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

We are pleased to welcome back Eric Frywall, Chief Executive Officer of IFF. Eric, it's great to have you here. So much progress in the last year, so I'm excited to get started.

So IFF has gone through a significant amount of change over the last 2.5 years. As you look at IFF today versus when you became CEO in early 2024, what would you say is the most different about the company today and its ability to grow?

We're a lot different, Lauren. But thank you for having me. It's great to be back here. And we had this discussion 2.5 years ago, and a lot has changed First of all, when I got to IFF, we had a very weak balance sheet. We were 4.5x levered. We're now 2.5%. We had missed consensus, we had missed guidance even a number of times. We now have a number of -- many, many quarters in a row of achieving guidance and doing what we say we're going to do. But I think the most important change is that at the time the attempt with the Frutarom acquisition, Attrition Biosciences acquisitions was to be a one-stop shop. And we've been very clear for the last almost 2.5 years that our goal is to be an innovation leader and an innovation leader with 3 great innovation-driven businesses, scent, taste and health and Biosciences. And we've set those businesses up as stand-alone end-to-end businesses that have everything within them to succeed. They have the R&D, the production and the commercial capabilities. Now they coordinate, collaborate across and I think they do it much more effectively because they know what they need to do to win in their businesses and then can help each other to win with customers. And we also have, I think, now a very strong leadership team in each of the businesses and corporately. And we've got the team and the capabilities to go out and drive profitable growth.

And when you say the company is more focused, where do you see that most clearly showing up? Is it in faster decision-making? Is it in better customer engagement, win rates, allocation of resources, but like what is the best way to articulate what more focus really means?

Well, I think if you look at where we were -- and it was interesting because in my first week, I got a call from -- I got calls and e-mails from a number of CEOs of very big CPG companies asking me to come and say hello. And basically, the message was IFF is a very important supplier, but you've kind of lost your way. You're not really delivering the innovation that we need and expect from IFF. . I think if you ask our customers today, you'll hear a very different story that IFF is back. Now of course, we're not where we want to be. We want to keep getting better. But we've made a lot of progress to where we've significantly enhanced the engagement scores of our people. So we were losing some really good talent. I think not only are we retaining our good talent, we're attracting really good talent. And we've hired some outstanding perfumers, for example, in our Scent business. But across the company, we've really brought in some great talent to augment the great talent that we have. We've strengthened our commercial capabilities. We've focused on making sure that we do well in the developed markets and with global key accounts, but we've also put more emphasis on regional and local accounts and in emerging markets, and that's starting to pay off. We've also significantly enhanced our R&D spend but also our R&D process around making sure that it's connected to what customers really value and will pay for and stop stuff that wasn't important. And then in manufacturing, we fell behind in investing in CapEx. We upped our CapEx spend and are strengthening our ability to supply reliably high cost -- or excuse me, high reliability, high quality and cost competitive. However, we're still getting the food ingredients business separated and so as we do that, there's still efforts to go into that separating the ERP systems, separating the contracts with third parties. We've got facilities. We've got products that we have to reregister because they had the same names, all kinds of things like that. So we still have effort to do that. But once that's finished, first half of next year, it's all about how do we drive greatness in scent, taste and health and Biosciences.

Okay. So that's the new IFF as we call it, and we've written called the new IFF. What do you think is the clearest internal proof point that this new company is now competing differently than it was 2 years ago?

So 1 of the things is the engagement scores are up a lot. And what are the main changes. The main changes were if you talk to our people, and I think customers and investors 2.5 years ago. There wasn't clarity on what we were trying to do. Saying you're going to be a one-stop shop is a catchy phrase, but what does it really mean? And what it meant was we're trying to do everything for everybody versus what are we going to be really good at. And to be really good at scent, taste and biosciences we can clearly articulate that. What does that mean? That means in scent business, you have great naturals, we're leaders in naturals. You have great synthetic chemistry molecules and you have great biotech molecules. You have great encapsulation technology, you have pro fragrance technology. We can describe that in how we bring it to customers. And we have an R&D pipeline. We have a commercial pipeline. We now measure it. We now have a disciplined approach. And we have great talent, making all that happen and working together in an end-to-end business unit process and the same across all 3 businesses. So I think if you ask our people, which I welcome investors to do, ask our customers and even ask our competitors. How is IFF different than it was 2.5 years ago. I think you'll hear very clearly that we've come a long way. We're not where we want to be, but we've come a long way, and we're headed in the right direction.

So revenue growth in the second quarter accelerated meaningfully and growth was broad-based -- you've talked about reinvestment in innovation, R&D, commercial and CapEx past couple of years. How much of the recent revenue acceleration do you believe is the early benefit of those reinvestments? And how much is actually just like the market demand is better or timing? .

I think the market demand is similar. It's maybe a little better, but it's choppy, too, with tariffs and oil prices and wars and all kinds of challenges all around the world. The market is choppy, and you see it in the stock market up and downs. So I think we're performing better than we were relative to the market 2.5 years ago. And I think that's a combination of things. I think we've got strong leadership in place now. We've got clarity on how the businesses work that the operating model of the company. We've strengthened our commercial capability, and we've made it very clear that we have 4 pillars. Engage people. We want our people really engaged. Second is customer obsession. We love customers. It's all about winning with customers. The third is innovation powerhouse. We've got to bring leading innovation in each of the businesses. And that's why these 3 businesses fit so well because they're all innovation-driven. And then last is operating excellence. We've got to do things well and we've got to do them cost effectively. And so I think all that is starting to happen, and you're seeing it in progress, and I'll give you 1 example that I think is really important in Consumer Fragrances. We had launched the edge and had lost some significant business, and we're actually performing significantly below the market for a while there in '23, '24. We've got strong leadership now. We've launched with -- in 2.5 years, we've launched a really great enviro cap encapsulation technology. We've launched Sensura Pro fragrances. We had none in the marketplace. We were behind in encapsulation. Now we're very competitive. And we've gotten into the pro fragrance and we've launched molecules. We had not launched any new molecules for quite a while. We've now launched biotech synthetic chemistry and more natural molecules. So it's an exciting time, and you saw the strong growth ahead of the market in the last quarter in Consumer Fragrances. And it's just an example of where a lot of focus, right leadership, doing things all across the different areas to get back to where we need to be with a customer obsession. So which brings everybody together. When you're obsessed about winning with customers, it kind of -- it brings all the functions together to make things happen.

Yes. Okay. So it sounds like -- I mean, consumer fragrance is a strong example of where the reinvestment benefits are now starting to be visible. What do you think are the further leading indicators before it maybe appears in the P&L as we think about manifestation of some of these reinvestments? Is it new wins? Like how can we think about the runway to start to see all this investment show up?

Yes. New wins is obviously an important one. But for us, we've put a lot of effort on making sure we've got an innovation machine that's working and measuring that -- monitoring that, measuring it through the pipeline and then the commercial pipeline. And the commercial pipeline is a combination of what projects do we have in the pipeline with customers and then what's the win rate. And so we've worked on both increasing the commercial pipeline and the win rate. And by the way, even though it's not a high R&D as a percentage of sales, even the food ingredients business benefited from that focus. We brought in like we've done across the company, brought a strong leader running that business. We put in place the commercial pipeline approach and the win rate approach. And so Andy Muller and his team has started growing that business and improving the profitability with operational excellence, which enabled us to sell it at a very good price and it enables us to then invest in scent, taste and Biosciences, which are also strengthening their commercial pipelines, their innovation pipelines and the win rates.

Yes. Okay. One more kind of near-term question. So last quarter, you'd mentioned that 3Q on earnings, I mean to say, you'd mentioned that third quarter started well. but your expectation is for growth to be in the low single-digit range in the back half of the year. Is that still the case with 1 more month under your belt? And any categories that you would call out that are performing better or worse relative to expectations? .

Yes. So it's still the case that the third quarter has started off fine and that we're increasingly confident in our full year guidance. But it is a crazy world, and you just want to make sure that you're doing the things and that you're agile enough and that you're commitments or commitments that you can deliver upon in any reasonable scenario in a very challenging dynamic in the world. And so that's where we are.

So let's talk about customer mix a little bit. So some of your competitors seem to have a greater portion of their business with local and regionals. I know you mentioned it earlier, it's been an area of investment, and it's still early days. I think IFF still has over half of sales from large customers. In the past, you had taste point with the Taste business to cater to smaller customers. So tell me a little bit about what the degree to which is becoming a bigger push for IFF overall, the degree to which you need like a different business model to work with those smaller customers and just elaborate on that a little?

So first of all, our split is about 1/3, 1/3, 1/3, 1/3, very large customers, 1/3 medium size and 1/3 smaller. And we've historically been I think, more successful with the larger customers, and we want to keep doing that. We want to be successful with the large CPGs because then you're bringing the leading innovation and you're working with great co-creators at your customers, which is very important, and we want them to win. But at the same time, we are putting more emphasis on regional and smaller customers and in emerging markets where they're popping up. A great example is Fairlife that was doing well and then Coke bought them, and now they're doing fantastic. So we want to be with the fair lives of the world before they're bought by a coke and be part of the formulation and then be part of the success as they get bigger and bigger. So we are putting more emphasis on small and medium-sized customers in emerging markets. but we're not doing that by taking away from our focus on the big accounts, the key accounts.

Okay. Great. And can you talk about maybe type of growth you're seeing across customer type. So like local and regionals have been gaining share from larger players, certainly see that in North America. We look at Nielsen data, we sort of look at our big coverage on the big branded companies in the was like in all other bucket and the all other keeps growing. Is that also what you're seeing outside the U.S. on a more global basis?

Yes, we're seeing that all around the world. But the result of that is that the larger customers are now focused more on innovation and how do they bring exciting innovation to capture the consumer and whether it's scent and a shampoo, how are you going to win? You're going to win by having the superior shampoo and scent is a critical part of the superiority and for protein beverage, it's the taste. Somebody will try an exciting social media product because it sounds cool, but they only redo it, they only buy it again because it tastes great. and we make sure a taste grade. So we want to work more with the big accounts to drive innovation, but we also want to work with the smaller accounts because the ones that grow up we want to be with them either because they become big companies or because they get bought by the big CPGs. And part of what we're doing here is adding more resources to do this, but also what we're doing is using AI tools to help us better respond to briefs faster for big customers, but also to enable us to to respond to briefs that previously we would say no to because they were too small. But if you can automate some of the brief response, do it faster, better and then automate the sampling, you can serve more customers.

Okay. Great. Let's get a little deeper into the 3 business units to start with taste. So taste delivered broad-based growth driven by new wins, strong commercial execution and innovation platforms like modulation has been a long-time hallmark of the company. What has changed in the taste organization since you joined that's making the growth more repeatable and sustainable?

I think really important. When I got here, we did not have a taste business. I'll tell you an example. So I was in meeting, it's actually January of '24 before I officially joined, I went to an ACI meeting in Florida. And we had a review with a major CPG company around sent we get to the end of the meeting and I'm walking out and their head of procurement comes to me and says, your company is losing share to our big global company in taste and I don't even know who to talk to. You don't have a taste leader. You have a nourish business, and I don't even know really what that is. . And so that kind of triggered in my mind. Maybe Nourish is in the business, maybe taste is a business in food ingredients business. So we went back and we worked with the leadership and we said, of course, taste is the business and nurses business. So we separated them. believe that, that and then creating the end-to-end business unit model was fundamental to the improvement of IFF because then Uraserura takes the taste business and unleashes the potential to make it great. You already had great people in it and great capabilities, but it was just getting muddled with this nourish concept, this one-stop shop concept. And then the food ingredients business got better too because they focused on what it takes to win in more commoditized, bigger volume markets where running the assets full out is a key to winning versus R&D for naturals and synthetics and biotech molecules, very different business in responding to briefs with taste. So I think that change, strong leadership figuring out where the world was going and part of it was 1 of the questions we kept getting was -- and I'm on the board of Lilly. So I'm right in the middle of this is isn't GLP-1s going to really hurt your taste business? Well, you, Raj and his team leaned into it and said, "No, we're going to make it an opportunity because GLP-1 patients and even broader, people are going to want more protein. And to make high-protein products taste good is a challenge that IFF is extremely well suited to achieving. So you take products that are beverages that have high protein content, you've got to have modulators, you've got to have flavorings, you've got to have stabilizers, you've got to make them taste good or taste great, and that's what we do. We also are able to reduce sugar content, salt content, fat content in products, which consumers want, but keep the exact same great taste. And so that's enabled us to grow this business in a market where caloric intake for many consumers is going down.

Yes. Okay. You've already seen a tailwind to growth from reformulation or actually, have you seen a tailwind from reformulation to cleaner labels or do you see that as more of a catalyst for faster growth for the industry over the next few years? Is that still to come?

I think it's been there for a while now, a desire for cleaner labels. I don't think it's accelerated a lot, but it's there. And when consumers want cleaner labels, customers develop products with cleaner labels and reformulate, that's good for us. So we're able to help make that happen and hope it continues, the trend continues, and even strengthens. But we see it, but it's not an overwhelming dynamic right now globally.

Okay. Let's move on to scent. Just looking quickly. We've kind of touched on consumer fragrance. So let's talk about fine. So as growth for the category continues to normalize, but certainly, I would argue stronger than it was years ago as consumer habits have now embraced fine fragrance. How much of your future growth should we expect to be driven by commercialization of new launches? And sort of similar to what we were talking about earlier with fragrance. But like how should we think about growth over the medium term for fine fragrance?

I don't think it's going to stay in the double -- it's not going to stay in the double digits. But I do think it's going to be in the mid- to high single digits. I think it's an amazing business that is driven by better understanding of consumers around the world, partially through social media of the benefits the joy that Fine Fragrance can bring. And it's used to be more of an evening women's perfume market. And now it's through the day, different emotions that you want, you want energy in the morning, you want relaxation in the afternoon, you want Romance in the evening. It's men are increasingly using fine fragrances. Younger people are using more fine fragrances and layering them. There are markets like Brazil where they shower many times a day and each time put something on to make them smell better. And I think there's still a long runway to go for healthy growth in fine fragrances. .

Okay. Great. And then Fragrance Ingredients, it's been about a year since you started talking about building up a captive molecule pipeline. When should we start to see that be a more material driver of growth? .