Q3 2022 International Flavors & Fragrances Inc Earnings Call
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[music].
Yes.
Good morning at this time I would like to welcome everyone to the I S. S. Third quarter 2022 earnings conference call. All participants will be in 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.
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I would now like to introduce Mr. 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 2022 conference call yesterday afternoon, we issued a press release announcing our financial results.
A copy of the release can be found on our IR website.
I R I S.
Dot com.
Please note that this call is being recorded live and will be available for replay.
Please take a minute to review our forward looking statements.
During the call, we'll be making forward looking statements about the company performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty for additional.
Information concerning the factors that can cause actual results to differ materially. Please refer to our cautionary statement and risk factors contained in our 10-K and press release.
Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release.
With me on the call today is our CEO , Brian <unk>, and our executive Vice President and CFO Glen Rector.
We will begin with prepared remarks, and then take any questions that you may have.
With that I would now like to introduce Frank.
Thank you, Mike and Hello, everyone.
Thank you for joining us today.
On today's call I will begin by providing an update on the strong progress we continue to make in reviewing and implementing a refresh operating strategy.
We are focused as ever on enhancing our operational plan and are making great progress towards completing our strategic refresh process.
Sharing this with you on December seven at our Investor Day.
I will then share our year to date performance and then turn the call over to Glenn who will provide a detailed look at our third quarter financial results and discuss our outlook for the remainder of 2022.
Once complete we will then open the call up for any questions.
Before we move ahead I do want to take a moment as I always do to thank our dedicated colleagues around the world.
And it used to be an unpredictable year and our colleagues continue to work tirelessly to deliver for our customers. Our global team members are truly committed to servicing our customers.
And I continue to be so inspired by our team's determination and ingenuity.
Now beginning with slide six I'd like to provide an update regarding our progress to complete our strategic refresh can begin putting this enhanced plan into action.
We are now working diligently to operationalize, our new divisional strategies.
In executing these focused integrated and value additive strategies with our customers and in the marketplace.
This next chapter in our company's transformation is intended to ensure we are going to market is the most effective in.
Innovative ISF, we can be to extend our position as a trusted partner to our customers and maximize value for them employees and shareholders. Both in the near and long term.
Let me review, what we focused on and what we've accomplished this comprehensive enterprise wide review process.
This review of our portfolio and our business is designed to ensure we are able to expand and extend our industry leadership in key markets geographies and grow our business with key accounts and new customers.
This is included evaluating our portfolio to a return on invested capital lens identifying portfolio optimization and divestiture opportunities.
This discipline will enable us to reduce debt and reinvest in our high performing businesses as well as identify additional growth opportunities and attractive end markets and geographies that will allow us to foster long term growth even amid ongoing external heads.
Winds.
It has been an important endeavor not only to help us streamline the business, but also ensure that we're focusing on only the highest value opportunities and maximizing our return profile across the entire business.
We are in the process of refining our operating model and organizational structure to ensure better commercial engagement enhanced one iff's Fs company culture strength and talent in key roles and renal arena in line incentives to ensure accountability and ownership.
We are also finalizing our financial aspirations for full year 2023, as well as what we believe the business should deliver longer term under more normalized conditions.
And the capital allocation strategies necessary to achieve them, all while prioritizing accelerated growth of our high performing businesses.
With this collective foundational planning I am confident that ISS will fully capitalize on our clear portfolio advantage and deliver value to all of our stakeholders.
We look forward to sharing more with you at our Investor Day on December seven.
Moving to slide seven I'd like to provide highlights of Iff's performance year to date.
Despite a volatile market environment of the last nine months.
<unk> has continued to execute on our operational priorities to achieve strong top and bottom line results.
Year to date, we have delivered $9 $6 billion in sales, which translates to 11% comparable currency neutral growth in our comparator well currency neutral adjusted operating EBIT grew 6% to $2 billion.
Through the first nine months, we continue to take strategic pricing actions as necessary to Austin and inflationary pressures and as a result has fully recovered total inflation cost to date.
Turning to productivity by focusing on efficiency in our manufacturing processes and optimizing our supply chain and procurement, we captured over $125 million.
Extremely valuable operational efficiencies and deal related synergies through the first nine months of 2022.
Accelerating productivity represents one of our top priorities and is increasingly important given the more challenging economic environment heading into the fourth quarter and full year 2023.
To this end, we are accelerating and expanding our efforts.
On our existing supply chain end to end manufacturing economic profit and global shared services platform initiatives, we outlined on our second quarter Conference call. We are now looking at our total cost structure to ensure we optimize around go forward strategic priorities to drive.
Greater efficiency and effectiveness.
These initiatives will be critical to support our growth strategy, all while positioning us to drive long term profitable growth.
To support our continuous improvement efforts within operations I am pleased to welcome Ralph Finzel to our executive team as executive Vice President and Global operations Officer.
He joins us from Honeywell International performance materials and technologies business group, where he most recently served as vice president of integrated supply chain.
Ralph brings decades of leadership experience and it is focused on operational excellence sustainable continuous improvement in customer satisfaction ensures he will be a key contributor to <unk> success moving forward as he will be accountable to deliver on our net.
Productivity goals.
In addition, I am pleased to announce that we've hired a new chief procurement officer, Alex to rollout, who will be responsible for leading all of Iff's procurement efforts globally with the goal to move from procurement to strategic sourcing.
Alex who joins from London lease International where he served most recently as senior Vice President sourcing global direct materials, managing $11 billion globally brings significant experience and end to end supply chain operations and procurement.
We also continue to progress against our portfolio optimization efforts now having successfully completed the divestiture of our microbial control business at the beginning of the third quarter.
The proceeds were used to reduce our net debt to credit adjusted EBITDA ratio to three nine times from four four times at the end of the second quarter as.
As mentioned earlier, we continue to assess the profitability and potential of each of our businesses and explore additional non core divestitures and other timely optimization opportunities to improve our capital structure and achieve our deleveraging target.
Now I'll turn it over to Glenn to provide a deeper dive into our third quarter as well as an overview of the performance of each of our businesses.
Thank you Frank and welcome everyone starting on slide eight I would like to provide an overview of our third quarter performance in Q3, <unk> generated approximately $3 1 billion in sales representing 10% year over year growth on a comparable currency neutral basis, primarily driven by double digit growth.
<unk> and pharma solutions divisions pricing was a strong contributor to growth and as expected volumes were down marginally in the quarter. It should be noted that on a two year average basis, which factors are strong 8% year ago comparison volume growth is running at about 4%.
And while we have seen strong volume growth across most parts of our pharma incent businesses in the third quarter nourish an HEB volumes were challenged.
To provide some more color.
Two thirds of our volume declined in the quarter came in protein solutions, which is part of the nearest business, where we have seen customer destocking to address higher inventory levels in response to sluggish and consumer demand in.
In <unk>, our health volumes were also challenged in the third quarter, a direct result for weakening market demand in the U S and Europe reflected in public market data.
Gross margin was negatively affected by the significant inflationary pressures, we faced across our markets.
Yet through strategic pricing and productivity gains.
<unk> delivered adjusted operating EBITDA growth of 3% on a comparable currency neutral basis. We also delivered solid adjusted earnings per share excluding amortization of $1 36.
The strong dollar continues to be a headwind to our business.
In the third quarter, we saw an approximately 7% impact on sales.
8% adverse impact on EBITDA due to foreign exchange.
Before moving on I want to share that we recorded a non cash goodwill impairment charge of $2. Two 5 billion because the third quarter related to our health and Biosciences business.
The primary drivers of the goodwill in park payment are related to increases in interest rates and lower business projections due to adverse macroeconomic impact from volume continued cost inflation and unfavorable foreign exchange rate variations.
Now moving to slide nine I will provide a brief overview of the performance across our business segments.
In the third quarter, we achieved year over year currency neutral sales growth of 10% driven by broad based sales growth across all of our business segments and nearly all of our sub business units.
Europe had another strong quarter with double digit growth and particularly encouraging performance from flavors ingredients and food design.
Health and Biosciences also saw strong single digit growth despite pressure in our grain processing business.
Again saw continued currency neutral sales growth in the high single digits. Thanks to our fine fragrance consumer fragrance ingredients businesses.
<unk> solutions rebound continues with an impressive 28% increase in sales driven by continued strength in both industrial and pharma.
Turning to slide 10, and looking at our profitability for the quarter third quarter, adjusted EBITDA totaled $612 million.
Comparable currency neutral adjusted operating EBITDA grew 3% year over year due to the disciplined pricing actions to fully recover total inflation.
We also achieved meaningful productivity gains in operational efficiencies from our productivity program, which have helped offset volume headwinds.
As discussed last quarter, while we are clearly seeing signs of raw material inflation easing, we will continue taking appropriate targeted actions to offset inflation to maintain profitability.
Now on slide 11, I'd like to discuss the underlying dynamics impacting the third quarter performance of each of our business segments.
<unk> delivered another strong top line quarter.
Is 10% year over year sales growth on a currency neutral basis was driven by double digit growth with good design ingredients and sustained growth in our flavors business.
Health and Biosciences also maintained comp performance delivering 3% comparable currency neutral sales growth driven by mid single digit growth in our culture and food enzymes.
Al.
Home and personal care and animal nutrition offerings. However.
However for each of these segments, we saw 4% and 1% year over year decreases respectively, and comparable currency neutral adjusted operating EBITDA as our price increases and productivity gains. We discussed earlier were offset by lower volumes are.
<unk> once again delivered a strong performance with 9% currency neutral sales growth this quarter driven by mid teen growth in fine fragrances, and fragrance ingredients and high single digit growth in consumer fragrances is.
<unk> also saw 3% growth in currency neutral adjusted operating EBITDA due to volume growth or price increases and productivity gains.
Pharma solutions contribute very strong performance with 28% growth in currency neutral sales led by strong double digit growth in pharma and industrial similar to <unk> pharma solutions also benefit from strong volume or pricing actions and the productivity gains we achieved in the quarter leading to.
Two an impressive 76% growth in currency neutral adjusted operating EBITDA.
Turning now to slide 12, I would like to cover our cash flow and leverage position.
In the first nine months, we generated $189 million in cash from operations with Capex, finishing at $344 million or approximately three 6% of sales.
The net result is that our free cash flow through nine months was a negative $155 million our free cash flow has been significantly impacted by much higher inventories due to a combination of inflation strategic increases and improved customer service levels and the slowing volumes. In addition.
Included in our free cash flow numbers are one time deal and integration related costs.
As a result, we are implementing a series of initiatives to improve our cash flow with an intense focus on managing inventories down.
Much of this will be driven by leveraging new processes.
Processes and tools in concert with specific targets for each business unit, which we will believe will improve our inventory efficiency across all parts of the business, while continuing to maintain high service levels to our customers.
In addition, we will be taking targeted actions to reduce Capex, then and improve other working capital metrics to further improve our cash position.
Importantly, we continue to make progress towards achieving our deleveraging target.
As Frank mentioned earlier, we improved our net debt to credit adjusted EBITDA ratio to three nine times from four four times, which was supported by proceeds from our recent Mcrobie will control divestiture.
We finished the third quarter with cash and cash equivalents of $538 million.
Gross debt for the quarter totaled $10 8 billion.
Turning to our consolidated outlook on slide 13, I want to provide an update on our expectations for remainder of the year, our business and broader industry continues to face challenging operational conditions with persistent foreign exchange deflationary and other economic pressures ease.
Challenges have only increased since last quarter. We are certainly encouraged by the consistent sales growth achieved across each of our businesses this quarter, especially in this environment. However, we are adjusting our sales expectations for Q4, as we expect volume to further decelerate due to a lower end market.
Man and we expect foreign exchange to remain a significant headwind east.
These factors will also present challenges to adjusted operating EBITDA in light of these factors. We are adjusting our full year guidance and now expect full year sales between 12, four and $12 5 billion.
Comparable currency neutral sales growth of 9% to 10%.
We are reconfirming, our adjusted operating EBITDA guidance of two five to $2 6 billion.
Anticipating results to be at the bottom end of this range as we maintained strong cost discipline and accelerate productivity to offset persistent headwinds and softer volumes.
Looking into 2023.
Current macroeconomic environment makes us cautious.
And as a result, we anticipate that we will be in a low volume growth environment, particularly in the first half of next year.
In addition, while we see raw material inflation easing, we do anticipate some year over year increases in raw materials and continued volatile energy markets.
Which will require additional pricing actions.
As a result, we will continue to examine and refine our resource allocation to focus on strong cost discipline and accelerating our productivity across our business.
We will also continue to implement pricing actions surgically to support our profitability ensure our business remains resilient.
And while it is still early in our planning process. We are targeting strong comparable currency neutral sales growth in 2023 to be driven predominantly by price with more modest EBITDA growth on a comparable currency neutral basis as we reinvest in the business to accelerate sales momentum.
And drive long term profitable growth.
Foreign exchange will continue to be a headwind as we roll forward current spot rates, we will spend more time on 2023 at our Investor day in a few weeks I'll now turn it back to Frank for closing comments.
Thank you Glenn.
I am tremendously proud of the work our teams have accomplished in the last quarter as we remain laser focused on developing innovative solutions and exceeding the expectations of our customers around the world.
As you can see from our outlook.
Although we are moving into Q4 with caution I am confident as we have demonstrated time and again and our global teams ability to navigate even the most complex environments.
As Glenn said, we are closely monitoring shifts in the market to effectively address any emerging challenge.
We remain intensely focused on controlling the controllable through the year end and we continue to work with our customers to surgically implement pricing actions meet or accelerate our productivity and portfolio optimization objectives.
Continued to Delever, our balance sheet and focus on driving profitable growth.
As you know we have made significant progress this year to strengthen our business and become more efficient.
By leveraging our strong foundation and being laser focused on our growth initiatives I am confident in the <unk>.
<unk> ability to be resilient and drive long term value creation, regardless of the market environment.
Before I open the call up to questions I would like to share a official details about our upcoming Investor day, which will be held on Wednesday December seven in New York City.
We are excited to host this event and share more about the opportunities ahead for ISS, including how we will capitalize on our leadership position innovate for our customers generate strong productivity and grow our business for the future.
We hope you all join us and we look forward to seeing you therefore, what promises to be an engaging interactive and informative experience.
Registration links for the in person live event had been set out but if you have not received one or have questions. Please feel free to reach out to our Investor Relations Department.
This will also be webcast at broadly for those that cannot travel to New York City with that I would like to open up the call for questions.
Thank you Frank we will now begin the Q&A session again to ask a question. It is star one and to remove that question. Please press star two as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question again in order to give all participants an opportunity to ask their questions. We request a limit of.
One question per person. Thank you.
Our first question today comes from the line of Adam Samuelson with Goldman Sachs. Adam Your line is now open.
Yes, thanks, good morning, everyone.
I guess.
Question on cash flow.
Year to date has been.
More challenged I think Glen previously there'd been a target of.
800 million or so of free cash flow this year and provide an update.
On.
What that might ultimately shake out to be just more broadly what.
The plan on improving the cash conversion as we go into 2023 and beyond thanks.
Good morning, Adam Thanks, Thanks, very much for the question clearly.
It has been more challenging than expected this year, and that's principally being driven by our inventory balances maybe if I can actually even start back to the first of the year you decided the 800 million we began the year at a $1 billion target.
And since that it's been a combination of incremental pricing slash inflation that was outside of the plan, that's costing us about $125 million.
And in addition, there's another $200 million of additional inventories, we expect to be at year end by the way that's a reduction of about $100 million $100 million from where we are we ended the third quarter with inventories up $600 million from the start of the year that was a large about $200 million of that is basically based on <unk>.
Raw material inflation of about $400 million is basically based on as Frank had mentioned builds.
Building inventories for service levels, but importantly, the basically demand has slowed down and we've ended up with higher inventories. So again, that's about $200 million Delta from our original target.
We are fully confident we're going to get that 200 million back we expect to get that back targeted in the first half of next year and even targeting more on top of that our business has slowed down and there's been some differences in terms of our tax payments really a timing element for us.
Collectively about $150 million, so those adjustments to get us to sort of north of 500. So it's a $1 billion minus 200 higher volume related inventory is about another 125 related to inflation about 150 slightly softer earnings in previous outlook and in addition, some timing on tax.
So thats a little over $500 million I would note as we mentioned in our script within our free cash flow that reported it as a GAAP basis in terms of free cash flow. So taken directly from our cash flow statements that include deal related and integration costs, that's very material for us this year given.
The sale of our microbial control business. So all of the transaction related costs and a number of items for the standup et cetera, basically paid for as part of the deal and some integration related costs was about $225 million. This year, that's sort of in will be netted against that 525 still answer reported basis. If you will that's more in.
300, but the frankly, the $200 million is really a charging as operating cash flow when it's really related to the sales of businesses is a little bit of an apples and orange side sort of points and maybe 500 as the true sort of operating cash flow this year.
With the gas this year, clearly 200 million inventory, we will get back I'd say taxes quarterly timing of another 100 million that gets us north of a little bit 800, and over time, we would expect the incremental raw materials that are sitting in our inventory. This year, we'd expect to get that back over time and again.
Yes.
Yes.
Over $250 million from the start of the year. So over time, we expect that to reverse as well so hopefully that was helpful.
Thank you Mr Samuelson.
The next question is from the line of Mark Astra Chen with Stifel.
Mark Your line is now open.
Yeah, Thanks, and good morning, everyone. I guess just to start I wanted to follow up on the last question. So.
Thinking about free cash flow more broadly.
Wrote down the <unk> business I assume that implies incremental investment for that so the question maybe sort of broadly how do you fund that obviously you just talked about free cash flow improvement kind of over the next 12 to 18 months with other sort of.
Underlying drivers, but can you comment on what a reasonable rate of free cash flow productivity for the business would look like kind of 24 and beyond.
Certainly in the context of some of your competitors, having targets out there are those reasonable levels.
And then second question is just on volumes.
Youre, implying the volumes will be down mid single digits in the fourth quarter, which categories are driving that and then how do you think about those trends through at least the first half of 'twenty three I would guess our challenge before comparisons get easier. Thank you.
Hey, Mark it's Glenn good morning relative to our longer term objectives on cash flow, we're going to hold them to our capital market space.
Less than a month away from that and we'll have a chance to actually discuss more specifically our longer longer term targets and then I'll turn it over to Frank to talk about some of the volume trends Hey, Mark Good morning, a couple of things I wanted to highlight.
You are correct. We are in the fourth quarter, assuming volumes do decelerate versus the Q3 number that we just posted in its really two factors and I'll give you where are the areas that are of focus for US right now what we're seeing I will start with our health business under the health and Biosciences.
Division Mark in health.
Susan I think even earlier in the quarter. We are seeing both end market demand slow as consumers are making choices between probiotics dietary supplement. So we are seeing some slowing end market.
Houston Health and we are also seeing destocking in that business in particular in North America, and we expect that to continue through the fourth quarter results. So well in Europe . So that's what we're seeing in our health businesses and we went through the quarter Mark we did see.
July down we saw August come back September was down and as we've now started to C&I tober, we're seeing a similar trend of the deceleration I mentioned in that business and ingredients under nourish and we highlighted this on our prepared remarks, Mark we are also seeing more.
Inventory Destocking that is the primary aspect.
Asset, we're assuming will continue as we go into the fourth quarter.
We also within the ingredients business did make some trade offs from a pricing perspective.
We have some mobile our protein solutions business that was capacity constrained.
Where we did.
Kris price made it some volume tradeoffs to preserve some margin, but it's primarily destocking. So that is the main reason it would also assuming in that business that will continue in the fourth quarter.
We go into 'twenty three we're expecting at least in the first half moderate volume growth will explain a lot more.
Anticipating for 'twenty three as we get the capital markets day, Mark with US hopefully gives you some color on what we're seeing in the business. The other thing I would highlight though and I think it's an important reminder, for us that if you do take a step back over the two year time period, and we mentioned this through Q3, we are growing up.
Volumes, 4% and we are still seeing good growth in particular and sent in pharma that we highlighted as well so.
The isolation that I highlighted is really primarily in those two areas, which is where were anticipating seeing the deceleration continues mentioned.
Thank you for your question.
The next question comes from the line of John Roberts with Credit Suisse.
John Your line is now open.
Great. Thank you.
The goodwill write downs seem to only affect health and bioscience, but I assumed the higher discount rate would've affected goodwill on the other segments as well so the difference must be in the longer term assumptions for health and bioscience relative to the macro assumptions for the other segments could you discuss a little bit why the longer term macro assumptions for health and biosciences appear to be worrisome.
Relative to the other segments.
Hey, John Thanks for the question actually it's more related to the amount of goodwill and intangibles that are allocated to the business. So let me just by way of background as I'm sure you're well aware.
Prior to the end of the quarter ahead about $25 million in goodwill and intangibles on our books. They were assigned to each of the four divisions there directly related to the acquisitions and by definition. The majority of that is from the MB acquisition.
So that allocation is concentrated in <unk> pharma and somewhat nourished nourish, obviously has legacy iff's business as well <unk> farmers do not guide. So if you will it's a heavy burden in terms of the goodwill intangibles against those two businesses for context about 45% prior to the write down of goodwill intangibles.
<unk> was sitting on the books of <unk> data. So that's 0.1 0.2 is youre required to do an annual test or if there is an event that suggests there may be an impairment had to do it within the year. The events largely is attributable to the interest rate environment. So the way you basically run the calculation is you're basically doing discounting.
Cash flow for each of the businesses into forward projections. The forward projections on the <unk> business were brought down those were in part because of exchange rates. So all of the businesses actually had lower earnings because of that we have to use the current exchange rates part of it is slightly lower operating performance, but exchange rates played a meaningful role.
But the most significant variable as the discount rates everyone's well aware interest rates are going up rapidly. So the discount rate we were required to use for the cash flow was materially higher than a year ago and thats. What resulted in the 225 billion. We do note in our disclosures that we have about 10.
<unk> Cushing on pharma as you would expect that will be the second business that would be under scrutiny just given the amount of goodwill intangible signs of the business.
It's less significant on a relative basis percentage nourish because you had some legacy businesses that don't carry the goodwill and other intangible impact as much. So it's really to some extent assay.
Minor reflection on the outlook of the business and more reflective of the interest rate environment and what we're experiencing from exchange rates.
Thank you.
The next question's from the line of Gunther <unk> with Bernstein going through your line is now open.
Thank you and good morning, Frank and Mike.
Q4 guidance also from what you just said on volumes implies around 10% pricing that's pretty similar to Q3, we know that cancer.
Pricing getting hot.
The weakening demand environment, what you're flagging as well new price homes getting even tougher so how do you see this develop into.
2023, then what are your expectations for the raw material costs into next year as well and also how much of the lower volume that you indicate that do you think on due to strong price increases that you pushed through.
The consumer demand down trading Destocking. Please.
Good afternoon, Gunther I'll actually start by talking about the inflationary environment I think Frank will probably pick it up to talk about pricing dynamics relative to volume first of all we are clearly seeing a deceleration.
Environment relative to raw materials in the marketplace. So that's happening in certain.
Commodities are going forward.
Let me kind of step back and talk about our overall outlook for 'twenty three in terms of three components. One logistics is actually looking very favorable flat to maybe slightly down we are encouraged by ease up with the supply chain, which is helping not only in terms of cost for freight but in addition, just making sure that we're able to deliver on time to our customers.
So that's a plus.
Energy is incredibly volatile as everybody knows its a very difficult to call that what we have been doing with our customers. As many had been doing is implementing direct surcharges or variable pricing that's tied to energy prices, so that will ebb and flow depending upon the market dynamic and again thats fairly consistent.
What's happening with many players that tends to be as youre, well aware more concentrated in the European market globally in terms of the impact and then as it relates to Ross we are seeing we're still seeing inflationary pressure.
Basically put that in three buckets.
There are certain commodity groups that are impacted by the energy environment.
<unk> supply chain, so synthetics aroma chemicals as an example pulp as an example secondarily.
Clearly seeing some roll off on contractual pricing, we had our hedging this year. So that's actually impacting and while there are certain price commodity categories. They are being getting to decline year over year. They represent some modest increases for us such as soybean oil palm level et cetera.
And related to that we are expecting next year's raw inflation to be about half of what we had this year. So call. It high single digit in terms of the impact you are correctly and pricing environment continues to tighten up.
By definition with a slowdown in consumer everyone's trying to be a little bit more thoughtful in terms of.
Commodity pricing wasn't pass through we are about to go to market for 'twenty three pricing. We have spent a lot of energy being very surgical relative to what makes sense customer type customer in terms of pricing tag directly to what we're seeing in the marketplace. So so we are again it will be a much lower number versus what we have.
But we are expecting another round of 323 pricing actions to offset the residual of raw materials.
And Jonathan this is Frank.
With regards to the second part of your question about the lower volumes and strong price increases we do not see it broadly gone through that.
Our pricing actions have impacted volume in fact, if you look at what's happening in the market.
Many of our peers are also increasing pricing so we do not see that.
As an impact in fact, we have also reached out to many of our customers and we've been doing this in concert and obviously with them and they have clearly signaled that.
We have not seen any any share losses per se offer because of our pricing actions, but one area that I did highlight is where we made a conscious trade off was within our ingredients business, where we were capacity constrained we did increase price and made some volume trade offs to preserve margins. So that is the one area.
With that I would highlight.
The other thing is with regards to.
What is the driver primarily as mentioned it is destocking for our business is what we're seeing out there and that is the main driver is our customers are looking at year and their inventory levels and wanting to obviously manage their working capital appropriately. So that's really the drive.
The last thing I will say, though with all of that one of the things and we will spend more time on capital markets day.
We are looking at ways to really continue to build our commercial execution.
Do we work with our customers to really bring the full portfolio of Iff's forward.
Increasing our market share with our key customers regional customers global customers as well as new customer acquisition and I'll be spending some more time here at capital markets day really talking about our plans in that area too.
Focus on our aspirations for growth costs are so much more to come.
Thank you Mr segment.
Our next question today is from the line of Heidi <unk> with BNP Paribas.
Heidi Your line is now open.
Good morning, So I have another question on outlets, we noticed that your peers aren't calling out devoting decline or any major destocking in Q4, although I do appreciate that many of them reported much earlier than you have half market trends weakened significantly in recent weeks or.
Is your cautious outlook driven more by that specific factor. Thank you.
Yes, it's Frank.
And as I highlighted as we went through the quarter.
And in particular in September a highly we did start to really see.
The Destocking that I mentioned and also we are seeing that in the month of October so.
As we look at now for our forecast for this fourth quarter. We're obviously, taking those most recent data points into consideration and that is why we feel as though.
Appropriately so we have.
<unk> guided to.
The top line sales that we've mentioned in our prepared remarks, the one thing I do want to take a step back, though and do highlight though is we still are confident that for the full year growing the business, 9% to 10%. If you were excluding exchange.
We feel as though is very good overall performance.
Clearly the fourth quarters, where we're seeing some challenges and this is primarily due to our customers wanting to manage their inventory and we think it's a prudent approach to take based on what we're seeing in the last couple of months end of Q3, and then as I mentioned in October .
Yes.
Thank you.
Our next question is from the line of David Begleiter with Deutsche Bank, David Your line is open.
Good morning. This is Anthony <unk> on for David.
You touched on it a bit throughout the call, but I was wondering if you could maybe elaborate on how much more destocking you're expecting into.
Into 'twenty three it will be a headwind in Q4.
And then maybe what particular end markets and regions.
Do you expect the destocking to be more pronounced in <unk>.
In regards to maybe the first half of 'twenty three.
Hey, Anthony this is Glenn thanks for joining us.
Say, it's really difficult for us to predict.
We do track very closely and consumer demand so what information we get larger in the scanner data secondarily, obviously in.
Very extensive dialogues with our customers.
In terms of what Theyre doing and as a byproduct product. We do believe that Destocking. In addition to declining and consumer demand are the key contributors to what we're seeing and of note as Frank had mentioned, we see it most pronounced in a couple of categories. One in protein solutions second and probe.
Biotics and as you follow the end market and look at what some of the major CPG firms are reporting.
They're double digit drops in terms of the end market and particularly think about probiotics, which had a big big boom related to Covid and the value of these things it's sort of understandable why you would see the declines. So one is we believe that this destocking and consumer point to relative to how long this.
We'll run we really don't know.
A number of our customers have communicated to us that they believe by year end. They will have their inventories in place that of course assumes they have a good crystal ball relative to where the consumer is billing others have indicated that the lead that this may extend into the first and second quarter of next year. So we will be providing more perspective at our investor day realm.
Our outlook on 23, but we do we will ultimately be factoring.
Potentially further destocking and slow down the consumer as we think about the outlook for our financial performance for next year. So I appreciate the question.
Our next question comes from the line of Mike Tyson with Wells Fargo. Your line is open.
Hey, guys nice quarter.
When you think about the portfolio.
Now and it does seem like folks think we're heading into a downturn in 2023, how do you think each of the segments.
Would perform if if a recession unfolds and.
And maybe give us a little bit of color of what you've learned.
Yes.
Those businesses as we head into 'twenty three.
Yes, so thanks, Mike for the question a couple of things.
As I look at the total portfolio, one would say that.
Overall, we feel as though in going into a recession. We are very resilient when you looked at our portfolio overall.
If I.
I start with nourish, Mike clearly if you think about ingredients in the end markets of food and beverage we should be very resilient. There. Our flavors segment is a resilient business and then also fully designed so if you were to <unk>.
<unk> some of the near term challenges that were talking about inventory Destocking perspective, we think that our nearest division would be overall very resilient in recessionary times.
If I look at the scent business, what is really interesting Mike is that the one area that we have.
Thought would be more of a challenge during a recession would be fine fragrance. However, we are seeing really good growth in our fine fragrance business. This year and our San business. Overall has continued to hang in there very well with overall strong volume growth.
As I look at health and Biosciences, clearly, we think that holds up very well also Mike.
In particular, if you think about cultures and food enzymes are home and personal care.
<unk> business within health and Biosciences, We think is a really good business and holds up during a recession.
Early resistance and then clearly we see pharma as being very resilient in a recessionary period of time.
Or Mike I should say and it's something we will clearly spent a lot of time either capital market stay unpacking, even more for you.
Our next question comes from the line of Ghansham Panjabi with Baird Ghansham. Your line is now open.
Hi, Good morning, this is actually Matt Krueger sitting in for Ghansham.
So I was hoping that we could touch on some of your own internal initiatives here. So what are some of the internal offsets across the business that can counter the tougher macroeconomic backdrop as we cycle into 2023 and into the back half of this year and what are some of the primary concerns when entering a downturn for the business are you already taking actions.
A key driver of our choices and decisions in our manufacturing operations group for logistics cost. So I would first start that we have made really good progress in improving productivity and I think Glenn highlighted that in his prepared remarks with that said as you go into a additional.
<unk> one our investment in innovation into really also making sure we're continuing to focus on working with our customers to drive growth so more to come at capital markets day, but we do think.
We will be able to accelerate productivity as we head into 'twenty three.
Third quarter trend versus the first half of the year. One as we are beginning to sort of normalize for price versus inflation. So there was a another round of pricing year to sort of catch up for what's been happening with raw materials that has been implemented so its been extremely helpful relative to the gross margin performance and we expect that to normal.
Lines into the first half of next year, but then secondarily. The team has also undertaken actions.
Year over year growth as a result of that.
Thank you.
<unk> Your line is now open.
The <unk> result.
I understand you want to save a lot for your analyst day, but just can you currently just highlight what youre seeing in raws transportation logistics and then just also general operating costs, just how we should be considering those at least on the preliminary basis entering 2023. Thank you so much.
As a byproduct of that not only do we need to be smart on our next round of pricing actions, but everything Frank had mentioned around managing our cost structure as a way to sort of offset those pressures as well.
Yeah.
Our next question comes from the line of Jonathan Feeney with consumer edge.
Jonathan Your line is now open.
Thanks, very much I think I've got a pretty good handle on how your customers from our primary customers are dealing with trade down amongst consumers, but specifically to your business.
Other than you mentioned, taking pricing in some cases prioritizing pricing over volume presumably to protect margins is what you meant.
How do your customers trade down within your portfolio sort of not innovating or going to a competitor are there signs of trade down and how is that different.
In.
The.
Legacy Dupont businesses, the businesses that are new to newer to iff's, because I felt we got a pretty good handle on how all of that work before 2021. Thank you.
Well, let me attempt to answer it on a couple of dimensions, Jonathan obviously with the consumer under pressure from inflation. There is a visible movement from branded to private label. So that's happening both in Europe , and the U S. Although more pronounced in Europe .
We play across.
The customers that play in those spaces. So.
We formulate products basically to take cost out and deliver the same solution for the consumer the third thing I would say relative to the behaviors consumer and this is clearly happening in the marketplaces, while the consumer may still actually stay within branded.
Less home <unk> personal care products usage or less fabric softener and as an example, so thats another factor thats happening affects our business as well as the customer's business, but it may in essence also result in sort of lower volumes in the marketplace as well. So hopefully that's helpful. Yes, the only thing I would add.
Jonathan anything it's important though that we do still continue to see our customers seeing how important innovation is for the future. So as we engage with them.
Going forward so.
Wanting to.
Basically every dollar you gain in revenue you lost out on EBITDA and that's a fairly sharp downshift in decremental margins from <unk> and maybe a little at odds with the price offsetting raw commentary so what.
What happened there and how does that kind of.
Set up for margin progression into <unk>.
Yeah, Matt one underlying factor relative to the quarter is how we are trying to correct manufacturing volumes to offset the decline in demand in order to address our cash flow and inventory problems.
As a result of that the production volumes in the third quarter for <unk> for drop even more so than demand. So there is an absorption issue.
That's hitting the business.
Affect sort of the marginal flow through of the dollar if you will also.
The quarter there were some.
Inflationary pressures like energy and some other things that were sort of.
Not yet.
Outside of the period per se in terms of the kind of the effects is a little bit hard to sort of normalize one quarter to another as being sort of an apples to apples, but the <unk>.
The reduction in volumes in order to get our inventories down as a factor that's hitting our business collectively in Q3 and also in Q4 and its more pronounced and nourish an HEB, we've seen a more pronounced volume declines so that that's a factor in that calculus you cited.
Thank you.
There are no further questions waiting at this time, it's my pleasure to turn the call back over to Frank Clyburn for closing remarks.
So.
Thank you everyone for joining our call.
Hopefully you can see in here.
Despite some of the near term challenges we are extremely excited about the future.
In front of us with Iff's, we look forward to December 7th.
Investor Day.
In the next couple of weeks, where we're really spend time sharing with you our growth our aspiration from an innovation perspective, how we're continuing to drive productivity to be able to reinvest in the business and why.
Very excited about the future of Iff's going forward. So look forward to seeing many of you in New York City on the seventh and thank you for joining our call.
That concludes the Iff's third quarter 2022 earnings call. Thank you all for your participation you may now disconnect your lines.
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