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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.
Please also note that we will be using combined historical results for the third quarter, defined as three months of legacy IFF results and three months of N&B results and for nine months year-to-date defined as nine months of legacy IFF January to September and eight months of N&B February to September, in both the 2020 and 2021 period to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig; and our recently appointed Executive Vice President and CFO, Glenn Richter.
As you know, Glenn joined us a little over a month ago as our new Executive Vice President and Chief Financial Officer.
I'm sure you will all find that his experience aligns perfectly with our strategic goals, making him an incredible asset to our team.
Rustom played an important role in our combination with DuPont N&B.
And for that, we are immensely grateful.
He has been important in putting IFF in the strong position it is today.
Before we conclude today's call with a question-and-answer session, Glenn will also speak to our outlook for the remainder of the year.
Now as I mentioned, I'd like to kick us off on Slide six by discussing our financial highlights for the first nine months of 2021.
Throughout the third quarter, we remained laser focused on extending the momentum IFF established in the first half of 2021.
In the first nine months of 2021, IFF achieved $8.6 billion in sales, representing 10% growth or 7% on a currency-neutral basis, a strong reflection of the strength of our market-leading platform and the compelling position we have established with our customers as a combined company.
We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5%.
As we will discuss in more detail, we continue to confront meaningful inflationary pressure due to higher raw material, logistics and energy costs.
We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strength, having achieved $884 million free cash flow or approximately 10% of our trailing nine months sales, driven by strong cash generation.
This cash generation has enabled us to stay on track to meeting our deleveraging target.
Finally, as I've mentioned in previous quarters, continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts.
I'm pleased to share that we have completed the divestiture of our food preparation business and are on track to complete the divestiture of our microbial control business in the second quarter of 2022.
Together, these two important divestitures will create a more focused IFF, allowing us to hone in on the constraints of our core business segments and it creates a stronger, more focused business.
We will continue to evaluate and optimize our portfolio as we move forward with our integration, looking for opportunities to rapidly divesting other noncore businesses.
We started this year with a simple commitment to focus on execution and deliver on the potential of the new IFF.
I'm pleased to say that even in a very challenging global environment, our team has met our integration objectives, while delivering strong results with continued sales momentum and profit growth.
Now turning to Slide 7.
I'd like to walk you through some of the regional sales dynamics underpinning our results for the last nine months.
First, I'm excited to share that we continue to experience strong growth in all four of our key operating regions despite ongoing and unique market uncertainties that have persisted across each geography.
In North America, we achieved 7% growth across all four of IFF's business divisions, led by high single-digit growth in Nourish and Scent.
These two divisions have continued to perform exceptionally well, quarter after quarter.
In Asia, we experienced a 7% increase in sales led by continued double-digit growth in India as well as a low single-digit growth in China, even amid particularly strong recent market complexities in the region.
From a business unit perspective, Nourish, Scent and Pharma Solutions continued to carry the region's growth throughout the year-to-date.
Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth, largely fueled by double-digit growth in our Nourish and Scent divisions and continued local currency strength.
Perhaps, most impressive is a 7% sales growth that our EMEA region achieved to date, which includes a robust double-digit increase in the third quarter, impressive performance on our Scent and Nourish divisions growth, this encouraging rebound with Scent delivering double-digit growth led by our Fine Fragrance business and Nourish delivering high single-digit growth led by our Food Service business.
We expect this momentum to continue through the remainder of the year, and we will stay diligent to ensure our business remains nimble, positioned to perform against any new supply chain challenges that may arise.
Moving now to Slide 8, I'd like to take a closer look at our nine months year-to-date sales performance across IFF's key business segments.
Our largest division, Nourish, has been a strong performer throughout the year, achieving currency-neutral sales growth of 9% with broad-based strength from our Flavors, Ingredients and Food Design businesses.
Scent has had a similar strong year delivering 8% in currency-neutral growth to date, led by impressive double-digit growth in Fine Fragrance as well as strong growth in Consumer Fragrance and Ingredients.
Health & Bioscience has seen strong demand in key focus areas including Home & Personal Care, Animal Nutrition and Cultures & Food Enzymes.
As you know, we are in the process of selling our Microbial Control unit, which has continued to experience headwinds through this year but has rebounded from COVID-impacted lows with growth in both Q2 and Q3.
This divestiture should further enhance the performance of this important division.
Pharma Solutions, despite significant challenges, is flat so far for the year.
Supply chain challenges have had an outsized impact on this division throughout the year.
While we have seen encouraging growth in our Industrial business, the division still struggles to meet customer demand due to raw material availability challenges and logistics issues.
Now on Slide 9, you will see that we have outlined some of the factors influencing the growth and profitability of each of our four divisions so far this year.
As I previously mentioned, Nourish has had a strong year with Flavors and Ingredients experiencing double-digit growth.
We have been working hard in our execution to manage volume and cost to limit margin impact from higher raw material costs, which continued to be a headwind on our profitability.
While we have seen some margin impact of about 20 basis points in the year, we are proud of how our execution has mitigated much of the negative headwinds, while delivering meaningful growth.
Our team has did an exceptional job increasing prices to combat inflationary pressures, something that will continue to be critical as we move forward.
In Health & Bioscience, we mentioned broad-based growth across the markets, but here, we are seeing significant margin impacts from higher logistic costs.
As shared on our second quarter call, part of this that freight rates have increased significantly, but also we are having higher logistic costs to balance robust customer demand and available capacity.
We have increased capacity investments in this business to support long-term growth, investing in R&D and plant technology to increase output later this year and into 2022.
The Scent division has certainly realized the strongest, all-around bounce back as consumer demand rises across end markets.
Notably, Fine Fragrances alone has realized 36% growth year-to-date with double-digit growth in Cosmetic Active and continued solid performance in Consumer Fragrances.
At the time, sales profitability expansion of 110 basis points has been led by higher volume, favorable mix and higher productivity.
As I mentioned, Pharma Solutions was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demand.
These challenges, including supply and logistic constraints and ongoing inflation have, in turn, significantly pressured our margin compared to the first nine months of 2020.
Moving to the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics, and we'll continue to prioritize returning our Pharma Solutions business to the profitability we know is achievable.
And in the fourth quarter, we're expecting year-over-year top and bottom line performance to improve.
As we have been talking about today, IFF is realizing very strong sales momentum across our business.
This is a reflection of the powerful new position we have created through our combination with the N&B business and a compelling value proposition we can offer to our customers.
While we are pleased to put many of the gross headwinds related to the pandemic behind us, it is important to understand that our growth this year is, in fact, meaningful above pre-pandemic results.
If you look at the total business, you will see that on a comparable 9-month pro forma basis, the new IFF has realized 9% sales growth over 2019 results.
This strength is broad-based too.
Each segment is realizing strong growth above pre-pandemic levels.
Nourish is a business that was particularly hard hit through the pandemic, is now strongly growing with sales growth of 9% compared to pro forma 2019 9-month period.
And important, especially given that much of the integration work is coming from within this division, these results showcase how our position in the market has been fundamentally strengthened through the merger and how our teams are delivering the full potential of IFF to our customers.
Moving to Slide 11, I would like to discuss the strong progress we have made in terms of synergy realization.
For just nine months, since completing our merger with N&B, our synergy progress reaffirms the tremendous opportunity we have in front of us as a combined company.
Having received significant and highly encouraging positive feedback from our customers, along with persistent robust customer demand, we are confident in our ability to meet our revenue target.
To date, revenue synergies have started to contribute to our top line performance, and we are pleased that our project pipeline is strong and growing.
In the first nine months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target with one quarter to go.
This was largely a result of the comprehensive savings programs we have implemented, where we are leveraging our increased scale and optimizing our organization.
I'm confident that we will more than exceed our $45 million year one synergy target.
And I'm encouraged by the continued progress we are making toward achieving our 3-year run rate of cost synergy target of $300 million.
His background is perfect, but there are two areas I think really stand out.
First, he brings tremendous depth with private and public companies and leading finance teams to enhance discipline and build processes that drive toward a goal of shareholder value creation.
He has time and time again shown an ability to help businesses accelerate top line growth while driving margin expansion.
In this way, he consistently implements productivity initiatives with lasting impact.
Second, he has been through several large-scale M&A integrations with a track record of strong success.
As we continue to execute on our multiyear transformational integration, this experience is invaluable.
Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community.
And the most common questions I've been asked is why did I join IFF and what are my near-term priorities.
Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction.
There were three very compelling reasons for me to join IFF.
First, and perhaps most importantly, IFF is a company that is truly making a difference in helping solve some of the world's biggest challenges.
We are delivering reliable, innovative and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions and creating a more sustainable environment.
Second, the industry has very attractive organic growth characteristics, benefiting from continued strong consumer tailwinds from increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets and new consumer needs presented by aging demographics in developed markets.
I also believe that scale will become an important basis of competitive advantage as customers demand leading ESG platforms, increased innovation and speed to market, global supply chain resiliency and help in navigating increasingly complex regulations.
Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry-leading platform.
And since joining IFF, I've tried to immerse myself in the business completely, visiting sites, meeting with our business and operations teams and spending time at our R&D and creative centers.
I've also prioritized hearing from you, our investors and analysts.
And frankly, today, I'm even more bullish on the strength of IFF's global capabilities and the tremendous long-term potential we have to drive strong top and bottom line growth.
Relative to my near-term priorities, I have four primary areas of focus.
By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses.
Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital.
A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity.
And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining.
In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you.
With that, I'd now like to provide an overview of our consolidated third quarter results.
In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division and strong increases in both Scent and Health & Biosciences.
In terms of contribution, volume performance was the primary driver of our growth as pricing represented approximately two percentage points in the quarter.
Though our gross margin continued to be challenged by inflationary pressures, it was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%.
And while we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points as our pricing actions recovered only about 65% of our raw material increases or approximately 50% in the third quarter when we include raw material, logistics and energy increases.
As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis but expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization.
Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of $1.47.
On the next few slides, I will dive deeper into the third quarter financial results for each of our four divisions.
Turning to Slide 13, I'll start with our Nourish division, which had an exceptional quarter.
In Q3, Nourish achieved 17% year-over-year sales growth or 15% on a currency-neutral basis, driven by robust double-digit growth in Flavors for the second consecutive quarter.
Ingredients also grew double digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosics, LPG and food protection, increasing double digits.
Food Design also grew double digits, led by Food Service, where pandemic-related restrictions continue to be lifted with away-from-home consumer behaviors returning to more typical levels.
As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points.
On Slide 14, you'll see that our Health & Biosciences division saw year-over-year sales growth of 7% or 5% on a currency-neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures & Food Enzymes.
Our Health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a 2-year basis.
As Andreas mentioned earlier, inflationary pressures and higher logistics and energy costs to keep up with the robust customer demand has challenged our margins across our business, with H&B particularly impacted, which drove an operating EBITDA decrease of 12%.
Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher air freight volumes, where we have increased intercompany shipments to manage available capacity.
As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output.
Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin.
Turning now to Slide 15.
Our Scent division continues to perform extremely well and experienced strong growth, achieving 10% year-over-year growth or 9% growth on a currency-neutral basis.
This performance was driven by Fine Fragrances' continued rebound, which grew approximately 36%, led by new customer wins and improved volumes.
Our Ingredients category also continues to perform well and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter led by strong performance in both Cosmetic Actives and Fragrance Ingredients.
While our Consumer Fragrances business saw modest low single-digit growth against a strong double-digit year ago comparison, this is a marked improvement from Q2, and we expect further growth as we move forward.
On a 2-year average basis, Consumer Fragrance remained strong at 9% in the third quarter.
Scent also experienced adjusted operating EBITDA growth of 10%, driven by strong volume growth and favorable mix.
Margin was down modestly due to higher raw materials and logistics costs, a trend we see continuing.
I will provide more context shortly.
Lastly, in our Pharma Solutions business, we saw a currency-neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistics disruptions, which have made it challenging to meet persistent and growing customer demand.
While Industrials has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison.
The division's adjusted operating EBITDA and margin also continue to be impacted by higher sourcing, logistics and manufacturing costs.
We also continue to see the impact of force majeures and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines.
While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic and as Andreas mentioned earlier, we remain focused on returning the division to profitability as these industry conditions stabilize.
Now on Slide 17, I would like to review our cash flow position and leverage dynamics for the first nine months of 2021, both of which remain a top priority for us.
So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion.
As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities.
Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back half weighted.
From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target, with our cash and cash equivalents finishing at $794 million, including $122 million restricted cash, with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan.
Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt to credit-adjusted EBITDA.
With our continued strong cash flow generation, including proceeds from divested noncore businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than three times net debt to EBITDA within 20 to 36 months, post-transaction close.
Turning to Slide 18.
I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year.
As I mentioned earlier, IFF and the industry at large have seen significant year-over-year inflation increases, which have been accelerating in the recent quarter.
The inflationary pressures we are seeing today are significant.
Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October.
The price of wheat is up almost 40% in the last 12 months through October.
Brent crude prices have more than doubled over the past 12 months to the highest level since October 2018.
In the U.S., natural gas prices are up 100% from a year ago and in the U.K. grew up about 500%.
And transportation rates have increased significantly given the high demand and limited capacity to ship.
Across the raw materials, logistics and energy markets, like many industries around the world, we have seen costs accelerate each quarter, which has led to our margins being adversely impacted.
For example, in the first half of 2021, gross margin was down about 150 basis points, while in the third quarter, we were down about 210 basis points.
As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022.
Consequently, this will require us to successfully implement significant pricing actions across each of our businesses as well as improve our sourcing efficiencies, accelerate operational improvements and capture targeted integration synergies to drive profit growth.
Now moving to Slide 19.
I would like to share what this means for our consolidated financial outlook.
For the full year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand.
For the full year 2021, we are targeting $11.55 billion in total revenue or approximately 8.5% growth, up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter.
We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid.
As mentioned, unprecedented macro supply chain challenges and inflationary pressures continue to impact our industry, and we do expect this to continue in the foreseeable future.
While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures.
And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21%, down from approximately 21.5% that was forecasted in September.
About half of this reduction is due to lower gross margin in the third quarter and the other half stemming from higher cost trends we see in the fourth quarter.
For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges.
We also adjusted our capex spend outlook down as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses.
Overall, we are pleased of the progress we've made to date, strong top line growth and a commitment to meet near-term macro cost pressures, and we're confident that IFF is on the right path and poised for continued success across our core business.
Before I wrap it up, I'd like to reiterate how proud I am of IFF and our thousands of employees around the world who have showcased a remarkable resilience toward an evolving and continuously uncertain industry environment.
We have continued to deliver strong year-over-year sales and profit growth, and I'm confident that with our top-notch financial and operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile, while continuing to deliver for both our shareholders and our customers.
Q4 is off to a solid start, and I know that our momentum will propel us to achieve strong sales growth for the full year and bring us another step closer to achieving our synergy targets.
In sum, it is clear to me that IFF is in an incredible strong position.
We knew entering this year that the new IFF was poised to change our industry.
But to do so, we had to execute.
As we look at industry-leading sales growth for the full year, I'm just so proud of how everyone here stepped up and executed on our vision and delivered against our potential.
IFF is once again the clear leader of this field, creating another iconic chapter in this company's 132-year legacy.
This core strength of the business is why I felt now was the perfect time to start the transition to find IFF's next CEO.
I have every confidence that now is the right time to let the next chapter of IFF legacy begin.
As we announced, the search has begun for my successor, and we expect that person to be in place by early 2022.
I'm fully committed to a seamless transition and look forward to talking to you all about this more in the near future.

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qtrly adjusted earnings per share except amortization $1.47.
achieves strong double-digit sales growth in quarter; on-track to grow 8.5% for full year 2021.

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