Yes.
Yeah.
Yeah. Thank you Adam for the question. So what we have seen in Q2 and Q3 that we have grown about 2% price. The risk was both volume going forward, we might see a little bit more in the fourth fourth quarter in terms of price.
As we said we had a good start sales force into the.
Into the fourth the fourth quarter, So October and then.
We don't have the final P&L I told we can't talk about that.
Synergy realization is going actually on the cost synergies extremely well.
As you've seen we've already realized $40 million in the first three quarters of the <unk> 45, who have promised so it's very very likely that we will overachieve on the sales synergies.
Very much from Craig and I see when I visit our facilities and I was basically all during that period. The last week in Europe, but the teams are working very nicely and very very well together. So we see that more sales synergies that are coming in.
And that shows that we are building a very very strong position for for the company going going forward in terms of the different categories as well, we see still good.
And good performance on the fine fragrance side, which is very very helpful. So just a good recovery, but it's a good growth rate here as well.
And that's.
Helping the whole result for the company going going forward.
That's what we can say about the fourth quarter.
The next question comes from Gunther <unk> with Bernstein. Your line is open.
Hi, Thanks for taking my question and welcome Glenn.
Slide looks very useful.
The active ingredients from Lucas Meyer cosmetics.
So sharing the percentage changing raw material versus <unk> versus <unk> can I just check that the numbers you gave on the Atlanta.
When do you include in our full year guidance, our current run rate and then pricing.
Two 2% of sales in Q3 can you share the exit run rate out of Q3 or in October if you have it and what kind of increases you expect to push through please.
And maybe good morning, or good afternoon, Gunther good to hear from you I'll answer. The second question first Q4 pricing Ied accelerating from Q3 is going to be very consistent with Q3. So its about two points, it's slightly higher in Q4 versus Q3 and as a result of that actually the <unk>.
Relation pressures are going to slightly outpace once again within the quarter just given the cost increases from the standpoint, just as a follow up to that really we are focused on aggressively implementing late this year into 'twenty two on that front.
Full year margin guidance.
And relative to the freight impact we have about 200 basis points associated with cost.
Two thirds of that is pure rate and about a third of that or about 60 basis points is related to higher usages of freight principally air and principally to support our <unk> business because of capacity limitations. So that being said as Andreas had mentioned will take us some time to work out through 'twenty two.
As we address some of the capacity constraints.
Yeah.
The next question comes from John Roberts with UBS. Your line is open.
Alright, Thank you and best wishes Andreas for the future and welcome Glenn.
Okay.
And your customers are seeing a lot of bulk raw material cost increases. So they are probably feeling even more cost pressure than you are do you see more reformulation going on is that providing any opportunities for more wins. If your customers are reformulating, our products a little bit more frequently here because of their cost pressures.
The only thing that first of all thank you for the question.
We see reformulation is massively more than what we have seen before probably probably not but what we see in general what comes in in terms of projects are bigger projects.
Less project, but bigger projects, which is actually good for us.
The consideration that we will win more of these projects.
Cost for us is reducing in terms of.
The average projects. So that's what we see at the moment indeed, many of our customers. Some good large increases but the discussion with.
The procurement people on the customer side.
Is doing going okay, and well because the more what's happening on the raw material frontier. So I think thats, where we are what we see is.
Still that we have really good strong demand from for.
Most of our customers and that's very very helpful. In terms of the business and also in terms of the momentum we have as a business growing going forward because we have to take into consideration we are still in the integration phase.
We are gaining share, but what we see also in comparison to all of our competitors.
And we are making good progress in the integration as well so that's one word answer.
Okay.
The next question comes from Jeff Zekauskas with Jpmorgan. Your line is open.
Thanks very much.
In your initial remarks, Glenn you said that there remains significant opportunities for portfolio optimization does that mean that there is another I don't know $500 million to $1 billion in revenues.
It can be monetized and second can you described.
Or are you articulate.
Your capital expenditures for 2022, and 23 and whats the arc of capital expenditures and what are the priorities to spend on.
Yes.
Good morning, Jeff This is andreas on the portfolio as.
As we said around about 5% of sales.
What it is and we are working on it more will become probably early early next next year.
And then we couldnt be more transparent around around it but we are very happy with should be the moves we have made on the portfolio invest more to come on the Capex I hand, it over to Glenn sure. Good morning.
As you recognize we updated our guidance for this year relative to our full year Capex stand at 4%.
And that's in part because of just the ability to execute our capital program as well given all of the different priorities. We have in the business and part of that is just continuing to be more surgical I'll say relative to where invest in capital. We do anticipate that that will ramp up next year as we were putting together our 2000 <unk> plan.
Largely focused on our higher margin and higher growth businesses and a big piece of that actually is really debottlenecking and enhancing our capacity situation.
So next year sounds like more to come around the plan standpoint, we I.
I think previously guided to having spent a little bit more capex around the business going forward for capacity reasons.
And then the other area I would just note, although it's a much smaller portion of ground. So it through an integration activity. We had we had some additional activity as we go into next year as well.
Yes.
The next question comes from Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, good morning.
I had.