Good morning. Thank you for joining today's IFF Second Quarter Conference Call. My name is Megan, and I will be your moderator. I would now like to hand the conference over to Michael DeVeau. Michael, please proceed.

Thank you. Good morning, good afternoon and good evening, everyone. Welcome to IFF's second quarter conference call. Yesterday afternoon, we issued a press release announcing our financial results. 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. Please take a moment to review our forward-looking statements. During the call, we will 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. 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 the press release. With me on the call today is our CEO, Frank Clyburn, 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 that you have. With that, I would now like to turn the call over to Frank.

Thanks, Mike, and thanks, everyone, for joining today for an important discussion on our business performance and the critical actions underway to create an even stronger IFF. As you are aware, recent results from across our industry and many of our largest customers have clearly demonstrated that macroeconomic headwinds continue largely unabated. This environment has challenged the financial performance of IFF and our peers in the first half of 2023, resulting in a more cautious outlook for the remainder of the year. However, despite this tough environment, it is also important that we highlight the significant progress we are making on transforming and strengthening IFF's business. Consequently, today, we will share promising early results from the strategic transformation initiatives we have been discussing with you, as well as some additional actions we are taking, summarize our performance for the second quarter of 2023, and outline the additional steps we are taking to drive shareholder value creation at IFF. Then we will be happy to take any questions you have at the end. With that in mind, on Slide 6, I'll begin with a quick summary of the key takeaways for the second quarter, which I will unpack further here in the next few slides, including the actions we are taking to progress our strategic transformation. First, amid the current operating environment facing the industry, including temporary destocking, IFF is performing broadly in line with peers, excluding Functional Ingredients. Second, consistent with our invest, maximize, and optimize framework that we introduced in our 2022 Investor Day, we continue to broaden our portfolio optimization efforts including through strategic non-core divestitures. Third, we've outlined a clear operational improvement plan to drive improvement within our Functional Ingredients business. Lastly, our work behind the scenes to strengthen our organization is paying off as we are making strong progress in terms of our strategic initiatives to ensure IFF is well positioned for long-term success as market conditions begin to improve. Let me now unpack each of these a bit further. Turning to Slide 7. Amid the current operating environment, Q2 results were mixed as comparable currency neutral sales growth for the second quarter was down 4%. Strong results in Scent and Pharma Solutions were more than offset by softness in Health & Beauty and Nourish, particularly Functional Ingredients. From a profitability perspective, our adjusted operating EBITDA was in line with our guidance range, excluding a one-time inventory write-down due to unprecedented cost fluctuations for one ingredient, Locust Bean Kernel. Our focus on cash flow generation has yielded solid results, improving sequentially and versus the prior year period as we successfully executed on our inventory reduction program. Now as we look to the balance of the year, the pace of industry recovery that we expected is not materializing according to our original expectation. Consumer demand remains soft and temporary customer destocking trends are continuing. As a result, we have adjusted our expectations for the full year 2023, lowering sales to $11.3 billion to $11.6 billion, entirely driven by lower volumes. For the full year, we expect volumes to now be down mid to high single digits versus roughly flat previously. Our adjusted operating EBITDA range is now $1.85 billion to $2 billion as favorable net price to inflation and enhanced productivity are more than offset by lower volume, higher manufacturing absorption costs related to our inventory reduction program, and the impact of the write-down of LBK inventory. Approximately 75% of IFF's business, including Scent, Pharma Solutions, Health & Beauty, Flavors, and Food Design, are performing broadly in line with industry peers. The one area where we have significant opportunity to accelerate is the Functional Ingredients business, where we are aggressively implementing an operational improvement plan. I will share more in a moment. On Slide 8, looking at our business more broadly, we're continuing to accelerate our portfolio optimization initiatives to maximize returns and deleverage our balance sheet according to plan. We are investing behind our high-return businesses while optimizing other businesses, including through additional divestitures across all three categories and best maximum and optimize within our strategic framework. We've made significant progress on this front with the recently completed sales of our Microbial Control, Savory Solutions, and Flavor Specialty Ingredients businesses. We are continuing that momentum as we launch a sale process for Lucas Meyer Cosmetics aligned with our best owner mindset. This aligns with our mindset of ensuring each of our businesses has the resources and ownership most conducive to long-term success and maximum returns. For LMC specifically, it is a fantastic business, and I have no doubt that it will continue to prosper under new ownership. And for IFF, it would allow us to reduce outstanding debt while continuing to invest in our most core and accretive businesses. We have also hired JPMorgan to explore additional divestiture actions within the portfolio as a pathway to accelerate, deleverage, and unlock further value creation for our shareholders. We are reviewing all options consistent with our strategic framework, and we will only pursue opportunities that are value accretive for our shareholders. A key part of our approach is that we will not look to divest assets at depressed multiples, especially those that are impacted by temporary destocking trends. Instead, we believe there is more value creation from improving these businesses before divesting. On Slide 9, I wanted to put this in today's presentation to show the dynamics we are seeing across the portfolio. As you can see from the slide, the vast majority of our portfolio from 2021 through the first half of 2023 has performed near or at expectations volumetrically, on a quarterly average basis, even amidst this unprecedented macro environment over the past two years.

Thanks, Frank. Turning to Slide 15. In Q2, IFF generated $2.9 billion in sales with comparable currency neutral sales declining 4% as strong performance in Scent and Pharma was offset by softness in Nourish and Health & Biosciences. Our pricing continues to remain strong in the second quarter, as it was up high single digits. However, volume in the quarter declined low double digits, about twice the decline anticipated in the quarter. To provide some more color on volumes, Scent and Pharma were largely in line with expectations, while Health & Beauty underperformed in large part due to softer volume performance in health. The majority of our underperformance in overall volume decline in the quarter, approximately 60%, was attributable to Functional Ingredients. Excluding the impact of Functional Ingredients, IFF volume would have only been down mid-single digits. Adjusted operating EBITDA was $510 million, down 18% year-over-year on a comparable currency-neutral basis, largely driven by unfavorable manufacturing cost absorption of approximately $55 million and a $44 million write-down of inventory related to unprecedented cost fluctuations for Locust Bean Kernel. As Frank mentioned earlier, excluding this one-time LBK write-down, our adjusted operating EBITDA would have been $554 million, within our previously communicated guidance range of $540 to $590 million. Cash flow from operations totaled $375 million this quarter, as a result of our very focused efforts to drive strong working capital improvements and right-size our inventories. We are ahead of target, having achieved approximately $320 million inventory reduction year-to-date. After normalizing for the LBK write-down, I would like to reiterate that while this inventory reduction program is adversely impacting the P&L through negative manufacturing absorption, it is a short-term impact that we will be recovering over time. CapEx for the first half was $290 million or approximately 4.9% of sales. Given this, our free cash flow position for the quarter has improved sequentially from last quarter and was $85 million in Q2. Included in our free cash flow is about $160 million of costs primarily related to integration and transaction-related costs. We also distributed $413 million of dividends to our shareholders. In Q2, our cash and cash equivalents totaled $641 million, additionally, net debt for the quarter totaled approximately $10.6 billion with net debt to credit adjusted EBITDA of 4.5 times. Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.2 billion. Improving our leverage profile and ensuring IFF continues to meet its deleverage commitments remains a top priority, and I am pleased with the strong working capital improvements made to date. With the initiatives in play, including our portfolio optimization efforts, IFF is on a path to delever according to our plan through the rest of 2023 and into 2024. Like many in our sector, we continue to navigate this unprecedented market environment. Consequently, we now expect many of the challenges that we faced through the first half of the year to continue through the second half of the year, including customer destocking and related consumer demand visibility constraints. And as a result, we have revised our second half outlook. Importantly, we remain intently focused on the levers that we can control, including accelerating sales growth, delivering positive price inflation margin, delivering on our identified productivity initiatives while also seeking additional efficiency opportunities, and driving continued improvement in cash flow. Ultimately, these actions will strengthen the platform and better position IFF to win when the environment improves. On Slide 20 is our updated financial guidance. We are now expecting net sales to be in a range of $11.3 billion to $11.6 billion, while our new guidance reflects softer revenue expectations across all businesses. Our lower expectations in Functional Ingredients account for the majority of the revenue change. For the full year 2023, we are expecting Functional Ingredients volumes to be down double digits, however, the rest of the business to be down low single digits amid continued and temporary customer destocking.

Our incredible teams around the world continue to deliver pioneering discoveries and strengthen our customer relationships, ensuring that IFF is the innovative engine behind the most critical and beloved consumer products. These efforts are reflected in the solid results across the majority of our businesses despite the current environment, which gives me great confidence in our ability to deliver industry-leading growth and profitability in the years ahead. Our strategic plan is showing very encouraging early results. We are investing in opportunities for growth, innovation and enhanced productivity, and we are taking decisive actions to manage through the volatile market conditions, refocusing Functional Ingredients with an operational improvement plan to strengthen operations and execution and progressing our deleveraging efforts through ongoing portfolio optimization efforts, including the launch of our cosmetic ingredients process. Amid even this challenging market environment, we are making great progress transforming IFF into the leader in high-value innovative solutions and the partner for our customers. The actions we are taking today and through the remainder of 2023 will create a stronger IFF capable of delivering significant value for shareholders and all of our stakeholders. With that, I will open the call up for questions.

Thank you. Our first question comes from Adam Samuelson with Goldman Sachs. Your line is open.

Yes. Thank you. Good morning, everyone. I guess just to the question that we're getting a lot from investors is as we look at the updated EBITDA guidance for the year, it does appear that you're going to be moving above your covenant threshold in the back half. And so Glenn, you talked about remaining committed to deleveraging. Can you just comment on what that path looks like over the balance of the year? And in that context, how should we think about the dividend? And then what is the updated expectation for free cash flow for 2023? I don't think I heard an updated guidance number there? Thank you.

Yes. Adam, thanks very much, good morning. And great questions to start off here. Let me start off by reassuring everybody. I am quite confident that we will not trip our covenants and the reason I am is because there are multiple levers that we can pull, and I'll get to your question about cash flow, but we've made very strong progress on working capital and other improvements in cash flow this year. In addition, we are well downstream on divestitures from a portfolio standpoint as well. And I would also remind you that there's a credit-adjusted definition of EBITDA, which is different than the adjusted EBITDA number. So point one, very confident we will not have an issue with our covenant. Point number two is currently a change in our dividend is not on the table. And then point number three, relative to our cash flow forecast for this year on a free cash flow basis reported, we're expecting to be about $100 million lower than our original guide. As a reminder, we had a $600 million free cash flow forecast for this year. We're forecasting $475 million. As a reminder, within that $475 million, there are $450 million of Reg G charges. So on an adjusted basis, we expect to be over $900 million. That compares to the $1 billion we started off. That $450 million includes $250 million of transaction related costs, taxes, M&A, separation fees for the microbial control business, and the residual $75 million is related to the final integration activities with DuPont this year. There's another $100 million plus that are largely related to the restructure that we performed this year. So again, on an adjusted basis, we expect our free cash flow to be around $900 million versus the original $1 billion.

Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Your line is open.

Thank you, operator. Good morning, everybody. I guess how does the operating backdrop in 2023 change how you're thinking about the financial commitments through 2026? I think you outlined at the Investor Day back in December. Maybe you can touch on the internal offsets you're pulling to count or the lower volume baseline. And I'm just asking because at this point, your dividend outlay is unsustainable relative to your rebased EBITDA starting point as Adam pointed out.

Hi. Yes, this is Frank, and I'll take that one. A couple of things that I want to highlight. First and foremost, if you look at what's taking place through '23. Clearly, we are seeing temporary destocking, as we mentioned, and we have been pulling a number of levers to manage the business. First, you can see really good progress with productivity. As Glenn highlighted, we've been really improving our net working capital and also making sure that we're doing everything to control our cost to manage the '23 year as it unfolds. We are on track. As you recall, we highlighted that we're going to have a cost reduction takeout of about $100 million. That is on track as well. More importantly, though, I am very excited about the opportunity that we have as we come out of temporary destocking. And as we move into '24 and as you could see, as we discussed with our customers, we're very well positioned based on the pipeline increase that we just highlighted, also based on the commercial efforts that we're putting forward. We've improved our customer service significantly, which gives me a lot of confidence as I look at the outlook, to your question over the next several years. So we're managing for the near-term temporary destocking, but we are clearly preparing for a good, strong growth in '24.

Yes. And if I could just tag onto the end of that regarding your comment regarding the unsustainability of the dividend, I just will piggyback on my response to Adam's question. Again, on an adjusted basis, $900 million of free cash flow and in addition, as we've called out, there's over $200 million of one-time items between LBK write-off and then the negative absorption. So we are confident as we exit this year, we're going to be in a much, much better trajectory, particularly as the environment improves. So I'm not sure the assertion on sustainability is correct.

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

Yes, thanks, and good morning, everybody. I guess the first question is just what gives you confidence in the back half outlook? I think you talked, Glenn, about the volume assumptions essentially being the same on a two-year basis, 2H versus 1H - you've cut numbers now, not necessarily your fault, partly industry stuff, now three times since the Investor Day. So what gives you confidence, what should investors take that would give you - give them any confidence that you can hit the numbers that you laid out there?

Yes. So I'll take the question. Thanks. It's really important. We've talked to a number of our customers. With regards to the temporary destocking, and we do believe that it is very prudent for us right now to derisk the plan based on the back half of the year, and we do think we've done that. And in derisking the plan, we also believe that we set the floor. So we're very confident in what you are now seeing is our new guidance going forward.

Secondarily, we have July in our belt at this point, and it's negative 4% volume. August is trending a little lower than that, but very, very consistent with what we think the quarter is unfolding. So a combination of bringing down to a two-year consistent with the first half, a couple more months largely closed gives us a pretty good sense that we're going to be in a good place. And obviously, we wanted to make sure we were prudent relative to the construction of this outlook. Your question on M&A is a good one, and there's no simple answer. Some businesses are more integrated than others. It is clearly a consideration relative to our portfolio strategy. The good news is we have acquired substantial experience over the last three years now through a combination of the sale of the microbial control business, Savory Solution, Atlas, as well as other ones we're working on. So we've got a pretty good track record in sort of being able to navigate through that. But it is an important consideration as we think about which parts of the portfolio we trim.

Thank you. Our next question comes from the line of Gunther Zechmann with Bernstein. Your line is now open.

Good morning, Frank. Good morning, Glenn. I know you don't guide for next year yet, but what do you think are the main moving parts if we want to build the bridge for 2024 considering your comparables. You talked about you're excited about the pipeline growth, destocking to subside. What are some of the potential negatives as well that we should take into account? So refineries for 2024, please?

Sure. Maybe I'll begin, Gunther, and Frank can add on. As we think about '24, one is, as we mentioned, we do believe that the environment will be improving. So we think we're now going to be entering an environment where destocking will be complete, and consumer pullback will be largely stabilized at a point. So that's point one. Point two, as we mentioned, there are a number of items to normalize from this year. So the $180 million associated with absorption which we have consciously tackled, by the way, that has delivered a $500 million reduction in inventory full year from a standpoint. So it's a very, very significant achievement we're accomplishing. It's also the LBK write-off, obviously, 44. So there are one-time items - from a volume standpoint, as Frank had mentioned, we feel that 75% of our business, i.e., everything except Functional Ingredients, is performing well in line with our competitive peers. So we'd expect them to continue to trend well in an improving market.

And the other 25%, we have been underway for a number of months on remediation and expect that business to pick up next year. And lastly, I would say that the other areas that we can control, i.e., productivity, working capital and cash flow efficiency and portfolio are well on track. So we feel like those should continue as we move into '24. But obviously, as we close the year, we'll have a more detailed update on next year. Yes. And I would add, Gunther, and I highlighted this in the prepared remarks. We've been spending a lot of time with our key customers. I can tell you that I've had discussions with many of those CEOs with those companies and Chief Technology Officers. What we highlighted is the 15 new R&D launches this year, the strong platforms that we have and as Glenn mentioned, if you look at our business performance in Scent, if you look at Pharma, if you look at Health & Biosciences overall, we're in really good shape. Even within Nourish, one of the things I wanted to highlight is that our Flavors business, our system ingredients business as we help customers solve some of their challenges is in good shape as well and benchmarks extremely well versus our peers. And now we have a plan that we will be getting after improving our Functional Ingredients and that's something that we'll continue to monitor very closely. We have a new team that's been put in place to really improve that business, and as volumes start to normalize, as you head into next year, we feel really good that you'll start to see improvement in that business, which gives us a lot of confidence for '24.

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

Yeah, hi. Thanks for taking my questions. So I was wondering if you could provide some more detail walking through your second quarter EBITDA to your second half run rate. So I mean, as you mentioned earlier, you exclude the inventory write-down you did about $550. Your guide at the midpoint is maybe $450 million a quarter. I guess the inventory adjustment isn't changing. It's maybe getting a little bit better price cost; you had some benefits from volumes you're guiding similar. I guess I'm not sure what's driving that magnitude of decline. So more color there would be helpful. Thank you.

Sure. Good morning, Josh. So let me actually - let me just do first half to second half because honestly, the first quarter is very similar to the second quarter. So the first half on a reported basis was $1.20 billion of adjusted EBITDA. And then the midpoint of the guide is 9.05 for the second half. As you pointed out, you need to adjust the first half for a combination of the absorption, $150 million LBK write-off, adding another 44, you've got to reduce for divestitures, which come out of the second half; you should take out $30 million and then you have foreign exchange differential of $20 million to $30 million, so that gets you roughly to $1.15 billion. And then obviously, for the second half, you have some absorption of $30 million. So that gets you to 9.35. So it's a $1.15 first half normalized versus a $935 million. So it's roughly a $200 million delta between them. So can break it down into basically two components. About $50 million is related to lower GP from seasonal volumes, particularly in the fourth quarter, it's our lowest quarter. So on an apples-to-apples basis, there's a $100-plus million of differential. The other is a little bit of productivity timing, but it's largely a net price realization versus cost higher in the first half than the second half. And as you noted or as we've noted, we have a 7% pricing in the first half; it's circa 3% in the second half. So while we continue to see some progress on the reduction of input costs, there was a better achievement in the first half versus the second half. So hopefully, that's helpful.

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

Thanks. Hi, everyone, I wanted to take a closer look at Functional Ingredients. I was wondering if you could give more color on which product groups or perhaps end markets in Functional Ingredients actually drove that volume weakness in Q2? And could you elaborate a bit more on the cautious outlook for the second half as well? Also, at your Investor Day last year, you highlighted your plan to optimize or exit underperforming divisions, so with today's new efficiency plan in Functional Ingredients, does this mean that you've ruled out exiting this division? Or could it still be a potential divestment candidate? Thanks.

Yes. Nicola, this is Frank. I'll take both. On the first question, we are looking at all options. However, as we've communicated, we will not pursue any options that aren't accretive to our shareholders. And we think right now, in particular, within Functional Ingredients, we are focused on the improvement plan that we outlined, and we do see really good early progress starting to emerge within that business. As far as the first part of your question, if we look at Functional Ingredients, underneath that, I'll use the example of protein solutions, with soft volume this quarter primarily due to destocking, and these are isolated soy proteins that go into nutritional bars and beverages. I've had a chance to meet with a couple of the customers, and the positive news is we're very well positioned within those end markets. The destocking has been the impact primarily for isolated soy proteins going into those beverages and bars. So that's an example, Nicola, of what we've seen, and that's been the impact we've seen across Functional Ingredients primarily due to destocking. There has also been some customer softness in some of the meat alternative products that are within Functional Ingredients as well. But hopefully, that helps give us a little bit more color on what we're seeing. And then as we come out of destocking, as I mentioned, we do anticipate things to start to normalize as we get into '24.

Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Your line is now open.

Thank you. What's the threshold for deciding when to take a write-down in raw material inventory? You've had spikes in citral, vanilla, and other ingredients in the past. I don't recall this kind of a write-down before. And then I think your earlier comments on price raw materials were year-over-year. Could you give us a sense of sequential and whether or not LDK is kind of affecting the sequential number significantly?

Yes. Good question, John. And good morning to you. Materiality and ultimately, the measure is do we expect to be selling it below cost. I would say LBK is a very unique case. You cited some others. But as it relates to the volatility over the last two years, to give you some sense, prices have dropped from €35 per kilo to €8 in less than 12 months. So that was a clear case that we needed to basically recognize the current value of the inventory; that's an anomaly. At least in my short history of 2 years, we've never seen anything like that in terms of kind of the sheer level of volatility, such a short period of time. I would also note that the inventories were slightly higher, which actually made it a bigger, slightly bigger write-off simply because we were making sure that we had enough supply for security purposes. Relative to the raw trends, they're continuing to progress downward, but I'll say, at a more modest rate than we saw in the second half of last year and then entering into this year. As you know, many of the factors impacting prices such as energy prices are a big input that have decreased, but they've stabilized as well. So we're seeing a little bit more improvement. I would note that the other two big input costs for us are logistics and energy; energy has come down dramatically this year. It's largely pretty stable at this point globally. And then logistics as well has been a very, very big improvement over the year, and that has largely stabilized and actually we see some continued downward progression in terms of prices as well.

Thank you. Our next question comes from the line of Christopher Parkinson with Mizuho. Your line is now open.

Hi, good morning. This is Harris Fein on behalf of Chris. Thanks for taking my question. So can you talk a little bit more about the visibility that you have into where consumer sell-through is trending versus any differences you're seeing in destocking at your customer level? Do you think that your customers are still holding above-normal inventories? Or do you think that this is a situation where maybe they're drawing down normal inventories into an area well below normal because maybe there's more supply chain comfort? And I guess based on all that, how are you thinking about the potential for destocking to maybe weaken into 2024 at this point? Thanks.

Yeah, hi. This is Frank. Thanks for the question. We do work very closely with, in particular, our large global key accounts and then also our large regional accounts. And I do think supply chains have improved, so they are willing to adjust some of their inventories. What we are hearing from them is mixed. Some customers are saying that destocking will start to come to an end as we kind of go through the third quarter and into the fourth quarter. Some are saying that it really depends on end market consumer demand and are thinking more that the destocking persists through the rest of this year and starts to improve as we get into 2024. So what we have done is, as we mentioned, in our approach is to really be prudent in the approach and to derisk our plan. However, we are very much focused on working with them to prepare for once temporary destocking is over to improve, obviously, our performance.

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

Hi, good morning. Thanks for taking my question. I really appreciate the transparency on the Functional Ingredients deep dive. What percentage of the Functional Ingredients business would you characterize as a commodity, low-margin business? And are any of these businesses separable now? Or is the bias more towards optimization and the prioritization of investment?

Yes, I'll start and then Glenn, I'll let you add. If you look at Functional Ingredients, what's underneath that is protein solutions, which is about a third or it's approximately - in functional ingredients. We have multipliers and sweeteners. We have core texturants, cellulose, and food protection systems that are kind of within functional ingredients. We feel good with regards to our specialty protein. So we think there's good differentiation there. That represents about half of protein solutions, and there are some more value proteins in there that I would say are a little bit more in a competitive landscape. Emulsifiers, I would say, are probably in the category of being much more competitive to answer your question, and it's something that we're looking at in particular, some of the emulsifiers that are within that category within that business. We feel as though are some differentiated, but there are some core texturants that are probably more challenged competitively. So we're staring at our portfolio. We feel good overall. We're going to put where we have core differentiation, our efforts behind that core, and that's a part of the functional ingredients plan. In areas here are some of the ingredients that are more commoditized or where we don't bring a differentiated benefit. That's where we're going to look to really optimize or possibly even discontinue in those ingredients.

Yes. I would just add two other comments. These are somewhat more commoditized than the rest of our portfolio. But to bring up Frank's point, our portfolio is very much focused on high value add. So you think about our cellulosics business, you think about Xylitol, you think about our soy isolates, really as it relates to specialty proteins, et cetera, we really are focusing a part of our strategy on maximizing the value-add opportunities in our portfolio and have been super turbocharging our customer pipeline activity to focus on those categories.

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

Hey. Good morning, guys. Frank, The DuPont transaction was designed to help you generate better organic growth longer term. And it seems like functional ingredients have been more of a challenge there. So when you think about the potential value of the deal, is there any left? Or can you give us some thoughts on can this - can any of their businesses really help improve your organic growth? And then longer term, how do you think you rebuild the EBITDA from '23 to what level do you think is possible?

Yes, Mike, thanks for the question. I think that if you look at the transaction, we still feel very confident about the value creation opportunities for IFF going forward. We are, as we highlighted, primarily due to destocking, and we have a clear plan to address some of the challenges in Functional Ingredients. If you look at our Health & Biosciences business, tremendous capabilities. The business is performing well. Pharma is also performing extremely well. So, we still feel very good about the future value creation opportunity as we move forward.

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

Good morning, Frank and Glenn. And thank you so much for taking my questions. I have two main questions. So following your intention to explore potential incremental divestitures, what is the current market interest to actually engage with M&A at this point in the cycle? And how difficult is it for potential buyers to obtain financing in this volatile and higher interest rate environment? And how should we think about the timeline for potential divestments? That's my first question.

I'll start, Lisa; I think technically at six questions, but let's unpack them. So on the M&A front, there are both PE firms, but more importantly, strategics out there that would have a high level of interest relative to our portfolio, relative to the former credit markets that have stabilized. So there's tons of PE money out there being put to work, and the credit market is actually in a pretty good place. But more importantly, on the strategic side, there is a very broad appetite relative to partnerships, various assets in the portfolio. As you know, most of the peers in this space actually have very good balance sheets. There's value to consolidation in this space, et cetera. So we feel very good about the robustness relative to the opportunities out there. We will be smart in terms of how we do that. It's got to make sense for us strategically in terms of what's in the portfolio, and it needs to be smart from a value creation for our shareholder. As we mentioned earlier, we're not interested in divesting assets cheaply. We'd rather actually maintain them, fix them, and grow them from that standpoint before we did that. So I think that was your first set of questions. Frank, do you want to take that?

Yes. I think you had a question about visibility into the business, and we do have a window where we are looking at a couple of weeks, obviously, we can look at our orders, and we obviously do a lot of work with regards to engaging with our customers. So - and we move pretty quickly. I said we move very quickly, I should say, with regards to how we adjust our business. And the example is, I think you're seeing us very rapidly focus on productivity, focus on cash flow. We've moved very rapidly with regards to improvement in net working capital. We signaled early on that we were seeing some softness in destocking and end market demand and ingredients, and we quickly put in place 50 commercial resources to address that. So we're moving very rapidly to address any challenges that we have. And then to your last question, Nourish's President is on board, fully aligned and helped to develop the plan you're seeing around Functional Ingredients, as well as helping us to focus on driving Flavors and Systems as we move forward.

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Your line is now open.

Great. Thanks. Good morning. End of the call, but I'll just keep this kind of high level and strategic. I was curious as you think about some of the things that are in this Functional Ingredients portfolio, including, importantly, the things that are maybe less differentiated and then, therefore, less attractive to continue to be in. But what's the role of those things in the dream - the dream of integrated solutions.

Because my understanding is that part of delivering full service to customers is having that full portfolio and that was sort of part of the argument for being a one-stop shop. But now it feels like the financial return profile or managing this collection of businesses that are varying degrees of more or less attractive on a stand-alone basis? Is making that bigger like industrial logic more challenged. Yes, Lauren, I would say that when I look at Functional Ingredients, I'll give you an example where we bring significant differentiating value is within our systems business, where we're bringing in combining multiple ingredients. And for example, emulsifiers are used in over 50% of our systems applications, and what we're bringing for customers. So we still believe that there are integrated solution opportunities as we work across all of Nourish. What we're highlighting is due to destocking, we need a rapid improvement plan based on the need to improve the financial profile of Functional Ingredients. But we still do see that the integration with, in particular, regards to emulsifiers, as well as some of our protein solutions is still bringing a lot of benefit and advantages to customers.

Thank you. Our last question comes from the line of Matthew DeYoe with Bank of America. Your line is now open.

Maybe operator, we'll go to the next one.

Absolutely. Our next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.

Just very quickly, how much of an EBITDA drag do you have from the working capital reductions that you've done this year? And secondly, for the target for Functional Ingredients to sort of match the market. Do you see yet a path for functional ingredients to get above-market growth in say 5, 7 years? Or is matching the market kind of the best fix?

Yes. So the answer to the first question is $180 million is related to bringing inventory out of the system. So as I mentioned, there's $500 million of volume related, and we have a little bit of raw materials price escalation. So the balance sheet will show a net $400 million improvement that way, that's significantly above what we were planning at the beginning of the year; we're sort of making more progress. So the cost of doing that is basically the negative absorption on the P&L from a standpoint for this year. But obviously, it's sort of one and done. And at least for the interim period, honestly, we haven't thought about 5 to 7 years as getting to market and generally, these categories were sort of low single-digit growth as the right target to be in part because we want to be reasonable. In part, we also want to optimize the return on these assets because they typically have a lower ROIC more capital-intensive. So it's not growth, the sale growth, that's really sort of optimizing the returns. But thanks for the question.

Thank you. Our last question comes from the line of Silke Kueck with JPMorgan. Your line is now open.

Hi. I also have a question along those lines. So if there's $180 million in income statement on penalty for reducing the inventories and improving the cash flows, is there a benefit in 2024 if the inventories don't get rebuilt? Like I understand you've done about the same cost, but you feel like an actual benefit unless you rebuild inventories?

You don't need to rebuild them. You just need to may be flat. So as a reference point, our total production will be down around 15% this year. As we mentioned, we expect sales volumes to be down 6%, So there's that 9% incremental to eat through that $0.5 billion of inventory still getting there. So assuming you - that's one and done, then you get the pickup of the 180 next year because obviously, production is at zero at that point going forward. So as you - if you rebuild inventories over time as you grow the business, that actually creates a positive absorption going forward.

Thank you. Our last question comes from the line of Andrew Keches with Barclays. Your line is now open.

Thanks, I appreciate the question. Glenn, if I could ask a timeline for that three times net leverage target changed. I heard you reiterate I didn't hear the timeline though. And do you still expect to get there by the end of 2024 with asset sales? I think even with Lucas Meyer and the other things, it still seems like you'd have additional work cut out for you?

Yes, yeah. To the second question, we're very committed to maintaining investment-grade. As you're well aware, the rating agencies are patient relative to your long-term strategy and goals. We've obviously have been in close discussions with them. They know our plans regarding what we're doing. Again, I would submit to you that the reality is on adjusted cash flow basis, we're at $900 million this year with some one-time items that mainly gets you north of that, probably not the best place to be relative to an $800 million dividend. And we get that, but normal growth trajectory gets you into a much better place from that. On the deleverage, i.e., the activities and the target, we are still committed to heading three times by the end of next year. We have been at work for quite a few months on M&A. That's we've been mentioning portfolio revisits since the end of last year. So there are a number of activities underway from that standpoint. And so we do feel that we have enough, if you will, irons in the fire beyond Lucas Meyer to basically accomplish our goals. Great. Thank you, Glenn. And as we come to a close today, a couple of key points I would like to just reiterate. And first, I want to make sure that we reemphasize that the majority of our business is doing well and is very resilient as we manage through temporary destocking. Second, we are taking action very rapidly to improve our business trajectory and our capital structure. We've implemented a functional ingredients operational improvement plan, and we look forward to sharing more with you of the progress. We're driving divestitures, as you've heard, such as the announced sale of LMC as well as additional opportunities that we're looking at to delever, and we're executing on our strategic priorities with strong improvements in commercial and operational excellence, as you heard today. We do remain confident in our value creation potential, given the relative strength of our pipeline, and we highlighted just within the first half of this year, over a 50% increase versus the prior year, and as the transitory nature of destocking ends, that's going to really position us well as we head into 2024 as the environment normalizes. And then lastly, I wanted to really reiterate, IFF is a great business. We're in a great industry, and we have significant opportunities to create value for our stakeholders and we want to thank each and every one of you for joining our call today.

That concludes the IFF second quarter conference call. Thank you for your participation. I hope you have a wonderful rest of your day.