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    INTERNATIONAL FLAVORS & FRAGRANCES (IFF)

    Q2 2024 Earnings Summary

    Reported on Aug 7, 2024 (After Market Close)
    Pre-Earnings Price$94.21Last close (Aug 7, 2024)
    Post-Earnings Price$94.94Open (Aug 8, 2024)
    Price Change
    $0.73(+0.77%)

    What went well

    • IFF's Functional Ingredients business is showing significant improvement, with volume recovery ahead of the market, aggressive productivity measures, and margin improvement goals being achieved, moving EBITDA margins from high single digits to mid-teens.
    • The Health business has returned to growth in Q2, driven by strong performance in probiotics, addition of significant commercial talent, and an exciting pipeline expected to drive future growth.
    • IFF raised its full-year free cash flow guidance to $600 million from $500 million, reflecting stronger earnings expectations and improved operational performance.

    What went wrong

    • Functional Ingredients business requires substantial turnaround efforts and may take over a year to reach desired profitability, as it previously dropped to high single-digit EBITDA margins and is only expected to reach low teens this year. ,
    • No incremental improvement in consumer markets, with Food & Beverage and Home and Personal Care showing no strengthening, and the company expressing concerns as "the market continues to give us pause because we're just not seeing a lot of strength in the consumer."
    • Volume growth may not be sustainable, as the company notes a pattern where volumes diminish throughout the quarter, with the third month typically being the softest, indicating potential volatility and weak demand trends.

    Q&A Summary

    1. Second Half Volume and EBITDA Outlook
      Q: Why will EBITDA and volumes decline in H2?
      A: Management expects modest volume growth in the second half, especially in Q4 where volumes are forecasted to be flat year-over-year. The decline in EBITDA is due to lower revenues from seasonal factors and an additional $20–$30 million in OpEx investments to accelerate growth in 2025 and 2026.

    2. R&D and CapEx Investments
      Q: Are you increasing R&D and CapEx spending?
      A: Yes, they are increasing R&D spending in Health & Biosciences, Scent, and Flavors, including $20–$30 million in OpEx investments this year. CapEx will also increase to add capacity, especially in Health & Biosciences, to support aggressive growth plans.

    3. Functional Ingredients Margin Improvement
      Q: How is the Functional Ingredients business improving margins?
      A: The business is showing progress, with gross margins up about 250 basis points in Q2. EBITDA margins are tracking towards the low teens this year, aiming for mid-teens in the future. Improvements are driven by volume recovery, innovation, and cost structure initiatives.

    4. Health Business Growth
      Q: What's driving growth in the Health business?
      A: Strong performance in probiotics is driven by increasing emphasis on health and gut health, especially in the U.S. market. They have added significant commercial capability and are excited about a strong pipeline for future growth.

    5. Free Cash Flow Guidance
      Q: Any update to free cash flow guidance?
      A: The company is still guiding full-year free cash flow of $600 million, including about $350 million in one-time Reg G items. Adjusting for these items, free cash flow would be around $950 million, consistent with previous guidance.

    6. Fourth Quarter Volume Outlook
      Q: Why is Q4 volume expected to be flat?
      A: Management has limited visibility into Q4 but is cautious due to lack of improvement in consumer demand and no signs of restocking by customers. They forecast Q4 volumes to be flattish year-over-year.

    7. Potential Divestitures
      Q: Are more divestitures planned?
      A: Currently, they are focused on the divestiture of the Pharma business and are concentrating on performance and strengthening the remaining businesses for 2024 and beyond.

    8. Balance Sheet and Strategic Plans
      Q: What are your plans once the balance sheet improves?
      A: They plan to strengthen Health & Biosciences, Flavors, and Scent businesses through organic investments and may consider bolt-on acquisitions next year to complement their capabilities.

    9. Guidance for Q3
      Q: Did you provide guidance for Q3?
      A: Yes, they guided Q3 revenue between $2.75–$2.85 billion and EBITDA of $520–$540 million.

    10. Impact of CPG Discounting and Innovation
      Q: Will CPG discounting boost your volumes?
      A: They are not seeing restocking or consumer strength but note that CPGs are focusing on innovation to drive growth, which benefits their business through collaborative efforts on new products.

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