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

So since the last time IFF participated in our conference 2 years ago, it has become almost an entirely different company, now having merged with DuPont's Nutrition & Biosciences division. We're pleased to welcome back Chairman and CEO, Andreas Fibig; and welcome to the stage, Nicolas Mirzayantz, who have known for over a decade as the leader of the company's Fragrance business, but now takes on the new role of President of IFF's Nourish division, which accounts for more than half of the new company sales. The format of this meeting is going to be a Q&A with me. So I'm going to get that conversation started. And Andreas, I'm going to go to you first with some closer-end questions. So you had mentioned on your August earnings call that you've seen a strong start in July. And now we're 2 months into the quarter, so I was curious if you could provide an update on the legacy IFF business, which saw double-digit growth last quarter. And then also on legacy N&B, which I believe had a more moderate performance in the prior quarter.

First of all, Lauren, thank you very much for having us here on your conference. It's always a pleasure. And indeed, if you look at the start, into the third quarter, it was quite robust. We see good demand actually across all the 4 divisions of our business. And if I would like to talk about the different parts of the business, we see that Scent is continuing the strong development in terms of sales, but in terms of margins as well, driven by a really good and stable recovery of our Fine Fragrance business as we have seen in the second quarter, which is really, really good. Also in comparison not just to 2020, which was not a regular year, but also in comparison to 2019, and that's driven by a real strong win-win performance. And when we have a bit more time, I know you're very interested in the Fine Fragrance, we can give you a little bit more details where we are winning here. Certainly, also Active Cosmetic, a business where we're in since 2015, is accelerating and doing extremely well. So good performance on the Scent side and the strong start, as we said, in the third quarter as well. Health & Bioscience actually a business where we had very tough comparables in the second quarter because the second quarter last year was driven by super strong probiotics sales and the enzymes in general. I think we had a good start and more of an even start into the third quarter as well. We see a very strong demand for the enzyme business right now, whether it's on the food enzymes, but also on the household care enzymes, where it looks like that our technology we are offering is sparking a lot of interest of customers. And actually and I will talk to this probably later, we have seen the first cross-selling win between Scent and Health & Bioscience exactly in that area. On the Pharma Solutions business, I think it's probably not as much growth as on the other businesses. But the Nourish piece and later, I think Nicolas can comment, we see a very, very, very strong performance, not just in the second quarter, but the start in the third quarter as well, driven by different parts. The legacy IFF business in flavors and taste is very, very strong, very good demand, good wins on all sites. And then we see good, let's say, demand on the plant-based proteins, for example, in other areas of the business as well. So I would say, the start was really, really good into the third quarter, and it's a little bit more evenly balanced compared to legacy IFF and legacy N&B in the third quarter. I hope that helps.

Very much so. I was also curious if you're seeing any change in customer order patterns, either with respect to reformulations, given inflation that your customers are dealing with or a slowdown or a pickup in commercialization of new wins.

Yes. Look, what we see is, first of all, in particular, for the bigger CPGs that we probably get less projects, but bigger projects. I think that seems to be a general trend, which is okay for us as long as you win because the cost to serve are lower than if you have to do all these teeny tiny, tiny projects. Another one, what we see is that the regional and local players are coming back. I would not say that they're taking share back from the big CPGs, but they're coming back in terms of the business in general. And we see that some of the more value customers, which have more value products for the consumers, are really looking at that reformulation to reduce the cost because as we have seen with the raw material inflation that we had to increase prices, and they have to look how they deal with their own customers. But in general, I think the order pattern is still very strong. We don't see too much inventory build. We see real strong demand and consumption on all ends. And what is important is that we see it across all the different regions, which is kind of interesting. So Asia is good, good growth. Even Western Europe, good growth. Africa, Middle East anyway. North America, strong and then Latin America, a little of a scattered landscape, but good growth as well. So we basically see in all the different regions good growth from the different customer types.

Great. And then you mentioned raw material cost inflation. I think last quarter, you talked about 5.5% inflation this year, which is pretty different than the low single-digit figure that at least your historical peers are facing. So any update there on the expected inflation this year? What are kind of the major areas? And then as you look into '22, I understand it may be early, but anything you can offer as we look into '22?

Sure. So I would reconfirm the 5% to 6% inflation. And if you look at our legacy IFF business, which is Flavors and Fragrances in general and a couple of Ingredients, it's certainly lower and very comparable to our legacy competitors like Givaudan and Symrise, for example. But what it drives it is now, it's large increases in certain raw materials like soy, locus, bean, kernel, vegetable oil, turpentine and propylene glycol, and that's certainly driving our performance on inflation compared to our traditional competitors. And what we see as well -- but I guess everybody seeing is higher freight cost. Due to increased rates, availability of containers, airfreight is going up. And in the U.S., we are missing 50,000 truck drivers, which is not helping in terms of logistics here as well. So that's how I would see it. On N&B, in general, I think it's high single digits in terms of the inflation and low single digits on the legacy IFF. That's how I would basically give you some context around the inflation picture. And we are raising prices, obviously, right now, but you know it takes always a little bit of time to recover the margin here.

Okay. That's great. And how might this be different pricing on N&B versus legacy IFF in terms of elasticity, if any differences at all?

Yes. I would say, particularly for the Ingredients, you have sometimes really built-in price increases, if the raw material goes up. Basically, the price goes up. You're quicker than you have it on legacy IFF. And then you have the fundamental difference between the big customers and the small customers. Usually with the small and regional, it's easier and faster to get the price increase compared to the big CPGs where you usually have in your contracts a certain moment in time where you can increase your prices. So these are the differences, and we're working through it right now.

Okay. Okay. Great. Let's talk a little bit about new IFF and longer-term goals. So first, on legacy N&B, you mentioned on the earnings call that you're going to -- you'll need a little bit more reinvestment in that business. I'm curious if you think it's a function of kind of a multiyear focus on margins and improving profitability within DuPont, which I think is a lot of kind of how they operate as a company. Or is it that demand has kind of come back a lot faster than expected and so you need to step up capacity? But I'm curious about the mix of those 2 factors, and what's really driving this need to spend a bit more on legacy N&B?

The fastest -- maybe the biggest investments we have to make right now is in the Health & Bioscience business, and particularly, on capacity on [ ferments ] on regulation. That's why we have to do it. There was something -- there was some capacity increase planned in the -- during the DuPont times, but we are accelerating it because we see that the demand is extremely robust right now. I believe they were taken by surprise how must it is. And because the technology is really strong, we see more demand coming in from new customers. I think that's important, in particular on our dishwashing enzymes. They perform much better than the competition. We're getting a lot of demand. We could actually sell more, if we wanted and would have that capacity, which is great. And then if I talk and look at Nicolas right now, his previous division, Scent business, is now helping H&B to find new customers because that's where the cross-selling is coming in. And as soon as we have enough capacity, they can open up some of the customers and sell more. We had actually one win with one of the customers for $5 million, which is not too bad, where the Scent business opened the door, and we could sell our enzymes in. So that's how I see it. So some of the capacity increase was planned, in particular in Health & Bioscience. It's not enough because the demand is very robust, higher than everybody has expected. And then on top of it, the cross-selling will come in and will help us actually to sell even more going forward. So that's the main focus area. But having said all of that, even in some of the other areas, we have to do some debottlenecking because the demand is so robust, whether it's on Pharma Solutions, even on some of the Nourish business on emulsifiers or plant-based proteins, where we have to figure out how do we satisfy the customers and how do we, let's say, enrich the mix to make sure that we serve to the right people with the right margins.

So I guess if -- part of this is, you are focusing on the demand side of this, which is obviously great topline driven. But why are we hearing the same thing from competitors? Is the -- may highlight the technology, but it's just interesting that the competitors aren't talking about some surge in demand that's requiring them to invest in their supply chain. So why is that? Or is it, again, just that maybe DuPont had a different view on the growth capacity of the business and now quickly under new management things are changing?

I would say, an underestimation of the demand. That's number one. Number two, we are starting to inject some commercial resources where we believe that we're a little under invested so which is showing that we could have more demand. And then on top of it, with the cross-selling opportunities, we have now an organization which is very much ingrained with many of the customers where probably legacy IFF has even more and better access where we can bring in these products and the technology. All of it together is probably making the difference here.

Okay. And last question on this conversation. So I think Rustom had mentioned an incremental $450 million kind of multiyear spend. And I just was curious within that CapEx versus OpEx, and how long is that investment time horizon to the $450 million?

It's predominantly CapEx. I think that's important, and it's probably for the next 3 years where we have to spend the money. And there's a bit more on digital and on software, which is going into it as well and that might be a general thing. We are now starting to apply digital technology to almost all of our big manufacturing plants because we believe that we can increase the output and decrease the cost quite significantly. And we are automatizing as much as we can, also in light of the labor shortage we see in many of the major markets.

Okay. Great. Let's switch, want to hear about revenue synergies. So curious about where you see the biggest opportunities. I know I've asked this before about integrated solutions, but now you're kind of 6 months post deal close and really also want to again understand why the -- your biggest customers would be willing to pay more for an integrated solution rather than this idea of going to multiple suppliers who actually specialize. So biggest opportunities for revenue synergies, and again, your confidence level in the effectively pricing benefits through providing the integrated solution.

I would say, the biggest -- and Nicolas can build on this because he has seen it in his tour. The biggest strategic advantage, which is right now materializing for us, is that we are catching the customer early in many of our traditional competitors. Let me explain it. If I'm a CPG company and I built on the food side, a new product, I start buying ingredients. And then I bring them together and at the very end, I think about the taste, about the seasoning and about the flavors, for example. And right now, if you deal with IFF and I take, for an example, a plant-based burger, usually in the old times, N&B was doing the protein, the textures, the binders, and they put a little bit of flavor on that, that you can eat it, and then they gave it to the customer. They were optimizing it and then they briefed it out to other flavor companies. Now if they come to us, they get already completely with a seasoning and with a flavor. And in many instances, they decide, okay, that's actually already a perfect solution, we are buying it as it is, and they don't brief the flavor or the seasoning out. That means none of our competitors sees the bid because it's not coming because it's already taken by us. And I think that's a very defendable strategic advantage now for IFF, and that's the reason why we believe these total solution give us really an edge compared to our competitors. On top of it, we have seen that in the combination of Health & Bioscience and Scent, we have 2 areas which are very helpful. First of all, many of our customers, we are selling fragrances, delivery systems, and the enzymes now. So we are the biggest technology provider, which is basically helping us to solidify our [ coreless ] position. So not having IFF on a core list is tough for many of our customers because we come from different avenues, and in many instances, we have the superior technology. On top of it, with the European green deal in the fragrance world, it has to change from hard chemistry to more naturals or biotech-derived molecules. And now with the very deep biotech capabilities we are having as a company, we can basically develop ingredients also for Scent out of our Health & Bioscience business with biotech means. And I think these are the most important differences. Whether the total solution -- you said we can price higher, probably not pricing higher, but we can make the business, and we can capture the business and increase our top line because what we say for our customers is also the application work because we can make sure that this works already together. And it's not just on the plant-based program, it goes into dairy segments, and it goes into fish and some other segments as well where we can bring everything together. So that's how I would describe the situation here.

Okay. Great. Final question before I turn to Nicolas. I just would love to hear about cost synergies. You've articulated concrete goals, but one thing I'm always curious about is, how you balance kind of the short-term reductions and need to take out costs probably a bit faster than anticipated because of the inflationary environment with making sure that you've got the right level of investment to support the topline growth?

Yes. It's good, two very, very fair point, and we had to reshuffle a bit in need of the hour, and mix of our cost savings for this year because of raw material inflation. But I think we have found a good way to do it. I think we are very much on track on the cost synergies and look, they're probably not the most aggressive anyway. I think it's very, very doable. And on top of it, we are already starting to make some investments. So we looked at our portfolio very carefully, where we can invest. And we have, for example, in Health & Bioscience, we are investing right now because we believe that this is an area where we can be very, very successful. If you look everything which is enzymes has usually good growth and EBITDA margin north of 30%. So it's a clear business to invest. We have an Active Cosmetics. We are just yesterday review on this one. We have a margin which is higher than 40%, and we are investing in these businesses. On the contrary, we are looking at lower margin or growth business. What do we do with the business? Can we fix it? Can we save some money? Or can we sell it? And you know we have announced the sale of the Microbial Control business for many reasons, but it's certainly also not a revenue and profitability driver, despite the fact that this different customer set up and probably has a different profile on sustainability on other businesses. So we are having a very clear view on our portfolio, and we are managing it in a way that we see, let's say, improvement of our mix. We will increase the growth rate, but also the profitability here as well. That's how we do it.

Okay. Great. So Nicolas, I wanted to -- I was going to ask you to give a little introduction of yourself, but I think we're going to run out of time if I go there. So let's just focus, if we can, on your objectives and priorities as you transition into the Nourish role.

Very good. Thank you, Lauren. So first of all, the strategy for Nourish has been developed by the very strong leadership team in Nourish. The strategy is very clear, and it's focused to set Nourish up for the industry leadership in our core categories. I'm very optimistic. I'm actually very excited, and I see endless possibilities. The more I learn about the different categories, the more I see some of the opportunities that Andreas was referring to at the moment of the merge. Our goal is very clear. It's about growth acceleration. We aim to outpace the market by leveraging innovation and unique capabilities and delivering unique value for our customers. With our new combined portfolio, we see many growth opportunities to deliver even stronger and unique growth solution to our customers. So I'm very confident, looking at our portfolio that we are very well positioned to meet not only our customer needs, but also to design with the purpose of the key shift in the marketplace. So if you look at our innovation portfolio, they are clearly focused on the strong market dynamics around protein and plant based. It's about the drive towards health and wellness options. It's about cleaner labels and more sustainable offerings. And for all these different trends, as you know, we have very, very clear platforms to deliver against them. So this really strengthened our leadership and position as a perfect match to deliver full product design. And earlier on, Lauren, you were asking about the sales synergies and the integrated solution. And yesterday, I saw an order that the team was sharing with me actually in the plant-based launch, and it was about integrating spice blend from our Savory Solutions. It was about an IFF flavors. It was about natural color. It was about a binder. And here, we were creating a superior premium experience. And what our partners told us, it was about speed to market. And in the current environment, we want to think about speed to market as speed to growth. So we help them to capture growth opportunity and profit opportunity much faster than they could do, if they were going to different partners across the development cycle.

I know it's been only 2 months in or so. It's very recent that your new role has been announced, but I'm curious actually about sort of the the process you're going through to get to know this business. Having been part of executive leadership for a very, very long time, you obviously know the business inherently. But just as you go a bit deeper, are you talking to customers? If so, what are they telling you that they want to see from the new IFF that they're hoping to see out of your leadership of Nourish?

So I'm 7 working days into the role.

Okay. That's...

I've already spoken to many customers. I'm very excited, and I'm spending my first week really understanding or in assessing our business or value proposition or products and our people. And I have already the good fortune to spend some time visiting our Ingredients and Protein site in the U.S., and also visiting the N&B sites in Europe, in Denmark, and I was very, very actually impressed by the number of opportunities that we have. Actually, I see many more opportunities than I thought entering into the role. So here, it's about for me to learn about our unique taste, food and beverage technologies. We need to have a deep dive into them and also have a deep dive into the categories where we play. And specially, given a very broad portfolio, how can we bring this integrated solution to our customers, what new insights, what new capabilities can we bring that none of the 2 organizations separately could bring in the past. So it's also about [ scent ] experiences, and here, it's about leveraging our very unique R&D capabilities. So I'm very impressed by the team. I'm very impressed by the portfolio and capabilities. And as I told you, I see more possibilities and I thought in looking at it and being part of the due diligence team for the merger. So I'm very excited and our customers are saying the same. They're excited about the possibility. They're excited about all the benefit that we can bring them, and it's a journey, right? We're only beginning. And as I told you, I was very pleased to see that first order for this plant-based solution and now coming to the market.

Okay. Great. And the sales synergies were such a critical part of the success of this transaction. So I'm just curious how your experience in Scent, your deep history in customer relationships and Fragrance, how that positions you personally, frankly, for success in Nourish?

So first of all, I believe that the sales synergies and the cross-selling is happening across all the divisions. So it's not only within Nourish, with Nourish and H&B, H&B and Scent, Pharma. So we have multiple opportunities. And regardless of whether someone is buying a food or beverage or fragrance product or an enzyme, it's still the same consumer at the end. And they are all driven by the same similar trend, including what I was referring to the trend for wellness, cleaner products, simpler ingredient list and sustainability. So the sales synergies across our portfolio are very obvious, and there are multiple. Some will be realized faster as you can imagine, and some will take longer in order to reflect also the development cycle of our customers. So we will see really a broad array of portfolio and the timing at which it will be released. So given the commonality that I see in the different divisions, I see also unique opportunities to partner with my successor in Scent, Christophe de Villeplee, in the same division to bring holistic solutions that will be leveraging our joint portfolio and truly deliver multi-sensorial experience, not only for the brands, but obviously for the consumers.

Okay. Great. That was actually going to be my next question, was just, Scent clearly such a strong trajectory, right? The win rate, there's been -- IFF is playing a key part in a lot of the big launches that have been happening lately at least in Fine Fragrance. Do you think anything changes under Christophe's leadership? I mean are you confident kind of these trends will continue? I'd love to hear a bit about the underlying momentum that you leave behind in Scent?

Look, Lauren, you know that we have a very strong momentum. You've seen it over the last quarters. We are gaining market share across our portfolio. So I'm very confident that the same business will continue to grow. Christophe is a strong leader and have been instrumental in building the successful strategy and the development for consumer Fragrance, which is the largest division from the Scent division. He was running Fine Fragrance before. We've been working for 22 years together. And also what is important is that we have a very clear strategy, and we know exactly where our growth opportunities are. They are clearly mapped out, and today, it's about execution. And if you think about our strategy moving forward, it's really the continuation, but more importantly, the acceleration of what we've built for the past 5 years. So I'm very, very confident. And today, it's about accelerating our IFF Scent innovation pipeline. It's bringing more valuable, sustainable and differentiating offerings to our customers while doing more good for the people in the planet. This will be achieved through -- actually, if you think about it, the largest R&D investment of our industry and with a very unique and vertically integrated biotech expertise, there is nobody else who has this vertical integration in biotech, which will be a key driver of our innovation platform for the future. So I believe that we are very well poised to an acceleration in Scent business, and so I see a very bright future for Scent, for Christophe and for IFF.

Okay. Great. We only have time to throw in one more question. Andreas, it's probably for you, but I'm sure Nicolas would comment as well. The long-term sales guidance for the company of 4% to 5% implies some pretty significant market share gains, if the industry is growing slightly under 3%. So notwithstanding everything you've already shared during this conversation, I am curious kind of what gives you the confidence that IFF can consistently outpace the industry at the rate that's implied by that suggested sales growth versus this industry, again, slightly below 3%.

No. I think a very, very fair question. We believe so our capabilities we are having right now and the R&D pipeline, which is in place, which can help us bring new solutions to the market and new technologies in a faster pace than our competitors. And on top of it, we should not underestimate that this cross-selling opportunity we are leveraging right now where Nicolas describe that he has seen this order. This is helping us actually to outpace the market growth, and I would say, we were off to a good start this year. We will continue in the third quarter as at least what [ IFF ] seen so far. So we believe we are off to a good start, and we have to because this is the promise of this merger that we can outpace our competitors because of superior capabilities, superior R&D pipeline and a better access to our customers because we should not underestimate. We have now the broadest footprint of all of our competitors in terms of labs close to our customer. We have exposure to all the growth markets, and we are in segments which have high growth like the plant-based proteins, for example. So I think it's a must that we deliver on that promise, and I think you will see for this year already.

Okay. That's great. We are out of time. But Andreas, Nicolas, Michael, thank you so much. It was great to see you all, and I really look forward to doing it in-person soon.

Thank you, Lauren. Take care.

Thank you. Bye-bye.