Please stand by, your program is about to begin. At this time, I would like to welcome everyone to the IFF Third Quarter 2021 earnings conference call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. . Participants will be announced by their name and Company. In order to give all participants an opportunity to ask their questions, we request a limit of 1 question per person. I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin.

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's third quarter 2021 conference call. Yesterday, we issued a press release announcing our third quarter financial results and our outlook for the remainder of 2021. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. I ask that you take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the Company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from our forward-looking statements, please refer to our cautionary statement and risk factors stated in yesterday's press release. Today's presentation will include non-GAAP financial measures which exclude those items that we believe affect comparability. 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 3 months of legacy IFF results, and 3 months N&B results. And for 9 months year-to-date, defined as 9 months of legacy IFF, January to September, and 8 months of N&B, February to September in both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February 1st, 2021. With me in the call today is our Chairman and CEO, Andreas Fibig and our recently appointed Executive Vice President and CFO, Glenn Richter. We will begin today's call with our prepared remarks, and then we'll take any questions that you may have at the end. I would now like to turn the call over to Andreas.

Thank you, Mike. Good morning, good afternoon and good evening, everyone. And I thank you for joining us today. Before I dive into our performance results, I would like to take a moment to thank all of our dedicated colleagues throughout the world, who have continued to work tirelessly in a challenging environment to fuel the global consumer goods supply chain and meet our customer’s needs. I can't thank each and every one of you enough for your hard work, dedication, and focus. I also want to take a moment and welcome Glenn Richter, who is joining us on today's call for the first time. 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. I also want to thank Rustom for his leadership and contributions during his time as IFF's CFO. Rustom played an important role in our combination with N&B, and for that we are immensely grateful. He has been important putting IFF in the strong position it is today. We wish him all the best in his future endeavors. On today's call, I will begin by providing an overview of year-to - date performance, including the progress we have made so far on our integration. I will then turn it over to Glenn (ph) who will provide a more detailed look at our third quarter financial results. Before we conclude today's call with a question-and-answer session, Glenn (ph) 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 6 by discussing our financial highlights for the first 9…

Thank you for the warm welcome, Andreas, and good morning, afternoon and evening to everyone. 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 3 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're 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 benefitting 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 immersed myself in the business completely. Visiting sites, meeting with our business and operations teams, and spending time at our R&D in 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…

Thank you, Glenn. 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. They have continued to deliver strong year-over-year sales and profit growth and I'm confident that with our top notch financial operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile by 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 some, 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 to transition to find IFF's next CEO. I have every confidence that now is the right time to let the next chapter of IFF's 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. Thank you all for your support. With that, I would like to open the call for questions. Thank you.

. In order to give all participants an opportunity to ask their questions, we request a limit of 1 question per person. Our first question comes from Heidi Vesterinen, with Exane BNP Paribas. Your line is open.

Good morning, everyone. I have a question for Glenn, actually, and thanks for the info on why you joined IFF. What do you think of IFF's long-term targets rate? Thanks.

Yeah, good morning. Thanks for the question. I would have to break them down relative to component parts. First of all, relative to topline, as we mentioned, we're very pleased for tracking extremely well versus the long-term targets and then when you take a look at how we're tracking versus competition, which is another great indicator. We're actually very pleased in terms of yards. So, we check that we'd say relative to our deleveraging target, getting below 3 times by year 3. We are feeling very comfortable with that. Combination of the cash flow generation from the business remains strong. And as you know, we've announced a couple of divestitures and we'll continue to look at other non-core businesses. So, I would check both that -- both the deleverage as well as our free cash flow. The area that really needs to work is around our long-term margin objective. As you know, we have a 26% EBITDA margin target that was easier when we started off with a higher number at the beginning of the year and versus the most recent guidance. We're now about 500 basis points off that relative to the guidance this year. So, as we approach our '22 plan, we're spending energy thinking about that multiyear target. I think structurally, there are couple of factors that we think still play in the favor of not only increasing where we are from an EBITDA margin, but potentially getting us back to that. 1, is clearly the biggest impact this year unexpected, has been the inflationary environment. And we thought would talk more about this, but we lost about 200 basis points this year at our margin, relative to inflation, net of what we expect to price, and in addition, we've had some pockets of higher use of freight costs in a couple of our business. So that's about 200 basis points. We still feel very confident on achieving the long-term synergy objectives, the cost synergies. And I would submit there are probably additional productivity in the business. I believe we strip out the material side of our business. We have over $4 billion of costs between our manufacturing operations and then our S&A, and I think we just sort of begun to scratch the surface relative to that with our synergy targets. That being said, we are working very intently right now to sort of think about -- and actually -- our pricing initiatives and also think about a longer-term productivity as well.

Thank you.

Thank you.

Our next question comes from Matthew DeYoe with Bank of America. Your line is open.

Good morning. I appreciate all the added detail in the slides on the cost side, but just trying to understand better the margin contraction a bit, and how we got to the point where we're cutting the guidance again. If I look at 3Q and then moving into 4Q, could you talk a little bit about how costs are coming in versus where you had budgeted them. And on that end, can you push price to offset logistics costs for businesses that you've just won recently, or is this just a cost of doing business in that margin component is going to come down or improve when cost and capacity come out.

Yes. So good morning, Matthew. This is Glenn. I'll start with answering and maybe turn it over to Andreas. In general, the biggest hit as I just mentioned, on our business this year has basically been material costs, broadly impacting our business. Of the 200 basis points, it has impacted us and anticipated impact is about 200 basis points in terms of margin. About 2/3 of that is related to rate increases. So that's a combination of our raw materials, our energy, and our logistics costs. What's happening relative to each of those buckets is earlier in the year, we were thinking mid-single-digit relative to inflation and raw materials. It's now high-single-digit approaching 10% in terms of the annual inflation. We're seeing logistics costs continue to accelerate that to the mid-teens. And then energy, as everyone is well aware, has been extremely volatile, and it's been trending up about 30% year-over-year. By the way, the planning posture for '21 is we really had relatively flat inflationary pressure, so we didn't expect at any of our material costs to go up. So, we have a much, much more significant impact relative to what we'd anticipated just a couple of quarters ago. I would say the rest of our cost structure is working quite well. We have actually delivered strong results against our R&D sales, and administrative expenses were actually exceeding plan relative to our costs, so we're actually lower at that point. In general, manufacturing is working on productivity, although constraints in our system have limited some of the capacity gains, we can get and some of the efficiencies out of the system. The pricing dynamics that we are working very, very aggressively on capturing the pricing. But today, we're capturing and expect to capture only about $0.50 on the dollar from inflation this year. And that's simply a lag factor relative to our ability to go to market and implement. I will note that as we look out in '22, we are anticipating those inflationary trends to continue into next year, and we are basically planning our pricing actions accordingly. I.e., each of our businesses are thinking about not only what has hit this year, but what we anticipate to hit next year, and we're executing against that. To your last point on pace, that depends by business. We have some but not a lot of multiyear contracts. In a lot of most cases, we have annual contracts. And in many, if not most of those cases, they tend to run on a fiscal cycle, so beginning of year forward. But my last comment I would make is, we're in, I'd say unprecedented environments given the level of inflation. So, it is affording us an opportunity to go back in almost all cases to our customers and discuss the inflationary environment this will be our pricing going forward, even when we have sort of contractual relationships in place. So, let me maybe turn it over to Andreas.

Thank you. Thank you, Glenn, I think it's very comprehensive. So just on 1 aspect, you asked Matt on the logistics. Obviously, we go back on logistics as well, either as price increases or surcharges, and it's a bit tough up for newly won contracts, obviously, but we try what we can do because that has a huge impact in all businesses, particularly on the Health & Biosciences business. But here, I think there's another element in it is -- we are working to increase capacity because there's a lot of demand for -- in particular for Enzyme business. And we are building -- we just installed a new fermenters and . And there's more to come for the first half of next year which will help us to decrease logistic costs as well and pull through when we get in terms of demand from our customers. We're very optimistic on this one because the technology is superior and then certainly good growth driver for us going forward.

We'll take our next question from Mark Astrachan with Stifel. Your line is open.

Yes. Thanks. And good morning, everyone. I guess just building on the last question, Glenn, maybe specifically, if you're willing to talk about it, and obviously you're early in the process, but how do you currently see inflation for '22? And how should we think about when you expect to have enough pricing implemented to cover inflation? Obviously, you talked about $0.50 on the dollar, but what's the timeline for more pricing to be in place? And also, how do you think about offsets in terms of dollars versus margin recovery in the timing they're in?

Hey, thanks for the question, Mark (ph). You semi answered it with the intro is -- we're in the early phases of locking down a '22 plan. We desire to go out early in the year with it as much as we can, relative to our pricing actions. However, the pace at which we're able to implement that vis -a - vis the pace of inflation, we're not sure if you will when the curves will cross over from a standpoint. It's likely to be sort of late second quarter into the second half of the year, but I would say stay tuned. We're really still working on that.

The next question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Yes, thank you. Good morning, everyone. I guess first, Andreas, you talked through some of the regional and business sales trends a little more on a year-to-date basis. Hoping you could frame that from the third quarter and into the fourth, where some of the pluses and minuses are. And specifically, with that organic sales guidance, where pricing was in the third quarter and where you think it's going to be in the fourth as we evaluate what the tailwind in 2022 could be, as you go back to customers on price. And if I could just sneak a quick other one in on synergy realization and just help us think about the cadence of cost and revenue synergy realization in '22, especially on the cost side, where would seem like an inflationary environment makes it harder to risk to achieve some of the procurement savings that had been previously targeted. Thanks.

Yeah, thank you, Adam, for the question. So, what we have seeing in Q2 and Q3 is that we have grown about percent price. The risk was for volume going forward. We might see a little bit more in the fourth quarter in terms of price. But as you said, we had a good start sales wise into the fourth quarter. So, October can come in. Good that we don't have the final P&L here, so we can't talk about that. Synergy realization is going, actually, on the cost synergies extremely well. As you have seen, we have already realized the 40 million in the first 3 quarters of the 45-worth promised. So, it's very, very likely that we will over-achieve. On the sales synergies, we are very much on track. And I see, when I visit our facilities and I was basically out in the field, the last week in Europe, but the teams are working very nicely and very, very well together. So, we see that more sales synergies are coming in. And that shows that we are building a very, very strong position for the Company going forward. In terms of the different categories as well, we see still a good performance on the Fine Fragrance side, which is very, very helpful. So just a good recovery, but its growth -- with growth rate here as well. And that's helping the whole results for the Company going forward. I think that's what we can say about the fourth quarter.

The next question comes from Gunther Zechmann with Bernstein. Your line is open.

Hi, thanks for taking my question and welcome, Glenn. The photo on the flight looks very youthful so it must be an active ingredients from Lucas Meyer Cosmetics. Thanks for sharing the percentage change in raw materials. Can I just check if the numbers you gave earlier, Glenn are what you include in the full-year guidance, or current run rate. And then pricing is up to 2% of sales in Q3. Can you share the exit run rate out of Q3 or and October if you have it? And what further increases you expect to push through, please.

Maybe, yeah. Good morning or good afternoon, Gunther. Good to hear from you. I'll answer the second question first. Q4 pricing rate from Q3 is going to be very consistent with Q3, so it's about 2 points. It's slightly higher in Q4 versus Q3. And as a result of that, actually the inflation pressures are going to slightly outpace once again within the quarter, just given the cost increases from the standpoint, just as a follow-up to that, really we are focused on aggressively implementing late this year into '22 on that front. Of the full-year margin guidance and relative to the freight impact, we have about 200 basis points associated with cost. About 2/3 of that is pure rate and about 1/3 of that, or about 60 basis points is related to higher usages of freight, principally air and principally to support our H&D business because of capacity limitation, so that piece as Andreas had mentioned, will take us some time to work out through '22 as we address some of the capacity constraints.

Our next question comes from John Roberts with UBS. Your line is open.

Thank you. And best wishes, Andreas, for the future, and welcome, Glenn. Andreas, your customers are seeing a lot of bulk raw material cost increases, so they're probably feeling even more cost pressure than you are. Do you see more reformulation going on? And is that providing any opportunities for more wins if your customers are reformulating their products a little bit more frequently here, because of their cost pressures?

So, I'm saying -- first of all, thank you for the question. It's -- we see reformulation. Is it massively more than what we have seen before? Probably not. But what we see in general, what comes in terms of projects, are bigger projects -- less projects, but bigger projects, which is actually good for us. Taking into consideration that we will win more of these projects, the cost for us is reducing in terms of the average projects, so that's what we see it at the moment. Indeed, many of our customers see good balance increases. But the discussion with the procurement people on the customer side is going okay and well because they know what's happening on the raw material front here. So, I think that's where we are, what we see is still that we have really good strong demand from most of our customers. And that's very helpful in terms of the business and also in terms of the momentum we have as a business growing going forward because we have to take into consideration, we are still in the integrational phase, and we're gaining share. That's what we see or some comparison to our competitors. And we are making good, good progress in the integration as well. So that's all what I am to.

The next question comes from Jeff Zekauskas with JPMorgan. Your line is open.

Thanks very much. In your initial remarks, Glenn, you said that there remains significant opportunities for portfolio optimization. Does that mean that there's another, I don't know, $500 million to $1 billion in revenues that can be monetized? And second, can you describe or articulate your capital expenditures for 2022 and '23. And what's the arc of capital expenditures? And what are the priorities to spend on?

Good morning, Jeff (ph). This is Andreas. On the portfolio, as we said, we own about 5% of sales. That's what it is, and we are working on it. More will come probably early next year and then we can be more transparent around it. But we're very happy with the moves we have made on the portfolio and there's more to come. On the capex, I hand it over to Glenn (ph).

Sure. Good morning. So, as you recognize, we updated our guidance for this year relative to our full-year capex spend at 4%. And that's in part because of just the ability to execute our capital programs well. given all of the different priorities we have in the business and far that is just continuing to be more surgical I'll say, relative to our investing capital. We do anticipate that that will ramp up next year as we're putting together our '22 plans, largely focused on our higher margin and higher growth businesses. And a big piece of that actually is really the bottlenecking and enhancing our capacity situation into next year. So, I'll say more to come around the plan standpoint. We had -- I think previously guided to having spent a little bit more capex around the business playing forward for capacity reasons. And then the other area I would just note although it's a much smaller portion around IT. So, IT through an integration activity. We have some additional activities as we go into next year as well.

The next question comes from Lauren Lieberman with Barclays. Your line is open.

Great. Thanks. Good morning. I had two questions. First, was the generally operating expenses in the quarter, both SG&A and then R&D specifically, were down quite a bit. And I was curious if you could comment on how sustainable those changes were. If it reflects maybe incentive compensation again or more tactical reductions given the gross margin pressures. I was curious about that piece. And then the second thing unrelated, was on Pharma. You've given the capacity constraints that you've seen and demand outstripping supply, which is great. The question is, what -- where is that demand going? What's the risk that rebuilding, if you call it relative market share, when you do get capacity up is a challenge? I mean, where is that business going, and how confident can we be that that will come back when you get the capacity up? Thank you.

Thank you, Lauren, for the question. The first keys, Glenn will take and then take the follow one.

Good morning, Lauren. As a relative to our R&D sales and administrative expenses, as I mentioned, we are favorable to plan and down from prior year, but that is not R&D. Actually, R&D is trending right on plan. And by the way, of our roughly 2.1 billion of annual spend for RS&A, about 30% is, R&D, and the residual is fairly equally split between sales, our commercial team, and an administrative. We're seeing actually more efficiencies in the commercial teams as they come together post-integration and the back-office. So, the administrative teams as well. So that's really where we're seeing and are pushing more of the productivity, not R&D, we're always looking for ways to more efficiently spend our R&D budget, but we sort of directionally want to make sure that we continue to stay within the guidance we provided relative to our ongoing R&D spend.

On the former part of the question. They're seem to be about the Pharma recipients, businesses, is such as a very stable business. And it's predictable in the sense because you know, when you're in the product or in the pharmaceutical that you stay in because everything else would execute require a change that with the FDA that means that our customer base is very stable. So, there's probably no big groups that if we increase our capacity, that we have too much capacity in place. We see as I said, good and stable demand. And despite the capacity on our manufacturing side, we had some issues with CB harvesting, which goes into one of the products of our big, big customers, which is -- I can give you, are all one-to-one. And harvesting now is going better because we have new fields in front of Norway, which we're discovering right now and using much to increase our manufacturing on the side. So just to give you a bit of detail around the Pharma business but there's certainly no danger that the overbooking.

The next question comes from Ghansham Panjabi with BaGird, your line is open.

Hi, good morning. This is actually Mark Kreuer (ph) here, sitting in for Ghansham. Sorry to belabor the point a little bit here, but can you talk about where we are at from a price cost perspective across both the legacy IFF businesses and then the legacy Du Pont businesses, maybe on a dollar basis. That would be helpful. And then what's the historical price costs catch-up period for the 2 legacy businesses? Is there any meaningful difference in catch-up period across your various segments or regions?

Yeah, relative to -- good set of questions. It's relatively inflation, we're seeing higher rates in legacy N&B then IFF, although we're seeing inflation across all businesses. But generally, we're in mid-single-digit range for legacy IFF and then low double-digit relative to legacy N&B. Catch-up period, generally 3 to 6 months. Certain businesses like H&B may have slightly larger percentage that are either an annual contract or a multi-year, so they might be slower.

The next question comes from Chris Parkinson with Mizuho. Your line is open.

Great. Thank you very much. Just based on the growth outlook for certain pieces of the acquired N&B assets, are there any parallels which may require additional capacity in the coming years just giving healthy outlooks? The legacy owner used to speak about some recent expansions already essentially being sold out, so just trying to gauge where the portfolio stands. Thank you.

No. Thank you for the question. So, you will see probably the biggest expansion on our side on capacity in the health and bioscience area, in particular, on the enzyme business, where we believe that our technology is really top notch, and we see a huge demand from our customers as well. So, most of the investments goes into that area. We've seen some capacity increases, as we said on the Pharma business, but not to the same degree as on the IFF's Health & Biosciences business. The rest is basically a business that's usually on Scent and on Nourish, which is partly legacy N&B as well. But more, let's say, maintain than it is investment into new plans.

Our final question today comes from Jonathan Feeney with Consumer Edge. Your line is open.

Hi. Thanks very much for getting me in. Just a quick one. As the pricing process and your assessment of how easy that is to do, the dialogue, is there any significant difference in the acquired N&B businesses in the legacy businesses that you're running into? Because I did notice that it seems like the lag is a little bit greater in the segments that are heavier on acquired revenue, but there may be other ex-plant nations for that. So just curious about the general nature of the business. Is it tougher to take pricing there?

Well, I think one thing we have to consider is the legacy N&B businesses just has a higher ramp. So, the inflationary pressures are more significant in that side. So basically, it just requires, if you will, a bigger lift relative to the implementation from that standpoint.

Absolutely.

We have no further questions at this time. It is now my pleasure to hand the program back to A - Andreas Fibig for closing reQ - Marks.

Thank you very much for participation. I hope that it helped to explain where we are. We are very pleased where we are in the integration process, and certainly with the volume performance we're doing as a Company, which is good. Thank you very much, and have a good day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.