Q3 2024 International Flavors & Fragrances Inc Earnings Call
The End
Speaker Change: At this time, I would like to welcome everyone to the ISF 3rd Quarter earnings conference call. All participants will be in a listen-only mode until the formal question and answer portion of the call.
To ask a question at that time, please press star 1 on your telephone keypad. If you would like to remove your name from the queue, please press star 2. Participants will be announced by their name and company.
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Speaker Change: I would now like to introduce Michael DeVeau ahead of investor relations. You may begin.
Michael Deveau: Thank you. Good morning, good afternoon and good evening everyone. Welcome to IFF's third quarter of 2024 conference call. Yesterday afternoon, we issued a press release announcement or financial results. A copy of the release can be found on our IR website at IR.
Please note that this calls me recorded live and will be available for replay.
During the call we were making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today in contained elements of uncertainty.
For additional information concerning the factors that can cause actual results to different materially, these refer to our cautionary statement and risk factors contained in our 10K and brush release.
Today's presentation will include non-gap financial measures, which exclude those items that we believe affects comparability.
Michael Deveau: A reconciliation of these non-gap financial measures to the respective get measures to set forth in the press release.
With me on the call today is our CEO Eric Fierwald and our Executive Vice President, CFO and Business Transformation Officer Glenn Richter.
Michael Deveau: We will begin with the pair of remarks and then take questions that you have at the end.
Speaker Change: With that, I would now like to turn the call over to Eric.
Eric Fierwald: Well, thank you, Mike and hello everyone. I'm glad to be here with you all today to discuss our solid third quarter results.
On today's call, I'll begin by providing an overview of our performance and the solid results across each of IFF's businesses, which gives us confidence to increase our full year 2020 for guidance.
Eric Fierwald: I will also provide commentary on our efforts to continue to strengthen IFF for now and the future.
Eric Fierwald: I will then turn the call over to Glenn who will provide a more detailed look at our third-quarter financial results and discuss our outlook for the remainder of 2024 and we will then open up the call for questions.
Speaker Change: You go to slide six.
Speaker Change: I have to have delivered another quarter of solid results and significant bottom line improvement compared to a year ago.
Speaker Change: IFF achieved growth across all our business units with notable volume improvement across the entire portfolio.
Speaker Change: The combination of improved market conditions and our global teams passion and drive to serve our customers and address evolving needs across end markets was a major contributor to our performance.
Speaker Change: The actions we have taken this year to strengthen our business and capital structure as well as our push to drive productivity and today's dynamic marketplace are producing encouraging results.
Importantly, we delivered high single digit volume growth with broad-based contributions across each of our businesses.
Speaker Change: Equal encouraging, comparable adjusted operating EBITDA, grew by double digits in the third quarter, I'm merely driven by volume performance and productivity gains.
Considering our solid performance in the third quarter, specifically flowing through our over-delivery in the quarter, as well as our continued cautiously optimistic outlook for the fourth quarter, we are modifying our four year 2020 four financial guidance.
Speaker Change: We are making solid progress against our targets and our confident we will achieve net sales between 11.3 and 11.4 billion dollars, which is almost $100 million higher than our previous guidance range.
Speaker Change: Breedodd, we are tightening the range and are now targeting the high end of our previously communicated range of 2.1 to 2.17 billion dollars.
Speaker Change: Lastly, I'm pleased to share that we remain on track to complete the previously announced debisitor of our Farmost Solutions business in the first half of 2025.
Speaker Change: Marking another significant milestone in our portfolio optimization and de-leveraging journey.
Speaker Change: Now moving to slide seven.
Speaker Change: I'm going to highlight a few key achievements so far this year.
Speaker Change: While we continue to operate in the challenging and market environment, our performance over the last nine months has bolstered our position as a preferred innovation partner and growth in Abler for our customers.
Speaker Change: Over the last nine months, currency neutral sales grew 7% by merely driven by double digit growth in health and bio sciences.
Speaker Change: Comparable adjusted operating EBDA has increased 19% year to date. Fueled by our strong recovery in sales volume growth versus prior year lows and our productivity initiatives.
Speaker Change: Continuing our new business led operating model.
Speaker Change: Operating Palausti and Strategy Refresh earlier this year, our focus on getting back to the basics is translating into stronger financial performance with greater end-to-end responsibility and accountability.
Speaker Change: With a reinvigorated mindset and a simplified structure, IFF is better positioned to navigate today's complex and fast-moving operating environment.
Speaker Change: Now these steps also include sharpening our focus on key end markets and increasing our investments in high growth areas with a benefit of our teams and our customers.
Speaker Change: In the third quarter, we also opened the Creative Center in Shanghai and have started to invest in additional creative centers in Mexico City and India.
Speaker Change: Together, the innovation hubs and important markets expand our global footprint and ensure we have the regional expertise required to serve customers on a more intimate level and address their unique needs.
Speaker Change: With our people at the Heart of IFF's Revive Strategy, I'm equally excited to announce that our employing engagement has improved significantly over the last 10 months.
Speaker Change: As I've said before, empowering and enabling our global team to do what they do best is essential to our shared success as a global organization.
Speaker Change: And earlier this month, much of our global team had the opportunity to come together and celebrate IFF's 135-year legacy and 60th anniversary of being listed on the New York Stock Exchange.
Speaker Change: A true honor and reminder of the incredible legacy of this great company.
Speaker Change: I have no doubt that that magazine on my FF will continue for the next 135 years, but for now I'll pass it on to Glenn for a closer look at our quarterly results. Glenn.
Glenn Richter: Thank you, Eric, and thank you all for joining us today. As Eric noted, ISF had another very solid quarter, achieving revenue just north of 2.9 billion, in increase of 9% on a comparable currency new full basis.
Speaker Change: We delivered broad-based growth across nourish, health and biosciences, sense and pharmaceutical solutions with notable volume improvements across all four business units.
Speaker Change: Our ongoing productivity initiatives also contribute to a 16% increase in comparable adjusted operating EBITDA in the quarter.
Speaker Change: Building on our margin strength from the prior two quarters, we also realized another successful quarter of margin expansion, with our comparable adjusted operating EBITDA margin of 19.4% improving by 180 basis points versus Q3 of 23.
Speaker Change: A just-in-EPS, excluding amortization, was a dollar for in the quarter, increasing 17% versus the prior year period, a strong profit performance and lower interest expense were mitigated by foreign exchange impacts in other expenses.
Speaker Change: Turning to slide 9, our improved performance was broad-based this quarter.
Speaker Change: Nourish comparable currency neutral sales increased 7% and we delivered an adjusted operating EBITDA increase of 18%. This was led by Flavor's third consecutive quarter of double-digit growth and modest sales improvement in functional ingredients.
Speaker Change: In functional ingredients, high single-digit volume growth was mostly offset by our pricing actions, which were very consistent with our planned price investments this year.
Speaker Change: Overall, we are very pleased with our Functional Ingredients Recovery Plan that has delivered three consecutive quarters of volume growth with strong expansion in margins and EBITDA.
Speaker Change: Health and Bioscience achieves double-digit improvements in all of its businesses due to strong volume growth and productivity gains.
Speaker Change: H&V's comparable currency neutral sales increased 12% and we delivered comparable adjusted operating EBITDA of $173 million, a 15% increase from the year-ago period.
Speaker Change: In scent, double-digit increases in both consumer fragrance and fine fragrance, as well as high single-digit growth in fragrance ingredients, led to a strong quarter for both revenue and profit growth.
Speaker Change: Net sales in the quarter totaled $613 million, up 10% on a comparable currency neutral basis. And we delivered adjusted operating EBITDA of $127 million, up 7% on a comparable basis.
Speaker Change: Lastly, Pharma Solutions returned to growth, delivering sales of $256 million, an 8% increase on a comparable currency mutual basis, while adjusted operating EBITDA surged to over 32% to $62 million on a comparable basis.
Speaker Change: This notable performance was driven by strong double-digit growth in industrial and mid-single-digit growth in core pharma. Once again, margin expansion was primarily driven by volume and productivity gains.
Speaker Change: Turning to slide 10, cash flow from operations totaled $702 million year-to-date.
Speaker Change: A $366 million increase from last quarter.
Speaker Change: While CapEx year-to-date totaled $303 million, or roughly 3.5% of sales. Our free cash flow position totaled $399 million year-to-date, a sequential increase from $136 million last quarter.
Speaker Change: Here to date, we also distributed $411 million in dividends to our shareholders.
Speaker Change: Our cash and cash equivalents totaled $569 million at the end of the third quarter, including $2 million in assets held for sale.
Speaker Change: Additionally, gross debt for the quarter over approximately $9.1 billion with a net debt-to-credit adjusted EBITDA of 3.9 times, a decrease from 4.5 times at the end of 2023.
Speaker Change: are trailing 12-month credit-adjusted EBITDA totals of approximately $2.2 billion, largely in line with last quarter.
Speaker Change: As we look ahead to the fourth quarter and into the first half of 2025, we remain committed to achieving our net debt-to-credit-adjusted EBITDA target of below three times.
Speaker Change: following the completion of our pharma solutions divestiture. This sale, which again we expect to complete in the first half of 25, reflects our near-term focus on optimizing our portfolio and improving our leverage position to further strengthen our capital structure.
Speaker Change: On slide 11, I'd like to turn to our consolidated outlook for the full year 24.
Speaker Change: Given our improved financial and operational performance in the first three quarters of the year, tempered by some caution due to continued soft and consumer demand, we are modifying our full year 24 financial guidance.
Speaker Change: We now expect net sales to be in the range of $11.3 to $11.4 billion up from our previously communicated range of $11.1 to $11.3 billion.
Speaker Change: We also now believe that volumes will be in the range of 5% to 6% growth versus our previous expectation of 3% to 5% increase.
Speaker Change: Pricing is also now expected to be roughly flat for the full year versus 1% growth previously.
Speaker Change: as real pricing remains consistent with what we expected at the beginning of the year, but FX-related pricing in emerging markets is expected to be slightly less than originally expected.
Speaker Change: Our outlook for the fourth quarter remains unchanged despite our performance in Q3, given macro trends.
Speaker Change: as we closely monitor food, home and personal care, and markets, order phasing due to potential customer inventory adjustments at year-end, and a slightly tougher year-over-year comparison.
Speaker Change: On the bottom line, we now expect to deliver full-year, 24 adjusted operating EBITDA near the high end of our previously communicated range of $2.1 to $2.17 billion.
Speaker Change: The high end of this range includes the upside we delivered in the third quarter.
Speaker Change: and assumes continued productivity improvements, a greater level of annual incentive compensation given the relative strength of our performance versus budget, and incremental reinvestments in the business with a focus on profitable long-term growth.
Speaker Change: Lastly, based on current market foreign exchange rates, we now expect that foreign exchange will have an approximately 3% full-year adverse impact to sales growth.
Speaker Change: Assuming a EURUSD exchange rate of 1.12 at the time of our forecast was developed versus the previous expected range of 3-4%. I'll now turn it back to Eric for closing remarks.
Eric Fierwald: Thank you, Glenn. I am tremendously proud of what our teams have accomplished both in the last quarter and through 2024 to advance our operating philosophy, our strategic direction, and our execution capabilities.
Eric Fierwald: Together, we are building a stronger, more resilient IFF backed by a global team whose relentless dedication to innovation and winning in the marketplace continues to energize me quarter after quarter.
Eric Fierwald: Our solid performance this year is a direct reflection of the strength of our team and the shared buy-in for our strategic vision, and I am so grateful to work alongside such talented colleagues.
Eric Fierwald: While I'm energized by our recent performance, I am clear-eyed and recognize that there is lots more work to be done.
Speaker Change: As Glenn mentioned, we remain committed to reinvesting in our businesses, particularly our highest return businesses, over the long term to ensure we are well positioned to deliver sustainable, profitable growth to our shareholders.
Eric Fierwald: In the near term, however, we remain laser-focused on achieving our 2024 financial guidance and encouraging our global teams to unleash the full potential of IFF with our incredible customers.
Eric Fierwald: Thank you all for your ongoing support. I would like to now open the call for questions.
Speaker Change: Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question, please press star one.
Speaker Change: If you would like to remove your name from the queue, please press star 2.
Speaker Change: Additionally, if you are using a speakerphone, please remember to pick up your handset before asking your question.
Speaker Change: We do request a limit of one question per person.
Speaker Change: The first question comes from the line of Josh Spector with UBS. Your line is now open.
Josh Spector: Hey, good morning guys, and congrats on a solid quarter. I was wondering if you could walk sequentially.
Josh Spector: to your 4Q guide versus 3Q. I guess when we look at it, it looks like a bit more than normal seasonality. And even counting for conservatism, it seems a little bit lower than what we would have expected.
Speaker Change: So, what are the assumptions that you have behind that, and is there anything you're seeing now that maybe gives you some pause on some of the trends or any incremental data you could share there?
Speaker Change: But the pattern we have seen in the last few quarters is a strong start and then a bit of deceleration through the quarter. And we've got limited visibility to December at this point.
Speaker Change: So we are cautious given the potential that customers could adjust inventory at the end of the year, which has happened in the last few years, but let me just say that we want to make sure that we continue to deliver what we say we will deliver, but the quarter started off as expected.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Nicola Tang with BNP Paribas. Your line is now open.
Nicola Tang: Hi everyone, thanks for taking the question. I wanted to ask a bit about nourish. Can you help us to understand what drove the sequential decline in margins despite the strong top-line performance? And again, can you provide a bit more colour between flavours and functional ingredients and how you're thinking about the progression into Q4 as well? Thank you.
Nicola Tang: This is Glenn. Good afternoon, Nicola. Appreciate the question. Just as a reminder,
Speaker Change: You know, typically our high water mark for margin is Q2 for nourish, a very positive mix as they go into the summer season here.
Speaker Change: what you see as it relates to the quarter-to-quarter progression.
Speaker Change: between basically two and three. And then ultimately from three to four, there'll be a slight contraction of margin as well. As it relates to two to three, you have sort of mixed more normalizes. And then secondarily, as we've mentioned, we are increasing our investments in the business.
Speaker Change: So those are beginning to basically show through relative to the margin as well. So as you look out into Q4, you should expect, because of the seasonality, i.e. lower volumes for nourish in Q4, that you will have some degradation of 50 to 90 basis points in terms of margin quarter to quarter.
Speaker Change: Thank you.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Ghanshyam Punjabi with Baird. Your line is now open.
Ghanshyam Punjabi: Thank you. Good morning everybody. You know, I know it's still early, but could you give us a sense as to how you're thinking about 2025 at this point as relates to some of the high-level variances such as, you know, volumes, price, maybe compensation expense, and also cost savings flow-through?
Speaker Change: Thanks Gautam. First of all, it's too early to give you any specifics.
Speaker Change: And, as you know, we normally guide in February, and right now we're finalizing our budgeting process.
Speaker Change: But I will make a couple of comments. First of all, as you'll recall, we will have over $100 million in incentive comp reset in 2025, which is a positive for next year.
Speaker Change: And let me just add that we continue to work really hard on customer focus, on driving innovation and productivity to drive our performance. And I've got to say that
Speaker Change: Nine months in, I love how our teams are stepping up and driving performance, driving execution.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of John Roberts with Mizuho. Your line is now open.
John Roberts: Thanks. First, just to check on, are you on track for reporting flavors separately from functional ingredients next year? And then where was the incremental volume strength in the quarter, or actually in the fourth quarter as well? I guess it's the second half volume strength.
Speaker Change: Do you think that was more driven by promotional activity by your customers and some easing in their pricing?
Speaker Change: The flavors business, we are on track to basically have that set up as two completely separate businesses. Actually, most of the organizational changes...
Speaker Change: have been announced and implemented. We will start reporting it starting next year, which means in the first quarter.
Speaker Change: So, May of next year is when you'll see the first cut between the businesses, and we plan on providing some historical context as well. And just to add to that, we have announced internally...
Speaker Change: We didn't see a need for a press release, but internally, that we have...
Speaker Change: named two presidents, a president of what we'll now call taste and a president of what we'll call food ingredients.
Speaker Change: Yeah
Speaker Change: And then relative to the performance in the third quarter volumes, we actually pretty much, it was fairly broad-based, John, across all the businesses.
Speaker Change: Very strong scent and certain businesses with H&B are very very strong.
Speaker Change: We believe it is a combination. As you're well aware, the end consumer, there's very few signs that the consumer is getting any stronger in terms of what's going on, in terms of consumption. But we do think that we're picking up share and winning in the marketplace. And that's a function of sort of the renewed focus on innovation, commercial excellence.
Speaker Change: across the businesses and the new operating model. As Eric had mentioned, the start as it relates to Q4, we're just being a little more cautious because we've been surprised in December the last couple of years.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Lawrence Alexander with Jeffries. Your line is now open.
Speaker Change: Good morning everyone, this is actually Dan Rizwan for Lawrence. Given the progress you've made this year, what do you think the right margin structure and ROIC is for your portfolio longer term once the farmer's gone?
Speaker Change: The way I would answer that is we are focused on driving continuous improvement in both margins and ROIC, and we're tracking them very closely by business now.
Speaker Change: And the levers that we have driving customer focus, driving innovation, and productivity are all helping us gain confidence that we'll be able to continuously improve both.
Speaker Change: Also, I just add that we are prioritizing capital allocation to our higher margin and higher return businesses sent.
Speaker Change: Flavors, now we're going to call it taste.
Speaker Change: and health and biosciences.
Speaker Change: And we continue to have strong emphasis on driving functional ingredients turnaround, which we're making good progress on. So that's, we are, we are focused on these two metrics and we're doing the things to continuously improve over time.
Speaker Change: Thank you. The next question is from the line of Patrick Cunningham with Citi. Your line is now open.
Speaker Change: Thank you for watching!
Patrick Cunningham: Hi, good morning. Is there any update to the adjusted pre-cash flow guidance for the year? I think last time you got it at $600 million. Should that trend higher, in other words, the higher end of the guide, or is it mostly offset by working capital or other items?
Speaker Change: Yeah, so two numbers I'll give you Patrick, good morning.
Speaker Change: One is our reported free cash flow, I'm sorry, our full year free cash flow, we expect to be basically largely unchanged versus previous guide.
Speaker Change: You sort of already mentioned the reason why the earnings trajectory is higher, but we also are building more working capital, which is almost exclusively related to higher sales, so it's sitting in receivables. So net-net, we're sort of in a neutral position for the full year, so no change in the forecast.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Kristen Owen with Oppenheimer. Your line is now open.
Kristen Owen: Hi, good morning. Thank you for taking the question. I just wanted to double-click on functional ingredients. Can you talk about what you're seeing in terms of order activity coming into the contracting period? And if you could provide an additional update on the functional ingredients turnaround. Thank you.
Speaker Change: The reality is we don't typically have a long order book, and certainly there's essentially zero into next year. The contracting period largely is around pricing with our relationships from a standpoint.
Speaker Change: It is going extremely well. We feel that this is a byproduct of the now two-year work we've had in place to basically remediate the business.
Speaker Change: that we're not in a very good place to sustain the momentum within the business. As a reminder, we have taken a tremendous amount of effort.
Speaker Change: to fix our service issues starting two plus years ago. Our service levels are extremely high. Secondarily, we reinvested deflation and giving price back to basically be much, much more competitive in the marketplace.
Kristen Owen: Third, we basically re-energized our sales pipeline, so work very closely with the front line and the innovation resources to identify how to win customers back and win new business.
Kristen Owen: That has been working extremely well.
Kristen Owen: And those collective efforts have actually resulted in us having mid-single-digit volumes this year. We feel like we've gained back about half of the lost volume at this point. And at the same time, we've been expanding margins, both gross margins and ultimately EBITDA, year-over-year growth, very, very well. The last piece is we are in the beginning phases of a fundamental restructure of our global supply chain footprint.
Kristen Owen: That means actually making sure that we have the assets in the best locations from a cost perspective and the best supply chain to support that. That will take several years.
Kristen Owen: But we think that's the final step, as we've committed to in the past.
Kristen Owen: of moving this business back to the mid-teens range in terms of overall EBITDA margins. We're circa 12-13 this year.
Kristen Owen: but we should be able to get to 15 plus in the coming years. So we feel very good. The team has done a phenomenal job, has been working nonstop to basically make this afternoon feel very good with the businesses.
Speaker Change: Thank you. The next question is from the line of David Begleiter with Deutsche Bank. Your line is now open.
Speaker Change: Thank you. Good morning. I'm Eric. Nine months into your tenure, how would you characterize the progress you've made on the R&D organization and the innovation pipeline, and what could that mean for new product sales in 25 and even 26?
Speaker Change: Thank you.
Speaker Change: Thanks for the question, David, and I feel very good about the progress we're making.
Speaker Change: First of all, let me start by saying that each of our BUs have developed very strong strategies with very clear priorities. And now with R&D embedded in the BUs, we can already feel both the power and the energy created by the focus and the better connection of our R&D efforts.
Speaker Change: to customer needs and I tell you it energizes our R&D people and it makes the whole system work better and just one example our Scent team now has
Speaker Change: a very clear plan and is already taking actions to strengthen our pipeline of naturals, synthetic chemistry, and biotech molecules.
Speaker Change: So, it's great to see that. What I would say in terms of the impact is, I think that the main impact of the new projects will be in 2026 and beyond.
Speaker Change: But I can tell you that the energy is already helping now and will help in 2025 in terms of seeing that pipeline strengthen and having discussions with customers and also our sales force energized by that, I think will benefit us, is already benefiting us. And I think we'll have benefits in 2025, but the specific project benefits will really come in 26 and beyond.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question is from the line of Salvatore Tiano with Bank of America. Your line is now open.
Salvatore Tiano: Thank you very much. I just want to ask a little bit about the disconnect between the very strong organic growth you're reporting and the more
Salvatore Tiano: and the slower growing end market. So, can you bridge a little bit, you know, the degree of performance that you have across the board versus slower consumer demand?
Speaker Change: Specifically on scent, you know, it's been on a roll for several quarters and that's where I think your customers are also doing well in fine fragrance, but how long can this extremely strong growth last?
Speaker Change: Yeah, thanks Al. It's a good question. One, just to remind obviously everybody is that there is a bounce-back effect this year from the lack of de-stocking so there's a...
Speaker Change: mathematical sort of performance that the entire industry is seeing as we overlap last year. So that's obviously explained some of the incremental growth above what is happening at the consumer level.
Speaker Change: Fine fragrance continues to be a unique case, as everyone is well aware over the last several years.
Speaker Change: Since COVID, the category has exploded.
Speaker Change: We believe that that is a function of multiple things happening at the consumer level, a plethora of new brands being launched.
Speaker Change: the impact of social media. Ultimately, the digital channel has become a very, very meaningful channel for the growth in the business as well. And the use of fine fragrance has expanded beyond sort of the special occasion as a result of that.
Speaker Change: I would also say that we believe, because we do track how we're doing in the market versus others, is we are winning share. So as Eric had mentioned, the investments we have been making.
Speaker Change: relative to new geographies, adding perfumers, adding new creative centers, etc., is the other way that basically we're winning in business. And we're very committed to continuing to do that, not only within the scent business, but more broadly across the higher growth and higher margin businesses within IFS. So, appreciate the question.
Speaker Change: Thank you. Bye.
Speaker Change: Thank you. The next question is from the line of Kevin McCarthy with Vertical Research Partners. Your line is now open.
Kevin Mccarthy: Thank you and good morning. Can you discuss your expectations for price-cost dynamics in the coming quarters? And related to that, would you touch on
Kevin Mccarthy: tariff scenarios. How do you think about potential for higher tariffs? Maybe you talk about the experience in the past and how you're planning to manage through various international trade scenarios moving forward.
Speaker Change: Yeah, good morning Kevin. Generally our price-cost dynamic is flattish.
Speaker Change: We have seen throughout this year some continued deflation, not to the degree of last year. In our early outlook for next year, things are fairly stable. We believe there's certain parts of the basket that we've increased with others.
Speaker Change: some level of deflation. So generally, the price environment, in our view, is fairly static. And the price-cost dynamic is fairly static as a byproduct of that.
Speaker Change: difficult to forecast at this point in time regarding tariffs. There is obviously some...
Speaker Change: some history here with the first Trump administration. That was more focused as it relates to food and China as one country versus broad-based, so it depends upon...
Speaker Change: What, if anything, ultimately happens in the reign of terrorism is something that maybe yesterday people weren't very focused on, but as of this morning, members of the team are very focused on. I would note that when there was basically escalation of terrorism in China,
Speaker Change: It's probably intuitively good for our business relative to our footprint, global footprint, our ability to react. As you're well aware, there's a more competitive environment within China, so those tariffs could actually intuitively be advantageous to our overall business broadly. But obviously stay tuned, and as we think about next year and provide guides in February, there's probably more to speak about at that point.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. The next question is from the line of Mike Sisson with Wells Fargo. Your line is now open.
Mike Sisson: Hey guys, nice quarter in Outlook. Just on the fourth quarter...
Mike Sisson: If you're at the high end of your outlook range,
Mike Sisson: It does imply that EBITDA will be down year-over-year despite positive growth. Just want a little bit of color on that.
Mike Sisson: Zapp, more conservatism, and then a quick follow-up, when you think about...
Speaker Change: you know, 25. You know, a lot of companies thus far in chemical end have noted
Speaker Change: the first half not likely better than the second half. Could you?
Speaker Change: Sort of talk about what you what you're seeing from customers And and do you think they're feeling better about next year about the same any sort of green shoots of improvement there? And and just kind of wanted to leave it at that. Thanks
Speaker Change: Thank you for watching!
Speaker Change: And, as you pointed out, our guide currently would get us around 440 for this year as well.
Speaker Change: It's very simple, honestly. It has all to do with our extent of compensation. As you know, last year, on the full year, we were below 100%. As we've mentioned, we are materially above 100%.
Speaker Change: in excess of an incremental $100 million of variable comp.
Speaker Change: That is a nearly $40 million dollar year over year impact in the quarter alone, so that sort of normalized impact.
Speaker Change: is a huge, huge impact. The rest of the equation is basically productivity is offsetting basically some modest level of inflation and investment. But it's really that incentive comp, you know, growth year over year that's the biggest piece.
Speaker Change: And then, Mike, to the second part of your question, we're not really seeing strong green shoot comments yet from our customer base.
Speaker Change: for 2025. But the good news is that we're taking aggressive actions.
Speaker Change: to strengthen our position by getting back to basics, as we said before, heavy customer focus, heavy focus on innovation. And by the way, as customers see slowing in markets,
Speaker Change: What they want to do is have more innovation so that they can drive growth relative to the market, and that's when they come to us, and that's a good thing. And I'll just also say we're doing lots of customer business, lots of focus on customers.
Speaker Change: and co-creation with them of leading products around the world. In the third quarter, I personally visited with other executive...
Speaker Change: team members, 11 countries.
Speaker Change: and representing over four billion people and it was just great and by the way up to now I've visited about 40% of our customer base.
Speaker Change: and just see how our people are in front of our customers and I feel a lot of energy with our teams in front of customers.
Speaker Change: whether it's our salespeople with our perfumers or our flavorists or biotech scientists
Speaker Change: co-creating products and you feel the energy and I would love it if you guys could feel the energy but just this is an example I was just in India and Indonesia.
Speaker Change: and was super excited to not only hear about our double-digit growth across scent, flavors, health and biosciences, and food ingredients.
Speaker Change: but met with customers that are very bullish about their growth in these high growth markets, but also about the innovation that we're bringing with these creative centers to help them grow.
Speaker Change: So, tough market, but I believe that we're putting in place the right things to grow above market.
Speaker Change: Thank you for watching!
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Mark Astrochan with Stiefel. Your line is now open.
Mark Astrochan: I wanted to go back to the question on end demand and maybe ask it in a bit of a different way. One is if you could just maybe try to give some framework around how much of the sales growth.
Speaker Change: It's from restocking.
Speaker Change: And then, more specifically, you know, we all can look at the big multinational public companies volume trends, and you can see it's really lower even if it's roughly half a year.
Speaker Change: sales growth is attributable to be stocking. So I guess the question is
Speaker Change: Are you seeing more growth out of local and regional companies and private label relative to some of these big multinationals and maybe there's a bit of a shift there?
Speaker Change: relative to recent years, and then just remind us how you think about
Speaker Change: you know, whether the customer is a local, regional, private label compared to a multinational. I recall that you're fairly agnostic. I just want to make sure that's the case. Thank you.
Speaker Change: Thank you.
Speaker Change: I would start by saying that both are very, very important to us.
Speaker Change: and the multinationals that are focused on innovation and driving superior products are wanting more of our innovation and we're doing more projects with them and that's helpful to their growth and to our growth. But also the regionals and the locals are also growing and we're
Speaker Change: I think strengthening our strategies and our capabilities to serve them locally. And that's what I'm seeing around the world. That's why we're building more creative centers to service both the global companies but also the locals, the regionals, and the locals.
Speaker Change: So, we're seeing growth opportunities across, but of course there's some geographies and there's some segments that are growing faster than others, but we're, I think, now very clear on making sure that we're able to grow in all three customer segments.
Speaker Change: Thank you for watching!
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you. The next question is from the line of Lauren Lieberman with Barclays. Your line is now open.
Lauren Lieberman: Great, thanks. Good morning, everyone. I just want to talk about reinvestment rates because I think initially seeing the implied EBITDA for 4Q, and I know you just clarified and said it's, you know, more or less all the incentive comp dynamic, there had been a thought that, you know, some of it was reinvestment, reinvestment ahead of next year pulling some activity forward, which is, you know, completely typical to see from companies when there's flexibility.
Speaker Change: So I wanted to talk a bit about reinvestments for next year. This year there was a lot of flexibility created in the P&L, the restocking dynamics and strength on top line. So how should we think about reinvestment next year? And, Erica, you've gotten closer and closer and closer to the business.
Speaker Change: and looking to build, you know, build back R&D, build back capabilities and set this stage for, you know, a big pipeline in 26. How should we think about rates of reinvestment spending in 25 versus what, you know, we saw in 24? Thanks.
Speaker Change: Yeah, Lauren, I'll start handing it over to Eric. I just said to clarify, the 24 impact as we communicated last time, which is the same, is 20 million in the P&L, so it's roughly 10 and 10, Q3, Q4, so that will annualize by another 20 million in the first half of next year. That's independent of any additional level, but that's our starting point.
Speaker Change: And then from there, you know, we're planning on continuing to grow our top line and with that be able to invest the same percentage of sales.
Speaker Change: So, and R&D people. So, really strengthening our ability to drive innovation. At the same time, we're strengthening our ability to drive productivity and make sure that we're able to.
Speaker Change: drive productivity in a way that we keep continuously improving our margins and our ROIC and be able to invest even more in innovation.
Speaker Change: So I think it's a virtuous cycle that we drive the innovation, which gives us sales growth, which enables us to invest more in innovation, at the same time we drive productivity to help our margins, but also enable us to invest more in innovation.
Speaker Change: and that's what we've started to be able to do in 2024 and intend to continue to do in 2025 and beyond.
Speaker Change: Thank you for watching!
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Jeff Sekalskas with J.P. Morgan. Your line is now open.
Jeff Sekalskas: Thanks very much. You talked about being satisfied with your volumes in October. Roughly, were they up, you know, mid-single digits, that is, sort of continuing the pattern of what you experienced in the third quarter?
Jeff Sekalskas: you have some volume growth and you have some price degradation. In general, is the EBITDA or operating profit of functional ingredients growing nicely for you this year or not growing or shrinking? Can you can you give us an idea of how that business
Speaker Change: is performing.
Speaker Change: Hey, good morning, Jeff. So, we're mid-single digit up in the month of October, so same pattern we've seen for the last few quarters.
Speaker Change: As Eric noted, it sort of drops there sort of fairly significantly with the last quarter being, last month of the quarter rather, being pretty tough.
Speaker Change: and Functional Agreances, sort of following that pattern. Functional Agreed from a volume metric standpoint is going to be 5% to 6% volumes this year. They've had very, very strong performance. [inaudible]
Speaker Change: We basically took those dollars to reinvest back with our customers on a very targeted basis.
Speaker Change: And it's helped us not only deliver the top-line turnaround in results, but to your final question,
Speaker Change: Gross margins are up very nicely, fairly consistent with flavors in terms of a year-over-year, and EBITDA itself is up very strongly. So last year...
Speaker Change: The business was, I'll say, circa a 8-9% EBITDA margin. It'll probably finish this year north of 12%, and it's sort of on its way to our stated objective to get to sort of mid-teens over the next two years. So hopefully that answers the question.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you. The next question is from the line of Lisa Deneve with Morgan Stanley. Your line is now open.
Lisa Deneve: Hi, thank you for taking my question. I just want to come back a little bit to the growth. We've talked a little bit about segmental growth and growth cost-efficient, but can you share how growth has been different across your regions?
Speaker Change: across the segments in that. And maybe can you also share how your performance has been in China and maybe also in India given a lot of your customers had very big volatility of delivery in these regions. Thank you.
Speaker Change: Yeah, good morning, Lisa. So I'll provide some general perspectives and turn it over to Eric.
Eric Fierwald: Generally, all of our businesses have performed well across the board. Pharma lagged, as we expected. The destocking was a little bit more later in the cycle.
Speaker Change: Farm is now back in the pot, very strong positive territory the second half of the year as expected, but all of the businesses have actually done very well.
Speaker Change: from the start of this year standpoint. China and India are two different stories. China, while there's been some improvement, still is a little bit choppy in terms of the growth trajectory given the local market. India is extremely strong. We are, as Eric mentioned in early comments,
Speaker Change: really doubling down on investments within India to really continue to capture that share in terms of the kind of the growth opportunity. So I don't know, Eric, other? I'll just add that we're investing in creative centers and the growth markets including India.
Speaker Change: very aggressively to ensure that we continue to grow strong in those markets.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Chris Parkinson with Wolf Research. Your line is now open.
Chris Parkinson: Great, good morning. Can we just dig in a little bit more into the HMB result? Obviously it's been pretty solid, but just the composition of kind of the subsegments, the probiotics recovery, and anything you know that we should be thinking about and considering as we enter 2025. Thank you.
Speaker Change: Good morning, Chris. Every single business within H&B had a very good performance within the quarter. Probiotics bounced back a lot, as you're well aware, over the last couple of years. There has been softness in the business.
Speaker Change: In part, given the situation in China, it's our second largest market, it's very close to the size of North America, so as goes China, it does whipsaw the business sort of back and forth, but the third quarter was a very, very strong quarter across the board.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: This will conclude the question and answer portion of today's call. I would now like to turn the call back to Eric for closing remarks.
Eric Fierwald: Well, first of all, I want to thank you all for joining today. I appreciate your questions and your interest in IFF.
Eric Fierwald: I've now been here for just about 10 months.
Eric Fierwald: And I've got to tell you that I'm more excited than ever about the prospects for our company.
Eric Fierwald: I love Team IFF, I love our customers, I love spending time with them, I love our innovation.
Eric Fierwald: and really appreciate the work that our teams are doing to have delivered the first three quarters and I can tell you that we're all very much focused on making sure that we deliver the fourth quarter but do it in a way that strengthens us for 25 to 26 and beyond. So thank you very much and have a great day.
Speaker Change: This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: . . .
Speaker Change: and maybe some other people.
Speaker Change: Happy Holidays!