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

So welcome to the IFF Learning Labs. My name is Nicolas Mirzayantz, and I'm the President of our Scent division since 2007. Today, I am honored to take you through several aspects of this very exciting business and provide you additional information regarding IFF Scent approach to remain a key industry leader within the segments we participate in. IFF Scent division has 4 business units with dedicated leadership and strategy each of which has a unique value within the division. First, Consumer Fragrances business unit create and sell fragrances compound for 3 main consumer product categories: fabric care, home care, body care, which encompasses personal wash, hair care, toiletries and skincare products. Then we have our Fine Fragrance business unit, which develop and commercialize fragrance compounds for perfumes and colloids for mass market to high-end and iconic fashion brands like the so-called fine perfumery industry. Then we have our Cosmetic Active ingredients with active and functional ingredients, botanicals and delivery systems creating to be part of our customers' cosmetic and personal care product line. And finally, our Fragrance Ingredient business unit consists of synthetic and natural aroma ingredients. They are the components of a fragrance compound and play an important role within our strategy. IFF Scent is well positioned to win in the marketplace today and tomorrow, and our diverse portfolio delivers wide geographic coverage, differentiated capabilities and well-trained passionate talent. Consumer- and customer-driven innovation pipeline, currently the strongest ever in IFF history and the strongest ever in our industry. Also, we have delivered -- demonstrated solid growth with robust margin profile and profit contribution; and last but not least, a proven product superiority from a technical, creative performance and preference perspective. At Scent, where human and consumer obsess partnering with winning companies, moving life to the most iconic brands globally. Scent is a very attractive market of $15 billion across the different markets in which we participate in. It is very resilient and with a solid growth perspective since it expands proportionally with population growth and increased urbanization. Here are the macro trends shaping the industry beyond the said democratic shift. But first of all, post-pandemic reality elevating personal and ambient safeness and cleanliness standards; #2, augmented naturality through biosciences, creating a future with safer and regenerative alternatives; three, health and well-being being amplified, increasing pro care routines; four, sustainability principle becoming the new normal to consumers and our customer; five, trust and transparency expectation regarding products and services; and last, digitalization, accelerating all aspects of the business. Our fragrance compound competitive landscape. Our market is highly concentrated. As you can see, the top 4 players represent more than 70% of the fragrance market compound as a result of several consolidation that were accelerated over the past 20 years. It is very important to underscore that IFF has delivered the best organic growth like-for-like over the past 3 years, while new competitors improve their position through a more aggressive M&A strategy focused on the scent market. We were able to grow market share ahead of the competition with significant improvement within the customers where we have just entered the new core list delivering a very meaningful high win rate. So I'm very pleased about the progress we're making. And recently, the team shared with me that, by far in 2020, during the pandemic, we have outgrown the market and grew significantly more market share than any other fragrance competitor. IFF is a global pioneer of a unique industry. We are in the business of emotions and memories, creating unique experiences for a variety of consumer product goods for over 132 years. It is a healthy business portfolio with consumer fragrances representing over 50% of our revenues. Fine Fragrance in 2020 was impacted, as you can imagine, by the overall pandemic crisis through many of the retail outlet closure and is expected to fast recover historic above 20% share in 2022. Despite our strong roots in the U.S.A., 77% of our revenue generation is captured outside North America with a very strong foothold in Latin America and Greater Asia and the largest revenues coming from the EMEA regions. Important to note that emerging market represents 54% of the total sales for our fragrance compound business in 2020. And this is due to the vision of the former leaders of this organization, where more than 100 years ago entered Indonesia, with also a participation in India, more than 100 years of presence but more important for you to know that we've been in China for 70 years. We've been in Brazil for 70 years. So before BRICS were even coined other word, we were already the leading players in this market. Our business is positively indexed towards multinational because of the concentration of the market but also with a very long-standing relation with regional and local companies. And this is coming from our long-standing presence in the developing markets. So we have very, very strong strategic relationship. So we have delivered a solid performance over the past 5 years. And based on our business intelligence. As I shared with you before, we believe that Scent division of IFF has grown faster than the market. While this is a global business, having a local presence, having a local understanding is absolutely fundamental to be knowledgeable, insightful and responsive to opportunities. Our multiple creative centers, business development teams and manufacturing footprint are strategically located to provide agile services, support and guaranteed supply safety to all our customers. On this slide, we are highlighting the scent major strength recognized, not by us, by the market and most importantly, by our customers. And let me share some of them with you. So we have delivered superior performance across categories and geographies, for example. We are the leaders in fine fragrance. We are #1 in fabric softeners and #1 in Latam and #2 in Asia. We have secured a broad market access at the global and the local level where we have been actively present in countries like India, Indonesia for 100 years, Brazil and China for 70 years, with very, very targeted customers, most iconic brands in the market, providing a deep market and consumer understanding and market trends that is extremely strategic to our customers. We believe strongly in product superiority, and this is even more important today when it comes to natural ingredients. IFF made a very bold step 40 years ago when the industry was actually shifting away from naturals. We understood that naturals were going to be a major trend for the future. And we went and acquired the leading company in naturals called Laboratoire Monique Remy, where with very high-quality craftsman processing, deep knowledge, and through that dedicated acquisition of LMR, we have become the industry benchmark now for many years. Also, IFF has developed in-house a leading capability expertise around human and consumer insight. This is valued and respected by our customers and a key driver for differentiation and for creating better, superior product, whilst unveiling innovation opportunities based on very, very deep consumer unmet need. This is critical today for the industry. And finally, I cannot stress enough our unique talent pool, driven by passion, creativity, empowerment and expertise, the thousands of individuals who are making a difference every single day for the brand that we work with. And we will get back to explain why talent and specialized talent, in particular, for industry is so critical further down in my presentation. So I was sharing with you that we have 4 different business units that diligently build an executive, their respective strategy by focusing on a very, very clear and tight portfolio management by sub classification, customer type and geography. We know where the growth opportunity are. It is very simple. And from a commercialization perspective, we see both a pull and a push model applied, depending on the industry or categories that we serve. Our fragrance compound business is mostly a pull model with the brief from our customers. As far as ingredient and cosmetic active, this is primarily a push model where we bring our solution to our customers. So for fragrance compound, as you can see, the commercial cycle can vary from 6 to 18 months normally set by our partners. For Fragrance Ingredients and Cosmetic Active, normally, they follow a longer development cycle between 1 to 5 years. So you can see 2 different dynamics. Also, the level of customization required is another variable setting business models apart. Fragrance compounds work through customization. Every brief is expected to receive fragrances solution being optimized to address specific product parameters like the brand needs at the local market relevance. On the contrary, ingredients and Cosmetic Active work based on a catalog, strategic catalog of materials that are introduced to the target market and customers as a ready-to-use material. Finally, micro trends actively present, shaping our product development, the product preference from the consumers and setting the innovation agenda for IFF. In a few slides, I will be highlighting the transformative nature that the sustainability trends are shaping in our industry as we become increasingly more human and consumer-centric and obviously, respecting nature. So now talking about human consumer centricity. We know that consumers just don't buy products. They're buying experience. It is a fundamental component of what we do. And let me highlight that the world of scent experiences is one of the few businesses with such a closeness, a proximity and influence on consumers over 24 hours a day period. So we leverage this by learning and improving and listening the product that they touch through their lives, through all the different touch points of their day throughout the entire day. And I would like to say that we are with every single 1 of you 24 hours of your day without you knowing that we're playing a role in increasing, in enhancing and augmenting your experiences. So we deploy human and consumer insight programs, offering our customer deep understanding of the underlying drivers of liking, and I will say, even drivers of loving products and also purchase decision, while exploring each of this moment of consumption, each of this moment of use. Likewise, we collect, we analyze and we deliver to our customers timely macro trends based on global, regional and local first-hand perspective and insights. So throughout the year, we conduct and analyze valuable data collected through hundreds of thousands of interaction that is translated into meaningful insights, driving product superiority, unique global market perspective and inspiring new growth ideas deriving from cross-category understanding. And you can think of a trickle-down effect from categories, trickle-up effect as well from our cross-category understanding. And here, I want to mention that we have conducted extensive research to understand the way the landscape was moving during the pandemic last year, and we had millions of data touch point that we can share to demonstrate and share with our clients where the market is going, what is changing, what is not changing, and therefore, where are the growth opportunities that we can provide to our partners. And this massive data collection, this massive insight is augmented through our unique IFF in-house artificial intelligence capabilities towards improving development cycle, stronger accuracy, far more effective and to the point targeted creations and finally, delivering winning creation. I just want to highlight that we've been really leveraging and working with artificial intelligence for the past 15 years. We knew that this will be augmenting our creative ability to strengthen our time to market and to have also a far more predictive model of what success and winning fragrance would look like. So I'm very happy about the result, the breakthrough that we brought to IFF and to our partner. So here is why is fragrances positioned at the top of the specialty ingredient pyramids. As you can clearly see on this slide, it disproportionately represent a very small portion of the total product cost, and it varies across category but probably less than 5%. And if you compare the impact on overall product perception, overall product preference, 70% of the product preference and 70% of the repeat purchase and initial purchase will be driven by the scent experience. It's a massive impact. So -- and this is true from fine fragrance, which is a main attribute, the scent is being the main attribute of the product, to other consumer good categories. So the scent is not important for liking -- it's important for liking, and most importantly, to drive repeat success and long-term success for our partners. It's about driving repeat purchase. So scent continues to be the #1 attribute driving purchase intent and even more importantly, the purchase repeat factor, as I just told you. It is a show stopper when consumers don't like the scent. And even if you love the advertising, even if you like the brand and you want to buy this product, as you know very well, if you do not like the smell, the likelihood for you to go back and repeat again that purchase for that specific product is very, very low. So here, it is about driving loyalty, and so this is so important today, both in total, today's social media and e-commerce media. So this slide is about market access, which has been our obsession for the past few years. We knew that, in the past, we were under-indexed, and we have been able to unlock now incremental growth opportunity. And what I wanted to share with you is that the commercialization process is very much dependent on securing customer levels at all -- customer access at all levels. Customers define who they invite to participate in their business in their development. And in other words, we must qualify, we must be fit to compete and to be selected and to meet the criteria of expectation of our partners in order to unlock new opportunities. For us, new opportunities are called briefs, the briefs that are shared with us by our customers. So once the doors are open, we have a very, very strong confidence that we can win. We just need to have access. And when I look at our win rate, it is actually very strong and increasing. And if you think, access and win rate are probably the best predictor of future success. So once the doors are opened by the customer, then you're invited to partner with them and to work on their brands, the work continues by applying best capabilities, very targeted and the expertise where they need that will be leading in creating that product superiority that I was sharing with you before. The creative development follows an interactive process between the internal development team of IFF and the team of our customers. Our creation for a specific brief, a specific brand, a specific market are then evaluated and screened by our customers according to the brief requirement that they gave us. Then all proposals are qualified through a series of technical, consumers and commercial validation. And the final selection is decided by the customer after the evaluation of their product and/or scent after it has been completed and deemed to be their criteria after very, very in-depth consumer screening. Furthermore, it is important to highlight that multinational large customers operate with a short list of core suppliers, core fragrance suppliers, which are formally selected to work as a preferred partner for a duration from 3 to 4 years. And think about the Olympics. You have to qualify to compete. But unlike the Olympics where one must compete to qualify and participate and just participate and compete for a few minutes, few hours, here, the fragrance houses must continue to deliver on the brief and to compete throughout the duration of the contract. So it's very intense. And once you're in, it's full engagement. You cannot just compete halfway, and there are strict also KPIs that are being deployed by our partners to make sure that you're performing on the most important components to this -- to their expectations. So adhering and delivering to a very strict pre-agreed key performance indicators, the KPI is absolutely critical. So being part of the so-called core list is a testimony of IFF's strength and our ability to compete in a very, very fierce landscape. Proudly, IFF's performance is second to none, and we're not afraid to compete and actually, we want to compete. So yes, if we look at the operating model, it can be understood as a consumer-centric closed loop. It starts by adding a keen perspective of consumers' aspiration, expectation and taste, then our dedication to an in-depth research, analytical and innate knowledge of consumers are part of our business development and creative process. So this is matched by our superior capabilities and technology, and earlier on, I was referring to AI. And this is the way we are creating these winning products. And think about this also as a virtual cycle where you keep building knowledge that you can be deploying across your portfolio and across the different categories in which you compete. So after careful selection of products with the retail market to our customer channels, we finally faced the most important moment, which we call the moment of truth, competing for the end consumer preference in the marketplace. And as you look today, the marketplace is very crowded. That's why differentiation and making sure that the brand that we partner with are standing out in the shelf and also that our scent are helping the brands to drive repeat purchase. So today, it's a new reality. It's a new augmented IFF. And it is important to highlight that post the merge with DuPont Nutrition & Bioscience, the new IFF will have the largest investment in R&D within our industry. And because of its relevance, allow me to explain how R&D is positioned within our industry and at IFF. Research is fundamental for growth. Research is fundamental for innovation, and research is a centralized function with a long-term development horizon for differentiation. Here, new technology, new analytical capabilities and engagement with outside partners happen with the objective of creating long-term relevance, differentiation and material competitive advantage. The development of our fragrance creation side is decentralized and operate across multiple creative centers, which are based all over the world, deployed according to the big markets, to the proximity with our large partners but also based on brief requirement, complexity and proximity to the key markets. This model allows us the advantage to create and test under real conditions and also in alignment, of course, with the regulatory landscape. This map shows you the breadth of our creative presence and relevance across all our key markets. So IFF is a global powerhouse with a local understanding, expertise, insight and proficiency with the advantage to be nimble and agile. As you know, the market is very fast and agile today, and you need to be able to deploy this insight very fast for our customers. So now having access to a great talent of ingredients and technology is important. But the creative process is done by hands, by human being, and we can see by their noses of highly skilled and specialized talent pool. I cannot stress this point enough. So IFF master the art of creation by nurturing creation and innovation, striving for the ultimate craft. Due to the critical and strategic nature, IFF has created and established for a very long period of time, an internal school to identify, to train and to source from within, securing a specialized talent pipeline to work around the world. The concept of scent designers, which is very unique to our business, the teams that are helping and guiding our creators to create, was actually an expertise that was pioneered, introduced by IFF in the '70s because we felt already the need to bring the voice of the consumer inside the company. This was before consumer insight, but we brought consumers inside our company to be a sounding board to the creative team and to see if it was market relevant. This has become now the norm in our industry. And so there is a saying that there are fewer trained perfumers in the world than astronauts or Nobel Prize. I still have not found yet a talent pool so restricted. So we need to make sure that we have the best talent, that they have the best training program and they are deployed in the most effective way. Our perfumers in a team with the scent designers and the scent technologies to create the most relevant, suitable winning candidates for the thousands of briefs that are developed every year across IFF creative centers around the world. They are guided by a team of consumer research experts who have first-hand knowledge and feedback from the consumers. IFF Scent division has been executing on a consistent strategy that resulted in superior performance over the past 5 years. Back in our Vision 2021 strategy, we've built upon our core strengths that I've shared with you and had increased focus on margin recovery and expansion. I want to highlight that we did double down on the following pillars: so first of all, unlocking growth. It was critical for us to win and to secure incremental market access to accelerate our goals; number two, it was all about driving innovation that leads to product superiority and differentiation; portfolio management with a very strict and focused allocation of resource-based on growth, profitability and return; and then we deployed a business transformation mindset by identifying and acting on key profitability levers, which were so important to us. And as we get ready for a new cycle, now part of a new augmented companies, we are more confident than ever to compete given our broader customer access, our very strong win rate and the best innovation pipeline in the Scent division history and also the best innovation pipeline in our industry. As I shared with you, market access is a single most important aspect for industry in order to deliver in the future profitable growth going forward. Without this access, not only our growth opportunities are limited, but it also will have some profound impact on our profitability as well as our ability to invest in the critical part of our business and will have also a negative impact on our ability to retain talent. With the addition of 4 new key core lists, just to give you a perspective, our market access has increased in the past 2 years by over $450 million, I repeat, $450 million, which is equivalent to 5% of the total market potential. And I'm very, very happy to report that with a very short time in this new core list, we have been able to win. We have a very strong win rate and to already grow double digits. So that will represent an incremental growth driver to our performance. So this new core list enables fast growth, otherwise telling you double digit, on new partners where IFF market share is far below our fair market share, thus providing significant dry powder or growth potential. So I was telling you that the win rate with this newly gained partner is disproportionate, and we're winning. We're winning fast, and the feedback that we're getting in terms of innovation is extremely positive. So I'm very confident about our future and the acceleration in our growth. Our strategy is very simple, is to win with the winners because they are constantly increasing market penetration. They can best leverage our global reach. They can best leverage also our innovation pipeline. And global reach regarded as the category leaders, thus, enable us to innovation first, and on the long run, it's creating a very, very strong position in regards to acquiring fast-growing local brands. So winning with winners, both at the multinational level as well as the regional and the local is critical. They know where their market is going, and we're helping them to grow organically, and we're also helping them to grow through M&A. In addition, let me highlight that scent growth and share is also strong among regional and local customers with whom IFF have longstanding relationship partnership due to its local pioneering presence in key developing markets across, such as Indian continent for 100 years; Indonesia, as I was referring before; but most importantly, also Latin America and Greater Asia, main countries. Very few companies were in China in the early '50s, and IFF was there. And actually, I spoke to the people who had developed the company. I was fortunate enough to meet the people who really pioneered the business of IFF in China and Brazil in the '50s. On this slide, we share IFF Scent's key R&D platform with respect to innovation. We have 70 platforms being activated by 25 different programs. On the left, you have the key core platforms, the #1 is being ingredients. Delivering a strong pipeline of unique, valuable material is absolutely fundamental. They are the pillar, right? Without ingredients, you cannot create a fragrance. So we have 17 new synthetics molecule in the pipeline. We have 41 new natural ingredients launched last year. This is the strongest innovation pipeline of IFF and the industry. Delivery system, which was the most breakthrough innovation in our industry for the past 80 years, and I want to remind everyone that IFF was a pioneer in really launching the delivery system first in the year 2000. So we were first to market. We were the pioneer. We're the leader in that category. Now there is a new opportunity that has come to be the first one to market again with a new sustainable delivery system that are being required within the European landscape. So this is a big priority for us and will create also great growth opportunities. Natural, I spoke to you earlier about the importance of natural, which is one of the fastest-growing trend and demand from consumers. We know the qualitative aspect and the benefit it brings in terms of consumer preference. We will continue to strengthen our clear leadership and focus also on functional and also the next-generation of natural ingredients. And also, as a platform, our cosmetic research is centered around cosmetic active ingredients with clinically proven claim based, which is very important. And here, I'm happy to report that this team gets a lot of wins and awards around the world for their very, very strong pipeline of innovation. Now if we move to the right side, the platform there are about the future. And they are about pioneering the future of our industry, pioneering the future of IFF, and they are set to -- for IFF to accelerate on 3 macro trends growing with very strong relevance. The first one, no surprise is about health and wellness. The second is about scent modulation; and the last but not the least, the digitalization of scents. Finally, I want to highlight that sustainability became, the Scent division, our #1 priority as it impacts all our platforms, core and pioneering the future. So we have secured our customers' commitment, and they expect us to supply 100% biodegradable and 100% renewable fragrances by 2030. This is in 9 years. It is coming very, very fast. And our internal strength now with our bioscience position coming from Nutrition & Bioscience from DuPont will be able to accelerate. We will be the only company in this area to be vertically integrated. So this is very exciting and a lot to be achieved moving forward. We see and we have seen a great deal of value creation potential from the portfolio management that we are deploying. Broadly speaking, we have categories in all 3 portfolio, as I was sharing with you, growth, balanced and fix. For each bucket, we have streamlined our strategy to focus on growth and margin expansion. Our focus is on disciplined portfolio management. We will accelerate margin accretive categories through investment. For the balanced categories, we will continue to leverage our market leadership position to expand margin, growth and generated free cash flow. In addition, we will improve margin in our fixed business by leveraging our industry-leading position or new access or innovation pipeline. In terms of business transformation, we took -- implemented 5 actions to drive margin enhancement. We applied procurement best practices to drive input cost savings. Then we leveraged strategic pricing to protect and expand our margins, using reformulation in collaboration with our customers to address supply and regulatory challenge while still delivering products of the highest quality for our customers but also delivering product superiority. We then also kept improving our manufacturing, optimizing our network all the time and also reducing our operational complexity for broader savings. And year-on-year, we've been able to deliver meaningful savings in that front. And last but not the least, aligning our resource allocation to support the choice we are making based on portfolio management, focusing our resource and investment in prioritizing them and our growth category. With regards to the transformation merger with DuPont Nutrition & Bioscience, we believe in the positive impact and benefits for the Scent division, expanded augmented possibilities with existing and new customers. And I can tell you on the feedback that we have received -- we're receiving, our customers are very excited, very confident about the new opportunities, more excited than I've ever seen them before because of leveraging our innovation that would come from a new complementary and super powered R&D. And here, I want to highlight again, this will be the largest budget in our industry. And when you look at our patents and our IP, it will be a quantum leap moving from 2,000 patents for IFF to now 12,000 patents for the combined entity. So our teams will be focusing resource, time and energy to create a stronger combined entity and bring forward together with selected targeted customers this new capability. So we expect that there will be many other opportunities by creating the future, and this is just the beginning of the journey. But we have to be very strict in our prioritization because we have to deliver our performance in our core business, and we have to force rank the new opportunities that we want to leverage and we want to capture. But let me share with you key areas that have been identified. First of all, about regenerative design and supporting the expected ingredients feedstock transformation that I was sharing with you before. Then under our holistic health, understanding the emotional, cognitive and physical impact of our products to consumers. Then it's all about augmented hygiene, as you can expect today and here is to support the effective clean and off odor modulation solution. Then the big focus today, everybody talks about the clean beauty combining Health & Bioscience product and IFF Active Cosmetics technology, all supporting the end markets where our customers participate or will be participating in. So in summary, we are very well positioned in a very attractive industry where IFF Scent has demonstrated business resilience and focus -- very clear focus on execution. Despite all the headwinds, and we have seen and faced many, during the past few years, we have always managed to generate value, deliver on our targets, deliver on our commitment to our strategy and gain market share year-over-year. So today, we are stronger than we were 3 years ago. Aligned with our strategy, we see strong performance with targeted customers, target regions and categories. And as the Scent division, we are focused on driving sustainable, profitable growth with increased focus on margin expansion. We have identified growth opportunities ahead, even the expanded market access with our new core list where we participate, and we have secured and targeted regional and local partners. Also through the identified macro trends shaping our industry, we have a strong innovation pipeline across high-value platforms, underlined by our commitments with a transformational sustainability agenda. Value creation is of a prime importance, so we plan to maintain focus on core business growth, cost management, securing a sustainable growth model. On this note, I would like to thank you all for your time and interest today. And please do not hesitate to reach out to our corporate team in case you have any further question. Thank you very much.