Q4 2024 Earnings Call Transcript

At this time, I would like to welcome everyone to the International Flavors & Fragrances Inc. Fourth Quarter and Full Year 2024 Earnings Conference Call. All participants will be in a listen-only mode until the formal question and answer portion of the call. To ask a question, in order to give all participants an opportunity to ask their questions, we request a limit of one question per person.

I would like now to introduce Michael Bender, Head of Investor Relations. You may begin, Michael.

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to International Flavors & Fragrances Inc.'s fourth quarter and full year 2024 conference call. Yesterday afternoon, we issued a press release announcing our financial results.

A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. During the call, we will be making forward-looking statements about the company's performance and business outlook. 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, please refer to our cautionary statement risk factors contained in our 10-K and press release, both of which can be found on our website. Today's presentation will include non-GAAP financial measures, excluding those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in the press release that we issued yesterday. With me on the call today is our CEO, Erik Fyrwald, and our CFO, Michael DeVeau.

We will begin with prepared remarks and take questions at the end. With that, I would now like to turn the call over to Erik.

Thanks, Mike, and hello, everyone. I'm excited to walk through our full year 2024 financial results and reflect on the progress we've made over the past year. I'll then turn the call over to Mike DeVeau, who will provide a more detailed look at our fourth quarter and our financial outlook for 2025. Then I'll come back to discuss our go-forward priorities in 2025, to maintain our momentum and continue to drive long-term profitable growth. We'll then open the call for questions.

Starting with slide six, I'd like to recap the significant improvement and progress achieved by International Flavors & Fragrances Inc. over the past year, supported by consistent execution across the businesses. One year ago, when I joined International Flavors & Fragrances Inc., I found an exciting company that was not delivering on its full potential. With a new perspective on our priorities and a renewed focus on execution by our executive leadership team, we got back to basics in 2024. The renewed commitment to operational discipline by our global teams led to improved financial results, including strong growth in both revenue and profit.

The transition to our end-to-end business-led operating model, splitting Nourish into focused taste and food ingredients business units, and our new operating system have better connected us to customer end markets and increased our line of sight into customer dynamics. These initiatives have driven greater accountability across the organization, while enabling our global teams to be faster, more efficient, and more responsive to the evolving needs of our customers. As part of our updated strategy, we have increased emphasis on biotechnology as an important differentiator and capability across our core business segments.

This focus ensures that we are investing in the necessary resources to leverage this competitive advantage and serve our customers more effectively. Now alongside this effort, we also implemented a program to increase investments across research and development, commercial capabilities, and CapEx focused on our high-growth, high-margin, health and biosciences, taste, and scent businesses to enhance our infrastructure and drive innovation at scale. We are also continuing to strengthen our talent with several key hires and internal promotions that solidify the next generation of International Flavors & Fragrances Inc. leadership.

I'm also pleased to share that our employee engagement levels improved significantly compared to 2023, demonstrating the success of our return to focus on bringing leading innovation to customers. Lastly, we announced the next phase in the evolution of our board of directors, appointing three new board members with the backgrounds, expertise, and proven track records to support management to fulfill our long-term strategic vision and unlock greater value for our stakeholders. We are excited to welcome Cynthia Jamieson, Dr. Mehul Khan, and Vincent Intrieri to our board.

We also announced that Kevin O'Byrne will become our new board chair. He will succeed our current chair, Roger Ferguson, who decided not to stand for reelection at the 2025 annual shareholder meeting after fourteen years of distinguished service. I thank Roger for all his support and guidance and look forward to working with Kevin in his new role. Taken together, all these efforts focus on our people, customers, innovation, and operational excellence form the foundation of our long-term profitable growth.

On slide seven, we'll take a closer look at our financial results in 2024. In 2024, International Flavors & Fragrances Inc. delivered $11.5 billion in sales, representing 6% comparable currency-neutral growth. Our profitability also improved as International Flavors & Fragrances Inc. delivered over $2.2 billion in adjusted operating EBITDA, representing 16% comparable growth. Broad-based volume improvement across our portfolio, strong execution by our commercial teams, and the absence of destocking drove growth across all our businesses. At the beginning of 2024, we also adjusted our dividend policy to better support our deleveraging efforts and give us greater financial flexibility to invest in key growth areas across International Flavors & Fragrances Inc.

On the portfolio optimization front, we continue to progress toward completing the sale of Pharma Solutions, which we expect will occur in the first half of 2025. From a leverage standpoint, our net debt to credit-adjusted EBITDA ended 2024 at 3.8 times, improving from 4.5 times at the end of 2023. We continue to be committed to further deleveraging. The completed sale of Pharma Solutions will help achieve that goal. I'm very proud of our results and the growth we achieved in the past year in what has continued to be a dynamic market and geopolitical environment. Our businesses achieved solid financial performance, and we've made very good progress delivering on our strategic and operational initiatives.

While I'm pleased with the significant progress we've made over the last year, we still have a lot more work to do. In 2025, we plan to continue to strategically reinvest in R&D, commercial capacity, and technology as we aim to strengthen International Flavors & Fragrances Inc. and build a long-term sustainable platform that will deliver strong value creation for all our stakeholders. We are also focused on simplifying our business process and IT systems to improve efficiency and effectiveness. I want to also take a moment to thank our International Flavors & Fragrances Inc. employees across the globe, whose passion and relentless focus have been the reason for the value we've created and the innovation we've achieved.

And as I mentioned on the previous slide, developing and promoting strong internal talent is a priority. Mike DeVeau is the kind of leader we elevate, and I would like to congratulate him on his appointment as International Flavors & Fragrances Inc.'s Chief Financial Officer. Mike has been an integral part of International Flavors & Fragrances Inc.'s global finance leadership over the last fifteen years. He brings a deep understanding of the needs of our global finance operations and the value International Flavors & Fragrances Inc. delivers for the world's consumer product companies.

I know Mike will continue to be an even more incredible asset to our team in this key role. I'll now pass it over to him to share a closer look at our fourth quarter results. Mike?

Thank you for the kind words, Erik, and hello, everyone. After more than fifteen years at International Flavors & Fragrances Inc., it is an honor to join my first call as CFO, and I look forward to working closely with all of you in my new role. Moving to slide eight, as Erik noted, our strong performance and execution through 2024 continued in the fourth quarter and drove solid results. International Flavors & Fragrances Inc. generated revenue of $2.7 billion in the fourth quarter, an increase of 6% on a comparable currency-neutral basis, driven by broad-based growth across all our businesses and led by mid-single-digit volume improvement.

We continue to realize the benefits from our ongoing productivity initiatives, leading to the third consecutive quarter of margin expansion on a comparable basis. Adjusted operating EBITDA totaled $471 million in the quarter, a 5% increase on a comparable basis, and their comparable adjusted operating EBITDA margin expanded by roughly thirty basis points. This performance was led by volume growth and our ongoing productivity initiatives that were partly offset by increased incentive compensation expense and business reinvestment. On slide nine, I'll provide a closer look at our performance by segment.

In Nourish, sales were $1.4 billion, a 4% increase year over year on a comparable currency-neutral basis. Comparable adjusted operating EBITDA also increased by 4%. This was led by the fourth consecutive quarter of double-digit growth in Flavors, a testament to that team's continued outperformance. In functional ingredients, mid-single-digit volume growth was mostly offset by our pricing actions.

This was consistent with our previously announced price strategy for 2024. Double-digit gains in home and personal care and grain processing alongside growth across nearly all our businesses resulted in another solid quarter for our Health and Biosciences segment. Sales came in at $553 million, a 6% year-over-year increase on a comparable currency-neutral basis. Comparable adjusted operating EBITDA decreased by 3%, largely due to strong year-ago comparables, as well as business reinvestments that Erik mentioned earlier. In Scent, broad-based growth was led by a double-digit increase in fragrance ingredients and high single-digit growth in fine fragrance.

Net sales in the quarter totaled $579 million, up 7% year over year on a comparable currency-neutral basis, and we delivered adjusted operating EBITDA of $97 million, up 1% on a comparable basis as volume growth and productivity gains were partially offset by higher reinvestment. Finally, Pharma Solutions delivered another strong quarter, achieving sales of $228 million, a 12% year-over-year increase on a comparable basis, while also recording excellent profitability growth of 81% to $47 million. Strong margin expansion was driven by volume and productivity gains and a favorable year-ago comparable.

Turning to slide ten, cash flow from operations totaled $1.1 billion for the full year, and CapEx totaled $463 million, or approximately 4% of sales. Our free cash flow position for the full year totaled $606 million, which is consistent with where we expected it to be at the beginning of the year. Year to date, we also distributed $514 million in dividends to our shareholders. Our cash and cash equivalents finished at $471 million at the end of the fourth quarter, including $2 million in assets held for sale.

Our gross debt at the year-end was approximately $9 billion, a decrease of more than $1 billion compared to the year-ago period following the completion of our divestiture of the cosmetic ingredients business. Our trailing twelve-month credit-adjusted EBITDA totaled $2.2 billion, in line with last quarter, and our net debt to credit-adjusted EBITDA improved to 3.8 times. We remain committed to achieving our net debt credit-adjusted EBITDA target of below 3 times following the completion of our Pharma Solutions divestiture, which we expect to be complete in the first half of 2025. On slide eleven, I'd like to share our outlook for 2025. While the current operating environment remains dynamic, we are cautiously optimistic about the year ahead as we look to build on our recent momentum.

Coming off the strong year we had in 2024, we believe our 2025 plan strikes the right balance as we're targeting strong year-over-year improvements on a currency-neutral basis and investing for the future growth of our business. Please note that our full-year guidance includes six months of Pharma Solutions, with the divestiture assumed to close June 30, 2025. For comparability purposes, we expect that divestitures will have approximately a five percentage point adverse impact on sales growth and approximately a six percentage point adverse impact on adjusted EBITDA growth in 2025. In the event that we can close the Pharma transaction earlier, we will adjust our guidance accordingly and reflect the lower contribution of the business.

For the full year 2025, we expect sales to be in the range of $10.6 billion to $10.9 billion, representing comparable currency-neutral growth of 1% to 4%. We believe that this will be driven by continued volume growth against a strong year-ago comparable, with increases across all our divisions led by HNB, Taste, and Scent. It should be noted that we expect the 2025 operating environment to be more normalized relative to 2024, which did benefit from the absence of destocking. Pricing is expected to be modestly favorable, including FX-related pricing, as raw material costs remain elevated and in some cases increasing year over year.

On the bottom line, we expect to deliver full-year 2025 adjusted operating EBITDA between $2 billion to $2.15 billion. On a comparable currency-neutral basis, this translates to 5% to 10% EBITDA growth, which will be driven by gross margin expansion as a result of volume leverage and COGS productivity. Following a year of strong margin expansion and double-digit profitability growth in 2024, we will continue to reinvest in long-term value creation opportunities while balancing our near-term profitability objectives. What this means is that we will continue to drive strong productivity to mitigate general inflationary pressures and at the same time, reinvest a large portion of our incentive compensation reset in R&D innovation and commercial capabilities across our businesses, similar to the actions we've taken in the second half of 2024. We believe that by doing so, not only will we drive short-term performance, but we will further enhance our and generate strong returns on these organic investments.

Based on foreign exchange rates, we expect foreign exchange will have approximately a 4% full-year adverse impact on sales growth and a 6% full-year adverse impact on adjusted operating EBITDA growth. This is primarily driven by the strength of the euro, where the current rate is down relative to the 1.09 average in 2024. In addition, there are several other emerging market currencies, such as the Brazilian real and the Argentine peso, where we issued a modest devaluation versus the USD over the course of 2025. As previously communicated, we plan to increase our CapEx investments, targeting approximately 6% of sales in 2025. Approximately half of this investment is maintenance CapEx, while the rest is split evenly between deferred investment catch-up, specifically in food ingredients, growth investments such as capacity expansion in HNB, an India creative center in Scent, and a creative center in Mexico in both taste and scent, as well as digital transformation, specifically related to our SAP HANA upgrade.

We believe these investments will yield strong returns, providing us with incremental growth and efficiency opportunities. As a reminder, we have resegmented the business into five divisions: Taste, Food Ingredients, Scent, HNB, and Pharma, and have adjusted our corporate allocations starting in 2025. Prior to the first quarter of 2025 earnings release, we plan to provide historical information for comparable purposes so that when we report first-quarter earnings, you will have the appropriate baseline. Our recent success gives us confidence in our outlook as we continue to execute our strategic and financial priorities.

With that, I'd like to turn the call back to Erik.

Thanks, Mike. Our outlook for the year reflects our confidence in our businesses and our ability to navigate macro uncertainties while continuing to deliver for our customers. I want to turn to the priorities that will guide our strategy for 2025 and help us reach the goals we've outlined for the year. In 2025, our focus will continue to be on creating and returns on capital.

We will continue to improve our businesses while also ensuring we have competitive cost best-in-class support functions. As we've discussed, this will require some investment. At the same time, we will continue to drive growth and returns by increasing our investment in R&D, value-enhancing capital projects, and commercial actions to deliver profitable market share growth over time. We will also keep exploring ways for our teams to better innovate, providing greater visibility and transparency into our sales pipeline and formalizing our sales targets and expectations across teams.

We will continue to deliver cost savings through productivity initiatives and improvements in execution and processes throughout our businesses as we strengthen our continuous improvement culture. In addition to completing our planned divestiture of Pharma Solutions in the first half of the year, we will continue our ongoing portfolio assessment, including exploring appropriate opportunities to bolster our portfolio through value-creating bolt-on acquisitions. But I can assure you, we will not do anything like another Frutarom. Importantly, we remain committed to consistently delivering solid financial results and meeting the goals we've outlined for 2025. Lastly, our people are the core of our success, and we will continue to invest time in developing talent and strengthening employee engagement to drive greater innovation and productivity.

This, in turn, will enable us to better serve our customers, enhancing customer satisfaction, which will help us capture new growth and market share over time. I am confident that these priorities, with the collective efforts of our world-class global teams, will make it happen. Now to close this out on slide thirteen, our solid performance in 2024 speaks to the success of our reinvigorated strategy and our focus on operational execution. All of us at International Flavors & Fragrances Inc. are excited to build on this foundation to further strengthen the business and reinforce our market position in 2025. We are well on our way to unlocking our full potential and continuing to deliver innovative and sustainable solutions for our customers and communities all around the world.

Thank you. And I'll now open up the call to your questions.

Thank you all. At this time, we will now begin the question and answer portion. If you are using a speakerphone, we ask that you do pick up your headset before asking a question. The first question is from the line of Kristen Owen with Oppenheimer. You may proceed.

Hi. Good morning. Thank you for taking the question. Wanted to ask if you can elaborate on the sources, wins versus underlying demand of your volume growth expected in 2025. Just for context, we're hearing from CAGNY many of the CPGs are saying that volume is getting harder to come by.

So we're just trying to understand what's sustaining that volume growth expectation and any specific areas of relative strength that you would call out?

Sure. Thanks, Kristen. This is Erik. I'll take this question.

So first of all, we're saying that for 2025, our volumes will be 1% to 4% growth. Which if you recall in 2026, we had 26% growth, which about half of it was destocking. So the normalized growth rate is in the range of 3%. We believe that our volume increases will be mainly in health and biosciences, scent, and taste.

And we see now that we have strong commercial pipelines in each of those businesses and a high win rate. And that means that we're winning more than our fair share in many cases. And that's really important and that's the drive. Food ingredients will be much lower volume increases, but we still see some volume increase there.

I think it's really important to step back and see what we're doing over the next three years, what our focus is. And what I'll start by saying, I think we made really good progress in 2024 getting back to basics, getting the fundamentals in place, but over the next three years, we must keep driving to get to growth rates while we narrow the margin gap versus our best-in-class competition in each business. And we're gonna do that by continuing to invest in R&D, commercial capabilities, and capacity, particularly in health and biosciences, scent, and taste businesses. Those are three great businesses with high margins, and we want to keep making sure that we're fully investing to be fully competitive with best-in-class competition.

In our food functional or, excuse me, food ingredients business, we are investing selectively in areas like technical service and upgrading some of our facilities that badly needed. But at the same time, we're driving an aggressive productivity program across our food ingredients business. And then even across the entire company, we're driving strong productivity programs across each business unit and across the corporate functions to make sure that we're fully cost-competitive but also fully effective. And then as we do all that, we're also leveraging our uniquely strong biotech capabilities into our scent and flavors businesses and continuing to drive the other health and biosciences application areas.

So we have a great plan for the next three years. We're gonna keep investing. We're gonna keep delivering year by year. We're gonna keep investing so that in three years, we are very strong versus our best-in-class competition.

The next question is from the line of Josh Spector with UBS. You may proceed.

Yeah. Hi. Good morning. I wanted to ask two things if I could.

First, just on the EBITDA bridge for 2025. I mean, understanding the pharma divestment and FX are negative, I guess, we thought that volume and the incentive comp resets could get you to about neutral. So there's obviously something else, investments or price cost or otherwise, which is adding a negative variance to that bridge that we're not accounting for. So how do you build that bridge? And then secondly, just around seasonality and your expectations for 1Q versus the rest of the year EBITDA specifically?

Thanks.

Great. Thanks, Josh. I'll take this one. You know, in terms of the EBITDA bridge to the midpoint of 2025 guidance, it's really around just two things.

It's around volume growth and productivity. So if you assume the midpoint of our guidance range, sales will grow 2.5% on a comparable base of $11 billion with an incremental margin of about 35%. That's yielding you around four to five points of EBITDA growth. The second piece of it that we're really trying to target and drive productivity within the organization.

And so you're getting another about 2% net productivity benefit from the inflationary piece. In terms of net pricing to input cost, they're expected to be neutrality. So flat when you net them together. And in terms of the incentive compensation reset, we have about $100 million of a reset and we're fully or essentially offsetting that reinvestment in the business.

And so there's about a $30 million carryover for 2024. A $70 million incremental investment in 2025. So we net the two together. And that's the zero. In terms of the EBITDA cadence, again, if you take the midpoint, the first half of the year will be stronger and that's with dollar basis because we're assuming that the pharma transaction will be completed at the end of Q2. Also, just remember that Q2 is usually our seasonably strongest quarter. So on an absolute dollar basis, EBITDA will be the highest in Q2 of 2025.

Thank you. The next question is from the line of Nicola Tang with BNP Paribas. You may proceed.

Hi, everyone. Thanks for taking the question. I wanted to dig a little bit more into your comments around volume or I guess the currency-neutral 1% to 4% expectation for the year. Would you be able to talk a little bit more about what you expect across the core divisions? Thanks.

Yeah. Thank you, Nicola. So first of all, it's gonna be primarily volume-driven with modest pricing, with some gives and takes in pricing across businesses and across geographies. But primarily, the volume of the growth will be driven by health and biosciences, scent, and taste. Food ingredients volume will be much more moderate, with a focus on increasing margins in that business.

The next question is from the line of Emily Fusco with Deutsche Bank. You may proceed.

Hi. This is Emily Fusco on for David Begleiter with Deutsche Bank. I wanted to ask what are your expectations for input inflation this year? And how should we expect net pricing to develop through the year? Thank you.

Thanks again for the question, Emily. Maybe just to start by saying that import costs from an International Flavors & Fragrances Inc. standpoint remain at historically high levels. In some parts of our business, we are seeing continued modest inflation, specifically in taste and scent, and this is really driven by natural ingredients. Well, including ingredients, there is a bit of deflation that the team is working with customers on, and on an HNB perspective, it's generally flat.

And so net-net on a consolidated basis, we expect our input cost baskets to be flat to up slightly. In all instances, we will continue to work and collaborate with our customers to make sure we have the opportunities to mitigate. This includes reformulations, but also price discussions as well. In terms of pricing contribution over the course of 2025, we expect pricing to be relatively consistent across each of the four quarters as we go forward.

The next question is from the line of Patrick Cunningham with Citigroup. You may proceed.

Hi. Good morning. This is Eric Zang on for Patrick. You mentioned last quarter about getting functional ingredients to 15% plus margins in the coming years. Are you on track for this margin expansion given the pricing actions? And what are the costs and productivity initiatives, savings underpinning this growth? Thank you.

Thanks, Eric. We are on track towards this target. And we made very good progress. If you recall, in 2023, we talked about high single-digit EBITDA margins in food ingredients.

In 2024, we achieved solid low double-digit EBITDA margins, and I would say under the new leadership of Andy Mueller with a strong team, we are confident in our plans to get to the mid-teens in the next few years. And we're doing that with a combination of better serving customers, so growing our business with attractive margins and driving aggressive productivity plans. Both are making progress. Andy has a strong background in this business and is helping the team to further strengthen those plans and the execution of those plans.

So we are on track.

Thank you. The next question is from the line of Lisa De Neve with Morgan Stanley. You may proceed.

Hi. Thank you for taking my question. I have a question for cash flow. Can you please give some details and granularity on how you expect free cash flow to play out for this year, especially concerning the net working capital movements and CapEx spend that's required?

And also more in the light of the limited leveraging we've seen in the second half of this year, which clearly will improve post-Pharma, but just the underlying would be helpful. And a small second question I'm just gonna slide in. I mean, you've now been with the company as a CEO for over a year. I mean, is there any intention to set new midterm targets given you keep referring your presentation towards the next three years for driving improvements?

So are you willing to set any financial targets against that? Thank you.

Thank you, Lisa. Maybe, Erik, I'll start on the first.

Yeah. Perfect. I'll start on free cash flow, and then I'll pass it back to you.

In terms of the full year for 2025, we expect free cash flow to be about $500 million. Note this does include a significant impact of taxes related to the pharma divestiture, so that's about $350 million is our estimate at this point in time. If you adjust for that, our free cash flow will be about $850 million, which is kind of consistent with the last couple of years. But more importantly, an improvement versus where we finished 2020. In terms of networking capital, we are targeting a slight inflow versus an outflow in 2024. And this is really driven by the work that we're doing around payables and selective strategic inventory reductions.

As we stated on the call, we expect CapEx to be about 6% of sales, and this is really around increasing the investments to catch up on some deferred spend Erik mentioned it moments ago, specifically in food ingredients. Also to make some growth investments, and so capacity expansion, new technologies in HNB, commercial-facing operations for taste and scent, and then lastly, really start to drive the migration of our digital transformation. And so those are the biggest drivers from a CapEx piece of it. And so maybe I'll turn it over to you for the second part of the question.

Yeah. So in terms of long-term targets, we'll come back later in the year with more clarity on that. Let me just say that I feel like we are a very strengthened company now versus a year ago. We've got absolute clarity on our organization model, our end-to-end business model.

We've separated Nourish into taste and food ingredients, two very different businesses with different strategies. We've got a strong team, a clear flat five-year plan, a clear investment plan, with both growth investment and driving productivity. So I am confident that we have the right direction. Now we need to execute very well.

And I think we did that in 2024. Now we need to do it in 2025. And you'll hear more later in the year about our longer-term aspirations.

Thank you. The next question is from the line of Steve Byrne with Bank of America. You may proceed.

Yes. Thank you. I'm curious. How would you characterize the potential impact on your businesses or perhaps some regulatory approvals from RFK now running HHS and the staff cuts at FDA?

Any near-term impacts from that? And then, Erik, you mentioned new investments in biotech and R&D. I assume that that could include the use of gene editing for natural product expression levels, etcetera. Do you think RFK could block this?

So first of all, thank you, Steve. We don't see any of our products as targets. In fact, what we do see is that many of our customers may reformulate products to have cleaner labels, which, by the way, plays into our strengths. And we've been making very good progress with customers that are working on cleaner labels, which has been a great growth opportunity for us already.

And we see that as a continued opportunity going forward. In terms of biotech R&D, I think there's lots of opportunities in many areas, and you'll be hearing more about that at CAGNY. We're gonna talk specifically about our biotech platform, and we see that as having opportunities in scent, taste, but also in the current areas that we're playing in and other areas with our DEB design enzymatic biomaterials, which plays right into the heart of what the world wants. Consumers want, our customers want, the world wants, in biodegradable materials that are sustainable and sustainably grown, sustainably produced.

So I see this as a bit of uncertainty about what will happen when, but in the general direction, I see it as significantly more opportunity than risk.

Thank you. The next question is from the line of John Roberts with Mizuho. You may proceed.

Thanks. And first, congrats, Michael. Back to raw materials, how much of International Flavors & Fragrances Inc.'s raw material spend is potentially exposed to tariffs here? And should we only be thinking of imported materials into the US, or do you worry about something reciprocal so that it's more than just the US issue?

Hey. Thanks, John. Appreciate that very much. You know, in terms of the tariff situation, it's ever-evolving.

It changes on a constant basis. When we assess the various situations or potential situations, we do not expect to have a material impact from any tariff change. As you know, John, we have an expansive and global supply chain, which provides us with a lot of flexibility to adapt. So should things change, we're working with our customers to make sure we mitigate that to the fullest.

You know, we lived through this a couple of years ago in this administration's first term. And so similar to that approach, we've taken now. That we're gonna work with our customers on mitigation strategies and including price surcharges as appropriate. But that will become a secondary methodology to it.

The focus is really seeing what we can do on the supply chain to mitigate a lot of our exposure. Again, immaterial nature, more to come as things develop, and we'll keep you updated there.

The next question is from the line of Mike Sison with Wells Fargo. You may proceed.

Hey. Good morning. Nice end of the year, and congrats to you, Mike. You know, Erik, with the year-on-year about, I understand you might wanna wait a little bit, but, you know, where do you think International Flavors & Fragrances Inc.'s EBITDA should get over time?

You know, it's expected to be a pretty big number when you bought NNB. You know? But with divestitures, you know, maybe framework, where it could be. And then and just maybe stepping back a little bit, with NNB, you know, do you think this is a good business for International Flavors & Fragrances Inc. longer term?

You know, what are the risks because, you know, certainly, it had a little bit it certainly had a tough time on the get-go. But what are the risks to the business? And maybe just talk about where what parts of the business now fit really well with or have good synergies with the legacy International Flavors & Fragrances Inc. Thank you.

Sure. Thanks, Mike, for the question. I mean, I see with our current portfolio over time us getting to the low 20s EBITDA with food ingredients being the most challenged and health and biosciences being the highest and scent and taste being very solid. And as I look at it, you know, I came to the company a year ago.

There was a lot of complexity, a lot of performance challenges. A lot of companies have been brought together, so there was a lot to clean up and a lot to get the executive team together and clarify for the organization. I think we've made very good progress. I think we've got a very solid HNB Health and Biosciences team and business.

Very strong scent and taste teams and businesses with very good, very strong, very competitive capabilities. And so we just need to continue to strengthen those and move them along in the next three years. And I think they'll compete very favorably within that period with the leading benchmarks. Food ingredients is still a turnaround situation.

Low single-digit EBITDA margins in 2023, low double-digit EBITDA margins in 2024, Andy Mueller and his team are absolutely focused on continuing that turnaround and getting those margins up significantly this year as another point of progress. And I'm confident in that team to make that happen. So I think that, you know, our focus right now is delivering 2025, but doing it in a way that we make smart investments that have good returns and get us increasingly competitive and deliver what we say we're gonna deliver. And I think we're on a good track to make that happen.

Thank you. The next question is from the line of Kevin McCarthy with Vertical Research Partners. You may proceed.

Hi. This is Matt Hettwer on for Kevin McCarthy. Can you help us to understand why the FX headwind to EBITDA is two percent higher than the impact on sales? How do your margins on international business compare to US domestic margins?

Hey, Matt. I'll take this one. Thank you for the question. You know, in terms of the incremental impact on EBITDA relative to sales, it's entirely driven by our purchases.

Our sales are based in local currency, while a larger portion of our input costs are denominated in euro and US dollar. And so, essentially, that's what's driving the kind of multiplier effect between the sales piece of it and EBITDA contribution. Your second question was around margin structure globally, internationally versus domestic operations. It's actually pretty agnostic and pretty constant.

The real differential comes when you compare the category exposures. And so just let me give you an example. In Europe, you have the strongest margin profile just given the exposure to fine fragrance, while in India, you have a lower margin profile just because the portfolio is geared towards savory. As an example.

So, really, when you look at it on a kind of a like-for-like basis, adjusting for the portfolio, you're pretty agnostic from the margin aspect of it. It really comes down to the category percentages within each one of them.

Thank you. The next question is from the line of Mark Astrachan from Stifel. You may proceed.

Yeah. Thanks. Morning, everybody. Two questions for me.

One, just could you talk about the growth rates between local, regional, and private label customers compared to multinationals and maybe just give a rough split of the businesses? It seems the former group seems to be growing faster and taking share away from the latter. And then Erik, you had talked about prioritizing best-in-class margins compared to sales growth. You're obviously accelerating investment, I guess, with flexibility in early 2025 in terms of the wraparound reinvestment.

Maybe talk a bit about how you manage the two and if you wanna sit there and try to think about prioritizing one versus the other, you know, how quickly can you get to the margins versus how quickly can you get to run rate sales growth that grows at least in line consistently with peers? Thank you.

Mike, you wanna start and then I'll take the second half?

Sure. So thanks, Mark, for the question. You know, when you look at the portfolio, the way I would categorize it is you basically have one-third global customers, one-third kind of midsized, and one-third small global customers, including some of the private label aspects. And so when you look at the dynamics across their global perspective, the growth is a little bit more muted than you see at some of the kind of regional, local, including private label customers.

So for us, a big part of the focus on the give you an example on the taste strategy is really to prioritize private label and smaller customers as we go forward. And so that dynamic, that growth that you referenced, Mark, is true. The good thing is that there's still a lot of growth opportunities with the big global customers. That's much more geared towards new innovation.

What we can do to help them have winning products or consumer-preferred products in the market.

So on the second application, we wanna keep continuing to work towards best-in-class margins and growth rates. So what I would say is track us on how we're doing to have growth rates in line with the best in class and gross margins that are improving and EBITDA margins that may improve a little bit slower because of our investments, our aggressive investments in research, particularly, but also in commercial investments, in health and biosciences, taste, and scent. Let me just give you an example. In 2024, we had nice margin improvements, but we could have delivered even more EBITDA and higher EBITDA margins if we wouldn't have made additional investments beyond what we had planned, particularly in research and commercial capabilities.

So what we're gonna do is continue to make progress but probably not as fast a progress on EBITDA as we could if we weren't making these additional investments. But the investments that we're making, we are absolutely sure that in the next three years, will have a very attractive payout and will strengthen us against our best-in-class competitors. And we're absolutely committed to becoming leaders in innovation across these businesses, health and biosciences, taste, and scent, while we continue to turn around the food ingredients business.

Thank you. The next question is from the line of Kate Grafton with Barclays. You may proceed.

Thanks. Just a couple of questions on the scent business. I was wondering why fragrance ingredients growth was so strong this quarter, up double-digit. And how we should be thinking about growth for 2025 as there's some pricing pressure on the business.

And then on fine fragrances, you were wondering what your expectation is for growth next year. And if you're expecting any growth in fine to normalize. Thank you.

Mike, you wanna start? Eric, I'm happy to start.

Yeah. I'll start on this one and then pass it over to you for more comments. Look, the team has done a fantastic job in the fragrance ingredients business. They really looked at their portfolio.

When you look at that portfolio, there's really high value in ingredients, and I would say more general kind of industry-led experience. And so what they did, they bifurcated that, and they targeted the market to go after some of the high-value ingredients. And so what we've seen over the course of this year, in 2024, my apologies, in 2024, performance has been strong. As you noted, Katie.

And for the quarter, we actually finished kind of in that mid-teens range. So very, very, very good. And that's really about being proactive and making sure they have adequate capacity to ship product. For that.

And then had some good success there in 2024. In 2025, I think you'll see the growth start to subside a bit. Obviously, that is a business that's gonna be driven by the end market consumption. And so, you know, as you go forward from here, I think the team has some good volume growth, but they will have some reductions in overall price. Because of some of the deflationary environment that we see in the fragrance ingredients market overall.

But they're working through that. I think their long-term strategy is very, very strong. And I think it still could be a growth driver as we go forward. It's just managing the next couple of quarters in terms of home loan growth.

So that's fragrance ingredients. The fine fragrance side, the business is performing very, very well. And so it's I think it finished the quarter at high single-digit growth rates. On a two-year basis, it's kind of in the mid-single-digit basis.

Kind of factoring the year-ago comparable, and so very, very strong. Based on the access to business and new win potential that they have, they expect growth to continue into 2025. And be one of the areas that will lead the scent in terms of overall growth. And that's really around the strategy they have in the emerging markets, like the Middle East and Africa. And winning some of the core big businesses and brands that are in Europe and North America.

I think there's anything I would add? Anything else you?

I don't think the only thing I would add is that I think overall, the dynamics for the scent business are favorable and for the scent industry. Both the consumer goods companies are putting more emphasis on scent as a driver of superiority for their products, whether it's shampoo, body wash, laundry detergent, etcetera, all their products that is a critical element of superiority and a low part of the cost. Product cost. I think that's gonna continue, and consumers love to have great scents in their products.

I think on the fine fragrance, the digital media and the desire to have better experiences through the day, not just an evening event for a woman when she's going out, but people of all ages, both sexes increasingly wanting fine fragrances to enhance their day, whether it's an energizing scent that makes you feel more energy, whether it's a relaxing scent, whether it's a romantic scent, these emotional drivers that are being expounded upon are being talked about by people like Charlotte Tilbury on digital media are helping to expand the market for scent fine fragrances all around the world. So I see the general direction of growth for the scent industry continuing to be very positive.

And we're taking advantage of that.

Thank you. The next question is from the line of Ghansham Panjabi with Baird. You may proceed.

Hi. Good morning. I have another peeling back the onion question. In, you know, in Nourish, you have your legacy, you know, flavor or what you call taste prisoners, and maybe that's like $2.5 billion in size.

And then there's the function ingredients business, which is that's, like, $3.3 billion in size. If you have a function ingredients business, which is the smaller one, grows slowly, maybe grows 1%. Like, your taste business really has to grow something like 5% to get to the, you know, to get to the midpoint of the organic growth, which is 2.5%. Is that the way to think about it?

You have, like, you know, just much higher growth in taste maybe, like, close in the single digits and very slow growth in function fragrances. And I have a similar question for the health and biosciences business, which I think maybe splits the two enzymes and maybe 45% into probiotics. Is it a similar dynamic where you think your enzyme business is gonna grow more, like, mid-single digits and probiotics, you know, at a very low end?

Mike, why don't you start and I'll add if any.

Sure. So first, maybe let me just start with the flavors or taste business. Ghansham, it is you're absolutely right. The way I think about $6 billion to $2.5 billion is gonna be the taste side, $3.5 billion food ingredient side.

The flavors or taste side of the business has been running very, very strong. And so their performance over the course of the year, if you see it's basically, you know, had four quarters of very strong double-digit growth. As you go into 2025, I think, you know, the taste business growth will more normalize. Relative to, let's say, historical averages just because the comp is strong.

So that is gonna be a big piece of the equation in terms of growth for the total company. Food ingredients will be a little bit more muted. As some of the volume gains are gonna be offset by a little bit of price reductions that are associated with the deflation. And so to your point, you have to grow this disproportionately faster on the taste side.

The one x factor caveat is that in the rest of the business, we expect growth. And so that's making it up, and it's actually taking us into, I'd say, a better trajectory in 2025 overall and offsetting some of the food ingredient softness that we have year over year in terms of total top-line growth. In HNB, with respect to enzymes versus probiotics into subcategory levels, I think broadly speaking, all the businesses are targeting kind of modest growth year over year. The health business, the one area on the probiotic side that has been a little bit of a pain point to be very frank, over the last couple of years, is expecting to recover a bit as we go into 2025 as well.

So that will help us both from a top-line perspective, it's also accretive from a margin aspect as well. So back to you.

Thank you. The next question is from the line of Laurence Alexander with Jefferies. You may proceed.

Hi. This is Dan Rizzo from Laurence. Thanks for fitting me in. Just to kind of revisit tariffs from the tariff issue, but just from a little bit of a different perspective, I was just wondering what your customers are saying their near-term impacts might be on order patterns and how you should think about where margins in ROI should be in three to five years?

Can you repeat that second part of the question? I'm not sure I heard the second part. Well, it's actually the second one is just how do you think where margins in ROIC should be in three to five years?

Yeah. Perfect. Erik, do you want to from a customer standpoint, because I know you engage in optimization.

What I would say is, you know, if you listen to the customer's calls, they're very conservative about volume growth. I think it's not it's separate from tariff issues, but tariff issues make people concerned about the economy. With the uncertainty today, I think that uncertainty will hopefully get cleared up in the not too distant future, and we'll get back to a more normalized growth. But I think what our customers, what we're hearing from our customers, which is really important, is that they expect volumes to be soft, and therefore, they want to grow with innovation.

And that's increasing the opportunity for us to work with them to deliver that innovation that excites consumers that drives their products. And by the way, drives value in their products as well. I think that's very positive. But anything to add to that specifically on tariffs, Mike?

No. I think that's good. Covered well. I think the second point just on the margin ROIC kind of.

You shouldn't advise that for the next three years. I think Erik addressed it before. Simple answer is higher. On both.

Think for us, we're making a concentrated effort really on return on invested capital as we go into 2025. And so we're making a big investment in terms of both carryover and reinvestment incrementally. I think this year, but the reality is as we go forward, we are being very diligent on how we're thinking about return on every dollar we put in the business. And so the team, this is both OpEx and a CapEx base Shachter, we don't have a formal target yet, and we'll come back later in the year Erik alluded to it. But over time, we would expect improvements in terms of, again, the margin piece of it, but also return on invested capital.

The next question is from the line of Artem Chubarov with Redburn. You may proceed.

Good morning. Thanks for taking my question. I've got a follow-up on the Health and Biosciences initiative. Would you remind us of the current breakdown by business just like that's just the big be helpful. And then looking ahead, do you see the future or some of those past utilization or could they potentially be considered for a review? Thank you.

I'll start and then, Mike, please add anything. First of all, our health and biosciences business is on very solid ground today. It's been growing nicely in 2024. We grew, I would say, consistent with the leading benchmark, and had strong solid growth across businesses. The slowest growth but still growing, was the health business.

As Mike alluded to, we expect that to start to increase again as we put more innovation into that business. Part of the business. But overall, the dynamics are solid. In all the different areas, all the different application areas.

We have this new area and designed enzymatic biomaterials that we're excited about. We started to get our first commercializations there. That's gonna add to the growth. And we've got a lot of emphasis now on how do we turbocharge our scent and our taste business with our biotech capabilities.

We've got resources focused on that that'll take some time to get through, but it's on a solid start, and I'm very, very optimistic about health and biosciences in the near term, but even more so in the three to five-year time frame.

Thank you. At this time, we will now take the last question from Christopher Parkinson from Wolfe Research. You may proceed.

Great. Thanks. This is Harris Fine on for Chris. Thanks for taking my question.

So there have been a lot of active asset sales divestitures within Food and Nutrition over the past year. I guess, when you look at what's happened, what does that price discovery mean to you in terms of maybe whether you could prune a little bit more from your portfolio? And you also mentioned potential for small bolt-ons. I guess, what are the implications for your M&A?

Thank you.

Yeah. So first of all, on our food ingredients business, Andy Mueller's here. He knows the business in-depth. He spent many years with Inisko, actually, before that with International Flavors & Fragrances Inc.

He knows the industry very well. He's working with his team to turn around the total business, and there are some pieces of it that may, like, likely not fit long term, so we're working on that. Working through that. But we're looking at bolt-on acquisitions, as I refer to, that specifically in health and biosciences, more related to technologies to further enhancing our technology breadth.

And taste, which is more to enhance our geographic footprint. But we will only do bolt-ons that make absolute sense to have good returns and that really fill strategic voids. But I think what the most important is to understand that we're focused on really driving the businesses that we have today. And getting the pharmaceuticals solution sale finished and continuing to execute really well this year.

And I'll just finish. I'll my closing remark is that I believe I joined the company excited about International Flavors & Fragrances Inc. And even more excited today. I believe we are much stronger than we were a year ago.

And I believe we will be much stronger a year from now. Thanks to our twenty-two thousand colleagues around the world that are now, I believe, much more focused on serving customers with leading innovation while we also drive productivity. And I would suggest if you know International Flavors & Fragrances Inc. employees, talk to International Flavors & Fragrances Inc. employees, talk to our customers, ask them about it. We've got positive momentum, and we're gonna continue to build on that positive momentum.

And we're gonna deliver what we say we're gonna deliver in 2025, but we're gonna do it in a way that further strengthens us for 2026 and beyond. And in the three-year period, I think you'll find us very competitive with the leading competitive benchmarks.

Thank you. At this time, this will now conclude today's International Flavors & Fragrances Inc. Q4 and FY 2024 earnings conference call. We appreciate your participation. We hope you all have a wonderful day, and you may now disconnect your line.