Q1 2023 International Flavors & Fragrances Inc Earnings Call
Good morning at this time I would like to welcome everyone to the I S. S first quarter 2023 earnings conference call.
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I would now like to introduce Michael Deveau head of Investor Relations.
Mr. <unk> you may begin.
Thank you good morning, good afternoon, and good evening, everyone welcome to Iff's first quarter 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 at IR <unk>.
Dot com.
Please note that this call is being recorded live and will be available for replay.
Please take a moment to review our forward looking statement.
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. 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.
Craig Claiborne, and our executive Vice President Chief financial and business transformation Officer Gwen Richter.
We will begin with prepared remarks, and then take questions at the end.
With that I would now like to turn the call over to Frank.
Thanks, Mike and Hello, everyone.
Delivered first quarter 2023 results in line or ahead of our expectations amidst a challenging operating environment.
Our team successfully navigated soft end market demand.
Customer inventory Destocking as we executed on our priorities to deliver on our financial commitments.
We are proud of the results and want to thank the entire <unk>.
Team for their contribution.
However year on year comparisons and a number of areas showed the backdrop in which we're operating remains challenging as I acknowledged on our last call.
As you will see from our quarterly financials, we have made solid progress on our objectives of reducing cost to improve efficiency recovering inflation and materially reducing our inventories while improving our service levels to our customers.
The key challenge remains volume growth and our management team remains keenly focused on accelerating profitable sales growth moving forward.
Before I get into our first quarter performance.
You want to share an update on our search for a nurse president.
For the past several months, we have engaged with various leaders about the opportunity to one our largest division.
At this time, our search continues as we're looking to attract a well regarded leader with a strong track record of success that can drive performance in this division.
I am pleased with the slate of candidates that we have and look forward to welcoming a new leader in due course, we will.
We'll provide further updates going forward as we progress the process.
Starting on slide six I'd like to begin with a high level look at our performance in the quarter before handing it over to Glenn to discuss our financials and full year outlook in more detail.
In quarter, one ISF generated $3 billion in sales, which reflects 1% comparable currency neutral growth led by increases in scent and pharma solutions.
As we expected volumes in the first quarter similar to what we experienced in the fourth quarter of 2022 remained under pressure down high single digits.
Mainly to consumer demand slowdowns and significant customer destocking actions. It should be noted that we are also comparing to our strongest year ago comparison, where volume grew mid single digits in the first quarter of 2022.
<unk> operating EBITDA finished at $503 million in the first quarter of 2023.
And largely was impacted by the lower volumes as well as a proactive effort to rebalance inventories to drive cash flow generation.
As we shared earlier this year, we are executing our inventory reduction program, making strong progress in the first quarter.
As expected while it was cash flow positive it did lead to a significant headwind in terms of profitability.
As our fixed costs were absorbed over reduced manufacturing volumes, which represented approximately a <unk>.
Percentage point year over year impact.
At the same time, we were successfully recovering our total inflation to increase pricing actions in the first quarter and executed on our internal productivity initiatives that continue to deliver strong cost and operational efficiencies.
From a leverage perspective, our net debt to credit adjusted EBITDA for the quarter was four six times.
As we disclosed earlier in the quarter, we have proactively renegotiated our debt covenants to ensure iff's continued resilience as we navigate today's complex global macroeconomic environment.
These amended agreements will provide us with maximum flexibility.
We grow our business and continue to optimize our portfolio to achieve our target leverage profile.
To this end, we continued to deliver on our portfolio optimization commitments.
Our savory solutions divestiture is now on track to close at the end of May.
In February we also announced the sale of our flavors specialty ingredients business.
K based private burn extranet for $220 million in cash proceeds which will be used for debt repayment.
We expect this transaction will close by the end of the third quarter of 2023.
Subject to customary closing conditions.
Moving forward portfolio divestitures remain a central part of our strategy and we are evaluating several opportunities to further strengthen our capital structure as we drive towards our targeted leverage profile.
Turning to slide seven I'd like to provide a bit more detail on our sales performance in the quarter.
As I mentioned, we delivered more than $3 billion in sales in the first quarter, which represents comparable currency neutral sales growth of 1%.
Our revenue growth in the first quarter was led by continued strength in our sensor business and steady performance in pharma solutions.
In a moment when we will take you through the underlying factors driving the performance across our business segments.
First it's important to provide high level context on what we're seeing in the environment.
<unk> once again delivered a strong performance, both fine fragrance and consumer fragrance grew double digits.
And our pharma solutions segment also delivered solid growth driven once again by a strong performance in core form.
<unk> was flat this quarter.
<unk> business continued to be pressured by macroeconomic factors, and destocking, which offset growth in flavors and fluid design, while certain businesses within our health <unk> Biosciences segment. We're also challenged this quarter cultures, and food enzymes and home and personal care with two strong.
<unk>, an ancient B that we expect will continue to gain share throughout the year.
Taking a step back and reflecting on our performance. There is essentially a handful of categories that have disproportionately impact our volume performance spin.
Specifically within a narrow segment.
Our ingredients division, which represents approximately 25% of total company sales and includes protein solutions multipliers of sweeteners Coretech strengths cellulose and food protection drove about 60% of our total volume decline in the quarter.
As we outlined at our December Investor Day, we are working to improve our performance and have largely addressed our capacity issues and have improved our service levels in these businesses.
We're now working on modifying our pricing strategies.
<unk>, our commercial coverage and simplifying our internal processes all to grow our project pipeline and deliver more robust growth going forward.
And while this will take time and attention we're doing so with a sense of urgency to ensure that when current market challenges like Destocking subsides, we are well positioned to capture market share.
Looking at our profitability.
Quarter on slide eight first quarter, adjusted operating EBITDA totaled $503 million down.
Down 19% on a year over year comparable currency neutral basis as expected.
As I shared on our last call lower volumes related to consumer demand softness and significant customer inventory destocking.
Plus unfavorable manufacturing absorption related to our inventory reduction program meaningfully impacted our profitability. Despite continued strong pricing and productivity gains.
We were successful in generating approximately $16 million of gross productivity gains in the first quarter.
However, this strong benefit was offset by higher manufacturing related costs, such as lower yields slower obsolete inventory and higher manufacturing inflation if.
If we look at our profitability performance absence of the unfavorable manufacturing absorption comparable currency neutral adjusted operating EBITDA would have declined approximately 4%.
Looking ahead, we remain intensely focused on controlling our controls.
Including identifying additional opportunities to further optimize our operations and strengthen our balance sheet.
While we certainly have work to do to fully execute on our refreshed strategic plan, we've taken significant action to ensure our business maintains the flexibility and resilience needed to deliver in any macroeconomic environment.
While we do believe 2023, we will continue to be impacted by many of these factors independent on an improving volume environment in the back half of the year. We continue to believe we can deliver our long term adjusted operating EBITDA growth target of 8% to 10% on a comparable currency neutral basis.
Over the 24 to 26 time period.
I'll now turn it over to Glenn to provide more context around on divisional performance cash flow and financial outlook going forward.
Thank you Frank and thanks to everyone for joining us today.
Turning now to slide nine let me review, our first quarter performance across each of our four business segments.
In Europe sales were flat on a comparable currency neutral basis with growth in fluid design and flavors.
Set by continued volume declines ingredients.
<unk> shared the Earth ingredients, which includes protein solutions multipliers in sweeteners core texturing and Cellulosic infill protection had the most pronounced volume declines in the quarter, representing approximately 60% of our total company volume decline.
Despite our pricing actions and productivity initiatives in the quarter within a narrow segment, the lower volumes and unfavorable manufacturing absorption due to our inventory reduction program that I mentioned earlier more than offset those efforts contributing to a 27% year over year decrease in currency neutral.
Adjusted operating EBITDA at $208 million.
Those same pressures impacted health and biosciences, this quarter with a 3% year over year decrease in comparable currency neutral sales and a 19% year over year decrease in comparable currency neutral adjusted operating EBITDA.
Slight price increases and strong productivity gains.
While we saw solid growth in cultures, and food enzymes and home and personal care lower volumes and unfavorable manufacturing absorption also pressured our performance.
As Frank mentioned earlier, our first division continues to perform quite well delivering an 8% increase in comparable currency neutral sales and a 1% increase in comparable currency neutral adjusted operating EBITDA driven by double digit growth in fine fragrances and consumer fragrances.
<unk> growth this quarter was driven by higher volumes pricing and productivity gains as the division as we made resilient.
Lastly, I'm pleased to share the pharma solutions delivered a 4% increase in comparable currency neutral sales led by continued growth in core pharma.
That said like nursing and health <unk> Biosciences segment was also impacted by lower volumes and unfavorable manufacturing absorption leading to a 6% decrease in comparable currency neutral adjusted operating EBITDA.
Overall for the quarter sales and EBITDA were slightly ahead of our expectations with pricing on track modestly better volumes and favorable productivity.
Now on slide 10, I'll discuss our cash flow and leverage position for the quarter.
Cash flow from operations to $127 million this quarter, which is an improvement versus the negative $4 million, we reported in a year ago period.
One bright spot in the quarter was approximately $200 million decrease in inventory versus our year end 2022 as.
As I discussed on our fourth quarter call. We have initiated a number of actions across our business and supply chain teams, including system and process enhancements.
To rapidly reduce our inventories over the course of the year.
This is adversely impacting the P&L through negative manufacturing absorption. It has a short term impact that will be recovered over time.
Looking ahead, while the majority of our efforts to reduce inventories for 2023 are behind US. We do have near term headwind in Q2, albeit to a lesser degree in Q1, as we continue to correct our over inventory position and maximize cash flow.
I also want to note that accounts payable in the quarter was adversely impacted as a result of seasoned payment patterns and buy our inventory reduction program, whereby we slowed the purchase of raw materials, which had a direct impact on our AP.
We expect this will improve over the course of the year as we achieve our target inventory levels.
Capex spending for the quarter was $175 million or approximately five 8% sales. This was elevated due to project timing and we expect to moderate through the balance of the year. We continue to believe that we will be around $500 million in capex for full year 2023.
Our cash flow for the first quarter was negative $48 million. This is consistent with the seasonality of cash flows for our business included in our free cash flow is about $100 million of cost primarily related integration and transaction related costs.
In terms of leverage we finished the quarter with cash and cash equivalents of $594 million, which includes $4 million in assets currently held for sale, while net debt totaled $10 7 billion.
Our trailing 12 month credit adjusted EBITDA totaled approximately $2 3 billion.
And our net debt to credit adjusted EBITDA was four six times for the quarter as we mentioned earlier.
While our leverage position is slightly higher than in the past few quarters, we were proactive and renegotiate our debt covenants in the first quarter to ensure that we have appropriate capital flexibility as we execute on our strategic priorities continue to be a challenging market.
Importantly, we continue to actively evaluate the portfolio with consideration for further divestitures that provide additional financial flexibility and debt pay down without impacting our long term aspiration.
Turning to slide 11 for our consolidated outlook for the fiscal year 2023.
As we look ahead to the balance of the year, we continue to believe our volume performance will improve yet.
I acknowledge that market conditions remain uncertain.
In our discussion with customers. The majority have signaled that they are destocking efforts are ending as they believe the consumer will be resilient in the second half.
Because unless we have yet to see a broad base volume improvement across our business, but we remain steadfast in our focus to control what we can control to protect profitability and maximize cash flow and drive portfolio optimization for.
For the full year, we now expect sales to be approximately $12 3 billion versus $12 5 billion previously this.
This change is largely related to energy and raw material pass through price adjustments.
In addition, we had a modest increase in unfavorable impact from foreign exchange.
As we noted on our February earnings call about 30% of our original 6% pricing guidance was related to energy deflation.
Much of which is pass through the surcharges with energy prices, having moderated significantly.
Maintaining our expectation of flat comparable currency neutral adjusted operating EBITDA growth and continue to believe adjusted operating EBITDA will be approximately $2 4 billion.
Foreign exchange headwinds are expected to continue to pressure sales and comparable currency neutral adjusted operating EBITDA growth, which we now expect will adversely impact us, 1% and 3% respectively.
This incremental pressure is due to a handful of hyper inflationary currency that has and we expect will continue to significantly devalued over the course of 2023.
On a comparable currency neutral basis, all of the above noted items translate into approximately 5% versus approximately 6% previously.
Sole driver once again is the energy and raw material pass through price adjustments as we continue to believe volumes will be flat for the full year.
In terms of cannibalization, we believe volume will sequentially improve each quarter with a growth rebound expected in the second half of the year.
As the market challenges are expected to subside and our year ago comparisons are more favorable.
To provide additional context first quarter volume performance was modestly better than we anticipated with the second quarter modestly lower.
Net result is that on a first half basis, we are broadly in line with our expectations, which we believe will be offset by a favorable second half.
On a two year average basis, we expect first half volumes to be approximately negative 2% reflective of destocking and second half volumes to be up plus 2%.
For the second quarter, specifically, we expect sales to be approximately three to $3 1 billion with volume performance down mid single digits, and adjusted operating EBITDA of approximately $540 million to $590 million.
We remain intensely focused on improving our inventory levels and driving cost savings through productivity and restructuring initiatives to ensure we generate strong cash flow for the full year.
As a result, we continue to target 2023, adjusted free cash flow of more than $1 billion, excluding costs related to integration restructuring and deal related items.
Turning to slide 12, we recognized that we continue to face a challenging environment, including reduced visibility on consumer and customer demand outlook and the path of inflation.
However, we remain intently focused on what we can control with the goal of continuing to strengthen <unk> operating foundation and execution performance.
As we've discussed there are a few top operational priorities that will enable ISS to not only manage these complexities, but also to drive long term profitable growth.
Our highest long term priority is accelerating topline growth.
To achieve this goal we are making key strategic investments in key areas of our business and continues to be more surgical and our pricing actions to ensure we would cover inflationary pressures while supporting volume growth.
We have also made great progress in enhancing our customer service and supply chain agility to reduce bottlenecks and increase efficiency in the first quarter. We maintained strong service levels, while also reducing our inventories.
Proving approximately $200 million from December 22.
In conjunction with this we will be rolling out a redesigned sales inventory operations planning process.
Enhancing productivity also remains a central as part of our transformation as.
As mentioned earlier during the quarter, we successfully achieved approximately $60 million of productivity benefits and began initial results from our restructuring program.
I expect this benefit will rapidly increase over the balance of the year and be a strong contributor to our EBITDA performance this year.
Lastly, we remain laser focused on improving our cash flows.
Delivering our long term deleveraging target.
We expect to continue to make improvements in net working capital for the balance of 2023 and into next year.
In parallel executing against our portfolio optimization efforts continuing to this noncore business in.
In Q2, and Q3, we expect to complete the sale of our savory solutions and flavors specialty ingredients businesses with proceeds used to pay down debt.
Going forward. This is a central part of our strategy and continue to evaluate additional portfolio optimization opportunities to strengthen our capital structure.
With that I would like to turn the call back over to Brent.
Thank you Glenn.
Moving to slide 13, I would like to summarize our current position in line first quarter results and reiterate where we are headed for the remainder of 2023.
Over the years ISS has remained resilient amid a variety of market conditions, while successfully transforming the business to meet evolving customer needs.
The same is true today as we focus on controlling what we can control and executing on the operational priorities outlined in our strategic refresh.
To achieve our financial vision and drive sustainable profitable growth that benefits all of our stakeholders. We continue to believe our volume will improve yet acknowledge that market conditions remain uncertain.
Glen mentioned earlier, a majority of our customers have signaled that they expect destocking efforts will end and believe the consumer will remain resilient in the second half.
We will continue to take action to stay nimble and strengthen our financial and operational foundation and maintained our resilience as we continue to be diligently focused on delivering our operational and financial objectives.
Moving forward, we remain committed to bringing strong products and innovation to our customers as we meet or exceed their service expectations.
Financially we are focused on improving our working capital.
<unk> by rapidly reducing inventory levels to increase cash flow generation and we will continue to execute on our growth focused strategy.
Enhancing productivity driving operational efficiencies and prioritizing our highest return businesses, all while maintaining capital discipline.
We have started the year in line with our objectives and are confident in our ability to continue to execute going forward.
Once again I want to thank our teams for their tireless work to innovate and bring to market the essential products and solutions that shapes. So many of our daily experiences.
I have no doubt that we are well on track to build a more efficient agile and customer centric organization.
To deliver sustainable profitable growth in any market environment.
With that I would like to now open the call for questions.
We will now begin the question and answer session.
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To limit your question.
One question per person.
Our first question comes from the line of Heidi <unk> with BNP Paribas.
Your line is now open.
Good morning, So I wonder if you could please talk more about the cadence of volume and margin performance through the quarters to get to your guidance. Please and specifically on volumes. So you reported Q1 volume down high single digits, which I think is what you had guided for originally but then in your speech you said that it was.
Better than expected and then Youre now seeing I think Q2 is looking somewhat worse than expected and I think your guidance needs to be down low single digits. So can you clarify what the guidance for Q2. Please perhaps you can also comment by segment and then same for op margins through the year. Please thank you.
Yes, it's Frank couple of things. So in Q1, we had guided to your point high single digits.
Volume decline and we actually performed a little bit better than what we had assumed in that original guidance sales was up 1% as you know on a currency neutral basis.
So a little bit of had in Q1 Q2 is slightly down.
Down from what we had assumed originally however, when we take a step back how do you think about the first half of the year mid single digit volume decline, which is pretty much right on what we had expected at the beginning of the year. So really what youre seeing is a phasing in shifts, but the first half of the year mid single digit.
Decline in volume and we will talk a little bit more about some of the different areas here in just a bit.
The second half of the year, what we are anticipating and assuming as against obviously against a much easier comp as we get to the back half of the year.
We are making the assumption that we will have mid single digit growth in the second half of the year, which then when you look at the full year has our volume being flat year over year. So let me unpack a little bit about some of the key assumptions as we get into the back half of the year.
Year, and even into the second quarter.
Destocking, we are assuming that that and pretty much in Q2. So if you think about destocking Heidi. We saw this really come to fruition in Q4 grew volumes were down high single digits for Q4 'twenty two we continue to.
Destocking in Q1, and some Destocking is continuing in Q2, but we think Destocking is at the end as we head into the second half of the year. This is really important for our protein solutions business and health business that were significantly in.
Impacted by Destocking.
Second the assumption is that consumer trends do remain resilient theres some uncertainty in that but if we look at what we.
I have heard from our customers and as we're working with them in bringing innovative solutions and home and personal care. We saw a good growth in the first quarter, we anticipate that will continue.
Dish detergent a lot of innovative projects that we're working on and we see good progress.
An acceleration as we go into the second half of the year, we think food and beverage will still remain resilient. Obviously, our flavors business is really important there grew in Q1, and we anticipate we will see accelerated sequential performance as we go through well this year and into <unk>.
Back half.
We also are focused on improving our ingredients business. We've discussed that really are focused on putting some additional resources behind ingredients. Our customer service has improved significantly we have the capacity to serve customers. So that's something that we're also assuming as we go forward in our ingredients.
Business and then we're seeing resilience in consumer in fine fragrance, and we anticipate that to continue and then also pharma continues to be resilient as well. So when we take a step back from a volume perspective, Heidi think of first half down mid single digit volume second half up mid single.
<unk> volume and then ultimately volume flat for the full year. The third thing that we are seeing that we believe will accelerate in the back half of the year and improved sequentially as geographical.
Volume growth in the back half for instance, China. This quarter Heidi was up 2% and sales in Asia Pacific or I should say greater Asia was up 1% as we talk to her.
<unk> in Asia and in China, while the opening is still slow in parts of China. We are seeing improved signals from customers and that gives us confidence as we get into the back half of the year that you will see geographical improvement and then we've also noted that North America.
It's been challenged for us over the last couple of quarters, where anticipate sequentially that will improve as we get to the back half of the year. So that's the the assumptions from a volume perspective, a lot of like we said there was some uncertainty but we're.
Believing that those three assumptions and drivers are what gives us.
The assumption at this point in time to hold our volume flat for the year. In addition to that as you look at the back half of the year Theres a couple other things I will highlight on the call. We spoke about the fact that absorption in the first quarter.
<unk> was a headwind for us it will be a headwind in Q2 to a lesser degree obviously as you get to the back half of the year that will go positive and help US and then in addition to that if you recall, we highlighted that we have our cost reduction program full year, we highlighted of course.
Reduction program of $100 million.
Highlighted a run rate of $70 million to $75 million for the year.
And if you look at the back half that is where youll see the majority of that benefit in the second half of this year as we execute on our cost and people reduction program. So when you take all those things into account is that is why we feel as though holding our EBIT.
Guidance to the 234 billion and Glenn highlighted was the appropriate assumption at this time.
Okay.
Thank you. Our next question comes from the line of Mark Oscar Chen with Stifel. Your line is now open.
Yes. Thanks.
Morning, everyone.
Wanted to ask about.
Guidance and then some of the troubled areas within the business. So.
In your opinion are you being more conservative or optimistic than you were.
Previously it seems like underlying assumptions, maybe from a consumer dynamic has changed to be more more positive within the underlying guidance I'm curious if you could comment on that and then.
For the more challenged portions of the portfolio of things like the the the legacy F&B and ingredients in terms of what you highlighted.
What proactive steps are you taking to offset what seems like perhaps some more permanent structural volumetric share loss, meaning like improving service levels. It doesn't seem like it could be enough to change the trajectory of the business, but perhaps I'm wrong, so sort of curious how youre thinking about what you can do to improve those.
The pieces of the business, which had been.
Dragging performance and losing share.
Yes, Mark it's frankly, a couple of things one is with regards to.
The businesses that were challenged and.
Some of these as we have highlighted clearly were due to what we see more destocking in end market demand and not necessarily share loss, but I will also acknowledge there has been share loss.
Other parts of our business so.
For instance in health Mark you highlighted we have discussed that the probiotic market in North America several times.
In that business in particular, we have been really focused on our resources into that marketplace that is really the down in volume has been driven much more by Destocking and end market softness.
But with that said, we have a strong focus on our with our health team. There's a lot of reviews with our commercial team and we are starting to see sequential improvement in that business Mark as we go forward.
In our ingredients business as I just highlighted there is a couple of things that we have put in place.
Our customer service levels were not where they needed to be re highlighted that.
During our Investor day, they have improved significantly mark so that is a big.
I would say.
<unk> for us and we're getting good positive feedback from customers, So customer service levels and on time performance range of 90% to 95% is really important and we are their second we now have the capacity that we need to supply customers. We had run into capacity challenges in the past. So we now have the supply that we need.
Third we are putting targeted resources in specific markets that are going to be focused on commercial.
Customers around ingredients. So additional resources Mark to your point are also a part of what we're doing and then for what has been encouraging we had gotten away from really good pipeline development with our customers in that space and I can tell you. This is going to take some time, but we are seeing good.
<unk> now.
Come to fruition and we are seeing pipeline progress in nurse and ingredients and specifically so those are the areas of focus the team is spending a lot of time really looking at how we can accelerate our sales performance in those areas.
Thank you.
Our next question comes from the line of Gunther Zechman with Bernstein you may.
Your line is now open.
Hi, Thank you Hi, Frank Hi, Ken.
Can you. Please provide you insight into the cash flow progression that cadence throughout the year.
The 1 billion free cash flow adjusted free cash flow targets.
And also within that could you just discuss an outline or do you think about it in terms of working capital improvement case.
Good afternoon.
For the question I think summarized.
Summarized version is we're actually tracking quite well against our objectives.
And I want to sort of unpack as you know the two big contributors relative to our adjusted free cash flow combination of achieving our earnings guidance and then secondarily all the work on working capital we had a very good quarter relative to our expectations around working capital as a reminder, our full year objectives for working capital.
<unk> of a $200 million.
On point year, and a year end reduction in inventory.
And then a $100 million increase between payables and receivables for a net $100 million reduction in net working capital. The biggest driver of that obviously is inventory at that 200 that $200 million reduction is actually a $350 million volume reduction with a $160 million of basically.
Price escalation <unk> raw material cost increases coming through in the first quarter focusing on inventory, we actually were over $200 million down inclusive of around $80 million of price escalation. So the volume component in the first quarter was $280 million against our full year objective of $3 50.
So we're trending quite well, we will probably actually get to the full sort of our.
The level of inventory reduction by the end of the second quarter at this point in time payables and receivables. They are a little lumpy seasonally we're feeling very good about achieving those objectives at the end of the year. So overall, we feel very good particularly relative to the working capital improvements. Thank you.
Thank you.
Our next question comes from the line of John Roberts with Credit Suisse. Your line is now open.
Thank you.
Can you explain what appears to be underlying consumer strength in fragrances versus the underlying consumer weakness in food ingredients.
Maybe the question should be how did the channels get so overstocked in food ingredients and not so overstock and fragrance consumer products and are there significant divergences in the current point of sale volumes between packaged food and fragrance products.
Yes, Hi, John This is Frank what we have seen in consumer fragrances in particular, we saw a very strong.
Q1 in fact, we also saw a very strong Q1 in fine fragrances as well. So we feel really good about what we're seeing I think consumer fragrances. It was a lot of I would say.
Pent up demand I think you are seeing clearly some positive trends on what we have been working with our customers in particular, bringing new innovation to.
Consumer fragrances, we've worked with a lot of the large consumer packaged good companies over the last several years and I think this is where we really have brought strong innovation.
In our consumer.
Business, So we feel really good about that.
There clearly was an inventory build significantly in.
Ingredients as we've highlighted you could see it as you go through the first.
Part of 'twenty, two and then you look all the way back to 'twenty, one I think that what took place in those businesses in particular uncertainty around supply chain and.
Companies wanting to make sure that they have the supply necessary as you went through a lot of volatility in the supply chain, which is what caused the build and obviously now is what we're seeing is some of the destocking from those efforts in those businesses.
Okay.
Thank you.
Our next question comes from the line of Joshua Spector with UBS. Your line is now open.
Hi, Good morning, this is Josh.
So just wanted to focus on the production cost under absorption.
Could you. Please tell us what was the actual size of the impact there it <unk> look like maybe.
$50 million or so in the EBITDA Bridge and then.
Looking at <unk> in the second half how much residual impact you're assuming in each period as the year progresses.
And finally, if we get a scenario where volumes kind of disappointing to the downside.
That get larger.
Yes.
Thanks for the question this is Glenn.
Within the first quarter, the negative absorption impact was $100 million, which translates to actually in the 330 basis points of impact on EBITDA margin.
That represented a year over year volume decline of about 20%. So think about our annual fixed cost base for our manufacturing base of about $2 billion. Every one point on an annualized basis is basically worth about $20 million. So hence why we were able to reduce our inventory so significantly to production down.
So I would say a one time event of $100 million we're.
<unk> as I mentioned to continue to make progress on reducing inventories and expecting to have mid single digit down volume in the second quarter that translates into another $50 million of negative absorption. We are anticipating actually positive absorption in the second half of the year as Frank mentioned, we're expecting mid single digit growth.
In the second half of the year, so production volumes being up year over year.
Again, the context of the risk associated or opportunity associated with declines or increases in manufacturing of one point on a full year basis is equal to $20 million of negative absorptions. So if you think about two points in the second half that would be equivalency.
That $20 million, we have discussed in the past that we will have to continue to consider that if we continue to see volume softer than our expectations what will be the balance of continuing to manage cash flow and keep our inventories in the right place for production efficiency purposes versus basically the earn.
<unk> profile. So they are clearly in a softer environment than anticipated. There is some risk of further negative absorption in the second half of the year and thanks for the question.
Thank you.
Our next question comes from the line of the Hudson Tuck in GB with Baird.
Your line is now open.
Hi, everyone. Good morning.
Just judging by some of the comments from your major customers out of this earning season. It clearly looks like the global consumer is a little bit weaker.
Just curious given inflation has peaked and just your more recent conversations with your customers do you get a sense as to whether some of the promotional activity that the.
Customers typically resort to during periods of weakness starting to contemplate that just trying to get a sense as to the.
The risk profile as we cycled through the rest of the year, because you will be passed destocking, but we still have a weaker consumer thanks.
Yes, Hi, this is Frank.
Think as we talk to our customers.
At least the big consumer good companies I would say, they're probably cautiously optimistic on the resiliency of the consumer.
Stepping up in certain categories promotional activities and efforts.
We have clearly seen a law.
Lot of I would say good focus from them on innovation and looking for new projects.
As they continue to focus on building out their future offerings to consumers I also think that what is taking place is.
If you look at from our lens and it goes back to what I was highlighting we do anticipate that.
That sequential improvement will continue from a volume perspective, so just to reiterate a couple of points in particular in the areas that are really key for us the sequential lift going from.
First half down mid single digits to positive mid.
Mid single digits in the second half, we do continue to see working with our customers.
Clear opportunities for that sequential step up, especially against a softer back comparison.
Quarters in the back half so we believe that our consumer.
Companies that we're working closely with are the ones that are highlighting differentiation and innovation has been key and thats something that we will continue to focus and work on as a company.
Thank you.
Our next question comes from the line of Andrew Caches with Barclays. Your line is now open.
Yes, hi, good morning.
Glenn I was hoping we'd get a little more context.
Your deleveraging plans over the next while the sharing next.
So you came into this year a little over four times on a net basis that figure has gone up.
As expected.
You do have those divestitures announced which will hope you get leverage back down it looks like to about where you came into the year, but.
I think it still looks like we're going to end the year around flat in 2023 from a leverage standpoint so.
I guess that leaves you with a lot of wood to chop next year to get down to that 3.0 times target. So I guess the question is do you expect to get there organically or at this point do you actually need additional portfolio actions to drive the accelerated deleveraging and actually get you. There next year and then really.
<unk> to debt.
It's not lost on me that your dividend is really absorbing all your cash flow at this point so to the extent that conditions do deteriorate from here or you can optimize the portfolio. Further are you open to considering a dividend reduction or cut at some point to preserve the investment grade status.
Hey, Andrew this is Glenn thanks. Thanks for the question agree relative to wood chopping Thats why I have a hatchet with needs today, but relative to your assumption for this year.
You are correct, we were a little over four times the beginning of the year, we will be receiving net proceeds after tax distributions transaction over $750 million combination of this quarter and next quarter related to the sale of <unk> solutions and.
And Ssi, which will all go to debt Paydown.
Element to getting to the three times or less by the end of next year, we are fully committed to that.
That will be achieved through a combination of three elements. One we continue to have opportunity to improve our working capital position. We expect to continue to make progress next year from this year secondarily, we do expect the earnings trajectory will improve significantly next year part of it is overlapping some significant items such as.
The $100 million of negative absorption.
Then getting the top line going with our productivity program. So that's the second thing I E. The denominator are improving.
But that all being said divestitures clearly play a role in getting to that less than three times.
I've been very active in reviewing the portfolio. We are proceeding on multiple fronts, we are fully confident.
That we have an attractive set of assets that actually arent ideal fits for our portfolio. We are past the two year anniversary of the reverse Morris Trust considerations as of February of this year of note.
We are proceeding quite well on that path, so I'd say, our confidence remains high and commitment.
Remains high to get to less than three times.
And regarding cutting the dividend that is not on the table at all.
Thank you.
Our next question comes from the line of Christopher Parkinson with Mizuho.
You May proceed thank you.
Thank you you just in your revenue guidance, a little bit you're setting some energy enrollment and then just can you remind us just how much of that portfolio of passes through and just as a corollary of that could you also just give us a real quick update on price cost movements for the balance of 'twenty three and just what portion of your portfolio. You believe will reign resilient in terms of price.
Thank you.
Okay.
Yes, yes.
Yeah, Hey, Chris This is Glenn again relative to energy as a reminder, in our original guidance at the beginning of the year, we had 6% gross pricing in the P&L, 30% of that or a little less than two points was associated with energy about 75% of our energy prices are either directly.
The index or indirectly via aligned surcharge attached to energy pass through to customers and they are generally reviewed on a quarterly basis.
We expect that as we mentioned, we're taking a point out of that just because it's been a very significant decline in energy prices globally. We believe that that will be relatively net neutral this year in part not only because the pass through but secondary timing the majority of our energy prices actually sit in inventory because they're part of production costs.
So with the 140 days of inventory they sort of matched by the end of the year.
Some overlap as we roll into next year, but for this year, we're assuming that the energy net to sort of neutral from a P&L standpoint in.
In general we are seeing.
Positive deflationary trends not only in energy, but in logistics as well as in certain raw materials.
So that is favorable relative to the portfolio as we've mentioned in the past we believe that that is a potential upside.
Either late this year, because generally the roles obviously run through inventories, but could be meaningful next year and.
Relative to our portfolio, we would say that roughly 60% two thirds of our portfolio has some degree of resiliency I E less commoditized more uniqueness relative to characteristic but I would caution we're in the early days of the deflation. So I think it's a little early.
To declare sort of significant.
Margin capture relative to improvements in raw material and other costs as well.
Thanks for the question.
Okay.
Thank you.
Our next question comes from the line of Lauren Lieberman with Barclays.
You May proceed.
Great. Thanks, good morning.
In the prepared remarks, you guys commented on pricing, particularly in nourish is a revisiting of pricing strategy. So I was just kind of curious.
If we could talk a little bit more about that kind of where you think there are areas to adjust what you meant by that and then.
Larry would be just a discussion on nourish margins over time kind of been in that 12% range over the past two quarters and I was just curious how youre thinking about nourish profitability.
Perhaps looking further out and also again.
Notice.
Justin and pricing strategy. Thanks.
Yeah, Hey, Lauren it's Frank on the pricing strategy, we are working.
With customers too.
Balance.
<unk> volume opportunities. So clearly this is not across the board, but very surgical alarm and our practices.
In particular in certain geographies and I would highlight.
And great areas of China in certain markets, where there is more price sensitivity. We are looking at price volume, but not across the board. So very surgical approach to pricing margins will improve learn over.
This year and over time remember that nourish based on the first quarter a lot of the manufacturing absorption impacted the merch division in Q1 there'll be some impact as we've highlighted in Q2, and then things will improve in the back half for nurse and for the company.
Thank you.
Our next question comes from the line of Matthew Deyoe with Bank of America. Your line is now open.
Good morning, everyone.
Hi, can you talk a little bit about the enzymes business.
I know, it's a consumer of energy.
Footprint is pretty European based so.
The gas price in Europe with that coming off a lot is that an area where energy will be given back in price do you think you can hold onto it there and I guess.
Given all the volatility on the cost center, where margins now for enzymes versus maybe where they were in 2021 and where do you think they may be by the end of the year.
Yes, so I'll have to take a look back.
'twenty, one, but let me give you the enzyme business and take a step back one we think this is a really.
An important business for us and we're seeing great innovation and our enzyme business as I highlighted we saw really good.
And home and personal care.
Continued to see really good growth from our food and cultural enzymes and we're seeing encouraging now trends as destocking improves in a probiotic business green.
Grain processing animal nutrition is still somewhat challenged but we are working very diligently on those businesses.
From a margin perspective I'll take.
Look remember that as we look at 2021 overall margins were obviously I think better in 'twenty. One we did see a obviously decline based off of what has happened from inflation. So clearly that has impacted us in 2020 to manufacturer.
Absorption also impacted us as we hit.
The fourth quarter of last year in the first quarter of this year, but over time, we're really confident in the margin progression and improvement in the health and Biosciences business as we go forward.
Thank you.
Our next question comes from the line of silica Cook with J P. Morgan. Your line is now open.
Hi, good morning.
Yeah.
This X $52 million in severance charges recorded this quarter.
Is that roughly 500 people that that was supposed to lead and can you tell them and you have left so far in any art chili's.
And I have a follow up on.
Volumes, if your volumes were down mid single digits for the quarter.
We're down high single digits in nutrition and bio thank you.
Yes.
Hey, Phil this is Glenn.
We are expecting charges of roughly $75 million full year for the cost reduction program.
That will be an annualized impact of about 100 million that we expect to be kind of around 72 to hit the P&L. This year.
And for obvious reasons im not going to describe sort of the pace at which exits in the organization are happening from the standpoint. So so that covers that can you remind me the second question again.
I was wondering whether you.
<unk> headwinds so just like in the high single digits.
I was talking with our voice at high single digits.
Both nourish and.
In your healthcare bio segment.
Yes.
Yes, as we had mentioned the source as part of our business from a volume standpoint was enduring.
But more specifically that really was in the ingredients portfolio, which is roughly $3 billion of nourish on an annualized basis. So that's where it was concentrated flavors and foods food designs generally we are fine.
Thank you.
There are no further questions I.
I would like to turn the call back over to Frank Clyburn for closing remarks.
Thank you everyone and appreciate the time today for our first quarter earnings call and we look forward to future updates and continuing our transformation and our overall path to a very strong profitable growth profile company.
In helping consumers around the world, we look forward to speaking to you soon.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
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