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Text: A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
With me on the call today is our Chairman and CEO, Andreas Fibig, and our Executive Vice President and CFO, Rustom Jilla.
We will begin by sharing a detailed look into our fourth quarter and the full year 2020 results, and then Rustom and I will highlight the go-forward outlook and opportunity for the new IFF.
I'm really excited and proud to say that as of February 1, we have officially completed our merger with DuPont N&B.
Our teams have hit the ground running establishing our new company as an innovation leader in the global value chain for consumer goods and commercial products.
With the close of the N&B transaction, we also unveiled a new brand identity and purpose intended to unify our organization and best position our divisions for success.
As a purpose-driven enterprise, we share a mission to build from strength and transform our industry.
We are now squarely focused on execution, building on recent performance to leverage the exciting capabilities and broader customer base of our new company.
I'm confident that the direction that we are moving and the opportunity ahead of us will lead to accelerated growth and improve profitability as we generate strong value creation and total shareholder return.
Beginning with Slide 6, I would like to recap what was truly a remarkable 2020.
Amid an unprecedented pandemic that challenged our global organization, we delivered solid financial results while embarking on a transformational journey to create a new industry leader together with DuPont N&B.
I'm pleased to report that we completed 2020 with positive momentum on a comparable basis, and we have seen this trend continue in January 2021 as a combined company.
In 2020, our portfolio remained resilient to an evolving and incredible challenging global environment due to the ongoing COVID-19 pandemic.
IFF generated USD5.1 billion in sales for the full year 2020, about a 1% increase on a currency-neutral basis from last year when excluding the 53rd week of 2019.
This sales growth was primarily driven by strong performance in our Scent division, which we believe is even better positioned to capture further market share in 2021.
We achieved an adjusted operating margin, excluding amortization, of 18.1%, driven by our synergy efforts with Frutarom and pursuing additional productivity initiatives across the business.
As we reflect on the integration of Frutarom, we are pleased with what we have achieved as it relates to cost synergies from procurement, manufacturing and administrative expenses.
Acknowledging the revenue challenges at Frutarom over the past two years, we have restructured the business and, going forward, it will be an integral part of our larger new segment, including Taste, Food and Beverage segments now we have the combined combination with N&B.
We really emphasized free cash flow management throughout the year.
This led to meaningful increases year-over-year as we continued to focus on managing our balance sheet through the pandemic.
We finished the year with an adjusted earnings per share, excluding amortization, of $5.70.
With the completion of our combination with DuPont N&B, we have also achieved the important milestone of completing the integration planning phase related to the merger.
We are now focused on execution going forward as we are committed to realizing the meaningful synergies presented by the transaction.
For capital synergy opportunity, we are encouraging collaboration across divisions and closely aligning with the markets and regions we serve to showcase the full breadth of IFF's new portfolio.
I will provide further details regarding our integration initiatives a bit later.
On Slide 7, let's take a second look at the sales dynamic that we have seen across the business.
Reflecting on 2020, we were off to a very strong start, growing 6% in Q1 2020, until the pandemic had a profound impact on society and, ultimately, our business.
Given the disruption of the year, we want to offer a bit more perspective on the trends we have seen within our business as we cover from the peak of the regulatory restrictions of the pandemic in the second quarter of 2020.
Our growth rates continued to improve in the fourth quarter, up 2% excluding the 53rd week, versus the 1% year-on-year growth seen in the third quarter.
A large part of this improvement came from Fine Fragrance, which returned to growth in the fourth quarter.
As we have noted before, roughly 15% of our business was negatively impacted by COVID-19 and decreased by 16% in 2020, excluding the impact of the 53rd week.
The vast majority of our portfolio, which includes food, beverage, hygiene and disinfection type products, is defensive in nature or benefited from the pandemic.
This was roughly 85% of our pre-pandemic sales and these grew approximately 4% for the full year, excluding the impact of the 53rd week.
Our performance was strong with multinational customers, especially those who benefited from the pandemic.
However, our exposure to local and regional players adversely impacted sales.
I think it's important to remember that while these smaller and regional customers were disproportionately impacted by COVID-19, they have historically been an important source of growth across our industry and we expect them to be important contributors in our recovery.
On the whole, we are proud of the results achieved and resilience of our business in 2020.
Some of our end markets have seen prolonged and significant negative impact that led to inevitable headwinds for certain segments.
However, when you look at the whole of our portfolio, we see strong results with meaningful momentum that affirm our central role in the consumer product good value chain.
That gives me great confidence as we begin to execute as a new IFF with the N&B business in 2021.
As we begin 2021, I'm very pleased to say we, on a combined company basis, had a strong performance in January, with approximately 3% currency-neutral growth against a strong year-ago comparison.
Scent trends continued to be very strong, Taste improved and N&B continued to be pressured by COVID.
It is good to see that the business has had steady improvement since the pandemic lows.
I would now like to pass the call over to Rustom, who will provide a more detailed review of our financial performance in the fourth quarter.
I will cover the P&L high points on this slide and get into additional detail as we go through the following several slides.
In the fourth quarter, IFF generated $1.3 billion in sales, down 2% year-over-year on a currency-neutral basis.
When excluding the roughly $50 million impact of 2019's 53rd week, our comparable currency-neutral growth was plus 2%, and as I'll explain on the next slide, up approximately 4%, counting foreign exchange-related price changes as our peers in many CPGs disclosed.
While Taste performed at levels similar to Q3 2020, we did see a significant acceleration in Scent.
In the fourth quarter, our adjusted operating profit, excluding amortization, decreased by 10% on a currency-neutral basis, or by 9% including a one percentage point benefit of FX, with solid operating performance -- operational performance offset by a challenging year-ago comparable and COVID costs.
We delivered adjusted earnings per share, excluding amortization, of $1.32, mostly as a result of lower operating profit in the quarter.
This was down 11% on a currency-neutral basis, or 10% including the one percentage point benefit of FX.
It was good to finally see foreign currency having a positive impact on sales, operating profit and earnings per share in the quarter.
Now moving to Slide 9.
I would like to focus on the emerging markets and currency impacts on our results, both in the fourth quarter and the full year, to provide better clarity regarding our currency-neutral sales growth.
For the fourth quarter and for the full year, the impact of FX-related pricing was approximately two percentage points.
To be clear, if we simply looked at our revenue in the current period by local currency and applied the average FX rates from the prior period to the current period, our currency-neutral growth of 2% in the fourth quarter would have been up approximately 4%, and our full year currency-neutral growth of 1% would go to approximately 3%, all excluding the impact of the 53rd week.
At the segment level, Scent would have grown 10% in Q4 2020 and 7% in the full financial year, while Taste would have been up 1% in both Q4 and the full year 2020.
Again, all excluding the impact of the 53rd week.
Responding to feedback from our investors and after further review of what our competitors and other CPG companies are doing, starting in Q1 2021, we will align our reporting with our peers' methodology.
For 2021, our plan is to provide this on a consolidated basis and divisional level.
And before our next earnings call, we'll provide a historical restatement of growth by division for 2020.
Moving now to Slide 10.
Let me break down the key factors impacting our Q4 profitability.
I do want to go into more detail on this as the overall results hide some meaningful operational improvements that support our optimism and momentum heading into 2021.
A close look at our operating profit bridge shows that we were able to drive operational improvements, about 8%, largely attained through Frutarom synergy realization, productivity initiatives and reformulation activities, mostly in Scent; higher volumes ex the 53rd week and disciplined cost management.
As expected and communicated earlier this year, there was a negative impact from our annual incentive compensation, or our AIP program reset, which was a direct result of weak Q4 2019 results.
Further negative offsets came from a challenging year-to-year comparable, which included the 53rd week and the Brazilian indirect tax RSA benefit that both occurred in 2019, and in 2020, incremental COVID-19 costs, which we expect will only reduce in the second half of 2021.
Unfortunately, these combined items represent an 18 percentage point year-over-year headwind and were the primary driver of our 10% currency-neutral decline in operating profit.
Now on Slide 11, I'd like to discuss our Scent division results in more detail.
Another strong overall performance from Scent.
Sales totaling $504 million were up 3%, or 7% when excluding the 53rd week comparison.
We've continued to see strong growth from our Consumer Fragrance business with a high single digit increase, driven by strong performances in our Home Care and Personal Wash categories.
Also, the new color is, where we recently gained access in Consumer Fragrance, core to our 2021 strategy, grew more than 60% in the fourth quarter and represented more than 1/3 of our Consumer Fragrance growth.
I'm also happy to share that we returned to growth in our Fine Fragrance business with a mid-single-digit increase as a result of several new wins in North America and Europe.
While this was a nice development in Q4 2020, we're cautious and are not extrapolating the trend for the first quarter of 2021.
In Fragrance Ingredients, we experienced a high single-digit growth, driven by double-digit growth in Cosmetic Actives.
So overall, the Scent division achieved a 15.9% profit margin on the $504 million of sales in the quarter.
Our recent performance across the Scent portfolio is encouraging and will remain a core piece of our growth story moving forward, bolstered over time by expanded sales opportunities from working together with N&B.
The team has done a tremendous job delivering market-leading growth, adjusted for the reporting differences over the past three years, while improving Scent's margin profile.
Turning now to Slide 12.
I'd like to highlight the fourth quarter performance of our Taste division.
Our Taste division, with the exception of our Food Services business, has remained resilient throughout the pandemic.
Taste sales totaling $766 million declined 5%, or 1% when excluding the 53rd week comparison.
Food Service was down roughly 17% on a similar basis.
The Taste division achieved approximately 11.8% profit margin, with $90 million in segment profit.
These numbers also include approximately $42 million in amortization of intangible assets.
If you exclude that amortization, our Q4 margin would be 17.2%.
Frutarom continued to be pressured in the quarter, declining mid-single digits on a currency-neutral basis as COVID-19 has disproportionately impacted Food Service and the end market performance of local and regional customers, both of which represent a large portion of Frutarom's annual sales.
Looking at our performance by region.
Our North American business remains particularly strong, outperforming other markets with mid- single-digit growth.
We have experienced challenges -- experienced challenges in our Flavors segment in Latin America and Greater Asia due to the ongoing pandemic, while our EAME performance was challenged by weakness in Savory Solutions, specifically driven by the Food Services market.
So returning to profitable growth in our Taste division will remain a top priority in 2021.
And we fully expect to deliver improved results and enhanced profitability as we emerge from the pandemic.
Now turning to Slide 13.
I'd like to spend some time on our cash flow.
IFF has always been a strong generator of cash, but given our 2020 starting leverage and the fact that N&B was coming along in early 2021 bringing additional debt, it was even more critical that we focus our people on the importance of cash generation across the company.
So capex and working capital targets were both included in our annual incentives, we launched specific initiatives and we tracked progress throughout the year.
As you will see, operating cash flow for the full year was up from $699 million in 2019 to $714 million this year, an increase of 2%.
Net income was lower as a function of operating profit but also higher year-over-year transaction and integration-related costs.
However, this headwind was more than offset by lower incentive compensation payments in 2020 as a result of our 2019 performance as well as by the timing of payments on some integration-related costs.
Core working capital was a modest use of cash, driven primarily by timing related to accounts receivable, where Q4 2019 was favorably impacted by the 53rd week.
Collections in that extra week ending in January helped 2019's cash flow, and this was always going to be very hard to fully offset this Q4.
Overall, we're satisfied with the 2020 trajectory of our 5-quarter average cash conversion cycle, which improved six days year-over-year.
And this was despite holding additional inventory to avoid any customer disruption due to COVID-19-related supply chain issues.
We also reduced our capex to 3.8% of sales versus 4.6% of sales in the prior year period as we prioritized spending more than ever to manage and preserve cash through the pandemic.
And travel and on-site work restrictions also helped lower 2020 capex.
All this led to a significant 13% increase in free cash flow compared to 2020's $522 million.
And we will be equally focused in 2021 in cash generation and on reducing our overall level of net debt.
Moving to Slide 14.
I would like to address the key assumptions behind our full year 2021 expectations.
While we were certainly encouraged by our business trends in the fourth quarter and in January 2021, we expect COVID-19 to have a similar impact in 2021's first half, as we've seen in 2022's second half.
While we expect improvements in Fine Fragrance, Food Services and our biorefinery business on a full year basis, 2021 sales will likely remain below our 2019 levels.
Assumed in our full year guidance is a euro to U.S. dollar exchange rate of $1.18, which represents approximately 25% of our combined sales.
We expect approximately $50 million of merger-related cost synergies with DuPont N&B, mostly back-end loaded this year, with $45 million coming from cost synergies and an additional $5 million from the EBITDA contribution of revenue synergies.
Now we also provided some additional inputs that should help you model the business moving into 2021.
We expect total annual depreciation and amortization to be $1.165 billion, which includes amortization of approximately $715 million.
Annual interest expense is expected to be around $315 million.
For our annual effective tax rate, we are still working through the details, given that we just completed the acquisition on February 1.
While we do have an estimate, it's still being validated by the team, so my preference is to complete additional work before we communicate.
Lastly, we expect diluted shares outstanding for the pro forma company, for earnings per share calculation purposes, to be approximately 255 million shares, and that's including the approximately 141 million shares from the transaction.
For Q1 2021, please do remember that it's two months of actuals for N&B and three months for IFF when modeling.
And also, please note that we'll continue to dig into these numbers post close, but we did want to share our thinking at this point in time.
So we will update you accordingly should anything change.
Now turning to Slide 15.
I'd like to detail our pro forma full year 2021 financial guidance.
In line with the projections included in our December 22 S-4 filing, plus the synergy realization plan communicated January 11, we expect to generate approximately $11.5 billion in sales at an approximately 23.2% adjusted EBITDA margin.
Please note that this is a 12-month combined company pro forma estimate and includes approximately $507 million of N&B sales that occurred in January 2021.
These metrics reflect our confidence in the combined company's ability to generate strong results in the complex global market as several of our businesses are expected to see improvement throughout the year.
On a pro forma basis, sales are expected to grow nearly 4% and EBITDA margin to expand by approximately 100 basis points.
We should note that we are moving toward reporting and guiding on an adjusted EBITDA basis as part of our broader effort for easier comparability with our peers, which includes our reported sales growth as well.
We are redoubling our efforts to be more transparent and investor-focused as a combined company, and we think EBITDA is a key contributor to that in our sector.
With an even stronger portfolio and enhanced capabilities, the new IFF is starting the year with a strong financial foundation from which to deliver strong results.
Our 2021 guidance reflects the strength of our enhanced platform, our expectation that the impact of the pandemic will have meaningfully subsided in the second half and our rigorous focus on execution.
As such, we expect to deliver 2021 results that are meaningfully better than 2020's.
I'd also like to comment on some of the underlying dynamics that we expect will continue into the first quarter of 2021.
As we face a strong first quarter comparison from both IFF at 6% and N&B at 3%, we will also continue -- we also continue to manage through pandemic-related headwinds.
While the majority of our portfolio delivers essential products and solutions, we expect that Food Service, biorefinery and microbial sales will continue to remain under pressure in the near term or until we lap the COVID-related challenges.
We are closely monitoring trend improvements in our Fine Fragrances business and are cautious not to extrapolate our Q4 -- our Q4 trends in the first quarter as we believe some of the performance was due to a strong holiday period.
Building on what Andreas said earlier, I'm pleased to say that we had solid pro forma results in January, with approximately 3% currency-neutral growth on our new disclosure basis.
In January 2021, N&B finished with approximately $507 million in sales.
Given that N&B became part of IFF's business just -- of IFF just eight business days ago, we are not providing quarterly guidance.
Just one reminder for anyone extrapolating out our January results for the quarter.
While this has no impact on our full year expected sales, please remember that we moved away from our previous 4, 4, five reporting cycle to calendar month reporting from January.
So in Q1 2021, we will have two less working days for legacy IFF.
Therefore, perhaps a better metric for tracking progress is average daily sales.
While we do not know where the pandemic will take us, we're happy with our start to 2021.
We will continue to thoughtfully manage resources, operating expenses and capital to ensure that our business is well positioned to deliver in an uncertain market.
We also want to note that since we closed the deal on February 1, we have been working on getting the investment community pro forma segmentation for our combined company.
Now moving to Slide 16, and before passing it back to Andreas, let me end by summarizing our go-forward reporting and disclosure updates, all aimed at being more investor-friendly and more comparable to our peers.
Starting in Q1 2021, we will align our currency-neutral sales reporting to the more common methodology.
We will calculate currency-neutral sales growth by taking our revenue in the current period in local currency and applying average FX rates for the prior period to the current period.
We've shifted from our previous financial reporting calendar of 4, 4, five weeks to the more commonly used calendar month end to eliminate comparable issues related to the 53rd week.
We're also moving toward reporting and guiding on an adjusted EBITDA basis for easier comparability with our peers.
This includes both at the consolidated level as well at the segment level.
And we will be eliminating our corporate expense line in our segment profit table by allocating corporate expenses accordingly to each division.
Turning to Slide 17.
Let's focus on 2021 and the new IFF with the N&B business.
Our teams executed well on the tremendous integration planning for the transformational combination despite working remotely due to COVID-19.
This integration planning effort, more than one year long, has provided an opportunity to create the right team and operating model needed to secure our global leadership position.
It has been driven by the lessons we have learned in past integrations across both organizations, rounding our plans and practical experience that will enable near-term execution.
We set out an aggressive time line in 2019 to close and complete integration planning in 2020.
The global pandemic only challenged us even further.
But I'm very pleased to say that our teams worked extraordinarily well together to complete every aspect of our integration planning.
I'm confident that the new IFF is ideally positioned to succeed.
With this planning complete, we can entirely focus on execution, delivering our commitments and realizing significant revenue cost synergies, resulting in significant value creation for shareholders for the years to come.
Let's move to Slide 18 and take a second and we focus on the value proposition of the new IFF.
Our new company is poised to realize significant value for all of our stakeholders.
And these two highly complementary companies form a true innovation partner for all customers.
The new IFF will be a force in shaping the future of our industry.
Our R&D investment will be 1.5 times greater than our nearest peer.
We will have #1 or #2 positions in core categories in nutrition, cultures, enzymes, probiotics, soy proteins, flavors and fragrances.
This is coupled with the broadest and most diverse customer base in our industry, more than 45,000 in total, and about 48% of our annual sales from small medium and private label customers.
We are well positioned to drive profitable growth for our shareholders.
This allows us to enhance the value we can deliver to our customers in a very powerful way.
We can deliver value to customers in every interaction, from leading product offerings to significant benefits of speed to market and supply chain simplification as we deliver market-leading integrated solutions.
I think it is important to remember that while the N&B transaction is a culminating and transformational move, it is completely consistent how we have been evolving the portfolio over the past five years.
Our strategy focused on positioning the company for where the industry is going, not where it has been.
That has required more naturals, more regional supply chains, reaching smaller customers and increasing technology and science-led innovation.
Actions like Frutarom, Lucas Meyer, Ottens Flavors and others were important foundational steps as we executed the strategy.
As we look ahead, we are pleased we have the most complete portfolio in the business.
While our portfolio may change around the edges, it is complete and gives us the right base to grow and the right assets to drive the financial results you see from our long-term targets.
Put simply, the new IFF will be the strongest partner to customers worldwide to corporate essential solutions for on-trend innovation.
Now to Slide 19.
I would like to emphasize the long-term value creation potential we have seen for IFF.
Our new company has substantial synergy opportunities that will drive growth and expand margins.
Through our integration planning, we confirmed the run rate revenue synergy expectation at approximately USD400 million by 2024, with a contribution of at least USD145 million of EBITDA by that time.
In addition, we expect to achieve meaningful cost savings, including a run rate cost synergy expectation of USD300 million by the end of 2023.
We expect that execution on our plan will unlock about $50 million in EBITDA contribution in 2021.
I think it's important to say that any combination is not just about synergies, but also to strong and leading-based businesses.
Our leaders across legacy IFF and legacy N&B businesses are committed to running every part of this business, both base business and combined, to yield superior results.
This requires a mindset of continuous improvement and operational excellence that we are embracing across the organization.
It is critical to underscore that we have a comprehensive structure in place to track more progress against the identified objectives.
At the center of our discussion will be synergy realization, where we will track diligently, including the onetime costs in both expense and capital.
Our hope is to highlight, on a continuous basis, all value creation levers to provide you with a critical how component of our value creation story.
And in the end, while we are focused on synergy realization, success will not be defined just as that.
It will be the cumulative results where synergies are additive to base business performance for a stronger total P&L.
On Slide 20, I want to highlight the actions that we are immediately taking to begin execution.
One of the most questions we get from investors is, not what will you deliver, but instead, how will you actually do it?
As you can imagine, synergy capture is all about the how.
And we -- and as we mentioned on January 11th, there are 85 separate initiatives behind the $300 million cost savings that are in our plan on the cost side and another several initiatives on the revenue side.
We try to give you a flavor for the type of actions that are part of these initiatives.
In terms of revenue synergies, we have engaged with our top global and regional customers to introduce joint portfolio and capabilities, accelerate co-development partnership with global customers, activate cross-divisional innovation and collaboration in R&D and launch combined commercial excellence and integrated solution teams.
At a high level, I would characterize the cost actions as follow.
First, where there's duplication, we eliminate the duplication.
You can imagine across two global companies, there's a lot of duplication in back-office and admin functions.
Second, we look to align our cost structure with best-in-class peers where it is comparable.
We have undertaken benchmarking across functions like G&A, which gives us a tangible target for improvement.
No two organizations are identical.
So we use this as a goal rather than a prescription.
Third, where there is efficiency, we spread the benefits of dollar spend across a larger base.
Let me give you an example.
Both organizations invest in R&D.
We can now leverage across double the categories and customers.
This powerful -- and this is powerful and shows you the benefit of global scale for supporting cutting-edge science investments.
Fourth, I will point out the power of centralized services.
We have empowered regional business leaders who drive their P&LS, but they have access to the best-in-class global-shared service centers in areas like HR, finance and procurement where there's a tangible benefit to scale and combine resources.
And finally, we have set all of our incentive compensation metrics to reflect and align with our base business and integration objectives.
I really hope this gives you some flavor for the how.
We now know the targets we want to deliver and we have told you our long-term goals.
So over the coming quarters, focus will be very much on these actions.
The new IFF is set to deliver a best-in-class financial profile and maximize value for our shareholders.
This slide summarizes our long-term outlook, which we introduced to investors at the beginning of this year.
From a revenue perspective, we expect currency-neutral organic sales growth of approximately 4% to 5% over the next few years, led by our unrivaled product and solutions portfolio, which is set to benefit from our industry-leading R&D programs.
We also expect to see meaningful operating margin improvements for IFF, including an estimated adjusted EBITDA margin of approximately 26% in 2023, up around 400 basis points from our 2020 pro forma.
The new IFF will continue to generate strong free cash flows, and we expect a significant increase to approximately $2 billion in 2023.
As we pursue further growth toward capital management and delevering, we remain -- we will remain at core priority.
We are targeting almost 3 times net debt-to-EBITDA ratio, 24 to 36 months post close and reaffirm our commitment to maintaining our investment-grade rating.
Finishing on Slide 22.
Across the world, our teams have worked tirelessly throughout a difficult year to ensure IFF continued to serve our customers and deliver strong business results.
Our full year financial results showcase the strength of our portfolio and, most importantly, our people.
Through this challenging environment, we made tremendous progress on our transformational journey.
The formation of the new IFF, together with N&B, has made us an even stronger company, better positioned to deliver value for our stakeholders.
With the pre-integration process completed, it's now time to execute.
We have the team and structures in place to ensure that our newly combined company will meet our financial and operating goals in order to shape the future of our industry and improve our world.
While global volatility is expected to persist, our foundational commitment to our people, customers, communities and planet will remain unchanged as we look to strengthen and redefine our role as the industry-leading ingredients and solutions partner.
I'm really thrilled for IFF's exciting new chapter, and hope that you will join us on our pursuit to revolutionize the industry and deliver for our customers, teams and shareholders.
So before opening to questions, please note that our plan for Q&A today is to focus on our results and outlook and not to address questions about market rumors.

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sees 2021 pro-forma (giving effect to n&b transaction) sales to be approximately $11.5 billion.

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