International Flavors & Fragrances Inc (IFF)

2025 Outlook
Q: How are you thinking about 2025 in terms of volumes, prices, compensation expenses, and cost savings? -
A: Management indicated it's too early to provide specifics for 2025, as they normally guide in February and are finalizing their budgeting process. However, they mentioned that there will be over $100 million in incentive compensation reset in 2025, which is a positive for next year. They continue to focus on customer engagement, innovation, and productivity to drive performance, and are pleased with how the teams are executing. -

Margin Trends and Incentive Compensation Impact
Q: Why does your Q4 EBITDA outlook imply a year-over-year decline despite positive growth? -
A: The key factor affecting Q4 EBITDA is the significant year-over-year increase in incentive compensation. Last year, variable compensation was below 100%, whereas this year it's materially above 100%, resulting in an incremental $100 million in variable comp, with nearly $40 million impacting Q4 alone. This normalization has a substantial effect on EBITDA. Productivity is offsetting modest inflation and investment, but the incentive comp growth is the biggest impact. -

Functional Ingredients Turnaround
Q: Can you provide an update on the Functional Ingredients turnaround and order activity? -
A: Management reported very good progression in the Functional Ingredients business, expecting momentum to continue into next year. They've addressed service issues, achieving extremely high service levels, reinvested deflation to become more competitive, and reenergized the sales pipeline to win back customers and new business. As a result, they've achieved mid-single-digit volume growth this year, regaining about half of the lost volume, and expanded both gross margin and EBITDA significantly. They are restructuring the global supply chain footprint to move the business back to mid-teens EBITDA margins, currently at approximately 12–13% this year, aiming for 15%+ in coming years. -

Innovation Pipeline and R&D Progress
Q: How is the progress on the R&D organization and innovation pipeline impacting future sales? -
A: Management is pleased with the progress, with each business unit developing strong strategies and clear priorities. Embedding R&D within business units has enhanced focus and connection to customer needs, energizing the R&D teams. For example, the Scent team is strengthening its pipeline in naturals, synthetic chemistry, and biotech molecules. They expect the main impact of new projects to materialize in 2026 and beyond, but the current energy and strengthened pipeline are already benefiting discussions with customers and will have positive effects in 2025. -

Scent Business Growth Sustainability
Q: How long can the strong growth in the Scent business, particularly Fine Fragrance, last? -
A: Fine Fragrance has experienced explosive growth since COVID, driven by factors like new brand launches, social media influence, and the rise of digital channels. The use of Fine Fragrance has expanded beyond special occasions. Management believes this growth will continue to some degree due to new channels, brand opportunities, and regional expansion. They are winning market share through investments in new geographies, adding perfumers, and new creative centers, not only in Scent but across higher-growth, higher-margin businesses. -

Segment Reporting and Volume Strength
Q: Are you on track to report Flavors separately from Functional Ingredients next year, and where is volume strength coming from? -
A: They are on track to separate and report Flavors (to be called Taste) and Functional Ingredients (to be called Food Ingredients) as completely separate businesses, starting in the first quarter of next year. Organizational changes have been implemented, including naming two presidents for the new segments. Volume strength in the third quarter was broad-based across businesses, with strong performances in Flavors, Scent, and Health & Biosciences. They believe they are gaining market share due to renewed focus on innovation, commercial excellence, and a new operating model. -

Free Cash Flow Guidance
Q: Is there an update to the adjusted free cash flow guidance for the year? -
A: Management expects full-year free cash flow to remain largely unchanged from the previous guidance. While the earnings trajectory is higher, they are building more working capital, almost exclusively related to higher sales sitting in receivables. Therefore, they are in a net-neutral position for the full year, with no change in the forecast. -

Price/Cost Dynamics and Tariffs
Q: What are your expectations for price cost dynamics, and how are you planning for potential tariff scenarios? -
A: The price/cost dynamic is expected to be relatively flat, with some continued deflation this year but not as much as last year. The early outlook for next year is stable, with certain input costs increasing and others decreasing. Regarding tariffs, it's difficult to forecast currently. Past experiences, like during the Trump administration, focused on China. If tariffs escalate, it might be advantageous due to their global footprint and ability to react, particularly given the competitive environment in China. They'll provide more guidance in February. -

Customer Sentiment and Demand Outlook for 2025
Q: What are you seeing from customers regarding demand outlook for 2025? -
A: They're not seeing strong indications of improvement from customers for 2025. However, they're taking aggressive actions to strengthen their position with heavy customer focus and innovation. As customers face slowing end markets, they seek more innovation to drive growth, which benefits IFF. Management has engaged extensively with customers globally, noting energy in their teams and bullishness from customers in high-growth markets like India and Indonesia. They believe they're putting the right initiatives in place to grow above the market, despite tough conditions. -

Margins and ROIC Outlook
Q: What do you think is the right margin structure and ROIC for your portfolio longer term once Pharma is divested? -
A: Management is focused on driving continuous improvement in both margins and ROIC, tracking them closely by business. Levers such as customer focus, innovation, and productivity are helping to improve these metrics. They're prioritizing capital allocation to higher-margin and higher-return businesses like Scent, Taste (Flavors), and Health & Biosciences. They're also making good progress on turning around Functional Ingredients. Overall, they aim to continuously improve margins and ROIC over time. -

Fourth Quarter Guidance and Trends
Q: Can you explain the assumptions behind your Q4 guidance versus Q3, which seems lower than expected? -
A: The fourth quarter has started as expected, but management is cautious due to a pattern of strong starts and then deceleration through the quarter, with limited visibility into December. They are cautious about potential customer inventory adjustments at year-end, as seen in previous years. Their goal is to ensure they deliver on commitments, but they acknowledge the potential for adjustments impacting Q4 results. -

Nourish Margins Sequential Decline
Q: What drove the sequential decline in Nourish margins despite strong top-line performance, and what are the expectations for Q4? -
A: Typically, Nourish's highest margin is in Q2 due to positive mix entering the summer season. From Q2 to Q3, margins contract slightly as the mix normalizes and investments in the business increase, impacting margins. Looking into Q4, seasonality leads to lower volumes for Nourish, and they expect margin degradation of 50 to 90 basis points quarter-over-quarter due to this seasonality. -

Growth Versus Slower End Markets
Q: How do you explain strong organic growth when end markets are slower, especially in Scent? -
A: Part of the growth is due to a bounce-back effect from last year's destocking. In Scent, particularly Fine Fragrance, the category has grown significantly since COVID due to new brands, social media, digital channels, and expanded usage beyond special occasions. Management believes the growth will continue due to new channels and opportunities and that they are gaining market share through investments in perfumers, creative centers, and innovation. -

Regional Growth Variations
Q: How has growth varied across regions and segments, especially in China and India? -
A: Growth has been strong across all businesses. China shows some improvement but remains choppy due to local market conditions. India is experiencing extremely strong growth. Management is doubling down on investments in India to capture growth opportunities, including building creative centers to support both global and local customers. -

Health & Biosciences Performance
Q: Can you provide more details on Health & Biosciences results and what to consider entering 2025? -
A: All businesses within Health & Biosciences performed well in the quarter. Probiotics bounced back significantly after softness in previous years, partly due to China, their second-largest market. The third quarter saw strong performance across the board in this segment. -