At this time, I would like to welcome everyone to the IFF Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. Participants will be announced by their name and company. In order to get all participants an opportunity to ask their questions, we request a limit of one 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 fourth Quarter and full year 2023 Conference Call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the results 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. Please 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, please refer to our cautionary statement and risk factors contained in our 10-K and press release both of which can be found on our website. 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 set forth in our press release. With me on the call today is our CEO, Erik Fyrwald; and our Executive Vice President and Chief Financial and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you may have at the end. With that, I would now like to turn the call over to Erik.

Thank you, Mike, and hello, everyone. I'm excited to join you all today. I would like to begin by sharing some initial perspectives since joining IFF. I will then turn the call over to Glenn, who will provide a look at the fourth quarter and full year 2023 financial results before providing commentary on our current outlook for the full year 2024. After that, we'll open the call for Q&A. Now I officially joined IFF on February 6th, and I have been impressed by the world-class teams globally and the strong innovation across our company. I spent the last few weeks visiting our operations and teams in some of our U.S. and overseas businesses. I spent that time listening to our teams, meeting many of our customers, and assessing the current status of our businesses. IFF has a proud history as a global leader in high-value ingredients and solutions and a great platform from which-to-build and expand our partnerships with customers across the value chain to help them create leading consumer products. I believe in our purpose to help create a better world through science and creativity applied to sustainably meet customer and consumer needs. The opportunity we have ahead of us is very big, and that is why I joined IFF. We have solid businesses and will take the actions needed to unleash our full potential to start to deliver profitable market share gains by bringing great innovation to win with our customers. A perfect example of this is in our scent business, where we have been outperforming competition, something we must do also across our other businesses. IFF also has other high-quality businesses such as flavors and health and biosciences where we will leverage our innovation to deliver higher growth rates with very attractive profitability. And in some…

Thank you, Erik, and hello, everyone. Moving to slide seven, as Erik mentioned, the board and management have taken this opportunity to accelerate the improvement of our capital structure as we work towards our deleveraging target of three times net debt to credit-adjusted EBITDA. Consequently, we reduced our quarterly dividend to $0.40 per share. We believe this dividend change provides a dividend yield that is consistent with industry peers and is aligned with IFF's long-term cash flow generation and target payouts. The dividend remains an important part of our capital allocation framework, and we expect this new base to grow alongside our profit over time. IFF remains committed to providing competitive returns to our shareholders and firmly believes these actions set us up for more durable value creation in the long-term. Now, on slide eight, as Erik mentioned, our performance for the fourth quarter reflects the operational and strategic initiatives that our team has implemented over the last several months to deliver strong results amid an uncertain operating environment. Despite some continued challenges in the market, volume trends continue to improve sequentially, with increases in nearly all businesses resulting in growth for total IFF. IFF generated $2.7 billion in sales, representing a 1% increase in comparable currency-neutral sales. This improvement reflected strong growth in our scent business with continued volume pressure in Nourish and Pharma, both impacted by de-stocking. Volumes continue to improve sequentially from down mid-single digits in Q3 to down low single digits in Q4, and if excluding the impact of functional ingredients, volumes for the fourth quarter would have increased low single digits. Adjusted operating EBITDA total $461 million in the fourth quarter, a 17% increase on a comparable currency-neutral basis. We also realized a year-over-year increase of approximately 260 basis points to our comparable currency-neutral-adjusted operating…

Thank you, Glenn. I'm truly excited to be joining IFF during this transformative time for the company. I have long admired IFF as the category-defining leader in the industry, and it's an honor to be able to work alongside our talented global teams to help us navigate and even thrive at a critical moment for our company and our industry. Through robust efforts from our teams worldwide and shared commitment to putting the customer at the center of all we do, IFF will continue strengthening our commercial execution and become a more nimble and efficient organization. Our global teams made progress towards ensuring we can meet the evolving needs of our customers and deliver industry-competitive returns, and we will accelerate the progress going forward. While 2023 was a challenging year, our financial results in the fourth quarter highlight an improving trend. Based on this performance and some improving market conditions, we are expecting a return to volume growth this year, which should enable EBITDA growth and margin expansion. Our updated dividend policy and the additional divestitures we continue to work on reflects our commitment to improve our capital structure. While the global economic landscape is uncertain, IFF will be focused on strengthening our execution, and as I said, we have work to do to improve our businesses and achieve our vision, but I am confident we are well-positioned to build on our progress and create sustainable value for all stakeholders in 2024 and beyond. I'd like to thank our teams and partners for welcoming me to IFF and look forward to seeing what we'll achieve in 2024. With that, I'd like to now open the call for questions.

We will now begin the question and answer session. [Operator Instructions] Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.

Hey, guys. Good morning. And Erik, first off, congrats on your new role.

Thank you.

I guess my question is on your fiscal year '24 EBITDA guidance, and I'm hoping that you can sort of bridge on a year-over-year basis the differential between '24 and '23. And also, Glenn, highlight what changed relative to the variances you highlighted from your three-queue conference call back in November, apart from just the fixed-cost absorption you cited. And if you could also just give us a sense as to what the embedded volumes are by segment as it relates to the low-single-digit volume guidance for '24? Thanks.

Sure. Yes, good morning, Ghansham. Easily done and a frequently asked question. So if you'll indulge me, I'll start with last year's results at 1980. There are two adjustments to get that to a normalized basis. One is the divestitures, which you're aware of. It's a half a year of savory solutions in FSI, and the LMC will be closed at the end of the quarter, so it's roughly three-quarters of LMC. That's roughly $78 million of normalized impact. And the other factor, which is the same, basically, we had discussed before, we also have included our updated view of foreign exchange, that's $50 million reduction. I'm not sure that was previously discussed from a standpoint. So that gets to a like-for-like base of $18.50. Our volume mix impact for this year is forecasted to be $170 million positive. That is inclusive of the $130 million of positive overlap on absorption. As we noted on our call, that actually came down as the fourth quarter volumes were higher from a production standpoint, so that was slightly different than we had guided. Our net price for the year is basically is zero. That is inclusive of the $44 million of LBK, so that's netted in that number. We can certainly talk more about the pricing dynamics this year. Then we have about a $35 million reset for AIP, so that's a negative, but that's better than we thought. We thought that would be in the 70 range from the standpoint. So I think all of the one-timers being absorption slightly lower, the negative reset on AIP is slightly lower, FX is new, and then the deals basically were all known. The last items are sort of wage, inflation, that's about $120 million, and the productivity is about $150 million in the P&L, so that's sort of consistent with our three-year view. So that adds up to the midpoint of our range of $2 billion. And then relative to the volume question, I think it's very simple to think about our view of this year. The functional ingredients, which is circa less than 25% of the business, we are projecting that to be relatively flattish for the year. All the other businesses actually have growth directly in the 2% to 3% range on a full year basis, a little bit more slower in the beginning of the year and ramping up in the latter, but that's why we mentioned. As we think about that range of guidance, it's functional ingredients is the area that probably gives us the most pause and we've been the most cautious, and that sort of is the difference between the high end of the 3% versus the 0% range. So hopefully that answers the question.

Thank you.

Next question.

The next question comes from the line of Josh Spector with UBS. Your line is now open.

Hi. Good morning.

Hi, Josh.

Hey. So I just wanted to -- hey, so I wanted to ask on the dividend. So I think it's been pretty clear that it's been a pretty big use of cash for a couple of years now. So, really the question is, why was now the right time versus when you looked at that probably a year ago or maybe two years ago? And what does that mean as it relates to the divestment strategy or timing? Has anything changed as you think about what's next?

So this is Erik. First of all, I wasn't here a year ago, obviously, but I did arrive on February 6th, looked at our entire situation, talked to Glenn and his team, talked to the board, and made the decision to go ahead and cut the dividend now. I think it's a wise move in terms of our overall balance sheet efforts to get our balance sheet in great shape, and it doesn't impact the divestment timing or strategy. We continue to work on our portfolio optimization, but obviously we're focused even more on working on strengthening the businesses, increasing our earnings and cash flow.

Thank you.

Next question.

The next question comes from the line of Gunther Zechmann with Alliance Bernstein. Your line is now open.

Hi, and Erik, welcome back to the public market as well. Erik, what are your priorities for this year? I appreciate you've only been in the role for a few weeks, but for this year maybe also beyond when I think about the portfolio and the balance sheet, please. And in addition, how do you think about IFF's midterm targets? And lastly, Glenn, what is your free cash flow guidance for 2024, please?

Thank you, Gunther, and glad to be back in the public market. My priorities for 2024, I should say, our priorities for 2024 are to continue the portfolio optimization work and have that be part of improving our balance sheet. But again, more importantly, we're going to strengthen each business. We're going to make sure that each business is clear on how they can strengthen their customer focus to profitably grow market share, strengthen the R&D and innovation in each business so that we better delight customers with our innovation so that we bring innovation that they value, that we can grow our market share with them. And then thirdly, we're going to keep driving productivity and strengthen productivity in each business unit and then also corporately. We want a very effective and efficient back office. What will reduce the amount of engagement we've had with consultants, advisors, and others that have caused us to be too internally focused. We're going to get back to focus on winning with the businesses by better serving our customers than our competition. In terms of how I'm thinking about the midterm targets, it's too early for me to comment, but I'll look at them with the team here and we'll do it by business and then we'll roll it up for the company and we'll get back to you in the not too distant future on that, but on the last one, Glenn?

Yes. Hey, good morning, Gunther. Our projected free cash flow for this year is $500 million. I would note that that's inclusive and an expectation of $100 million of taxes for the sale of LMC and carryover for savory and then another $100 million for other restructure one-time items. So there's 200 of Reg G, but net of the 200, we're at $500 million for your free cash flow.

Thank you. The next question comes from the line of David Begleiter with Deutsche Bank. Your line is now open.

Thank you. Good morning. And Erik, congratulations on your role. Erik, two things.

Thanks David.

First, can you comment on pressure ports that a sales process for pharma solutions is underway? And secondly, in addition, it's 2.5% reduction in pricing you're forecasting in '24. All the pricing you expect to give up versus the roughly 19% pricing you've achieved over the last three years on a cumulative basis? Thank you.

I'll take the first one, and, Glenn, you can have the second piece, because I'm not that familiar with the details at this point, but I'm getting into it. But in terms of any portfolio optimization, we're not going to comment on rumors. All I can tell you is we continue to work on portfolio optimization, and we will not sell a business at a price that doesn't make sense, but we're looking at what does make sense for IFF and for our employees and any business that we might consider divesting. So with that, Glenn?

Yes, thanks. Good morning once again, David. As you point out, we've got three years of very significant pricing to reflective of the inflation environment of 18%, 19% cumulatively. 2.5% is all we're anticipating. That actually reflects sort of overall price decline. So as I mentioned, that price is sort of zero in our P&L. It is highly concentrated in the functional ingredients and the scent ingredient space. And we've been extremely surgical in terms of where we needed to give it back. And at this point, we're pretty much locked in to most of our pricing for the year at this point. So that actually feels like a pretty safe number relative to the plan.

Thank you. The next question comes from the line of Lisa De Neve with Morgan Stanley. Your line is now open.

Hi. Thank you for taking my questions. So the question I have is two-fold. I mean, how is IFF positioned versus peers? I mean, does it expect to go in line with the market, in line with its direct peers, or believe that it's actually better positioned and this year, but also maybe more structurally? And next to that, how should we really think about delivery of the functional ingredients optimization and efficiency program for this year? And I have a small follow-up on the pricing. So on the negative pricing in fragrance ingredients, have your customers come back for pricing here? And are your peers offering the same price reductions or comparable price reductions? Thank you.

Thank you, Lisa. And I'll take the first part of that question. I've looked very hard at the data over the last five years, and clearly we have underperformed, as all of you know. We have pockets of strength, scent as an example I mentioned in the opening comments, but we have some businesses that are challenged, like food ingredients. What I can tell you is we're going to have each business be very clear on what is their strategy to win. How are they going to delight their customer set and make sure that we profitably grow our market share? How are we going to make sure that we have our innovation targeted and needs the customer's value? And how are we going to make sure we're driving productivity? So each of the business end-to-end, how do we drive the businesses? And as you know, we've got strong businesses in great markets, like our flavors and our fragrances or scent business, terrific businesses that should be able to fully compete with margins and growth rates with Givaudan and others. We've got a strong business unit in Health & Biosciences in great markets, and we should be able to fully compete with margins and growth against Novonesis. In our challenged businesses, we've got very good markets in food ingredients and protein solutions, and we should be able to be fully competitive with Kerry and other food ingredient players. And we've got a very good business and very good markets with pharmaceutical ingredients, and we need to be fully competitive with our ingredients set there, Ashland and others. So, we have not performed as a company, across the company in the last five years like we should. In the next five years, we'll get back on track.

Hey, Lisa, this is Glenn. Let me address your second question regarding functional ingredients. So from past conversations, 2021-'22, we had a number of missteps on our part that caused this business to step backwards. Since that, we've been working on basically four major items. One, getting service levels up to the right standard. I'm happy to say for the last year plus, service levels have been at 95% plus across all the business and across the entire globe. Secondly and perhaps most importantly, is getting volume back on track, which is combination of our sales execution pipeline. As we mentioned, that has dramatically picked up over the last year in getting our pricing right in the market, we just talked about that. We've been very smart this year thinking about market-by-market, product-by-product, what makes sense to be competitive, to win and retain business. We feel much better about that. The third item has really been around sort of our general go-to-market strategy, and as Erik has mentioned, be much more focused across the ingredients team, making sure that they own the results. Lastly, it's cost. So we have been really focusing on all of the costs, but largely the 85% that sits in cost of goods. So it's skew rationalization, raw material consolidation, manufacturing footprint consolidation, taking out fixed costs, et cetera, and we're making very good progress. We are seeing successive improvements in volume quarter-to-quarter. Q2 last year was a low watermark. We're actually moving into sort of flattish as we start this year, and we're also continuing to see good expansion in margin. So we have a lot of work to do, as Erik mentioned, but we're beginning to see some progress in terms of what we've been doing. Thank you.

Thank you. The next question comes from the line of Nicola Tang with BNP Paribas. Your line is now open.

Hi, everyone. I just wanted to pick up on a few topics that were just asked by Lisa. On this pricing side, I was wondering if you could give a bit more detail on this expected price declines in functional ingredients and in fragrance ingredients, and whether you could expand on your comment on competitive dynamics in these markets. And then, in addition, on the volume side, I was wondering why you don't expect more in terms of year-on-year volume improvement bearing in mind, I mean, I guess the headwind of de-stocking and inflation that are clearly in the base in 2023? Thanks.

Thanks. Two very good questions. So on the pricing of our 2.5%, 80% of our downward pricing is concentrated in functional ingredients and the scent ingredients business. Those areas, by definition, are more commoditized, and in addition, those areas have seen some more meaningful deflation in terms of commodities. So it's natural. As I mentioned previously, we were doing a very good job of making sure we're competitive in the market by product, by region, and we feel good that that 2.5% sort of is reflective of the environment. The second question regarding why are we not more optimistic? Honestly, we're just cautious. We're very cautious and prudent given the environment. The last year was extremely bumpy. We do believe that de-stocking for most of our business is largely behind us, and we're seeing positive signs, but we need a couple of quarters of positive momentum, I think, and stabilization before we can move from cautious to optimistic.

Thank you. The next question comes from the line of John Roberts with Mizuho. Your line is now open.

And welcome back, Erik, two-part or if I could. Is the functional ingredients business significantly different today than when you were at DuPont? It sounds like you think it's just more of a cyclical problem that can be addressed through productivity, but do you think there are structural changes you need to make there? And then, your predecessor was targeting going from four segments to three segments. Have you gone back to the whiteboard to start over on those plans, or was that nearing completion and there's just some fine-tuning left to complete it?

Thanks, John. And let me start with the first one. The makeup of our functional ingredients business is better than what it was when I had responsibility for that as part of agriculture and nutrition back at DuPont a number of years ago. So I believe our potential is significantly higher than it was then. I think that it's in a very good market. I think we've underperformed. And I think we've underperformed because we've been too internally focused. We've had lots of consultants. We've had lots of advisors talking about helping us to figure out what to do around synergies. And what I can tell you is, I've been in these businesses for many, many years, these types of businesses. The goal was not synergy. Synergy is a tool. The goal is to have a very clear strategy for our functional ingredients business. How are we going to profitably grow our market share with customers by delighting the customers with our solutions approach, with our innovation, and then do that in a productive way with our assets and our functions, very productive. We have the potential to significantly improve the performance of this business. I've spent time with our business leaders. I think they're headed in the right direction and we're going to further accelerate the progress and make sure that we profitably grow our food ingredients business and fully compete with our competitors, the leading competitors in food ingredients, because we have so much value to bring customers. If we do it right, when we do it right, we'll have a very good business. And then, in terms of the organization structure, no decisions today, but what I will tell you is I'm a big fan of business units that have end-to-end accountability and responsibility to drive all the levers of the P&L, making sure that everything we do is to delight customers, profitably grow our market share, but do it in a way that's efficient and effective so each business unit can win. And I find when business units are winning, all of a sudden synergies become clearer and become more powerful and easier to access. So we're going to ensure that our businesses are on the right track and that our synergies are additive to further strengthen each of our businesses.

Thank you. The next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is now open.

Yes, thank you and good morning. Erik, welcome back. Glenn, two questions from my side, please. Your Health & Bio segment margin was the best in more than three years. Can you just maybe rank order the drivers of the improvement there? And more importantly is the 30% plus level sustainable into 2024. And then secondly, what are your input cost trends and the outlook that you're baking into your guidance for this year?

Yes, so I think for the H&B had a very good year and that was a result of a progressive improvement in volumes. As we noted, the health business, one of our largest segments, actually had a very good fourth quarter. Secondarily, productivity, so we've driven a lot of productivity across the business. And third, really net price. So there's been -- to your second question, a decline in input cost in that business as well. So that got us to the 30% range for the business. I did note on the call that we are anticipating H&B like all four of our businesses that demonstrate both EBITDA growth and margin expansion this year. So we expect that to be the case for H&B. In general, our input costs, as I mentioned, are anticipated to be down this year. Energy is flattish at this point, logistics are down, and we're seeing some raw materials deflation. As a reminder, it takes about four months for a purchase to run through the balance sheet. So that's a positive momentum. That's a net zero, as I mentioned, for the overall enterprise for the year. So thanks for the question.

Thank you. The next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.

Good morning. If end markets do not cooperate, can you provide more granularity on how you can de-lever in 2024 and 2025 in terms of reviewing business lines, Brexit, productivity relative to comp and so forth? And Erik, given your initial impressions on IFF operating culture and discussion around productive solutions, can you speak more to the mindset around productivity and R&D? Is it more about operational fixes, or do you see structural or philosophical issues around how the firm has targeted ROIC margins or profit growth?

Yes, thanks. This is Glenn. I'll answer the first part of your question. In general, we're pretty cautious on our outlook on volume. So we're, as I mentioned, flattish to three. So we haven't expected a giant recovery this year in our base case. So that's kind of a starting point. In the absence of that materializing, we have been very good at delivering productivity, as Erik mentioned in his opening comments. We are accelerating both ongoing efforts, and we have additional efforts underway to take costs out that aren't reflected in the plan. So that would be my second comment. Relative to the de-leverage, so that gives you some sense on the earnings profile and offsets if there's additional softness in the external market. The de-leverage will largely be accomplished through divestitures. As Erik mentioned, we are on path. We feel very good in terms of our activities underway, and we do think we'll accomplish our targeted divestitures, which will be the biggest driver of achieving our de-leveraged goal.

Now, on your second question, Laurence, my initial impressions of IFF's capabilities are we've got really great people. We've got really great capabilities in each of our businesses, and we have just under-performed. But there are pockets of examples where we are performing tremendously well that give me so much confidence that we can make this happen across the company. I spent time with the leadership of arguably the largest consumer products company in the world, where we have a very strong relationship, very much innovation-driven, their innovation people to make sure that the best consumer products are being developed. And we were meeting both with our scent teams and their fragrance team, and with our Health & Biosciences team and their consumer products teams. And it was the best relationship, the best dynamic that I've ever experienced in my 42 years of customer interactions. And then I had another interaction with the top management of a leading beauty care company in Europe. And same thing, our people were working hand in glove with their people to create great, great consumer products that consumers love. So we can do it. We do it. We just need to do it more across the company. And I'm really excited by helping our teams, stop being so internally focused, get more focused by business unit on winning with customers, and then collaborate where it makes sense to enhance across our portfolio, to bring even more to customers so that the customers win more and we win more. Now in terms of productivity, as Glenn mentioned, their pocket's there where we're doing very well, but there's more we can do on productivity. Ralf Finzel and his production team are really driving tremendous productivity in our operations, and it's still early phase, but they're ramping that up very nicely. We've already had efforts in back office productivity for our corporate functions. That's going okay, but we're going to accelerate that. You'll see more shared service centers and more activity with IT systems to make sure that we're effective serving the businesses and very efficient. So I love what I see. There's so much excellence here, but we've got to get it across the company, and we will.

Thank you. The next question comes from the line of Patrick Cunningham with Citi. Your line is now open.

Hi, good morning. Just a question on the Q1 guide. So, it's about 487 [ph] 488 [ph] at midpoint in a seasonally weak quarter. And you noted some nice volume ramping productivity throughout the year. So even annualizing that is above the low end of the guide. So can you help us understand if that guide is just conservative? And then just a small follow-up, when do you expect to see the end of de-stocking within your Pharma Solutions business?

Yes, I'll start with the second. Generally, we've seen de-stocking basically, I'll say it's done everywhere with exception of pharma largely, and it's the second half of the year. Pharma just started late as an industry part of the de-stocking for logical reasons given the margin structure, but we do anticipate the second half of this year to be done with pharma. The Q1 we think is a very reasonable guide, 475 to 500. We have started off the year generally pretty good on the volume side, but we just want to be cautious as we sort of go through the quarter. Generally, the volume slightly lower than the average for the year, so that's a little bit of the impact there, Patrick.

Thank you. The next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.

Yes, thank you. Good morning. A couple of questions on cash flow and investment. One, just wants to clarify on the deleveraging targets. It had previously been three times by the end of calendar '24. Are you no longer committing to that timeline? Second, the last slide of the deck references high return growth investment. Can you provide any more clarity on what those are, size, and timing of those? Then finally, Glenn, I think you said earlier a question, the $500 million free cash flow guidance for the year. Can you bridge $2 billion of EBITDA to $500 million free cash flow, but even acknowledging some deal-related charges, cash flow would be down year-on-year, and I just want to make sure I understand the context and implications of that?

Thank you, Adam. I'll start, and then Glenn can add on. First of all, I fully am aligned with and agree with a target of three times net leverage debt as a target to get to. I think the year end '24, I'd like to see us get there by the end of '24, but we're not going to do something stupid that destroys significant value to get there in '24, but I can tell you we're going to make very good progress at least towards that goal in '24. In terms of high return growth investments alluded to, I'll just reinforce that flavors and fragrances, we call it scent, and health & biosciences are strong business units in great markets. I've been in many chemistry and biological markets. These are great markets, and we're going to invest in them to win.

Yes. So hey, good morning, Adam. So let me take you through the cash flow reconciliation. It's a good question. And I'll start from the top with EBITDA. So the midpoint of our guide is $2 billion. We are forecasting $345 million of interest expense. Cash taxes are roughly $450. That includes the Reg G or transaction related. I'll back them out later. We have networking capital, slightly a negative. We're being a little cautious in terms of the overall full year. Part is just the growth of the business. And then there's miscellaneous, sort of others, about $100 million of other items to get an operating cash flow of $1.50 billion-ish. As we mentioned, we have a CapEx target up this year. We're trying to invest in our growth business of about $540 for the year. That gets us to a free cash flow, including Reg G of $500 million. I would note, as I mentioned, there's $200 million of Reg G items, $100 million of that's transaction, largely taxes, a little bit of other deal costs, but largely taxes. And then there's $100 million of other miscellaneous Reg G items as well. So that gets you to, if you back those out on adjusted free cash flow around $700 million for the year. The other note I'd say, Adam, the biggest shift year-over-year is networking capital. We had an improvement last year of $500 million. We're being sort of conservative and flattish to slightly down this year.

Thank you. The next question comes from the line of Mike Sison with Wells Fargo. Your line is now open.

Hey, good morning. Hey, Erik, welcome back. I'm sure you've seen several chemical businesses go awry over the years for a lot of different reasons. What's your sort of playbook in terms of turning around a business and clearly functional ingredients has been a sore spot here? Anything in particular you're going to sort of work on to get that business back? And then, just a quick follow-up on pharma, Glenn, since Erik's only been here a couple weeks. But where do you think margins can get back to for that business? The last two quarters have been pretty light relative to its historical past.

Well, thanks, Mike. And I'll start with the functional ingredients question. First of all, I like the functional ingredients business. It is a very good business with lots of opportunity to bring value to customers. And by having multiple elements of the solution set, you can bring value in terms of helping customers achieve their goals and what food products they want to have to delight customers, delight consumers. So I think what we really have to do here is, and the team is working on this, is make sure that we're clear on what is our strategy, how are we going to create value in this business, how are we going to make sure that we're focused on the right consumers, excuse me, the right customers in the right way, profitably growing our market share, and how do we make sure that our assets are very competitive, that our costs are very competitive, that we're driving productivity so that we can be competitive with our product portfolio both in terms of the value we bring and the costs to deliver that value. And then we're spending money on innovation. We've got lots of great innovation. Make sure that innovation is tied to real customer needs that they're willing to pay for that can be part of the solution set. And I think that we've taken our eye off the ball, as I said before, too much internal focus, listening to too many consultants going all different directions. We get clear what we're trying to do, what the goals are, and execute well against those goals. This business will significantly improve in 2024 and beyond.

Yes, good morning, Mike. Good to hear your voice. Regarding pharma, as you know, this business quarter-to-quarter can be a little lumpy based on demand. And fourth quarter is typically a lower volume quarter. The margins are always compressed seasonally for the fourth quarter, so it's difficult to look at that. We are very optimistic on the strength of this business and the go-forward plan. We do expect the business to be in approximately the mid-20s from an EBITDA margin this year from a standpoint. And there's tons of other initiatives to continue to drive up the margin further. So I think what you're seeing is a function de-stocking, idle mills, seasonality over the last couple of quarters, but just not reflective of the fundamentals of the business.

Thank you. The next question comes from the line of Mark Astrachan with Stifel. Your line is now open.

Yes, thanks and good morning, everybody. I guess lots of questions, but I'll try to keep it narrow here. So today's IFF was created to provide a suite of products to customers. At least that was the initial idea in merging the legacy IFF into the DuPont business. I guess, Erik, how do you think about that as an effective go-to-market strategy? The corollary to it, we hear a lot from investors that this is arguably a better business, pre-even cruder on, is there a scenario where you can divest nearly all of those assets of the acquired businesses? How integrated are they? Is that possible? And sort of, just holistically thoughts on kind of all of that together, and then just one follow-up to you, Glenn, the flat expected plus three volumes, considering how easy the comparisons are, would still suggest that two years is strongly negative. How do you think about that from a competitiveness standpoint, meaning it would suggest that you're still losing share? And I guess, it's not across all of the businesses equally, but it's still a pretty stark difference relative to your closest peers? Thank you.

Okay. Thank you. I'll start by saying that I believe that the historical IFF plus the DuPont nutrition and biosciences business are stronger together than they were separately. The potential, the opportunity is greater than it was separately. So I believe in that combination very strongly. Now, as I said before, we haven't executed it well, and I've seen this happen before. When I got to Syngenta almost eight years ago, the seeds in the crop protection businesses had been mushed together, and the focus was on synergies versus having a great crop protection business and a great seeds business. We made clear that we were going to have those two businesses as business units, end-to-end business units. And as soon as we did that, we found out that we had been losing share, losing margin versus the competition. We started regaining that, and by the way, when the business units were clearing what they were trying to do, the synergies grew a lot because there were synergies. I see the same thing here at IFF as we're really good at flavors, at fragrances or scents, at health & biosciences, at food ingredients, those businesses, when they're performing well the synergies will increase, not decrease. The ability to help each other, the different businesses to help each other, to help customers more together will increase, but we've got to get the businesses performing extremely well by themselves and not have synergy of the goal, have synergy of tools. When we do that, I can assure you that the combination will be very strong.

Hey, good morning, Mark. Hey, thanks for the question. You're right, if you look at a three-year stack, we would still be negative over the three-year average by about 1%, 1.5% over, including if you hit the 3% this year. But I would note, as we said in the past, I think you have to sort of think about the performance of the business between 75% and 25%. 75% of the business, our core scent business is forming very well. Flavors has pockets of strength, H&B, both enzymes, probiotics, culture's business are doing well, pharma overall is doing well. It's really the other 25, which is functional ingredients we've talked about, that actually has been a drag on the overall results of the business. So if you separate that, I think you clearly have a very different view in terms of that three-year stack, and the 75% is nicely positive, and I would submit it's in line with competition. For the most part, we have opportunities, as Erik said, to perform better, but it's focused on that 25%. I also will note once again, as we're trying to be realistic, there's prospects that the markets improve more significantly. Certainly the start of the year knock on wood is pretty encouraging, but it's too early to call anything above that range until we see a consistency month-by-month in terms of volumes coming back. So, I appreciate the question.

The only thing I would add is that even in the 75%, there is significant improvement opportunity, and we've got businesses that are looking at that, and we're going to work with those businesses to support them, both for the businesses to win more and for the corporate cost overheads to be lower and more effective at supporting the businesses. So there is great opportunity, of course, in food ingredients to turn it around, but even the rest of the company to significantly improve performance, and we're going to do it.

Thank you. The next question comes from the line of Salvator Tiano with Bank of America. Your line is now open.

Yes, thank you very much. I want to ask a couple of questions on the -- I guess, strategy shifts to grow that you mentioned a little bit more, a few more details. And essentially, as you're trying to reposition the business and gain market share that's becoming the clear focus. What would that mean for R&D spending, SG&A spending, and CapEx in the next few years, not necessarily 2024, but that's almost three or four-year basis? And you made a comment about the 2024 price, that's 2.5% negative, in part being because of competitive pressures, but also because it will allow you to gain some market share. So how are you thinking in this new strategy about the tradeoff between price and volume?

I'll start, and I think our R&D spend is significant today. I think if you look at what we spend, it's very competitive versus the industry leaders, other industry leaders, but I do think we can focus it better, connect it better to the business units and to customers, and ensure that the R&D efforts are fully aligned with the highest value needs that our customers have. So I think we can get more out of the R&D spend that we have, and where there are areas that we need to spend more R&D, particularly in health &biosciences and flavors and fragrances, we will spend more on R&D. On capital expenditures, I feel similarly that the level of capital expenditures are reasonable, but we have to look at where we're spending it and make sure that it's optimized and we're spending the capital in places that have significant returns, have very good returns, and strengthen the businesses where we need to win.

And I would just add to that, as we mentioned, we're going to be up about 8% year-over-year in CapEx, and at core operational CapEx, which is really supporting growth in our core products is up 10%. So we're in the right range from a CapEx, around 5% of sales in terms of what we need to maintain and grow the business.

Thank you. There are no further questions at this time, so I would like to hand the call back to the team for concluding remarks.

Great. Well, thank you for joining the call this morning. Again, I just want to finish by saying that I'm thrilled to be at IFF. We've got a tremendous team at IFF. We've got great capabilities. We haven't performed to our potential in the past, but I can tell you we're all completely committed to making sure that we unleash the full potential of our businesses and drive the right kind of synergies that enhance each of the businesses, and make customers very pleased, delighted with what we bring in our innovation. And by doing that, possibly grow our market share and through their productivity efforts, make sure we do that with leading margins. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.