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

At this time, I would like to welcome everyone to the IFF 2022 ESG call. To ask a question during the Q&A portion of the call, please e-mail Michael DeVeau at michael.deveau@iff.com. I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin.

Welcome, everyone, and thank you for joining us for our fourth annual webcast focused on IFF's environmental, social and governance plus sustainable solutions, or ESG+ efforts, a set of topics of increasing importance for all our stakeholders. Yesterday morning, we published our latest Do More Good report, summarizing IFF's 2022 ESG+ progress, which provides the foundation for today's discussion. The report can be found on our website at iff.com/responsibility. The 2022 report is the first full year in which we are reporting as a combined company, and it showcases the many ways that we have come together as one IFF to address challenges, leverage learnings and improve our performance in pursuit of our ambitious 2030 Do More Good planned goals. It also outlines our collective road map for the future. Before we begin, I ask that you please take a moment to review our cautionary statement. During the call, we will be making forward-looking statements about ESG+ targets and goals. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from our forward-looking statements, please refer to our cautionary statement and risk factors contained in our 10-K filed on February 27, 2023. Today, I'm joined with an excellent group of leaders who will highlight how IFF approaches our ESG+ priorities. This includes IFF's CEO, Frank Clyburn; our Chief R&D Global Integrated Solutions and Sustainability Officer, Dr. Greg Yep; our Global Operations Officer, Ralf Finzel; our Chief Human Resources, Diversity, Equity and Inclusion and Communications Officer, Deborah Borg; and our General Counsel and Corporate Secretary, Jennifer Johnson. We will start with prepared remarks and then take any questions that you may have. To ask a question, please feel free to e-mail me directly at michael.deveau@iff.com. Again, that is michael.deveau@iff.com, and we will be happy to take any questions that you may have. Now I'd like to introduce our CEO, Frank Clyburn.

Thank you, Mike, and thanks to everyone for joining. On behalf of IFF, I am excited to share our 2022 ESG+ journey and showcase where we're going. Before we go further, however, I'll provide a brief overview of what you can expect today. First, we'll start with the root of it all, our company purpose statements, applying science and creativity for a better world. It guides everything we do at IFF and sets our course for success. I'll also provide an overview of the new strategic framework that we announced at the end of 2022, Do What Matters Most and explain how we're embedding ESG+ in everything we do across our enterprise. Next, we'll then review our key ESG leadership positions and partnerships before turning to a summary of our '22 performance against the ambitious 2030 goals of our ESG+ strategy, the Do More Good plan. And finally, we will share a recap of where we've been and where we're going through 2030 and beyond. Thanks again for joining us today. And as Mike said, we will be happy to answer questions following remarks from our team. Next slide. We believe our purpose of applying science and creativity for a better world acts as a guidepost for all that we do, ensuring we remain centered on our commitment to do more good and align to what we believe in as a company. Grounded in our purpose, our Do More Good Plan inspires us to work toward a more sustainable and equitable future. To get there, we are focused on abiding by our ethics and values and delivering on our promises to our customers and ourselves with transparency. We continue to innovate, keeping the health of our people, communities and planet at the forefront. These aspirations require dedicated execution that is only possible by empowering our people to take ownership and be accountable for our goals and process. To that end, our global teams worked tirelessly to identify areas of improvement and are comfortable with going beyond the status quo and sharing ideas on how to do things differently at IFF. As Mike mentioned, you can find more detail about how we are delivering on our sustainability, value proposition in our new Do More Good report, IFF 2022 ESG+ progress released yesterday. If you haven't yet had the chance to review it, it's available on our website. I hope you will take the opportunity to read through it and understand more about why we are so proud of our accomplishments. Next slide, please. We launched our Do What Matters Most strategy at the end of 2022, and we knew that our success centered on our ability to deepen our commitment to our extended IFF communities, support our customers and their ability to meet their own sustainability goals and reduce our operational environmental footprint. Living up to our commitments, be the premier partner, build the future and become one IFF calls for us to embed environmental, social and governance plus sustainable solutions in all that we do, and we are excited about the opportunities that this road map provides for us and for our stakeholders. IFF started our sustainability program more than a decade ago, and we are proud of the foundation it provided for our ambitious ESG targets. To date, we have a number of touch points that illustrate our achievements and commend our progress. Rating and ranking providers such as Sustainalytics, MSCI and Bloomberg ESG have recognized us as leading in this space. Sustainalytics' ESG risk rating measures a company's exposure to industry-specific material ESG risk and provides a quantitative measure of how well a company is managing those risks. Our current Sustainalytics ESG risk rating is 22.6, ranking us 60th out of 559 companies in the chemical industry and in the 11th percentile. Similarly, our current MSCI ESG ratings assessment is a AA on a scale of AAA as the best to CCC. We have held this position consistently for the last several years, which is higher than the industry average in environmental topics such as water, waste and carbon emissions. Further, our performance on key ESG metrics not only translates to higher rankings like these but also to higher profile and influential recognitions including the Dow Jones Sustainability Indices, CDP, EcoVadis and the Bloomberg Gender Equality Index. For example, 2022 saw us being named to the DJSI for the third time in a row, meaning we remain among the top 10% of the 2,500 largest companies in the S&P Global Brand Market Index. And in recognition of our leadership in corporate transparency and action on climate change, we were named to CDP's 2022 A List for Climate Change for the eighth consecutive year. On EcoVadis, which assesses companies on the environment, human rights, ethics and sustainable procurement, we maintained the selective Platinum Sustainability Rating for 2022, placing us amongst the top 1% of companies assessed. We were also pleased to be named to the 2023 Bloomberg Gender Equality Index for the second consecutive time, scoring 100% on data transparency. Being included in this index again is a tribute to our ongoing efforts in supporting gender equality through policy development and representation. As we work to address key ESG issues, it is especially important to us that we remain aligned with like-minded partners, initiatives and memberships such as the UN Global Compact, the World Business Council for Sustainable Development and the CEO Action for Diversity and Inclusion, amongst many others. Our Do More Good Plan is also guided by the 17 UN Sustainable Development Goals. We continue to make progress in our work to support the SDGs, including gender equality, responsible consumption and production, climate action and life on land, which is outlined in more detail in our new report. Thank you for your time today. I'll now turn it over to Greg, who will tell you more about how our Do More Good Plan is set up to help continue our leadership across these ESG platforms and partnerships moving forward.

Thanks, Frank. To provide additional context for our discussion today, I want to share how we define and prioritize our ESG commitments here at IFF. Following our most recent ESG materiality assessment for the combined company in 2021, we identified the most important ESG topics for our business and stakeholders to help guide our ESG strategy and disclosures. We distill the results of the ESG materiality assessment to a strategic road map with 4 pillars that correspond to the 4 categories of our material issues: Environmental, social, governance plus sustainable solutions or what we call ESG+, which we refer to as the Do More Good Plan. Our Do More Good Plan is grounded and then activated by purpose, which sits at the core of this strategy. Reflected in the top half of the framework visual here, we begin with science and creativity through our sustainable solutions pillar. As consumers increasingly demand greater transparency throughout the supply chain, we are focused on helping our customers proactively respond to these market shifts while achieving their own ESG goals through sustainable innovation and the central product solutions we can offer. And in the bottom half here, we are focused on contributing to the better world by focusing on our environmental, social and governance priorities. Through our focus on climate and planetary health, we are leaning on urgent climate actions to reduce our operational footprint, from biodiversity and regenerative ecosystems through responsible sourcing. To support equity and well-being, we are unleashing the uniqueness and potential of our people, ensuring the health and safety of our workforce and strengthen our local communities, including the farmer communities around the world from whom we source. And finally, to drive transparency and accountability, we act with integrity, adhere to the highest ethical standards and levels of transparency in line with stakeholders' expectations and hold ourselves accountable for continuous improvement. These 4 areas of the Do More Good Plan are not only the right thing to do, but we believe we can use our own spheres of influence to make a positive impact and contribute to the most pressing sustainable development challenges. Next slide, please. More than ever, we need science and creativity to create a better world, and we invite our customers to join in this effort. I am proud to lead IFF's R&D organization. We are bringing to bear unmatched scale, renowned scientific talent, compelling portfolio strength and capabilities, including industry-defining value technology. Let me start off on the left side of the slide with our 2030 sustainable solution goals. We intend for all new innovations to have a sustainability value proposition that supports people and plan for all new innovations. Second, we will enable our customers to save 50x more CO2e than generated by IFF-owned manufacturing sites. Finally, we will partner with the customers to achieve their ESG goals. Regarding the first goal, to measure our progress against the goal in 2022, we designed a proprietary methodology to assess the sustainability value propositions of the products in our innovation pipeline. During the year, we initially screened more than 250 innovation projects against the model's criteria, resulting in key ESG insights that informed our new product development processes. On the second goal, from a sustainability perspective, one of the ways we believe our products can make the most significant difference is through the positive life cycle impacts during the use phase. This includes quantifying environmental health impacts and benefits of our solutions through the life cycle assessment. We then leverage these learnings across all divisions as we partner with our customers to deliver end-to-end solutions. Combined with regenerative approaches and circuit design thinking, we are also making progress against our third goal. To partner with the customers to help them achieve their own ESG goals, these efforts are important to us and our customers because we know that our own sustainable solutions can have a beneficial impact on the world in ways that far outweigh the impact of our own environmental footprint. We are doing this in multiple ways, from fueling the potential plant-based foods to reducing food waste through upcycling. For example, on the right side of the slide, you can see a summary of our new-to-world advanced biotechnology called Design Enzymatic Biomaterials or DEB, which is helping our customers replace fossil-derived petrochemicals with naturally derived biodegradable biopolymers. Unlike traditional synthetic polysaccharides, these novel polymers strengthen sustainability value and proposition and many times add increased performance of multiple end products from packaging and home and personal care items to fibers and paper coatings. You can find more examples like this in the sustainable solutions chapter of our new Do More Good Report. Now to tell us more about how we're leading in climate action with our own operations, I will turn it over to Ralf.

Thank you, Greg. Our environmental commitments to climate and planetary health is driven by the urgent need to tackle climate change, lighten our operational footprint and protect our planet for future generations. Starting on the left of this slide, our 2030 environmental goals include: reducing our absolute greenhouse gas emissions by 50% below our 2021 baseline; striving for 100% renewable energy across our operations; supporting water stewardship and completing an annual water risk assessment; and expanding our zero waste to landfill program to all major manufacturing facilities. I'm happy to report that during our first full year of performance as a combined company, we are off to a good start towards meeting our 2030 goals. At the end of 2022, we achieved a 6.4% reduction in greenhouse gas emissions from the prior year, had renewal electricity usage of 14.2%, completed an annual water risk assessment to identify and probably mitigate water risk at our facilities and the communities where we operate. And we now have approximately 40% of our major manufacturing facilities internally verified as zero waste to landfill. We rely on key partners to guide our efforts to mitigate climate change. For example, we work closely with the Science Based Targets initiative, CDB and RE100 on setting addressable targets, and we advance the transparency of our reporting by adhering to guidance from the Task Force on Climate and Related Financial Disclosures or TCFD. Importantly, all our efforts are consistent with our triple bottom line approach that is not only good for the environment but also for reducing costs. Next slide, please. Within IFF's Do More Good Plan, our unwavering commitments to responsible sourcing is reflected as a cost-cutting priority across both our environmental and social pillars. It also represents an important enabler of the sustainable solutions pillar. As a critical partner of the global consumer goods supply chain, we are constantly sourcing the raw materials required to deliver our broad offering of ingredients and products. Taking this into consideration, our responsible sourcing program is all about driving sustainable practices across our supply chain, including ethical standards and environmental stewardship. We are also intent on addressing climate risk by helping our suppliers reduce their GHG emissions, and we were pleased to again be named as the CDP Supplier Engagement Leaderboard in 2022. If we focus on our 2030 goals for responsible sourcing on the left-hand side, we will promote nurture of the ecosystems and achieve zero deforestation for strategic raw material supply chains, beginning with palm and soy. Launch a human rights program for our business critical suppliers and ensure prosperous and equitable value chains and implement at least 10 field initiatives linked to supporting farmers' livelihood. Moving to the right-hand side of the slide, we have made excellent progress in these areas during 2022, for example. IFF is a member of the Roundtable on Sustainable Palm Oil, or RSPO, which seeks to ensure that the palm oil supply chain does not contribute to deforestation, peat clearance or human rights abuses. As of 2022, 61% of our total palm volume is currently RSPO-certified, and we are striving to reach 100% by 2025. For soy, we are pleased that our Esteio, Brazil site has achieved Proterra and Roundtable on Responsible Soy certifications. In addition, 100% of our non-GMO soybeans from this same site in Brazil were also Proterra certified, affirming that they were produced in a sustainable and traceable manner. To work towards our human rights goals throughout our supply chain, we appointed a trusted third-party adviser on human rights in 2022. Through this partnership, we will further develop our due diligence approach for strategic natural supply chains, including identifying new action plans and preparing for change in human rights legislations. And finally, our commitment to responsible sourcing means we strive to improve the environment and the quality of life in the farming communities around the world where we source. As of 2022, we are currently sponsored 7 community and biodiversity programs, on our way to reaching at least 10 by 2030 through which we support more than 11,000 beneficiaries in 14 countries. From agro-forestry programs to support especially farmers in Indonesia to making income strategies that support [indiscernible] farmers in Madagascar. You can refer to our new Do More Good report to learn more about how we are helping our farming communities to be more biodiverse, stable and resilient. Next slide, please. Our Do More Good Plan on equity and well-being reflects IFF's focus on providing a safe, flexible, engaging, attractive and inclusive workplace. Among other social topics focused on people and community, this pillar includes both our commitments to employee health and safety as well as diversity, equity and inclusion. I will start off this slide with some remarks about our environmental health and safety program, and then I will hand it over to Deb to share more from an HR perspective. To highlight safety management, in 2022, we continued to focus on our operation's core principles, where our commits to zero safety campaign is front and center. It underscores that nothing is more important than the health and safety of our people and the communities where we operate. We are focused on developing and executing world-class safety systems and rolling out globally consistent policies. I am pleased to say that we have made a good start with the reduction in both total recordable incidents and with lost-time incidents. We saw a 24% decrease in IFF's total recorded incident rate from the prior year and a 35% decrease in our lost-time incident rate from the prior year. But this is just the beginning. We will continue our laser focus on the system, culture and policies that will drive us to world-class safety performance. I will now hand it over to Deb.

Thank you, Ralf. As a continuation of the safety discussion, our social focus on equity and well-being also means creating an environment where our employees are not only physically safe but which also takes into consideration their mental, financial and emotional well-being. We do this by creating pathways and safe spaces for IFF-ers to bring their authentic self to work. To this end, we're committed to unleashing the uniqueness, potential and talent of our people. During 2022, as part of our focus on talent acquisition, engagement and retention, we introduced new sourcing strategies, increased our focus on diverse internal and external candidate fleet, expanded the reach and participation of our volunteer employee resource groups and enhanced our talent management programs to emphasize the development, visibility and readiness of diverse candidates to succession slates. We continue to embed programming and action planning in service of our ambitious 2030 diversity, equity and inclusion goals, which you can see listed here on the left hand of the slide, including: 50% women in management roles company wide; 40% people of color in management roles in the U.S., with equitable representation in other markets globally; all global and local policies and practices fully inclusive of LGBTIQ+ colleagues with a focus on transgender-inclusive health care; and 5% of our workforce will be people with disabilities and 100% of physical locations, internal and external technology, policies and processes will be fully accessible for people with disability. And as you can see on the right hand of the slide, we continued to make progress in 2022. We were pleased to again be recognized by EDGE or the Economic Dividend for Gender Equality, the leading global standard for gender equity. We retained the Move level globally, becoming the first company in our industry to do so. We expanded the scope from 21 to 27 countries and it was our first assessment as a combined company since our merger with DuPont's Nutrition & Biosciences division in 2021. For the representation part of their assessment, EDGE sets the minimum threshold of targeting at least 30% of either gender at all levels of the organization. And as of the end of 2022, we met that threshold for all levels of the organization with the exception of executive management. To work toward our 2030 goal of reaching 50% women in all management roles through intentional focus on external hiring, internal promotions and retention, we achieved our internal target for 2022 of having 37% of women in management positions. Additionally, 5% of our executive leadership team's 2022 bonus was tied to the success of meeting this target, creating an important incentive structure internally. We also advanced our efforts to create a fairer and more inclusive place to work by introducing a global parental leave policy in 2022 that raises the minimum parental leave for many of our sites globally by providing 16 weeks of fully paid leaves to both men and women following the birth, surrogacy or adoption of a child. In terms of racial equity, IFF remains steadfast in our commitment to inclusion within our ranks as well as opportunity and diversity within our practices. In the U.S., IFF diversity by employee category continues to be a mixed story of both success and opportunity for improvement. As of the end of 2022, 30% of our U.S. employees and 21% of our Board of Directors represented people of color as defined by the U.S. Equal Employment Opportunity Commission. We know we have significant room to improve the racial diversity across all levels of management and throughout our U.S. workforce. I'm proud of the steady dedicated advancements we've made, and I'm excited to continue to progress our DE&I agenda forward and ensure we enable our IFF-ers to share their uniqueness in the workplace for the success of our customers and the success of each other. And with that, let me turn it over to Jen to cover our governance pillar.

Thank you, Deb. All of our commitments for the better world are underpinned by an ethos of transparency and accountability, including striving to adhere to the highest ethical standards, commitment to transparent disclosures and always holding ourselves accountable to continuous improvement. We have a strong enterprise risk management program in place and maintain high expectations for ourselves as reflected in things like our code of conduct, our compliance program overall, robust information security protocols, responsibility to quality and product safety and global human rights through diligence processes. This commitment to transparency also extends to our ESG disclosures and oversight. In fact, as part of the Do More Good Plan, on the left side of the slide, our goals are to: increase the transparency of our annual ESG disclosures and key performance indicators in line with stakeholder expectations; launch ESG metrics tied to executive compensation; and expand oversight for ESG governance at the Board of Directors level. Regarding the first goal on transparency, we wrote our 2022 Do More Good report in compliance with 3 widely recognized reporting frameworks, the GRI, SASB and TCFD. We also partnered with a third party to assure the accuracy of our statements in the report. But we aim to build on this work and continuously improve our annual ESG disclosures and third-party validations across multiple platforms. For our second goal related to ESG key metrics, as Deb referenced earlier, I'm proud that in 2022, we took meaningful steps towards strengthening decision-making and incentivizing corporate performance by linking key ESG metrics to executive compensation for the first time. Specifically, new ESG-linked metrics for greenhouse gas emissions reduction and DEI gender representation impacted executive leadership compensation by 5%. And finally, for our third goal, to further expand oversight for ESG governance at the Board of Directors' level, we have the Governance and Corporate Responsibility Committee to assist the Board in overseeing the company's ESG program and sustainability matters. This includes assessing new opportunities that would support our sustainability and corporate responsibility targets and goals, including those related to environmental stewardship, operational eco-efficiency, climate and water risk strategy as well as risks associated with responsible sourcing. The committee also reviews and discusses management of the company's environmental performance, including progress towards targets, programs, policies and disclosures related to climate change. And now I will turn back to Frank to provide a recap of what we have heard today and to share more about what is ahead for IFF.

Thank you, Jen. When waiting to enter this session or in reading the report, you might have noticed our inspirational use of the hummingbird. In many cultures, the hummingbird is a sign of good luck. It's graceful and a determined creature that relies on the best of both science and creativity, and proves through its diligence that small actions can add up to big benefits. When it comes to sustainable development, the imperatives can be overwhelming and the targets can seem impossible to achieve. But at IFF, we believe that individual actions accomplished collaboratively can make a world of difference. With this in mind, I am confident in our ability to make progress as one IFF against our goals. As a recap, I want to reaffirm what we've shared today. We have developed a robust Do More Good Plan, a solid baseline and a set of ambitious yet feasible 2030 goals. We have made great progress but we certainly have much more work to do. 2022 was our first full calendar year of reporting on our ESG+ progress and performance against the prior baseline year. Leveraging the best of science and creativity, we took diligent and determined steps to create a solid foundation with a clear path forward. Our environmental commitment to climate and planetary health means doing our part to lead on climate action and biodiversity by strengthening our operational efficiencies and responsible sourcing, such as reducing our absolute Scope 1 and 2 greenhouse gas emissions by 50% below 2021 levels by 2030, reaching zero waste to landfill for all of our major manufacturing facilities and achieving zero deforestation for strategic supply chains. Regarding our social commitments on the equity and well-being pillar, we are focused on creating a great place to work, one that is safe, engaging, inclusive and empowers our employees. Within DE&I, this includes a goal to reach 40% people of color in management roles in the United States and 50% women in management roles company wide. On corporate governance and ESG governance, we'll continue to act with integrity and increase our transparency and accountability through our risk management efforts and reporting processes, including strengthening our disclosures on our ESG reporting frameworks. And finally, our innovation pipeline has traditionally been a differentiator. But now with our sustainable solutions pillar, one that helps customers achieve their own ESG goals, we are able to be the premier partner for our customers and support them in new ways and, in turn, respond to consumer expectations to a greater extent. Among our goals in this area, for all of our new innovations, to have a sustainability value proposition that supports people and planet, enable our customers to save 50x more CO2 than generated at IFF's owned manufacturing sites. In short, we are embedding ESG+ in all that we do. It's just that simple and we are excited. Yes, the opportunities of this strategic agenda offers will undoubtedly unlock actions that will help this company and our customers take a leadership role in advancing sustainable development for people and planet. I would like to thank my entire leadership team for their vision and commitment, delivering our purpose every day and for doing what matters most to be, build and become the best IFF possible. Every day, we cascade these messages down to all of our teams and employees around the world, and we invite our customers and other stakeholders to join us on this significant and transformational journey. I also want to thank all IFF-ers for their dedication and hard work during 2022. And I hope you see yourselves captured and highlighted in our new Do More Good report. With that, I will turn the call back to Mike to lead the Q&A portion of our call.

Thank you, Frank. Maybe the first question for you. You mentioned a key component of IFF's Do What Matters Most strategy is related to ESG. How does this relate to the Do More Good Plan? And what does embedding ESG across our organization look like?