IFF Reports Third Quarter 2022 Results

IFF (NYSE: IFF) reported financial results for the third quarter ended September 30, 2022.

Third Quarter 2022 Consolidated Summary:

First Nine Months 2022 Consolidated Summary:

Impairment of Goodwill

The Company has determined that for the third quarter of 2022 the carrying value of the Health & Biosciences reporting unit exceeded its fair value and recorded a goodwill impairment charge of $2.25 billion in the Consolidated Statements of (Loss) Income and Comprehensive Loss for the three and nine months ended September 30, 2022. The primary drivers of the goodwill impairment are related to on-going increases in interest rates and lower business projections due to adverse macroeconomic impacts on volume, continued cost inflation, and unfavorable foreign exchange rate fluctuations.

Management Commentary

“We delivered solid results in the third quarter in the context of a challenging operating environment," said IFF CEO Frank Clyburn. “Through the ongoing efforts of our teams around the world, we successfully implemented pricing actions and generated strong productivity that drove our top and bottom-line performance. On a year-to-date basis, we are executing on our pricing, productivity and divestiture objectives, which has led to strong sales momentum, steady advancements in profitability and an overall improvement in our leverage profile. As we begin working through the fourth quarter, we are proceeding cautiously as market conditions have become more challenging. In this context, we are keenly focused on the items under our control, including advancing our innovation efforts to support our customers and driving greater cost efficiencies, to ensure we deliver on our commitments and maximize value for our shareholders.”

Third Quarter 2022 Consolidated Financial Results

• Reported net sales for the third quarter were $3.06 billion, flat versus the prior-year period. On a comparable basis², currency neutral sales increased 10% versus the prior-year period, led by double-digit growth in Nourish and Pharma Solutions.
• Loss before taxes on a reported basis for the third quarter was $(2.04) billion. Adjusted operating EBITDA for the third quarter was $612 million. On a comparable basis², currency neutral adjusted operating EBITDA grew 3% versus the prior-year period, as strong pricing actions and productivity gains more than offset lower volumes.
• Reported earnings per share (EPS) for the third quarter was $(8.60). Adjusted EPS excluding amortization was $1.36 per diluted share.
• Cash flows from operations at the end of the third quarter was $189 million, and free cash flow defined as cash flows from operations less capital expenditures totaled $(155) million, as higher inventory value as a result of inflationary pressures more than offset strong improvements in accounts payable. Net debt to credit adjusted EBITDA at the end of the third quarter improved to 3.9x versus 4.4x in the second quarter of 2022.

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1</sup> Schedules at the end of this release contain reconciliations of reported GAAP to Non-GAAP metrics. See Use of Non-GAAP Financial Measures for explanations of our Non-GAAP metrics.

² Comparable results for the third quarter exclude the impact of divestitures in the prior and current year periods and acquisitions in the current year period.

Third Quarter 2022 Segment Summary: Growth vs. Prior Year

Nourish Segment

• On a reported basis, third quarter sales were $1.70 billion. On a comparable basis² , currency neutral sales grew 10% led by double-digit growth in Food Designs and Ingredients.
• Nourish adjusted operating EBITDA was $287 million and adjusted operating EBITDA margin was 16.9% in the third quarter. On a comparable basis², currency neutral adjusted operating EBITDA declined 4% as strong price increases and productivity gains were offset by lower volumes.

Health & Biosciences Segment

• On a reported basis, third quarter sales were $512 million. On a comparable basis² , currency neutral sales increased 3% with growth in Cultures & Food Enzymes, Health, Home & Personal Care and Animal Nutrition.
• Health & Biosciences adjusted operating EBITDA was $137 million and adjusted operating EBITDA margin was 26.8% in the third quarter. On a comparable basis², currency neutral adjusted operating EBITDA declined 1% as price increases and productivity gains were principally offset by lower volumes.

Scent Segment

• On a reported basis, third quarter sales were $591 million. On a comparable basis^2, currency neutral sales increased 9% with mid-teen growth in Fine Fragrance and Fragrance Ingredients and a high single-digit increase in Consumer Fragrance.
• Scent adjusted operating EBITDA was $119 million and adjusted operating EBITDA margin was 20.1% in the third quarter. On a comparable basis², currency neutral adjusted operating EBITDA grew 3% led by volume growth, price increases and productivity gains.

Pharma Solutions Segment

• On a reported basis, third quarter sales were $257 million. On a comparable basis², currency neutral sales increased 28% with strong double-digit growth in Pharma and Industrial.
• Pharma Solutions adjusted operating EBITDA was $69 million and adjusted operating EBITDA margin was 26.8% in the third quarter. On a comparable basis², currency neutral adjusted operating EBITDA grew 76% led by volume growth, price increases and productivity gains.

Financial Guidance

The Company expects full year 2022 sales to be approximately $12.4 billion to $12.5 billion (versus $12.6 billion to $13.0 billion previously), with an expected full year 2022 adjusted operating EBITDA to be in line and at the low-end of the Company's previous $2.5 billion to $2.6 billion range. The change in sales guidance is principally due to an unfavorable impact from foreign exchange and a more challenging operating environment.

The Company expects to deliver comparable currency neutral sales growth of 9% to 10% (versus 9% to 12% previously) for the full year 2022, with comparable currency neutral adjusted operating EBITDA growth to be in line and at the low-end of the Company's previous 4% to 8% range.

Based on current market foreign exchange rates, the Company expects that foreign exchange will negatively impact sales growth in 2022 by approximately 5 percentage points and adjusted operating EBITDA growth by approximately 6 percentage points.

Audio Webcast

A live webcast to discuss the Company’s third quarter 2022 financial results will be held on November 8, 2022, at 9:00 a.m. ET. The webcast and accompanying slide presentation may be accessed on the Company's IR website at ir.iff.com. For those unable to listen to the live webcast, a recorded version will be made available on the Company's website approximately one hour after the event and will remain available on IFF’s website for one year.

Cautionary Statement Under The Private Securities Litigation Reform Act of 1995

Statements in this press release, which are not historical facts or information, are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current assumptions, estimates and expectations including those concerning the impacts of COVID-19 and our plans to respond to its implications; the expected impact of global supply chain challenges; expectations regarding sales and profit for the fiscal year 2022, including the impact of foreign exchange, pricing actions, raw materials, energy and sourcing, logistics and manufacturing costs; expectations of the impact of inflationary pressures and the pricing actions to offset exposure to such impacts; the impact of high input costs, including commodities, raw materials, transportation and energy; our ability to drive cost discipline measures and the ability to recover margin to pre-inflation levels; the divestiture of our Microbial Control business and the progress of our portfolio optimization strategy, through non-core business divestitures and acquisitions, such as the Health Wright acquisition; our combination with N&B, including the expected benefits and synergies of the N&B Transaction and future opportunities for the combined company, the success of our integration efforts and ability to deliver on our synergy commitments as well as future opportunities for the combined company; the impact of global economic uncertainty on demand for consumer products; the growth potential of the markets in which we operate, including the emerging markets, expected capital expenditures in 2022, the expected costs and benefits of our ongoing optimization of our manufacturing operations, including the expected number of closings, expected cash flow and availability of capital resources to fund our operations and meet our debt service requirements; our ability to innovate and execute on specific consumer trends and demands; our ability enhance our innovation efforts and drive cost efficiencies; our ability to continue to generate value for, and return cash to, our shareholders.

These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in our business that could cause actual results and events to differ materially from those in the forward-looking statements. Certain of such forward-looking information may be identified by such terms as “expect,” “anticipate,” “believe,” “intend,” “outlook,” “may,” “estimate,” “should,” “predict” and similar terms or variations thereof. Such forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the Company, are not guarantees of future results or performance, and involve significant risks, uncertainties and other factors, including assumptions and projections, for all forward periods. Our actual results may differ materially from any future results expressed or implied by such forward-looking statements.

Such risks, uncertainties and other factors include, among others, the following: (1) inflationary trends in the price of our input costs, such as raw materials, transportation and energy; (2) supply chain disruptions, geopolitical developments, including the Russia-Ukraine conflict, or climate-change related events (including severe weather events) that may affect our suppliers or procurement of raw materials; (3) disruption in the development, manufacture, distribution or sale of our products from COVID-19 and other public health crises; (4) risks related to the integration of the N&B business, including whether we will realize the benefits anticipated from the merger in the expected time frame; (5) our ability to successfully establish and manage acquisitions, collaborations, joint ventures or partnerships, or the failure to close strategic transactions or divestments; (6) our ability to successfully market to our expanded and diverse customer base; (7) our substantial amount of indebtedness and its impact on our liquidity and ability to return capital to its shareholders; (8) our ability to effectively compete in our market and develop and introduce new products that meet customers’ needs; (9) our ability to retain key employees; (10) changes in demand from large multi-national customers due to increased competition and our ability to maintain “core list” status with customers; (11) our ability to successfully develop innovative and cost-effective products that allow customers to achieve their own profitability expectations; (12) disruption in the development, manufacture, distribution or sale of our products from natural disasters, public health crises, international conflicts, terrorist acts, labor strikes, political crisis, accidents and similar events; (13) the impact of a significant data breach or other disruption in our information technology systems, and our ability to comply with data protection laws in the U.S. and abroad; (14) volatility and increases in the price of raw materials, energy and transportation; (15) our ability to comply with, and the costs associated with compliance with, regulatory requirements and industry standards, including regarding product safety, quality, efficacy and environmental impact; (16) our ability to meet increasing customer, consumer, shareholder and regulatory focus on sustainability; (17) defect, quality issues (including product recalls), inadequate disclosure or misuse with respect to the products and capabilities; (18) our ability to react in a timely and cost-effective manner to changes in consumer preferences and demands, including increased awareness of health and wellness; (19) our ability to benefit from our investments and expansion in emerging markets; (20) the impact of currency fluctuations or devaluations in the principal foreign markets in which we operate; (21) economic, regulatory and political risks associated with our international operations; (22) the impact of global economic uncertainty on demand for consumer products; (23) our ability to comply with, and the costs associated with compliance with, U.S. and foreign environmental protection laws; (24) our ability to successfully manage our working capital and inventory balances; (25) the impact of the failure to comply with U.S. or foreign anti-corruption and anti-bribery laws and regulations, including the U.S. Foreign Corrupt Practices Act; (26) any impairment on our tangible or intangible long lived assets, including goodwill associated with the N&B merger and the acquisition of Frutarom; (27) our ability to protect our intellectual property rights; (28) the impact of the outcome of legal claims, regulatory investigations and litigation; (29) changes in market conditions or governmental regulations relating to our pension and postretirement obligations; (30) the impact of changes in federal, state, local and international tax legislation or policies, including the Tax Cuts and Jobs Act, with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes; (31) the impact of the United Kingdom’s departure from the European Union; (32) the impact of the phase out of the London Interbank Offered Rate (LIBOR) on interest expense; and (33) risks associated with our CEO transition, including the impact of employee hiring and retention.

The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for other factors that may cause actual results to differ materially from those projected by the Company. Please refer to Part I. Item 1A., Risk Factors, of the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2022 for additional information regarding factors that could affect our results of operations, financial condition and liquidity.

We intend our forward-looking statements to speak only as of the time of such statements and do not undertake or plan to update or revise them as more information becomes available or to reflect changes in expectations, assumptions or results. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this press release or included in our other periodic reports filed with the SEC could materially and adversely impact our operations and our future financial results. Any public statements or disclosures made by us following this press release that modify or impact any of the forward-looking statements contained in or accompanying this press release will be deemed to modify or supersede such outlook or other forward-looking statements in or accompanying this press release.

Use of Non-GAAP Financial Measures

We provide in this press release non-GAAP financial measures, including: (i) comparable currency neutral sales; (ii) adjusted operating EBITDA and comparable currency neutral adjusted operating EBITDA; (iii) adjusted operating EBITDA margin; (iv) adjusted EPS ex amortization; (v) free cash flow; and (vi) net debt to credit adjusted EBITDA.

Our non-GAAP financial measures are defined below.

Currency Neutral metrics eliminate the effects that result from translating non-U.S. currencies to U.S. dollars. We calculate currency neutral numbers by translating current year invoiced sale amounts at the exchange rates used for the corresponding prior year period. We use currency neutral results in our analysis of subsidiary or segment performance. We also use currency neutral numbers when analyzing our performance against our competitors.

Adjusted operating EBITDA and adjusted operating EBITDA margin exclude depreciation and amortization expense, interest expense, other income, net, restructuring and other charges and certain non-recurring items such as acquisition related costs, gains on sale of assets, impairment of goodwill, impairment of long-lived assets, shareholder activism related costs, business divestiture costs, employee separation costs, Global Shared Services implementation costs, Frutarom acquisition related costs, N&B inventory step-up costs, N&B transaction related costs and integration related costs.

Adjusted EPS ex Amortization excludes the impact of non-operational items including, acquisition related costs, restructuring and other charges, gains on sale of assets, impairment of goodwill, impairment of long-lived assets, shareholder activism related costs, business divestiture costs, gains on business disposal, employee separation costs, Global Shared Services implementation costs, pension income adjustment, Frutarom acquisition related costs, N&B inventory step-up costs, N&B transaction related costs, integration related costs, redemption value adjustment to EPS and non-cash items including the amortization of acquisition related intangible assets.

Free Cash Flow is operating cash flow (i.e. cash flow from operations) less capital expenditures.

Net debt to credit adjusted EBITDA is the leverage ratio used in our credit agreements and defined as net debt (which is debt for borrowed money less cash and cash equivalents) divided by the trailing 12-month credit adjusted EBITDA. Credit adjusted EBITDA is defined as income (loss) before income taxes, depreciation and amortization expense, interest expense, specified items and non-cash items.

Comparable results for the third quarter excludes the impact of divestitures in the prior year period and acquisitions in the current year period.

These non-GAAP measures are intended to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. In discussing our historical and expected future results and financial condition, we believe it is meaningful for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of the Company’s results under GAAP and may not be comparable to other companies’ calculation of such metrics.

The Company cannot reconcile its expected Adjusted Operating EBITDA under "Financial Guidance" without unreasonable effort because certain items that impact net income and other reconciling metrics are out of the Company's control and/or cannot be reasonably predicted at this time. These items include but are not limited to gains (losses) on sale of assets, shareholder activism related costs, business divestiture costs, employee separation costs, N&B inventory step-up costs, N&B transaction related costs, integration related costs and the impact of the merger with N&B.

Welcome to IFF

At IFF (NYSE: IFF), an industry leader in food, beverage, scent, health and biosciences, science and creativity meet to create essential solutions for a better world – from global icons to unexpected innovations and experiences. With the beauty of art and the precision of science, we are an international collective of thinkers who partners with customers to bring scents, tastes, experiences, ingredients and solutions for products the world craves. Together, we will do more good for people and planet. Learn more at iff.com, Twitter, Facebook, Instagram, and LinkedIn.

International Flavors & Fragrances Inc.

Consolidated Statements of (Loss) Income

(Amounts in millions except per share data)

(Unaudited)

International Flavors & Fragrances Inc.

Condensed Consolidated Balance Sheets

(Amounts in millions)

(Unaudited)

International Flavors & Fragrances Inc.

Consolidated Statements of Cash Flows

(Amounts in millions)

(Unaudited)

The following table reconciles cash, cash equivalents and restricted cash between the Company's statement of cash flows for the periods ended September 30, 2022 and September 30, 2021 to the amounts reported on the Company's balance sheet:

International Flavors & Fragrances Inc.

Reportable Segment Performance

(Amounts in millions)

(Unaudited)

International Flavors & Fragrances Inc.

GAAP to Non-GAAP Reconciliation

(Unaudited)

The following information and schedules provide reconciliation information between reported GAAP amounts and non-GAAP certain adjusted amounts. This information and schedules are not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

International Flavors & Fragrances Inc.

GAAP to Non-GAAP Reconciliation

(Unaudited)

The following information and schedules provide reconciliation information between reported GAAP amounts and non-GAAP certain adjusted amounts. This information and schedules are not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

International Flavors & Fragrances Inc.

GAAP to Non-GAAP Reconciliation

(Unaudited)

The following information and schedules provide reconciliation information between reported GAAP amounts and non-GAAP certain adjusted amounts. This information and schedules are not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

International Flavors & Fragrances Inc.

GAAP to Non-GAAP Reconciliation

(Unaudited)

The following information and schedules provide reconciliation information between reported GAAP amounts and non-GAAP certain adjusted amounts. This information and schedules are not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

International Flavors & Fragrances Inc.

Debt Covenants

(Amounts in millions)

(Unaudited)

The following information and schedules provide reconciliation information between reported GAAP amounts and non-GAAP certain adjusted amounts. This information and schedules are not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

International Flavors & Fragrances Inc.

Comparable Reportable Segment Performance

(Amounts in millions)

(Unaudited)

The following information and schedule provides reconciliation information between reported GAAP amounts and non-GAAP certain adjusted amounts. This information and schedule is not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.