International Flavors & Fragrances Inc. (IFF) Earnings Call Transcript & Summary

Good morning, good afternoon, and good evening. It's good to be back at the CAGNY Conference. Please take a moment and read our cautionary statement. What we want to do today is we want to talk about IFF's new leadership position. We want to talk about the ESG, efforts we have done in the last couple of years. And certainly about the exciting journey forward in terms of delivering on the synergies of our transaction with N&B DuPont and our financial profile. Let's start with the first slide. The market has evolved. The market for flavors, fragrances and ingredients in general. It is really important to see that we have now a quite different market dynamic than we had a couple of years ago. First of all, we see that is very important to be exposed to naturals. We see that you have to be exposed to some of the smaller customers, but also that more and more of our customers are asking us to combine ingredients and technologies or even come up with integrated solutions. And it's so important that a company like IFF reacts on it and basically goes forward to satisfy all of these customer needs of our big customers and the smaller customers as well. If you go to the next slide, then you see with our transaction with the N&B -- DuPont's N&B business, we have made a significant step forward. First of all, we ramped up our game in research and development. We have a very, very solid R&D organizations now together with all the capabilities, which are important for our customers, like biotech, like coming up as the right enabling technologies encapsulation solutions and so on. Certainly, with that move forward, we are creating a leader in the industry, which is in many other categories where we are playing, in #1 or #2 spot. And as I said before, really important that we are capable and able to deliver integrated solutions, basically the whole product for our customers. If you look at the market for the different players in that field, then you can see that IFF is now a clear #1 in the marketplace. And that provides us with a very good position with many of our big customers and small customers, but also then gives us the financial means to compete where we want to compete and to invest in R&D where we believe it is really super important. Let's talk about what defines an industry leader. It is certainly the size, but it's also our investment, and particularly our investment in research and development, which is unmatched by any of our competitors, but also the quality of these investments, and I will come to that a couple of slides later. Market position. We talked about it, but also the customer, a real good coverage of many good and big customers. So all in all, in all of these 6 metrics, a real strong position of the new IFF. And that leads me straight to the categories on the next slide. What you can see here is that our new market is around about USD 60 billion in size. And you see the different categories in different markets. Slightly different in size, but also in growth rates. And now it's up to us to look where can we accelerate our portfolio, in which areas and where can we grow the most and deliver good value for our customers. You see we have organized ourselves in 4 divisions to decomplex the portfolio and make sure that it was a single focus on areas like scent, for example, or health and bioscience or pharma solutions or on the food business, like in our [ newer ] division. On the next slide, I thought it's important in a time like COVID, where we see that everything is virtual and things are changing, are the same market dynamics and forces are still important for us for the new company for the new IFF. And I have to say it's a clear, yes, because you see that many of the megatrends, which are seen here on the left-hand side are still intact. They are really, really important. But also some of the trends, which came through COVID are very well captured by the new company, just talking about health and wellness, in particular, health ingredients, probiotics, super important, got even an acceleration during the crisis. And then trends like dental hygiene and to washing. This is captured by the new portfolio as well. I believe it's important to see that the previous megatrends are suiting the new setup and the new company, the new IFF very well, but also the new trends or the new developments we have seen. If you go to the next slide, then you see clearly that we have an unmatched breadth and depth of R&D platforms, R&D platforms where we are playing. And also enabling capabilities, which are really helping us to achieve. And I don't want to go too much into detail, but it shows very clearly what kind of company it is, how many researchers, how many developers we employ in our organization. We have more than 3,000 on that. We have more than 40 partnerships with academic institutions. We have more than 12,000 patents, which are relevant for us as a company. And that should show the unmet strengths of our R&D machine, what we're so proud of because we believe it can deliver a lot of value to our customers, but certainly then, finally, to our shareholders as well. On the customer side, I said it before, we have certainly more than 45,000 customers, well matched between the big and the small customers. And that's, by far, the biggest exposure to customers. And so important because the overlap is just 20% between the 2 legacy companies. So ample of opportunities for cross-selling products into each other's customer portfolio, very important and certainly a growth driver going forward. If we look at the next slide, you see that this company, the new IFF is really poised and positioned to win. We can see that if we get customer expectations in, they need certain solutions for, let's say, green -- green encapsulation for detergents or softeners, just as an example, we can know about it. We can solve it for them, and we can come up with really, really important and good solutions. We go to the next slide, then you see that the product offering is very different than you see in many of our competitor companies. And it starts with single ingredients. Many customers are still want to have just single ingredients. We can do it, we can deliver. Single ingredients, single technology. We can do multiple ingredients. We can combine these ingredients and technologies -- tie technologies together, whether you buy -- you want a potato chip and you want the seasoning and the food protection and the natural color from 1 supplier altogether in 1 solution, we can do it. But if you want to have a whole plant-based burger with everything together, the new IFF can deliver it. And then one area where we are very excited about it is that we see a clear trend going away from the heart, chemicals, from small molecules to biotech solutions. And right now, with that setup, we have probably the best biotech solution and capabilities in the industry, which will help us to come up with the right solution, the wanted solutions of our customers and can grow their business quite significantly. In all these areas, we can come up with innovative solutions on technology, so similar ingredients or raw materials. We can do the whole solution as depicted here in the plant-based burger or on fabric care when you go for real detergent solution, for example, which is shown here on the left-hand side. And everything from a single ingredient, so the total integrated solutions, everything can be done with the IFF capabilities. Another area, which is so important for all of us is are we making progress on sustainability? Are we making progress on ESG? And I can tell you the journey of the legacy IFF was a very good journey over the last 5, 5 or 6 years. And you can see here on the slide that we are hitting all the marks which are needed, which are requested by our customers, which are requested by our employees and which are good for all of us, whether it is the environment, whether it is our workforce or certainly what our customers requested as well. So big progress, and I can promise you, for the new company, we will have very ambitious targets withe want to go after because as a bigger player, we certainly can have a bigger impact here as well. Despite doing more work for the planet and the world, we certainly want to deliver for our shareholders as well. On this slide, you see very well how we think about synergies on the revenue side, but on the cost side as well. We will deliver, over the next 3 years, run rate savings of $300 million in cost and $400 million in revenue synergies. You see it starts slow on the revenue side in '21, then it picks up over time. That's one of our learnings from our previous acquisitions. On the cost synergy, it's certainly less back-loaded because we start much faster, and the second year is already a very important year for delivery in cost synergies. But many of you have asked us, it's not just what you want to achieve, but how you want to achieve it. And here you can see, on that slide, some examples how we think about it. For example, on the revenue synergies, we have had more than 100 ideas coming out of our teams. We distilled it down to 40 important projects where we want to go about. And since the last 3 weeks since we are one company, the teams are already executing on it, talking to customers and look what we can achieve with the new setup, with new customers on both sides. And I have to say I'm actually impressed for just 3 weeks, how well these first discussions are going. On the cost synergy side, more than 84, 85 projects we are working on. On one hand, internally, can we bring more of our back-office activities into shared service centers, where DuPont is a very, very good setup where we are rolling in some of the IFF activities. On the other hand, what can we do on the procurement side to basically have better prices, better terms and conditions to bringing some savings for the new IFF. Just to pick 2 or 3 examples, which I believe are meaningful to produce our financials in the future. Talking about financials. So what are we thinking about the next 3 years? What can we deliver? We believe we can deliver around about 4% to 5% in sales growth, around about 26% in EBITDA margin, $2 billion in free cash flow, and we want to bring our leverage down to lower than 3x in the next 24 to 36 months. We believe very realistic targets and goals, achievable, but that's what we want to measure going forward. When we talk about the financials, it's very important for U.S. investors and as analysts to know how do we want to allocate our capital. There's certainly not a lot of surprise. The first priority is now debt repayment. Important because we said we want to get our leverage rate down to below 3x. On the other hand, on the dividend, we want to stay with our current dividend of a modest increase, important as well. We look at a portfolio and we will find out whether all of the pieces of the new IFF portfolio should stay with IFF; or around the edges, we want to make some adjustments. We have already started with the legacy IFF portfolio to look at smaller divestments. And then when all of it is said and done, we want to restart our share buyback program as we headed in place many years ago before we embarked into this M&A journey. We certainly want to make sure that we put our resources behind the parts of the portfolio, which have great growth potential and nice profitability. And here, you can see with the bubbles, that this is not in all -- in -- for all of our categories, the case. So we have to see, can we fix some of these categories? Or do we want to find a different owner for it? That's a portfolio exercise, which is right now ongoing, 1 small business, we have already bidden out to the market to get the first offers. That will be an activity, which will stretch over the course of the year to figure out, around the edges, how we can adapt our portfolio to the new environment and that we are really poised for good growth going forward. By the way, when I have talked about all the financial results, we already have in mind that they are just organic numbers. If you would sell a business, that certainly comes on top of it, and we would use it for the debt repayment. Let's talk about the year 2021. That's, for us now, the most important year because it's the first year as a unified company, the first year where we have to deliver. So we believe we can achieve $11.5 billion in sales pro forma. Remember, $507 million in January, we're still with DuPont. We closed the transaction the first of February, and then around about the 23.2% adjusted EBITDA margin. Now because the times are so volatile, and we want to come out of the gates fast, I want to show you how we have performed in the last 13 months. You can see here on the slide, very clearly, the impact of COVID on the legacy IFF, on the legacy portfolio. The worst quarter was probably the second quarter, after a real strong start in 2020. And then over time, sequentially, we have improved. At January, already a number for the combined company is around about a 3% growth, which is a good number for us because it's very much in line what we have planned. So let's talk about the priorities just for a moment. Because now after 13 months of planning, of strategizing, it's now time for execution. And execution will make the difference for that integration. So we will integrate our organization, the back office function and our divisions. The good thing is with 13 months of planning period and planning time, we are already very, very advanced. We have already announced the first 3 layers of the organization. We will announce the next layer until the end of March and we are moving forward. So we had a real good head start on the integration. We will look at the cost. We will look at where can we take the cost out for the synergies or even beyond that in some of the, let's say, enabling areas, because we believe there is room for us to go after cost and to deliver as, let's say, free cash flow or some money for reinvestment or for our investors. And that's certainly on growth, we want to grow the business. And as I said, we have a base business to grow, really important. But we want to achieve $400 million in revenue synergies. So we start with our 40 projects into this year, 2021 to figure out, can we deliver, already this year, the promise growth and what are, let's say, the most compelling combinations of technologies, ingredients for our customers and see whether we can move ahead here even faster. So in summary, I think a very strong company, much stronger than ever, a company which is in a very, very good shape to start a new era of IFF, to grow the business even faster than before. And we all believe, when we come out of this pandemic, hopefully, mid of this year, you will see a real, real strong growth going forward as a company. With that, I have just 1 slide left over, and I want to show it to you, because we are not together, all, in Boca Raton. And many of you and us are used to be in Sunny Florida. But we have created for you, and hopefully, you have received a fragrance, which should remind you that CAGNY is Florida. And hopefully, we will see each other in Florida next year. Thank you so much.