Q2 2023 International Flavors & Fragrances Inc Earnings Call

August 8, 2023

Good morning. Thank you for attending today's I S. S second quarter Conference call. My name is Megan and I'll be your moderator for today's call.

All lines would it be.

During the presentation portion of the call with an opportunity for questions and answers at the end.

I would now like to pass the conference over to Michael Deveau, Michael. Please go ahead.

Thank you good morning, good afternoon, and good evening, everyone welcome to <unk> second quarter Conference call Yes.

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 Dot dot.

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 statements.

During the call, we'll be making forward looking statements about the Companys 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 the press release.

With me on the call today is our CEO , Frank Clyburn, and our executive Vice President and Chief financial and business transformation Officer, Glenn vector.

We will begin our prepared remarks, and then take any questions that you have.

With that I would now like to turn the call over to Clint.

Thanks, Mike and thanks to everyone for joining today for an important discussion.

Business performance in the critical actions underway to create an even stronger ISS.

As you are aware recent results from across our industry and many of our largest customers has clearly demonstrated that macroeconomic headwinds continue largely unabated.

This environment is challenged financial performance of ISS and our peers in the first half from 2023 and has resulted in a more cautious outlook for the remainder of the year.

However, despite this tough environment. It is also important that we highlight the significant progress we are making on transforming and strengthening <unk>.

<unk> business.

Consequently today, we will share promising early results from our strategic transformation initiatives, we have been discussing with you as well as some additional actions. We are taking summarize our performance for the second quarter 2023 and outlined the additional steps, we're taking to drive shareholder.

Holder value creation at ISS.

We will be happy to take any questions you have at the yen.

With that in mind on slide six I will begin with a quick summary of the key takeaways for the second quarter, which I will unpack further here in the next few slides, including the actions we are taking to progress our strategic transformation.

First amid the current operating environment facing the industry, including temporary Destocking Iff's is performing broadly in line with peers, excluding functional ingredients.

Consistent with our invest maximize and optimize framework that we introduced in our 2022 Investor day, we continue to broaden our portfolio optimization efforts, including through strategic non core divestitures.

Third we've outlined is clear operational improvement plan to drive improvement within our functional ingredients business.

And lastly, our work behind the scenes to strengthen our organization is paying off as we are making strong progress in terms of our strategic initiatives to ensure iff's is well positioned for long term success as market conditions begin to improve.

Now unpack each of these a bit further.

Turning to slide seven amid the current operating environment Q2 results were mixed as comparable currency neutral sales growth for the second quarter was down 4%.

Strong results in <unk> and pharma solutions were more than offset by softness in <unk>, particularly functional ingredients.

From a profitability perspective, our adjusted operating EBITDA was in line with our guidance range. Excluding a one time inventory write down due to unprecedented cost fluctuations for one ingredient locus being colonel.

Our focus on cash flow generation has yielded solid results improving sequentially and versus the prior year period as we successfully executed on our inventory reduction program.

Now as we look to the balance of the year the pace of industry recovery that we expected is not materializing. According to our original expectation.

Consumer demand remains soft and temporary customer destocking trends are continuing.

As a result, we have adjusted our expectation for the full year 2023.

Lowering sales to 11, three to 11 6 billion entirely driven by lower volumes for the full year, we expect volumes to now be down mid to high single digits versus roughly flat previously.

Our adjusted operating EBITDA range is now 1852 2 billion as favorable net price to inflation and enhanced productivity are more than offset by lower volume higher manufacturing absorption costs related to our inventory reduction program and the impact of the write down.

Down of L BK inventory.

Approximately 75% of Iff's business, including <unk> pharma solutions H N B believers in food design are performing broadly in line with industry peers. The one area, where we have significant opportunity to accelerate is the functional ingredients business, where we are.

<unk> implementing an operational improvement plan I will share more in a moment.

On slide eight looking at our business more broadly, we're continuing to accelerate our portfolio optimization initiatives to maximize returns and deleverage our balance sheet. According to plan.

We're investing behind to maximize our high return businesses, while optimizing other businesses.

<unk> through additional divestitures across all three categories and best maximize and optimize within our strategic framework.

We've made significant progress on this front with the recently completed sales of our microbial control.

<unk> solutions and flavors specialty ingredients businesses.

We are continuing that momentum as we launched the sale process for Lucas Meyer cosmetics, along with our best owner mindset.

This is consistent with our mindset of ensuring each of our businesses as the resources and ownership most conducive to long term success and maximum returns.

For <unk>, specifically it is a fantastic business and I have no doubt that it will continue to prosper under new ownership.

And for ISS, It would allow us to reduce outstanding debt, while continuing to invest in our most core and accretive businesses.

We have also hired JP Morgan to explore additional divestiture actions within the portfolio as a pathway to accelerate deleverage and unlock further value creation for our shareholders.

We're reviewing all options consistent with our strategic framework and we will only pursue opportunities that are value accretive for our shareholders.

Key part of our approach is that we will not look to divest assets at depressed multiples expressly those that are impacted by temporary destocking trends. Instead, we believe there is more value creation from improving these businesses before divesting.

On slide nine I wanted to put this in today's presentation to show the dynamics, we are seeing across the portfolio.

As you can see from the slide the vast majority of our portfolio from 2021 through the first half of 2023, that's performed near or at expectations volume metrically.

On a quarterly average basis, even amongst this unprecedented macro environment over the past two years.

Also when comparing with our peers. We believe that these businesses are largely performing in line with them based on our business mix.

The main business has been functional ingredients with quarterly average volumes down approximately 6% during that same timeframe.

The message is similar if we analyze our volume performance on a first half 2023 basis as volumes for functional ingredients is down approximately 20% versus a mid single digit decline for the rest of the business.

Based on this and as I mentioned on the first quarter call. We had been taking immediate action to improve functional ingredients performance, while continuing to invest in our high return businesses that make up the bulk of ISS by revenue stent, HEB pharma and the other categories within our niche.

This division.

On slide 10, I would like to focus on functional ingredients in particular.

Digging deeper in our functional ingredients and what has happened overall market declines and alternative protein consumption, including demand decline for plant based products.

<unk> supply chain challenges given the macro backdrop since the pandemic and more aggressive inventory management by customers have collectively contributed to pressure functional ingredients.

Looking forward, while food demand volumes are beginning to stabilize and service challenges across the entire supply chain of improved we do expect customer destocking to persist through the second half of the year based on what we're hearing from our customers.

This destocking while temporary in nature, we will continue to pressure our functional ingredients volume as we move through the second half.

Now moving to slide 11, our plan includes several near term actions to improve performance and functional ingredients.

First and foremost there are clear opportunities to enhance our go to market approach with several key customers and accelerate our pipeline to win more opportunities.

Since the early part of the year, we have hired over 50, new commercial professionals entirely focused on functional ingredients to pursue incremental market opportunities.

We are already seeing early signs of improvement with a strong and growing pipeline.

The second opportunity is strengthening our operating model, we will be disciplined in our approach from a productivity and operational excellence perspective, delivering 2% to 4% of annual productivity and.

And also as we think strategically about how to allocate capital to this business to deliver strong ROIC growth.

We have also made the decision to report functional ingredients to provide increased transparency on performance and ensure increase management accountability with well defined kpis.

Lastly, we are working to significantly reshape the functional ingredients portfolio for success.

This means increasing the competitive edge of our successful core product lines, while modifying or discontinuing those that have proven not to be additive to the portfolio.

The net result of this operational improvement plan supported by our new leader and nourish and functional ingredients will allow us to grow sales in line with the market and deliver a mid teen adjusted operating EBITDA margin over the next three years, we expect that through this plan.

Plus the elimination of more transitory challenges such as the <unk> inventory write down and negative absorption, we will see a meaningful improvement in 2024.

Moving to slide 12, I would like to now focus on the significant progress we are making against our strategic plan as we seek to be the premier partner build our future and become <unk>.

Despite the current macro environment, we see our industry and our teams around the world are putting in the work to ensure we are setting ourselves up to capitalize as economic conditions begin to normalize.

Our commercial excellence initiatives are yielding strong results, we have greatly improved customer service performance identified more than $250 million in new growth opportunities in 2024, and beyond and are expanding the sales pipeline up more than 50% year over year across.

All divisions.

We are building, our future and extending our leadership in R&D with 15, new technology launches year to date and inexpensive.

<unk> revenue contribution exceeding $100 million.

At the same time, our focus productivity initiatives yielded approximately $140 million in savings through the first half of the year.

We are optimizing our portfolio to focus on our highest growth highest margin businesses through selective divestitures, which will complement our efficiency objectives as we meet our deleveraging targets.

Lastly, we're making exciting progress in building a more unified ISS, we're finalizing our transition to our new customer aligned operating model, which will be completed in the first quarter of 2024.

We've also continued to enhance our culture and deepen our bench of World class talent in June we appointed you Raj Aurora and experienced CPG executive who previously led U S categories for till August President of our nurse Division.

With our leadership team and incentive structure now in place the organization is poised for sustainable profitable growth and expansion.

Now on slide 13, I would like to highlight the strong improvements we have made in terms of our pipeline opportunity.

Our scientific and technical logical expertise remains a key differentiator in the competitive market we.

We win by introducing new and unique capabilities to meet our customers' evolving needs.

We're seeing the benefits of our refocused R&D and commercial excellence initiatives, including a more than 50% increase in opportunities. So far in 2023 versus the same 2022 period.

This increase is giving us continued optimism in the future potential of ISS.

And nourish increase opportunities across regions and categories has led to a greater than 60% pipeline inflow versus last year.

A recent notable wins included xylitol, which is a sweetener using bars serials and other confectionery goods.

<unk>, our compounds pipeline opportunity continues to be healthy and strong including in this was a significant win for our boost powder detergent, a 100% active powder laundry detergent that is effective and safe to use on washable fabrics and.

In health and Biosciences, greater capacity is driving a robust pipeline and our cultures and food enzymes and are halting grain processing units included within this is a notable win in North America Probiotics, a dietary supplement that supports good health.

And in pharma solutions the pipeline has doubled while the team has delivered key wins in method itself our plant base water soluble functional ingredient that supports dietary supplement manufacturing in a high growth category.

Collectively our teams creativity and efficiency and bringing innovative solutions to market provides confidence in our ability to strengthen our long term leadership as the preferred partner for Cpg's worldwide.

Moving to slide 14, our management team is aligned on key objectives are essential to iff's success as market conditions normalize turning <unk> into a leader in high value innovative solutions.

Through the second half of this year and beyond we are focused on accelerating growth and maximizing shareholder value expanding our margin enhancing our return on capital and improving our leverage ratios.

We believe we have a strong achievable plan in place to ensure we are well positioned to rebound growth and profitability and continue executing on our broader strategic transformation in 2024 and beyond.

I will now turn it over to Glenn to discuss our second quarter performance and financial position entering the second half of 2023.

Thanks, Frank turning to slide 15, and Q2, ISS generated $2 9 billion in sales with comparable currency neutral sales declined 4%.

Strong performance in defense.

And pharma.

Offset by softness to nourish and health and Biosciences.

Pricing continues to remain strong in the second quarter as it was up high single digits.

However, volume in the quarter declined low double digits about twice the decline anticipated in the quarter.

Provide some more color on volume.

<unk> pharma were largely in line with expectations.

While <unk> underperformed in large part due to softer volume performance and help.

The majority of our underperformance of our overall volume declined in the quarter approximately 60% was attributable to functional ingredients.

Excluding the impact of functional ingredient ISF volumes would have only been down mid single digits.

Operating EBITDA was $510 million down 18% year over year on a comparable currency neutral basis, largely driven by unfavorable manufacturing cost absorption of approximately $55 million and a $44 million write down of inventory related to unprecedented.

Cost fluctuations for Lucas Blue Carnell.

I mentioned earlier, excluding this onetime <unk> write down.

Our adjusted operating EBITDA would have been $554 million within our previously communicated guidance range of $5 40 to $5 90.

Adjusted EPS, excluding amortization was <unk> 86 cents in the quarter.

Active by lower profitability.

Taking a closer look at our profitability performance on slide 16.

Excluding the unfavorable manufacturing absorption rate later to our inventory reduction program and the inventory write down of LTE Kay comps.

Comparable adjusted operating EBITDA would have declined 3% on a currency neutral basis versus the previous year.

We continue to benefit from strong pricing and productivity gains. However, as you can see from the slide.

Biggest driver impacting profitability in the quarter was the decline in volumes.

This volume decline is most pronounced in our nurse business driven by functional ingredients as noted volumes across our pharma solutions businesses net expectation on HB was modestly behind.

Turning now to slide 17, I'll provide a look at our second quarter performance by business segment.

We've noted continued weakness and functional ingredients impacted nourish performance overall with strong results in flavors and food design and in line with peers.

Pricing and productivity gains were more than offset by lower volumes unfavorable manufacturing absorption and the <unk> inventory write down.

Turning to health and Biosciences strong results from certain segments, including cultures, and food enzyme grain processing and home and personal care were offset by volume declines and health.

Driven primarily by the continued soft market conditions across the probiotics and broader dietary supplement markets.

From a profitability perspective pricing and productivity were more than offset by lower volume and unfavorable manufacturing absorption.

Continue to remain resilient performing strongly this quarter led by double digit growth in consumer fragrance and high single digit growth in fine fragrance with solid contributions from both volume and price.

Coupled with strong productivity led to growth and margin expansion across the division.

These initiatives also drove strong growth in pharma solutions, which saw a 16% increase in adjusted operating EBITDA on a comparable currency neutral basis led by solid performance in our core pharma business and ongoing pricing and productivity gains.

Turning to slide 18 cash flow from operations totaled $375 million. This quarter as a result of our very focused efforts to drive strong working capital improvements and right size our inventories.

We are ahead of target, having achieved approximately $320 million inventory reduction year to date.

After normalizing for L D K right down.

I would like to reiterate that while this inventory reduction program is adversely impacting the P&L through negative manufacturing absorption. It has a short term impact that we will be recovering overtime.

Capex for the first half with $290 million or approximately four 9% of sales.

Given this our free cash flow position for the quarter has improved sequentially from last quarter and was $85 million in Q2.

Included in our free cash flow is about $160 million cost primarily relate to integration and transaction related costs.

We also distributed $413 million of dividends to our shareholders.

In Q2, our cash and cash equivalents totaled $641 million.

Digital net debt for the quarter total approximately $10 6 billion with net debt to credit adjusted EBITDA of four five times.

Trailing 12 month credit adjusted EBITDA totaled approximately $2 2 billion.

Improving our leverage profile and ensuring ISF continues to meet its deleverage commitments remains a top priority.

I am pleased with the strong working capital improvements made to date.

With the initiatives in flight, including our portfolio optimization efforts.

<unk> is on a path to delever. According to our plan through the rest of 2023 and into 2024 as.

As we mentioned we remain laser focused on achieving our target leverage profile to improve cash flow and the portfolio actions and other strategic initiatives, we discussed today.

Moving to slide 19, like many in our sector, we continue to navigate this unprecedented market environment.

Consequently, we now expect many of the challenge that we faced in the first half of the year to continue through the second half of the year, including customer Destocking and related consumer demand visibility constraints.

And as a result, we have revised our second half outlook.

Importantly, we remain intently focused on the levers that we can control, including accelerating sales growth.

Delivering positive price inflation margin delivering on our identified productivity initiatives, while also seeking additional efficiency opportunities on driving continued improvement in cash flow.

Ultimately these actions will strengthen our platform and better positioned.

When the environment improves.

On slide 20 is our update financial guidance.

We are now expecting net sales to be in a range of 11, three to 11 6 billion.

Our new guidance reflects softer revenue expectations across all businesses.

Our lower expectations with functional ingredient accounts for the majority of the revenue change.

For the full year 2023.

Our expecting functional ingredients volumes to be down double digits.

However, the rest of the business to be down low single digits, and then continued and temporary customer destocking.

For the second half of 2023 weeks that sales to be between five three and $5 6 billion with comparable volumes flat to down high single digits.

At the midpoint of our volume guidance range, our two year average volume was down 4%.

Is consistent what we delivered in the first half.

Also please remember that included in our first half 'twenty three results are approximately $300 million in sales and approximately $30 million EBITDA related to our savory solutions and Ssi divestitures.

These transactions closed at the beginning of June and August respectively. Our second half of 'twenty three financials will be lower by these amounts.

For full year 2000, <unk> adjusted operating EBITDA, we now expect to be between 185 and $2 billion.

Which is lower than our previous guidance.

This is driven by three factors.

Goose volume expectations.

80 million more of higher absorption costs.

And the $44 million <unk> inventory write down.

We are now expecting our full year inventory reduction to be approximately $425 million and as a result, the absorption related to our inventory reduction will be approximately 180 million impact to profitability for the full year.

To reiterate this is a onetime transitory impact to the P&L in order to maximize cash flow moving forward.

We remain committed to driving working capital improvements to our inventory reduction program.

As we navigate this near term complexity.

And finally and very importantly in light of this environment, we are maintaining strong cost discipline to drive enhanced productivity across the organization in order to protect profitability.

For our full year expectations for interest expense, we now expect it to be around $425 million, mainly due to higher interest forecast short term debt and factoring programs.

In a higher balance of short term debt due to lower earnings and.

And we would also expect our effective tax rate for the year to be 21% or no change.

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 like 2% and 6% respectively.

This incremental pressure is due to a handful of hyper inflationary currencies that have moved against us in the first half of 'twenty three.

FX was a three point headwind to sales and a seven point headwind to adjusted operating EBITDA.

We expect that many of these currencies will continue to significantly P value in the second half of 'twenty three now.

Now I will turn back to Frank for closing remarks.

Thanks, Glen our incredible teams around the world continued to deliver pioneering discoveries and strengthen our customer relationships ensuring that <unk> is the innovative engine behind the most critical and be loved consumer products.

These efforts are reflected in the solid results across the majority of our businesses. Despite the current environment, which gives me great confidence in our ability to deliver industry, leading growth and profitability in the years ahead.

Strategic plan is showing very encouraging early results, we are investing in opportunities for growth.

<unk> and enhanced productivity and we're taking decisive action to manage through the volatile market conditions refocusing functional ingredients with an operational improvement plan to strengthen operations and execution and progressing our deleveraging efforts through ongoing portfolio.

<unk> optimization efforts, including the launch of our cosmetic ingredients process.

Amid this challenging market environment, we are making great progress transforming <unk> into the leader in high value innovative solutions and the partner for our customers.

The actions, we're taking today and through the remainder of 2023 will create a stronger ISS capable of delivering significant value for shareholders and all of our stakeholders with that I will open the call up for questions.

Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.

Any reason you would like to remove that question. Please press the star followed by two again to ask a question press Star one.

As a reminder, if youre using a speaker phone. Please remember to pick up your handset before asking your question. We will pause briefly ask questions are registered.

Our first question comes from the line of Adam Samuelson with Goldman Sachs.

Your line is now open.

Yes. Thank you good morning, everyone.

I guess just.

A question that we're getting a lot from investors.

As we look at the.

The updated EBITDA guidance for the year.

It does appear that you are going to be moving above your covenant thresholds in the back half.

And so Glenn.

You talked about being kind of continuing to commit to deleveraging can you just comment on what that path looks like over the balance of the year.

And in that context, how should we think about the dividend and then what is the.

Dave's expectation for free cash flow for 2023, I don't think I heard an updated guidance number there. Thank you.

Yes, Adam Thanks, very much good morning is great great questions first start off here.

Let me start by reassuring everybody I am quite confident that we will not trip our covenants.

And the reason I am is because there are multiple levers that we can pull.

And I'll get to your question about cash flow, but we've made very strong progress on working capital and other improvements in cash flow this year.

In addition, we are well downstream on divestitures from a portfolio standpoint, as well and I would also remind you that theres a credit adjusted definition of EBITDA, which is different than the adjusted EBITDA number. So obviously there are a number of add backs relative to that calculation. So so one very confident we will not have an issue.

Hugh with our Covenant point number two is currently a change in our dividend is not on the table.

And then point number three relative to our cash flow forecast for this year.

On a free cash flow basis reported we're expecting to be about $100 million lower than our original guide as a reminder, we had a $600 million free cash flow for this year, we're forecasting $4 75, as a reminder, within that $4 75, there for her.

15 million Reg G charges. So on an adjusted basis, we expect to be over 900 million that compares to the $1 billion. We started off that 450 by the way includes 250 of transaction related so its taxes, it's M&A separation fees for the.

<unk> control.

Ssi and savory solutions of the residual $75 million is related to the final integration activities with Dupont. This year and there is another 100 million plus that are largely related to the restructure that we performed this year. So so again on an adjusted basis, we expect our free cash flow to be around $900 million versus the.

Original $1 billion. Thank you.

Thank you.

Our next question comes from the line of Ghansham Panjabi with Baird. Your line is now open.

Thank you operator, and good morning, everybody.

I guess, how does the operating backdrop in 2023 change how youre thinking about the financial commitments through 2026, I think you outlined at the Investor Day back in December and maybe you can touch on the internal offsets you are pulling to counter the lowered volume baseline in SaaS can because at this point youre dividend outlays unsustainable relative to Rebase, our rebased EBITDA starting point.

As Adam pointed out.

Yes, Hi, this is Brian and I'll take that and good morning, everyone. A couple of things that I want to highlight.

First and foremost if you look at what's taking place.

Through 'twenty three clearly we are seeing temporary destocking as we mentioned and we have been pulling a number of levers to manage the business first.

Can see really good progress with productivity as Glenn highlighted we've been really improving our net working capital and also making sure that we're doing everything to control our costs two to manage the 23 year as it unfolds. We are on track as you recall, we highlighted that.

We're going to have a cost reduction take out of about $100 million that is on track as well.

More importantly, though I am very excited about the opportunity that we have as we come out of temporary destocking and as we move into 'twenty four and as you could see.

As we discussed with our customers, we're very well positioned based on the pipeline increase that we just highlighted also based on the commercial efforts that we're putting forward we've improved our customer service significantly which gives me a lot of confidence as I look at the outlook to your question over the next several years so.

We're managing for the near term temporary destocking, but we're clearly preparing for.

Good strong growth in 2004, we still remain committed to our long term guidance that we put out of 4% to 6% topline sales growth and 8% to 10% EBITDA that we have communicated during capital markets day.

And if I could just tag on to the end of that regarding your comment regarding the sustainability of the dividend I guess.

We'll piggyback on my response to Adam's question again on an adjusted basis $900 million of free cash flow.

And in addition, as we've called out there is over 200 million of one time items between L. BK write off and then the negative absorption. So we are confident as we exit this year, we're going to be in a much much better trajectory, particularly as the environment improves so I'm not sure the fee.

Assertion of Unsustainability is correct.

Thank you.

Our next question comes from the line of Mark Astrachan with Stifel. Your line is now open.

Yes, thanks, and good morning, everybody.

I guess the first question is what gives you confidence in the back half outlook I think you've talked a lot about the volume assumptions essentially being the same on a two year basis to eight versus one H you've cut.

Numbers now not necessarily your fault.

Partly industry stuff.

Three times since the Investor day, so what.

What gives you confidence what should investors.

Take it.

Would give you any give them any confidence that you can hit the numbers that you laid out there and then helpful. On the divestiture commentary curious how integrated the.

The businesses are today, such that more divestitures are disruptive they don't create significant fixed cost deleverage and having too.

Staff up and absorb costs. Thank you.

Yes, so I'll take the question. Thanks for it it's really important we've talked to a number of our customers.

With regards to the temporary Destocking and we do believe that it is very prudent for us right now to.

To Derisk the plan based on the back half of the year and we do think we've done that.

And Derisking. The plan. We also believe that we have set the floor. So we're very confident in what you are now seeing as our new guidance going forward.

Important to note, though while we are navigating 'twenty three we are also continuing to prepare as we just discussed as we move into 'twenty four as we see Destocking subside and as we see volumes improve Glen I don't know if you want to yes, I would add.

Very very legitimate question Mark is.

A we feel we're being very prudent relative to the range in terms of what the guidance here secondarily, we have July .

In our belt at this point and it's negative 4% volume August is trending a little bit lower than that but very very consistent with what we think the quarter is unfolding. So a combination of bringing down to a two year consistent with the first half couple of more months largely close.

Gives us a pretty good sense that we're going to be in a good place and obviously, we wanted to make sure we were prudent relative to the construction of this outlook Youre question on M&A is a good one and Theres no simple answer some businesses are more integrated than others. It.

It is clearly a consideration relative to our portfolio strategy.

Good news is we have had.

As acquired substantial experience over the last three years now through a combination of the sale of the microbial control business savory solution and Atlas as well as other ones. We're working on so we've got a pretty good track record in this sort of being able to navigate through that but it is an important consideration as we think about which parts of the portfolio we trim.

Thank you.

Our next question comes from the line of Gunther Zechman with Bernstein your.

Your line is now open.

Good morning, Craig Good morning, Glenn.

You don't guide for next year, yet, but what do you think are the main moving parts. If we wanted to build the bridge for 2024.

Deferring comparable.

<unk> talked about quite a bit about the pipeline growth destocking.

Subsides.

Some of the potential negatives as well which are taking hold.

Account so binary.

Finally for 2024 please.

Sure maybe ill begin Gunther and Francis can add on.

As we think about 'twenty four one is as we mentioned we do believe that the environment will be improving so we think we're now going to be entering.

And environment will destocking will be complete the consumer pullback will be largely stabilized at points. So that's 0.1 0.2 as we mentioned there are a number of items to normalize from this year. So the $180 million associated with absorption, which we have consciously tackled by the way that has delivered $500 million reduction in.

Tori full year from a standpoint.

So it is a very very significant achievement. We're accomplishing is also the <unk> write off obviously a 44. So there are onetime items from a volume standpoint, as Frank had mentioned, we feel that 75% of our business.

Except functional ingredients is performing well in line with our competitive peers. So.

So we would expect them to continue to trend well in an improving market and the other 25, we have been underway for a number of months or remediation and expect that business to pick up next year, and lastly, I would say that the other areas that we can control I E productivity working capital and cash flow efficiency and portfolio are well on <unk>.

<unk>. So we feel like those should continue as we move into 'twenty four but obviously as we close the year, we'll have a more detailed update on next year.

And I would add Gunther and I highlighted this in the prepared remarks.

We've been spending a lot of time.

With our key customers I can tell you that I've had discussions with many of.

Ceos with those companies and Chief Technology officers and what we highlighted is the 15, new R&D launches. This year the strong platforms that we have and as Glenn mentioned, if you look at our business performance in <unk>. If you look at pharma, if you look at health and Biosciences.

We're all we're in really good shape and the businesses are performing well in a challenging environment and backdrop.

And even within nourish one of the things I wanted to highlight there is that our flavors business our system ingredients business as we help customers solve some of their challenges is in good shape, as well and benchmark extremely well versus our peers.

And now we have a plan that we will be getting after improving our functional ingredients.

And that's something that we'll continue to monitor very closely we have a new team that's been put in place too.

<unk> really improve that business and as volumes start to normalize as you head into next year, we feel really good that youll start to see improvement in that business, which gives us a lot of confidence for 'twenty four.

Thank you.

Our next question comes from the line of Josh Spector with UBS. Your line is now open.

Yes, hi, thanks for taking my question.

I was wondering if you could provide some more detail kind of walking through.

Quarter EBITDA to your second half run rate. So I mean, as you mentioned earlier exclude the inventory write down you did about $5 50.

Guide at the midpoint is maybe $450 million a quarter I guess, the inventory adjustment isn't changing it's maybe getting a little bit better price cost you have had some benefits from volumes you are guiding similar I guess I'm not sure what's driving that magnitude of decline so more color there would be helpful. Thank you.

Sure. Good morning, Josh So let me actually maybe just to first half the second half because honestly the first quarter is very similar to the second quarter. So the first half on a reported basis was $1 20 of EBITDA.

Adjusted EBITDA and then the midpoint of the guide is nine five for the second half as you pointed out you need to adjust the first half for a combination of the absorptions 150, <unk> write off adding another 44, you have got to reduce for divestitures, which could come out of the second half you should take out 30.

And then you have foreign exchange differential of 20% to $30 million. So that gets you roughly to $1 billion 150, and then obviously for the second half you have some absorption of 30. So that gets you to 935, so let's say 1150 first half normalized versus a 935. So it is a.

Roughly $200 million delta between them.

You can break it down into basically two components.

$50 million is related to lower GP from seasonal volumes, particularly the fourth quarter, it's our lowest quarter.

On an apples to apples basis, Theres 100, plus million dollars of differential the other is a little bit productivity timing, but it's largely a net price realization versus cost are higher in the first half in the second half and as you noted or as we've noted we have a 7% pricing in the first half it's circa <unk>.

3% in the second half so while we continue to see some progress on reduction of input cost.

Better better achievement in the first half versus the second half so hopefully that's helpful.

Thank you.

Our next question comes from the line of Nicola Tang with BNP Paribas. Your line is now open.

Thanks, Hi, everyone I wanted to take a closer look at functional ingredients I was wondering if you could give some color on which product.

Perhaps switch and rockets and functional ingredients actually trace that putting weakness in Q2 and could you elaborate a bit more on the cautious outlook for the second half as well.

So.

Investor Day last year, you highlighted your plan to optimize or exit underperforming divisions.

With today's new efficiency plan and functions against does this mean that you've ruled out exiting this division or could it still.

<unk> divestment candidate.

Sure.

Yes, Nicole this is Frank I'll take both of them on the first question.

We are looking at all options. However, as we've communicated we will not.

Pursue any options that aren't accretive to our shareholders and we think right now in particular within functional ingredients. We are focused on the improvement plan that we outlined and we do see really good early progress starting to emerge within that business as far as the first part of your question. If we look at.

Functional ingredients underneath that I'll use. The example of protein solutions was soft niccolo. This quarter, primarily due to destocking and these are isolated soy proteins that go into nutritional bars and beverages.

I've had a chance to meet with a couple of our customers and.

The positive news is we're very well positioned within those end markets.

Stocking has been the impact primarily.

Four isolated soy proteins going into those beverages in bars. So that's an example, nicole of what we've seen and thats been the impact we've seen across functional ingredients primarily <unk>.

Destocking there has been some customer softness and some of the meat alternative products that are within functional ingredients as well, but hopefully that helps give us a little bit more color on what we're seeing and then as we come out of Destocking as I mentioned, we do anticipate things to start to normal.

<unk> as we get into 'twenty four.

Thank you.

Our next question comes from the line of John Roberts with Credit Suisse. Your line is now open.

Thank you.

The thresholds for deciding when to take a write down of raw material inventory, if that spikes and set trial vanilla other agreements in the past I don't recall.

Kind of a write down before and then I think your earlier comments on price raws were year over year could you give us a sense of sequential.

And whether or not <unk>.

It's kind of affecting the sequential numbers significantly.

Yeah. Good question, John and good morning to you.

Materiality and ultimately the measure is do we expect to be selling it below cost.

<unk> is a very unique case.

I have some others, but as it relates to the volatility over the last two years to give you some sense.

Prices have dropped from 35 euros per kilo to eight.

Less than 12 months, so that was a clear case that we needed to basically recognize the current value of the inventory that's an anomaly at least in my short history of two years, we've never seen anything like that in terms of kind of the share level of volatility is such a short period of time I would also note that the inventories were slightly higher which actually made that big of a slightly bigger.

Off simply because we were making sure that we had enough supply for security purposes relative to the rawls trends there.

They are continuing to progress downward, but I'll say at a more modest rate than we saw in the second half of last year and entering into this year as you know many of the factors impacting prices such as.

Energy prices as one big input have decreased but they've stabilized as well. So we're seeing a little bit more improvement I would note that the other two big input costs for us are logistics and energy energy has come down dramatically. This year, it's largely.

Pretty stable at this point globally, and then logistics as well has been a very very big improvement over the year and that has largely stabilized and actually we see some continued.

Downward progression in terms of prices as well thank you.

Okay.

Thank you.

Our next question comes from the line of Christopher Parkinson with Mizuho. Your line is now open.

Hi, Good morning. This is Harris fein on for Chris Thanks for taking my question.

So can you talk a little bit more about the visibility that you have into where.

Consumer sell through is trending versus any differences you're seeing in destocking at your customer level.

Do you think that your customers are still holding above normal inventories or do you think that this is a situation where maybe they are drawing down normal inventories into an area.

Well below normal because maybe there is more supply chain comfort.

I guess based on all of that.

How are you thinking about the potential for Destocking, So maybe weak into 2024 at this point. Thanks.

Yeah, Hi, Frank Thanks for the question, we do work.

Very closely with in particular, our large global key accounts.

And then also our large regional accounts.

And I do think supply chains have improved so they are willing to.

Just some of their inventories.

What we are hearing from them is mixed some customers are.

Thing that Destocking will start to come to an end as we kind of go through the third quarter and into the fourth quarter. Some are saying that it really is depending on end market consumer demand and our thinking more that the destocking persist through the rest of this year and start to improve as we get into 2002.

24.

So what we have done is as we mentioned in our approach is to really.

Be prudent in the approach and to Derisk. Our plan. However, we are very much focused on working with them to.

To prepare for once temporary destocking is over to improve.

Obviously, our performance and I can tell you that when we look at.

As I mentioned, our pipeline win rate in some of the commercial activities. We have underway, we feel really good and well positioned but your question on visibility is one that we are working with them on but clearly we are making sure. We're doing everything we can prepare for as we head towards the end of this year and into next year.

Thanks for the question.

Thank you.

Our next question comes from the line of Patrick Cunningham with Citi. Your line is now open.

Hi, Good morning, Thanks for taking my question I really appreciate the transparency on the functional ingredients deep dive.

What percentage of the functional ingredients business would you characterize as the commodity low margin business.

Any of these businesses separable now or is the bias more towards optimization and the prioritization of investments.

Yeah, I'll start and then Glenn I'll, let you add if you look at functional ingredients, what's underneath that is protein solutions, which is about one third or approximately.

$1 billion three of <unk> and functional ingredients, we have a multiple fires in sweeteners, we have core tax strengths cellulose CIS and food protection and systems are kind of within functional ingredients.

We feel good with regards to our specialty proteins. So we think theres good differentiated differentiation there.

And that represents about half of protein solutions and there are some more valued proteins in there that I would say are a little bit more in a competitive landscape.

I'm also buyers I would say are probably in the category of much more competitive to answer your question and that's something that we're looking at in particular some of them also fires that are within.

That category within that that business and also some of the core tax fronts. We feel as though are some are differentiated but there are some cortex rents that are probably more challenged competitively. So were staring at our portfolio we feel good overall.

We're going to put where we have core differentiation our efforts of Baja in that core and Thats a part of the functional ingredients plan.

In areas, where some of the ingredients that are more commoditized or where we don't bring a differentiated advantage benefit that's where we're going to look to really optimize or possibly even discontinue and those ingredients. So.

We have a well thought out plan as we move forward and feel good about the new team that we have in place.

Yes, I would just add two other comments is.

These are somewhat more commoditized than the rest of our portfolio, but to bring up Frank point. Our portfolio is very much focused on high value add so you think about our Cellulosic business you think about the xylitol you sort of think about our soy isolate really as it relates to specialty proteins et cetera.

Our alginate et cetera, we really are focusing in part of our strategy of maximizing the value add opportunities to our portfolio and have been super turbocharging, our customer pipeline activity to focus on those categories.

Thank you.

Our next question comes from the line of Mike Sison with Wells Fargo. Your line is now open.

Hey, good morning, guys.

Frank.

The Dupont transaction was designed to to help you generate better organic growth longer term.

And it seems like functional ingredients has been more of a challenge there. So when you think about.

The potential value of the deal is there any last or can you give us some thoughts of.

Candice.

Can any of their business is really help improve your organic growth and then longer term. How do you think you rebuild the EBITDA from 'twenty three to what level do you think is possible.

Yeah, Mike. Thanks for the question I think that if you look at the transaction, we still feel very confident about the value creation opportunities for <unk> going forward.

We are as we highlighted and is primarily due to destocking and we have a clear plan to address some of the challenges and functional ingredients. If you look at our health and Biosciences business.

<unk> capabilities. The business is performing well pharma is also performing extremely well. So we still feel very good about the future value creation opportunity as we move forward.

Thank you.

Our next question comes from the line of Lisa didn't need with Morgan Stanley .

Your line is now open.

Good morning, Frank and Glen and then thank you so much for taking my questions I have.

Two main questions.

So following your intentions to explore potential incremental divestitures I mean, what is the current market interest you actually engage with M&A at this point of the cycle and how difficult this for potential buyers to potentially obtain financing in this volatile and higher interest rate environment and how should we think about the timeline.

For potential divestments. That's my first question and then the second question I have just like from your top management level. How is your visibility across the different business units. How quickly do you see when certain units are deteriorating, whether it's market driven or any other reason and how quickly do you address.

On the performance in some segments and maybe on that note as well what will change and norrish now there is a new heads driving that segment. Thank you.

I'll start at least I think secondly, it's six questions, but let's unpack them. So on the M&A front.

There are both.

E firms, but more importantly, strategics out there that would have a high level of interest relative to our portfolio relative to the former of the credit markets have stabilized so theres tons of money out there being put to work in the credit markets actually are in a pretty good place, but more importantly on the strategic side.

There is a very broad appetite relative to partnerships on various assets in the portfolio as you know most of the peers in this space actually have very good balance sheets. There is value to consolidation in this space et cetera. So we feel very good about the robustness relative to the opportunities out there we will be smart in terms of how.

We do that it's got to make sense for us strategically in terms of what's in the portfolio.

In the portfolio and it needs to be smart from a value creation for our shareholders. As we mentioned earlier, we're not interested in divesting assets cheaply.

Rather actually maintain them fix them grow them from that standpoint, before we did that so I think that was your first set of questions. Frank I think you had a question about.

Visibility into the business and we do have.

A window, where we are looking at a couple of weeks. Obviously, we can look at our orders and we obviously do a lot of work with regards to engaging with our customers So and we move pretty quickly.

We moved very quickly I should say with regards to how we.

Adjust our business and the example is I think youre seeing us very rapidly focus on productivity focus on cash flow. We've moved very rapidly with regards to improvement in net working capital. We signaled early on that we were seeing some softness in destocking in <unk>.

Market demand and ingredients and we quickly put in place 50 commercial resources to address that so we're moving very rapidly to address any challenges that we have and then to your last question nourish.

President is onboard fully aligned and help to develop the plan youre seeing around functional ingredients as well as helping us to focus on driving our flavors and systems as we move forward.

Thank you.

Our next question comes from the line of Lauren Lieberman with Barclays. Your line is now open.

Great. Thanks, good morning.

End of the call I'll, just keep this kind of high level on the strategic I was I was curious as you think about.

Some of the things that are in this functional ingredient portfolio, including importantly, the things that are maybe less differentiated and then therefore less attractive.

To continue to.

But what is what's the role of those things in the <unk>.

Dream the dream of integrated solutions, because my understanding is that part of the.

Delivering full service to customers is having that full portfolio and that was sort of part of the argument for being a one stop shop, but now it feels like the financial return profile or of managing this collection of businesses.

Varying degrees of more or less attractive.

Standalone basis is making that bigger like industrial logic.

More challenged so.

Have you ever heard that long for the end of the call, but I was just curious on how you would react to that.

Yeah, Lauren I would say.

When I look at functional ingredients. So I'll give you. An example, where we bring significant differentiating value is within our <unk>.

Systems business, where we're bringing in combining multiple ingredients and for example, emulsifiers are used in over 50% of our systems.

Applications and what we're bringing for customers. So we still believe that there is integrated solution opportunities as we work across all of nourish. What we're highlighting is due to destocking, we need a very quick rapid improvement plan based on the need to improve the financial profile.

Functional ingredients, but we still do see that the integration.

In particular with regards to our multiple fires as well as some of our protein solutions is still.

Bringing a lot of benefit and advantages to customers.

Thank you.

Our next question comes from the line of Matthew <unk> with Bank of America. Your line is now open.

Mr. <unk>. Your line is now open.

That.

Maybe operator, we will go to the next one.

Absolutely.

Our next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.

Hi, just very quickly how much of the EBITDA drag do you have from the working capital reduction that you've done this year.

And secondly for the.

Target for functional ingredient to sort of match the markets do.

Do you see yes, a path for function to get above market growth in say five seven years or.

Matching the market kind of.

Sure.

Best fix.

Yeah.

So that answered. The first question is $180 million is related to bringing inventory out of the systems. As I mentioned, there is $500 million of volume related and we have a little bit of raw materials price escalation. So the the balance sheet will show a net 400 and change improvement that that way it is.

Significantly above what we were playing in the beginning of the year or so we're making more progress of the cost of doing that is basically the negative absorption on the P&L from a standpoint for this year, but obviously, it's sort of one and done.

At least for the interim period honestly, we havent thought about five to seven years is getting to market and generally these categories are sort of low single digit growth is the right target to be in part because we want to be reasonable in part. We also want to optimize the return on these assets because they typically have a lower ROIC more capital into.

So it's not growth for the sake of growth is really sort of optimizing the returns so but thanks for the question.

Thank you.

Our next question comes from the line of silica.

With JP Morgan Your line is now open.

Hi.

On the question along those lines.

If there is.

$180 million of income statement on panel tool for dosing.

The inventory, while improving our cash flows.

Is there a benefit in 2024 is the inventories don't get rebuilt I understand you've got about the same cost, but it's still like an extra benefit unless you rebuilt inventories.

You don't need to rebuild them you just need to be.

Be flat so as a reference point, our total production will be down around 15% this year.

As we mentioned, we expect sales volumes to be down six so theres, 9% that 9% Incrementals is basically eat through that have a $1 billion of inventory so getting there so assuming.

That's one and done then you get the pickup of the 180 next year, because obviously productions at zero at that point going forward. So as you rebuild inventories over time as we grow the business.

It actually creates positive absorption going forward.

Thank you.

Our last question comes from the line of Andrew <unk> with Barclays. Your line is now open.

Thanks I appreciate the question.

And then if I could ask has the timeline for that three times net leverage target changed.

I heard you reiterate I didn't hear the timeline now do you still expect to get there by the end of 2024 with asset sales.

Even with Lucas Meyer and sort of in the Hopper. It still seems like you'd have additional work cut out for you.

And then.

Right.

I was just related to that.

Yes related I appreciate that.

So youre messaging deleveraging is still a priority.

But at the end of the day the agencies have you very close to high yield at this point and that dividend is still effectively two times, what youre cash flow is.

Is is maintaining <unk> ratings, a significant importance to you and yes, thats intentional emphasis on maintaining.

Yes.

Answer is.

To the second question, we are very committed to maintaining investment grade as youre well aware the <unk>.

Rating agencies are patient relative to your long term strategy and goals. We've obviously have been in close discussions with them. They know our plans in terms of what we're doing.

Again, I would I would.

Admit to you that the reality is on an adjusted cash flow basis. We're at 900. This year with some one time items that really gets you north of that probably not the best place to be relative to an $800 million dividend, we get that but normal growth trajectory gets you into a much better place from that.

On the deleverage I E. The activities and the target we are still committed to hitting three times by the end of next year.

We have been at work for quite a few months on M&A and that's we've been mentioning portfolio revisit since the end of last year. So there are a number of activities underway from that standpoint.

So we do feel that we have enough. If you will irons in the fire beyond Lucas Meyer to basically accomplish our goals.

Alright, Thank you Glen and as we come to a close today a couple of key points I would like to just reiterate.

First I want to make sure that we reemphasize that the majority of our business is doing well and is very resilient as we manage through temporary destocking.

We are taking action very rapidly to improve our business trajectory and our capital structure.

We've implemented a functional ingredients operational improvement plan and we look forward to sharing more with you of the progress we're driving divestitures as you have heard such as the announced sale of LLC as well as additional opportunities that we're looking at to Delever and we're executing on our strategic priorities with strong improvements in.

Marshall and operational excellence as you heard today.

We do remain confident in our value creation potential given the relative strength of our pipeline and we highlighted just within the first half of this year over a 50% increase versus prior year and as the transitory nature of Destocking in that's going to.

Really position us well as we head into 2024 as the environment Normalizes and then lastly.

I wanted to really reiterate iff's a great business, we're in a great industry and we have significant opportunities to create value for our stakeholders and we want to thank each and every one of you for joining our call today.

That concludes the <unk> second quarter conference call. Thank you for your participation I Hope you have a wonderful rest of your day.

[music].

Good morning. Thank you for attending today's I S. S second quarter Conference call. My name is Megan and I'll be your moderator for <unk>.

Today's call.

All lines, what do you mean it during the presentation portion of the call with an opportunity for questions and answers at the end.

I would now like to pass the conference over to Michael Deveau, Michael. Please go ahead.

Thank you good morning, good afternoon, and good evening, everyone welcome to <unk> second quarter Conference call Yes.

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> com.

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 statements.

During the call, we'll be making forward looking statements about the company's performance and business outlook. These statements are based on how we should think today and contain elements of uncertainty for additional information concerning the factors that can cause actual result 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.

Reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in the press release.

With me on the call today is our CEO , Gregg <unk>, and our executive Vice President and Chief financial and business transformation Officer, Glenn Victor.

We will begin our prepared remarks, and then take any questions that you have.

With that I would now like to turn the call over to Frank.

Thanks, Mike and thanks to everyone for joining today for an important discussion.

Business performance in the critical actions underway to create an even stronger iff's. As you are aware recent results from across our industry and many of our largest customers has clearly demonstrated that macroeconomic headwinds continue largely unabated.

This environment has challenged financial performance of ISS and our peers in the first half of 2023 and has resulted in a more cautious outlook for the remainder of the year.

However, despite this tough environment. It is also important that we highlight the significant progress we are making on transforming and strengthening iff's business.

Consequently today, we will share promising early results from the strategic transformation initiatives, we have been discussing with you as well as some additional actions. We are taking summarize our performance for the second quarter 2023 and outlined the additional steps, we're taking to drive shareholder.

<unk> value creation at Iff's.

Then we will be happy to take any questions you have at the end.

With that in mind on slide six I'll begin with a quick summary of the key takeaways for the second quarter, which I will unpack further here in the next few slides, including the actions we are taking to progress our strategic transformation.

First amid the current operating environment facing the industry, including temporary destocking.

<unk> is performing broadly in line with peers, excluding functional ingredients.

Second consistent with our invest maximize and optimize framework that we introduced in our 2022 Investor day, we continue to broaden our portfolio optimization efforts, including through strategic non core divestitures.

Third we've outlined is clear operational improvement plan to drive improvement within our functional ingredients business and.

And lastly, I'll work behind the scenes to strengthen our organization is paying off as we are making strong progress in terms of our strategic initiatives to ensure iff's is well positioned for long term success as market conditions begin to improve.

Let me now unpack each of these a bit further.

Turning to slide seven amid the current operating environment Q2 results were mixed as comparable currency neutral sales growth for the second quarter was down 4%.

Strong results in <unk> and pharma solutions were more than offset by softness in H E B and nourish, particularly functional ingredients.

Our focus on cash flow generation has yielded solid results improving sequentially and versus the prior year period as we successfully executed on our inventory reduction program.

Now as we look to the balance of the year the pace of industry recovery that we expected is not materializing. According to our original expectation.

Consumer demand remains soft and temporary customer destocking trends are continuing.

As a result, we have adjusted our expectation for the full year 2023.

Lowering sales to 11, three to 11 6 billion entirely driven by lower volumes for the full year, we expect volumes to now be down mid to high single digits versus roughly flat previously.

Our adjusted operating EBITDA range is now 1.8522 billion and favorable net price to inflation and enhanced productivity are more than offset by lower volume higher manufacturing absorption costs related to our inventory reduction program and the impact of the write down.

L BK inventory.

Approximately 75% of Iff's business, including <unk> pharma solutions H N B flavors and food design are performing broadly in line with industry peers. The one area, where we have significant opportunity to accelerate is the functional ingredients business, where we are.

<unk> implementing an operational improvement plan I will share more in a moment.

On slide eight looking at our business more broadly, we're continuing to accelerate our portfolio optimization initiatives to maximize returns and deleverage our balance sheet. According to plan.

We're investing behind to maximize our high return businesses, while optimizing other businesses, including through additional divestitures across all three categories and best maximize and optimize within our strategic framework.

We've made significant progress on this front with the recently completed sales of our microbial control savory solutions and flavors specialty ingredients businesses.

We are continuing that momentum as we launched the sale process for Lucas Meyer cosmetics align with our best owner mindset.

This is consistent with our mindset of ensuring each of our businesses has the resources and ownership most conducive to long term success and maximum returns.

For <unk>, specifically it is a fantastic business and I have no doubt that it will continue to prosper under new ownership.

And Brian that it would allow us to reduce outstanding debt, while continuing to invest in our most core and accretive businesses.

We have also hired JP Morgan to explore additional divestiture actions within the portfolio as a pathway to accelerate deleverage and unlock further value creation for our shareholders.

We are reviewing all options consistent with our strategic framework and we will only pursue opportunities that are value accretive for our shareholders. A key part of our approach is that we will not look to divest assets at depressed multiples expressly those that are impacted by temporary destocking trends instead.

We believe there is more value creation from improving these businesses before divesting.

On slide nine I wanted to put this in today's presentation to show the dynamics, we are seeing across the portfolio.

As you can proceed from the slide the vast majority of our portfolio from 2021 through the first half of 2023, that's performed near or at expectations volume metrically.

One a quarterly average basis, even amongst this unprecedented macro environment over the past two years.

Also when comparing with our peers. We believe that these businesses are largely performing in line with them based on our business mix. The main business has been functional ingredients with quarterly average volumes down approximately 6% during that same timeframe.

The message is similar if we analyze our volume performance on our first half 2023 basis.

Volumes for functional ingredient is down approximately 20% versus a mid single digit decline for the rest of the business.

Based on this and as I mentioned on the first quarter call. We had been taking immediate action to improve functional ingredients performance, while continuing to invest in our high return businesses that make up the bulk of ISS by revenue stent, H N B pharma and the other categories within our <unk>.

<unk> Division.

On slide 10, I would like to focus on functional ingredients in particular digging deeper in our functional ingredients and what has happened overall market declines and alternative protein consumption, including demand decline for plant based products.

Assistant supply chain challenges given the macro backdrop since the pandemic and more aggressive inventory management by customers have collectively contributed to pressure functional ingredients.