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

Very good. Good morning, everyone. Thanks for joining us for this session with Frank Clyburn, Chief Executive Officer at International Flavors & Fragrances. My name is Gunther Zechmann. I'm the senior analyst covering consumer chemicals at Bernstein. So I'm truly delighted to have you here on the stage with us, Frank, your first conference to meet investors with Bernstein. So thank you very much for being here.

Yes. My pleasure, Gunther.

Frank joined IFF in February 2022 on Valentine's Day. Previously, he held roles as Executive Vice President and President of Human Health for Merck & Co. And he had full P&L responsibility for the largest business, 90% of sales, I think it was. During that tenure, he was also responsible for building one of the leading oncology businesses in the world. And that is the largest business within Merck, as mentioned, and he transformed the cancer care business on a global scale. Frank joined Merck back in 2008 and he held several positions, including Chief Commercial Officer, the inaugural President of the company's global oncology business and the President of the primary care and women's health business. In addition to leading the creation of the global oncology business, Frank also executed on the worldwide launch of Merck's immuno-oncology business, which helped establish the company as a leader in oncology. And before joining Merck, Frank was Vice President in Oncology & Internal Medicine business at Sanofi-Aventis and he held a wide range of leadership roles in the company. I think what's relevant to IFF now as well is that he was actively involved in the $65 billion integration of Sanofi and Aventis. Frank received an MBA, a degree, from Arizona State University and a BA degree from Franklin Marshall College (sic) [ Franklin & Marshall College ]. He notably served on the Board of DuPont between 2019 and January this year, and he currently serves also as the Director on the Board of the -- Federation of Pharmaceutical Industries and Association. And he's the Chairman of the Thomas Edison State University Board of Trustees. With that intro Frank, again, it's a pleasure to have you. So the format we run today is that we will jump straight into the fireside chat. Just like before COVID, there's still no real fireside here. We have moved on from paper-based question-and-answer cards to QR codes, so you should all have been given a QR code when you came in. [Operator Instructions] and I will then try to include your questions in the Q&A. If that doesn't work for you, we can still have some paper-based question-and-answer cards for you as well. So if you just make yourself known to one of our event management staff.

Great. With that, Frank, so you joined fairly recently to IFF on the 14th of February, 116 days with the company so far and counting. Where do you think the organization has been exceeding your expectations? And where do you think more work needs to be done?

Sure. So first -- and thanks for having me, Gunther. It's a really exciting time at IFF, and where I think the company has exceeded expectations are on a couple of fronts. One, when I joined the company, when we started to -- when I started to think about the opportunities, especially, Gunther, externally or what was happening in the landscape where consumers were focused on health, wellness, the importance of sustainability and when you look at how IFF is positioned in those areas, those are all, I think, very positive. And we'll get into a little bit about our portfolio and our pipeline. So those are all things that I think have been very exciting and one we're strongly positioned to drive profitable growth. The other area that has been very good to see is the passion that the IFFers have around the mission, the science in IFF. The creativity to work with customers to develop solutions has been very positive, and it's across all of our divisions. In Scent, our Nourish division, where we're codeveloping new flavors, ingredients for nutrition and for health, those are all extremely positive. Also our Health & Biosciences team, very exciting to see what's being developed in our portfolio and pipeline, Gunther, especially around our enzyme capability now and we'll talk a little bit about, I'm sure, the merger of Nutrition & Biosciences. So those have been really strong, I would say, positives for us. The opportunities, and I highlighted this on our call, are a couple of things. One is how do we bring together our companies to have an executional operational focus as a company. I think we were very transparent that there were some missteps over the last 18 months, Gunther, some things that we promised that maybe we didn't deliver on. So we're really trying to bring operational execution into the company. Very strong financial rigor, getting our data, our systems, in place to really drive a strong financial acumen. And we brought in, obviously, Glenn Richter, our new CFO, and he's helping to drive that. And then lastly, we also see, I think, opportunities overall just culturally. And when you think about the culture of IFF now and bringing together these companies, that's probably one of the top agenda items, and driving stronger accountability and collaboration across the company. So those are some of the things that, I think, are opportunities for us to improve and focus on, which I will be leaning in with our management team and we think will drive significant growth in the future for us.

Great. Thanks. And you mentioned the integration of the DuPont Nutrition & Bioscience assets there already. I think that's one of the key concerns of investors as well. Can you please give us an update, being new to the company, how you see that integration progressing and where you see that go over the next year, please?

Yes. So the integration actually overall is going well. If you look at what we've committed to on the cost synergy side, we're making good progress there, Gunther, from an overall cost perspective. We're focusing on productivity and that is making very good progress. I would also say that bringing together now, in particular, the biotechnology capabilities that come with Nutrition & Biosciences we think is going to be one of the key linchpins for our future growth going forward. That integration is going well. We're obviously using that platform to develop new products and ingredients in the health sector, but we think it has applications across all of our businesses, and particularly, in our Nourish division. So that integration is going well and is underway. I think the one area that we're focused on, Gunther, is with the integration, and we spoke about this, we're in the process of doing our strategy refresh. And I think there are opportunities for us to unlock incremental revenue opportunities as a company as you now bring these two companies together. So we're not where we need to be on that front. That's something that we're now focused on and we'll be spending a lot more time in the second half of the year at our upcoming strategy refresh meeting with investors to really share the incremental opportunities that we think we'll be able to get from the combination.

Great. One thing I found very noticeable is the focus not just on acquisitions, but also on bolt-off divestments, which isn't something that the industry is typically very good at. There's always a drive to grow and to be the CEO of a big company rather than a smaller company. So how do you see the divestment? You announced some of them already and you alluded to a few more to come. Could you just give us an update on your thinking and your strategy around divestments?

Sure. So we're actually making good progress and we've announced a couple, for instance, our Microbial Control business, which is we're looking to divest here very shortly now Gunther, and we are looking for the proceeds from that to actually continue to drive down and deleverage our balance sheet. And we've made the commitment to a 3x EBITDA target over the next 18 to 26 months post when we did the acquisition and we're making progress there. We've also mentioned, where I'm not able to share today, but there are several other divestments we will be making. We think the proceeds from that would be in the $1.5 billion to $1.7 billion range to continue to help to delever the balance sheet. And we think that's really important for us. So that's been the focus from a divestiture perspective. The other thing we're doing, Gunther, is we're spending time looking at the entire portfolio and we highlighted during our first quarter call utilizing a framework around return on invested capital and looking at the entirety of the portfolio and really determining where it's going to be the best place to put our resources and our capital to drive profitable growth. We have areas in our enzyme, probiotic health area flavors that we think we can drive disproportionate growth and that's going to be an area of focus for management. As well as there'll be some areas where we need to improve. And we either have to improve portions of our portfolio or those might be some areas that we think about divesting in the future. But right now, we have communicated that we've got a couple of additional divestitures that we're planning, and like I said, in that range of $1.5 billion to $1.7 billion that we'll use to continue to delever our balance sheet.

And what criteria -- what metrics do you look at when you decide whether something is core or noncore. You mentioned return on capital, but are there any other...

Return on capital. And then I think it's strategic that we believe we're the best owners? Does it fit within our overall portfolio? Can we drive the type of growth that we believe we want to drive in our portfolio versus it just maybe sit better in someone else's hands and be a better owner? So we look at the overall strategy, we look at obviously return on invested capital and then we look at just our capabilities to drive growth and does it make sense for us to put resources to do that or would it be better suited in someone else's hands.

Sure. I'm sure we'll get back to the integration of Nutrition & Biosciences over the next hour and the rest of the day. But can I just ask how do you ensure that you also maximize the returns and the growth in the legacy part of the business?

It's interesting, Gunther, we're actually looking at it from the entire business. So we obviously have a very strong IFF legacy business, but what we're trying to do now is to look at the portfolio in its entirety and I kind of alluded to this return on invested capital framework that we're using. So we're staring into everything as a part of our strategy refresh process. I want to spend time with each one of the businesses, and I've been doing that. I've had a chance to spend time with our R&D team out in Palo Alto, meeting with a number of our customers, a number of our business leaders. So we're not looking at maximizing just legacy. We're looking at it now, as the new IFF, how do we maximize the opportunity. And that's a clear focus for us. I do feel good on some of the legacy businesses, I think you saw in the first quarter. Many of them feel very -- I feel good about our legacy businesses. They performed very well, as you know, in the first quarter. So it's an area, like I said, for us, is we need to now bring this together, Gunther, and really show the power of one IFF.

I mean that's a great segue what you mentioned around R&D and the pipeline to some of the consumer trends, I'd like to say that ingredient companies like IFF, the innovation centers and the warehouses of the FMCG industry. So as you're very early on in that process, can you just talk us through what are the key trends you see in the consumer industry over the next 3 to 5 years, please?

Yes. And we had a chance to spend some time with one of our top customers recently discussing this. And we obviously also have a very strong capability where we get good customer insights in IFF. So we do our own research and getting good insights into what the consumer is looking for, Gunther. And right now, I would put it into a couple of buckets. Clearly, health is a key area of focus for consumers, and I would even go further, even personalized health where people really want to know about what ingredients, how do they impact their health. Wellness is a key area of consumer interest. The importance of naturals and natural products. Sustainability and how important sustainability is. And then also not only for just the consumer, but obviously for our customers sustainability is at a very high level as far as what they're looking for and how can we, at IFF, help them to achieve that, which we have a lot of capabilities to do. So those would be some of the areas that I would highlight are really at the forefront of, I would say, the consumer trends and what we're seeing.

Now Frank, you come from a very R&D-driven organization to IFF. How do you think about the return on R&D? And how do you measure the output of what it's done in the labs and in the consumer panels, et cetera?

Yes. So you look at it, I think Gunther, from a couple of different lenses. Obviously, the one that we're focused on is clearly we're going to look at our return on our capital that's invested in R&D. So that's a part of our overall process. You also have to really look at your portfolio and your pipeline, and I think really have a good understanding and link to the end market into the consumer. And is this something that is going to really be differentiated? Is this something that's going to bring additional value to the consumer? So we work very closely, our R&D colleagues, very closely with our business and our divisional teams, but then also co-creating with our customers to really have good customer insights into what we're innovating and what our target product profiles and what we're trying to achieve in the marketplace. I think when you put all of those together with a very strong ROIC lens, you usually get, in many cases, really good returns. The other thing you have to be open to, Gunther, is where you don't see progress, you need to be able to quickly ascertain that those things are not going to materialize because you don't want to invest capital in something that's not going to be beneficial in the market. So you have to look at that as well. So we spend a lot of time -- or we're going to be spending a lot of time, I should say, looking at our portfolio and making sure our R&D investments are lined up against the greatest opportunities.

And how do you measure the success? And how do you measure the failure?

Well, you ultimately measure the success through your portfolio. Our portfolio, approximately 20% or so, Gunther, turns every year. So you look at the makeup of your portfolio, number one. And then you obviously look at the growth. And this is one of the things that we believe we now have the opportunity at IFF is to drive very strong, profitable, sustainable growth. And you've heard us use that coin, Gunther. And we're focused on top-tier industry top line sales and then getting leverage throughout the P&L. And I think if we do that, I'm confident that's being driven through our innovation and through our R&D efforts and our platforms.

Makes sense. Now biotech is a much talked topic within flavors and fragrances as an industry. How does that position IFF in terms of the H&B business, but also the legacy business?

Yes. And that's what we're excited about. If you think about our Flavors business, I'll start there, we have a great opportunity. And if you look at even the Flavors market opportunity, it's probably in the course of about a $15 billion market opportunity, Gunther, and we're positioned very well, as you know, 1 or 2 in Flavors. But I think we have even greater opportunity to drive stronger growth in that category. So that's something that we're going to be focused on, and that's something that Nicolas and his team at Nourish are focused on. The biotechnology capabilities that we now bring allow us to utilize this platform across a number of areas within IFF. And you mentioned -- not only in the health area and what we can do with regards to enzymes, but how can we utilize our flavor capabilities to even get greater customer interactions across their opportunities. So not only in health, in nutrition, some customers are looking at our opportunity with flavor in oral care as an example. So there's a lot of opportunities that we see, Gunther, as far as our Flavor business, combining that with some of the biotech capabilities we have in H&B.

How would you characterize that? Is that more a revenue opportunity by having a claim to your customers that this is derived through a biotech route? Or is that more a cost reduction where you can replace inputs that might be volatile as minority crops or...

Probably more on the revenue side, Gunther. Probably more on the revenue side, and helping to drive additional revenue opportunities for us.

How significant could that be for IFF?

And that's something we'll be coming and talking about here at our refresh here at the second half of the year. We'll be spending some time clearly outlining what we see the opportunities are.

Great. If we can talk about the financials for a bit. First of all, just talk us through your capital allocation policy and the use of cash, please?

Yes. So right now, as I've mentioned, our capital allocation policy, what we're really trying to do is our focus is the delevering of the balance sheet, as you and I have discussed. Clearly, that's a priority as we think about the divestitures that we've been discussing. So that's very high for us to get to the right net debt-to-EBITDA ratio that we've committed to as a part of the deal. So that's first. We also, over time, will look at continuing to look at our dividend, of course, and our dividend policy, Gunther. And then as we think about the future as things unfold, we'll want to use our cash flow primarily on organic growth opportunities. So I want to make sure that we're funding our R&D efforts, our innovation efforts so it would be primarily organically focused. There may be some additional bolt-ons that we'll look at in the future, but I don't anticipate anything of any large-scale M&A for capital allocation at this point in time. So much more organic focused, much more focused on deleveraging the balance sheet in the near term.

So net debt/EBITDA will come down from 4.2x to 3x mainly driven by the divestments that you mentioned, $1.5 billion to $1.7 billion in expected proceeds. And should investors then expect the buybacks that IFF did historically to be reinstated?

Yes. I think it's too early to state whether we're ready to commit to that at this point in time, Gunther. Like I said, that will be something we'll come back at the second half of the year as part of our refresh process.

Sure. Yes. How do you think about the credit rating?

I think we're going to be on track. I think we're going to be fine there.

For investment grade rating?

Yes.

Yes, yes. And one thing that was notable over the last year is an increase in CapEx, absolute, of course, because the company has grown in size, but also relative to sales. Can you just talk us through why that is and what we should expect going forward?

Yes. And we'll -- so that was an increase and it was sort of a catch-up if you recall even from last year, but we felt the need to increase CapEx to release capacity. We had some constraints in parts of our business, especially in our Health & Biosciences business, even in some of our Pharma Solutions business, also some opportunities in our Nourish business. So that was really to release an ability to increase our capacity. And we think those are really good profitable returns as we're increasing capacity. So that's something that we put in place for this year. We're going to look at it as we go forward and we'll share more as we think about the next couple of years. But I would anticipate that to really continue. We'll look at, like I said, where we can release additional capacity, if it makes sense, profitably in the areas of our portfolio that can drive really strong growth.

One area you didn't mention on the consumer trends is alternative protein. It's quite a sizable business for IFF, around 10% of your turnover. It's high growth, but it's also rather capital intense. And I think your capital -- your capacity constrained in that business today. So how do you think about the alternative protein as a growth area within IFF?

I think it's going to be a really good opportunity for us. That's an area that we are staring into, Gunther, because we need to really understand, like you said, what's going to be required from a capital perspective. But I do think it's a good growth opportunity for us going forward. And the feedback from our customers is that is an area that they're very excited about. So we do think it's a good opportunity for us.

Both on the plant protein and on the biotech part?

Biotech side. Yes.

Okay. Yes. Just finally on finishing off on the CapEx side. What are your hurdle rates for commissioning CapEx projects?

Yes. I'm not prepared to share our hurdle rates, Gunther, today as far as CapEx is concerned.

Okay. One set of targets that you inherited on the financials is the 4% to 5% organic sales growth, a rather punchy 26% EBITDA margin target and the resulting free cash flow target of around $2 billion. You alluded to the strategy update an Investor Day later this year already. But is there anything you can share being an outsider to the company how you think about IFF in the context of the industry and those targets?

Sure. So I think, Gunther, if you recall what we've communicated and we'll, like I said, be coming back and really unpacking our financial targets here in the second half of the year, but a couple of things I would highlight. One, on the top line revenue target that was outlined. I feel really confident that we're going to be able to drive really good strong top line growth with our industry within industry peers and even above industry peers as we look forward. So the top line is going to be a major focus for us, Gunther. I'm not ready to commit to a specific number today, we'll come back to that. So that's something that we're really focused on and that's our first priority is to maintain our sales momentum. And we had a very good strong quarter. And we've had a couple of really good strong quarters here that we've strung together. So that's something that we'll continue to focus on. We highlighted clearly our cost synergy target, and we're on track for that. So the $300 million that we highlighted and discussed, that is progressing well and that's something that we will continue to move towards. So I feel good about that target. The EBITDA margin target is the one where it was set it, you mentioned at 26% and 23%, Gunther, I mentioned that. Currently, we do not see a path forward to that next year. So that's something that I did mention that we are not going to be able to achieve that. However, with that said, I'm very confident in our margin expansion going forward. So we'll come back and really look at how we finish out and track in '22 and then give a view of '23 and '24 and we do anticipate we'll be able to see margin expansion, just not at the target that was laid in '23. And a lot of that, if you think about, what we're seeing from a hyperinflationary aspect, what's happening around the world, Gunther, what's happening in many markets, especially with inflation is one of, obviously, the reasons why. But that's one of the targets that we kind of said that we'll have to come back on.

On the organic sales growth point, if I can just dig a little bit deeper there. Are there any reasons why that should be different from historical levels? If you look back the last 10 years your pro forma in the Nutrition & Bioscience assets, you get to an organic sales growth that is within that 4% to 5% range. You mentioned the revenue synergies already that should come on top of that. But are there any structural shifts that would imply that, that growth rate should be higher or lower?

Yes. No, I wouldn't say that, Gunther. I think that's within the range is how I would think about it. Like I said, we'll want to really look at how do we do everything now as a new combined company to drive strong top line growth with our customers. But I think that's within the range as we sit today, Gunther.

We had a small update from one of your Swiss private competitors yesterday. Does that validate the Nutrition & Bioscience move around integrated solutions or any -- you're itching to make a comment on that so just...

Well, I think it does and I don't want to actually get out in front of really our competitors, and I think they're going to share kind of their overall focus going forward. But I would say I think it does reinforce or validates what we did at IFF. And if you think about our assets and the importance of the combination of IFF with DuPont's Nutrition & Biosciences business and now the opportunity, Gunther, through to have global scale, to have 45,000 customers, the breadth of our portfolio for us to be now #1 in absolute investment in R&D and innovation, I think it does. If you look at that, what was announced yesterday, I think it validates the importance of the size, the scale, the diversity and the ability to work with customers across a number of different areas to provide solutions for them. So actually, we know and look forward to learning more and we'll see how they'll communicate and we'll see them as obviously an important competitor for us, but I think it does validate what we've been saying is why we're so excited about the IFF opportunity and why we felt the combination of IFF along with Nutrition & Biosciences puts us in a very strong position going forward with our customers.

So it goes back to the point of the strategic drive towards integrated solutions to not just sell a flavor, but to package that with an emulsifier, texturizer, sweetener, culture, colorant, you name it. Can you explain to us why your customers would want that?

I think for two reasons, as we've discussed with our customers. One is speed to market, Gunther. So -- and we used an example where we've just recently won a large brief on vanilla flavoring. But it also gives us the opportunity, as you mentioned, to sell emulsifiers, to sell sweeteners, other aspects of our portfolio we'll be able to sell. And what happens is customers now recognize how important it is to be able to innovate and then to be able to get that innovation to market in a fast route. And when you're able to come and codevelop or work with a company like IFF across a number of different areas or a number of different ingredients, it allows you to bring speed to your development process, and we think that's going to be very important. So that's number one is speed to market and how we codevelop and work with our customers. The second thing it brings is scale, size, reliability of supply chain, all of those things are important. The capabilities we now have around sustainability and customers that are really looking at ESG solutions. When you have a customer and a company like IFF that has the capabilities we now have, not only our biotechnology platforms, but our other capabilities in flavors and fragrance, it just helps for a customer that's thinking about the sustainability they need to bring to consumers as well as just the scale, size and the importance of our global reach in the different markets as well. So we have strong presence in the emerging markets, we have strong presence in Europe, strong presence in North America. The scale size piece matters, we think, with customers. So those two things, speed to market and scale size and reliable supply and sustainability. So all of those things, we think, will help differentiate us.

So that's very difficult to replicate unless you do a large deal. Or put it another way, you have Swiss flavors and fragrance competitor now that is joining that integrated solution drive. Does that put pressure on others to do that as well?

Yes. Well, I'm not going to comment on the pressure on others. I just am very excited about the IFF opportunity, Gunther. For us, when we were contemplating or when the deal was being contemplated, and as you mentioned, I was actually on the Board of DuPont. And the promise of this combination, I really truly believe gives us a really strong competitive advantage in the marketplace. We now have to execute against that, which is what has been kind of the mantra coming in and the management team is focused there. But I do think if you can really continue to innovate and if you can execute as we're talking about and work very closely with our customers in co-development and on their innovation and areas of focus, I do think it gives us a really good opportunity to drive long-term sustainable profitable growth for our company and within our industry.

Great. Thanks for that, Frank. Maybe we can turn to trading for a bit. You're pushing through very high price increases in response to input cost inflation, logistics and generally cost inflation at the moment. Have you seen any change in consumer behavior on the back of those price increases?

Yes. So, so far, Gunther, we have not, anything that we can point to of significance. We do have some customers, I would say, in some of our emerging markets that are more price sensitive. So we've seen a little bit of challenge in some of those markets. But overall, we have not seen significant consumer behavior changes because that -- because if you think about it, our customers are passing on a lot of our price increases. And so far, most regions have held up, I think, pretty well. I think the big question for all of us, Gunther, and this is one of the things that we spoke about on our call is two areas. One, the challenging dynamics that we're seeing in China right now and the lockdown. And obviously we're starting to see some encouraging news about things opening up, but the lockdown in China clearly has had an impact, I think, on the industry as a whole, and 6% to 7% of our sales are in China. The other thing is that with the war, with what is anticipated, possibly in particular, in Europe, I think that's the big question as some of these prices now, as you know, will be passed on what the impact there will be. But nothing yet, but it is something that we are closely monitoring, which is also why we guided for the rest of this year to sort of a very low single-digit volume growth for the back half of the year after coming off of a quarter where we grew volume at 5%. So that's the thing that we're probably spending the most time staring into.

You mentioned the China lockdowns. What impact are you seeing from that on your business? Or what are you expecting this is?

Yes. So we've seen some impact, just a slowdown in demand, obviously, in China because of the lockdowns. And like I said, for us, it's something that is about 6% to 7% of our business. We'll have to see what happens when things open back up, Gunther. What we have seen is we've gone into the second quarter some slowdown in China based on the lockdowns.

Okay. And just coming back to the point of pricing, can we take a step back and can you talk us through how you price your products? How do you know you make a good margin?

Yes. So we -- our pricing, it varies across our portfolio, Gunther. So we take a very -- it depends on obviously our Scent business compared to our Health & Biosciences business. We know we have different margins within the different businesses. What we're focused on, though, right now and what we're trying to really look at from a pricing perspective is doing everything that we can to be on the innovative side of the curve and go upstream to make sure that we're bringing innovation into the marketplace. And if you think about what we do from a flavors perspective, Gunther, and the combination of so many different ingredients to come up with new flavors, well, we're trying to be at the forefront of innovation, which then will lead to how we engage from a pricing perspective. The same thing in Health & Biosciences in the probiotic area and other areas is that, that's really where we're focused. Clearly, we have to be competitive. Clearly, there's core listings. There's all of the things that come within our business. But what we're really trying to do is make sure that we're on the innovative side and trying to do everything we can to get fair price, fair margins for the value that we're bringing to the marketplace.

And can you just talk us through the time lag? You're aiming to offset all the cost inflation through price increases and it's quite substantial. We're looking at high single-digit price increases. So how do you ensure you recover the full amount of cost increases through pricing on a dollar -- absolute dollar line?

Yes. And as you know, we mentioned, as you look last year, we're still trailing probably a couple of hundred million dollars and we communicated that in the first quarter from last year's inflation. So one of the things that we're doing is working very closely with our customers, Gunther. Some parts of our business take longer times from a pricing aspect. And others, for instance, Scent, we've mentioned is maybe a 12- to 18-month lag time where other businesses are -- we're able to recoup the increase in inflation on raw materials and all logistic costs much sooner. So we're now talking about pricing impact of probably over $1 billion, Gunther, very significant. And it's doing everything we can to be transparent, work with our customers, share with them what we're seeing in the supply chain, what's happening from an inflationary perspective. And I think you saw in the first quarter we got out in front of that pretty well so far this year. Our Nourish division, in particular, I think, has been doing a really good job in being able to work with our customers to get and cover the inflationary costs that we're seeing. But you are going to see a lag, to my point, especially in our Scent division. And also, we were probably about a couple of hundred million behind from what happened back last year. So we're working to obviously try to recoup that as well.

So we've got a couple of hundred million to be recovered at the tail end of the inflationary cycle that came from last year. I think last time we talked, you said it's not impossible that there could be a third wave of input cost inflation. What is your outlook on the cost side?

And that's what we -- so we're anticipating additional inflationary pressures as we go into the back half of this year. So that's something that we are anticipating and something that we are working with our customers on as we speak.

One additional complication is that we've seen quite some significant changes to FX rates as well. Is that something -- and you're the only dollar-listed major ingredients producer. Is that something where European competitors take advantage of FX moves when it comes to pricing their product? Is this something you've seen? And likewise, you have customers that are listed and reporting in euros. So same question on your customer FMCG group as well?

We have not really seen the FX. I mean, clearly, FX, as we've highlighted, is a headwind overall for us, Gunther, and it's something that for the overall business. But as far as within what we're trying to do to recoup our pricing from an inflationary perspective, we have not really seen that.

Right. Very good. So can you share, as far as you can, you've got the Investor Day in the second half of this year. Without putting specific targets out there, what would we expect? And what should we be looking out for?

Sure. So one of the things that we will want to communicate or -- we plan to communicate, I should say, as we go into Investor Day is a couple of things. We will clearly be spending time in outlining where we are going to want to invest to drive very strong profitable growth. And we will be utilizing our ROIC framework that we highlighted to really show the portions of the portfolio that we think will, with additional investment, additional capability builds will drive additional profitable growth. We will also show where we just need to continue to think about ways to improve portions of our portfolio, you think about Fabric Care and all the businesses we're in where we think we can put some additional focus, not necessarily more capital, additional focus to drive growth. And then we also will be highlighting where we're going to make choices, as we talked about, in areas that aren't returning our invested capital as well as some others. And you'll see us either really get laser-focused on those portions of our portfolio from a management perspective to improve that return or possibly think of other alternatives for that part of the portfolio. So think of the portfolio discussion as a part of our strategy. The other thing we will highlight is our growth profile in our financials. So we will share what our financial commitments are going forward. We also will be taking a look strategically at how well we're positioned versus the competition. We'll look and share just sort of the geographical potential opportunities that we see. And then in addition to what I would say kind of the top line, Gunther, we talked about really getting clear on where we see the incremental revenue opportunities that exist across now the broader company and sort of unpack where we see those opportunities and what we're going to do to make sure that we execute against them. So that will be some of the things that we'll be highlighting during our strategy.

And as a final question, unless there are any more from the audience. From the three metrics you have inherited, the growth, the margin and the cash flow target, which one would you prioritize? Or if there's another metric like return on capital that is...

Yes. I think for us, right now, it is around growth. And what I would say there, Gunther is profitable growth. And what I mean by that is we need to be able to demonstrate good top line sales growth, but then also get leverage throughout the P&L, drive good EBITDA, strong growth and then also earnings per share growth. So I think it's really -- that's going to be our focus as a company. And what I want to really reiterate as we think about the story around IFF is that profitable growth with a laser focus on operational execution. And that's really where we're spending our time so that we really understand the opportunities we have in front of us and then we execute and follow through on them, and like I said, really think about us as a growth story is what we want to do in a profitable way.

Looking forward to the Investor Day in the second half of this year. Frank, thank you very much for joining us here, and you will be around for many, many meetings for the rest of the day. So thanks very much.

Thank you, Gunther. Appreciate it. Thank you.