International Flavors & Fragrances Inc Q1 FY2024 Earnings Call

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's First Quarter 2024 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. During the call, we will be making forward-looking statements about the company's performance and 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 that we issued yesterday. With me on the call today is our CEO, Erik Fyrwald; and our Executive Vice President, CFO, and Business Transformation Officer, Glenn Richter. We will begin with prepared remarks and then take any questions you have at the end. With that, I would now like to turn the call over to Erik.

Well, thank you, Mike, and hello, everyone. I'm excited to join you all today to discuss our solid performance in the first quarter and what we are seeing across the business so far this year. Today, we'll focus on our financial results, our outlook for the balance of the year, and our increased confidence in our reiterated guidance, where we now see us trending toward the upper end. Now, before moving forward, I want to acknowledge Glenn, who today is announcing his plan to retire at the end of 2024 after three successful years with the company. During his tenure, Glenn has driven multiple actions to improve our balance sheet and position the company for financial success. We've benefited from his experience and commitment to transformation and his ongoing leadership to position IFF to drive long-term profitable market share growth. He has also been very helpful to me already as I've come on to the IFF team. Now with this announcement, we have started a succession plan to evaluate internal and external candidates to succeed Glenn. The Board and I are grateful for all Glenn has helped IFF accomplish and look forward to his continued leadership as we identify a successor and ensure a smooth transition. Now turning to Slide 6. We are off to a good start at IFF. We achieved volume growth for the first time since the first quarter of 2022, as volumes grew mid-single digits in the first quarter of 2024 with strong contributions from Scent, Nourish, and Health & Biosciences. We are also encouraged by the double-digit comparable adjusted EBITDA growth as we not only benefited from volume growth but also from productivity gains across our businesses. At the same time, we made important progress focusing our portfolio with closing the divestiture of the cosmetics ingredients business and the announced sale of our Pharma Solutions business. We expect to complete the pharma transaction in the first half of 2025. The proceeds from these divestitures will help further strengthen our capital structure, address our deleveraging goal of 3x net debt to credit adjusted EBITDA, and refocus us on high-growth areas of our business. With our solid performance in the first quarter and our expectations for the remainder of the year, we are cautiously optimistic about the remainder of 2024 and now expect full-year 2024 results to trend toward the higher end of our previously announced guidance ranges. It's still early in the year, and there's a lot more work to be done, but we are focused on building on our momentum to energize our team and return to sustainable profitable growth. Turning to Slide 7. Let me take a step back for a moment and share what I've learned during my first 90 days here at IFF. Now I've spent time getting to know our teams all over the world and meeting with many of our customers. And I'm grateful for the productive discussions. What I found is that IFF has lots of top talent and incredible innovation capabilities. But we're not yet realizing our full potential. With a new leadership perspective on our priorities and a renewed focus on execution by our executive leadership team, we are getting back to basics, and I'm optimistic about what we will do from here. First, we are strengthening our balance sheet and capital structure to create the flexibility we need to achieve our long-term goals. My assessment is we have not consistently delivered on our financial commitments largely due to a need for greater strategic and organizational operating model clarity to enable us to better execute against our goals. I think we are now getting the clarity we need and have taken some decisive steps in the first quarter to help us start to realize more of our potential. We recently rightsized our quarterly dividend to align with the market and our long-term cash flow generation and have made divestiture moves, including cosmetics and Pharma Solutions, to focus our portfolio and drive debt reduction. We also recently announced and are implementing our refocused IFF operating model, which is now business-led, supported by lean functions. This includes the appointment of Ana Paula Mendonça, who has dedicated her career to the advancement of fragrance at IFF, as the President of Scent. This enables Simon Herriott to focus his full attention on driving profitable growth in our Health & Biosciences business unit. We will also put more focus on our Flavors and Functional Ingredients units within our Nourish division. With this operating model change, we have also changed the reporting structure of several of our functions, including R&D, operations, finance, and HR, to go directly into our business unit presidents, so they have the full end-to-end responsibility and accountability for business execution. Their goals will include delivering growth above market with a margin structure that gets us in line with or better than leading peers. Now to make this work, we have also established an operating system, which is a simple set of management processes that collectively define how IFF makes decisions and creates value, provides a framework for standardized processes, responsibilities, and metrics, and defines the tools to help managers drive continuous improvement. We believe this will create greater visibility to track performance, so we drive execution to deliver results in the current period in ways that strengthen us for the coming years. We are also introducing an operating philosophy based on four main pillars: number one, customer focus to drive profitable market share growth; number two, innovation powerhouse to create sustainable new products and other innovations customers value and do this faster; number three, operational excellence to lead our relentless focus on safety, quality, continuous improvement, and competitive cost structures; and four, people, people who are engaged across the organization. We expect that our business-empowered model and operating system will enhance collaboration to profitably win with customers, and by doing so, deliver strong financial performance over time. And while it's still early, I am pleased and encouraged by the energy and commitment of our teams all around the world. With that, I'll now pass it over to Glenn to dive deeper into our results for the first quarter.

Thank you, Erik, and thanks to everyone for joining us today. As Erik mentioned earlier, we're encouraged by the momentum across our business as we start the year, and we are excited to continue to build on these positive early signals throughout 2024 and beyond. In the first quarter, IFF generated roughly $2.9 billion in sales. On a comparable currency-neutral basis, sales increased 5% year-over-year. Our strong quarterly revenue performance was led by mid-single-digit volume growth with sequential improvements across most of our businesses, including Scent, Health & Biosciences, and Nourish. Pricing was modestly positive, inclusive of FX-related pricing in emerging markets, in particular the Argentine peso, where we, like the industry, have indexed pricing to U.S. and/or euro exchange rates that drive pricing changes. Absent this benefit, pricing would have been negative in the quarter, largely in line with our plan. We delivered strong profitability in the quarter with adjusted operating EBITDA of $578 million. This represents a 20% increase on a comparable year-over-year basis, led by volume growth and the contribution from productivity initiatives. As a result, margins improved by approximately 310 basis points to nearly 20% adjusted operating margin in the quarter. Turning now to Slide 9. I'll dive deeper into the business performance across our segments. In Nourish, sales increased by 3% on a comparable currency-neutral basis with strong double-digit growth in Flavors, with improvements in both volume and price. We saw very strong growth in our Flavors business across nearly all markets. Functional Ingredients volume was up low single digits, the first time since the fourth quarter of 2021. Overall, comparable currency-neutral sales declined year-over-year due to our planned pricing actions. In terms of profitability, productivity gains and volume growth drove a 13% increase in comparable adjusted operating EBITDA with solid gross margin improvements in both Flavors and Functional Ingredients. Our Health & Biosciences segment had another strong quarter with both top and bottom line growth. Solid performance in our H&B portfolio, led by double-digit sales growth in Cultures & Food Enzymes, Animal Nutrition, and Grain Processing and mid-single-digit growth in Home & Personal Care, drove a 6% increase in comparable currency-neutral sales. Improved volume and productivity gains led to a 21% increase in year-over-year comparable adjusted operating EBITDA. Scent delivered another excellent quarter, including 16% growth in comparable currency-neutral sales, driven by double-digit growth in Consumer Fragrance and Fragrance Ingredients and mid-single-digit growth in Fine Fragrances. The segment also excelled in terms of profitability, primarily led by volume growth and productivity improvements, which delivered an outstanding adjusted operating EBITDA growth of 55% on a comparable basis. Lastly, in Pharma Solutions, while we saw some improvements from productivity initiatives, these were offset by lower volumes driven as expected due to continued destocking trends, which began late last year. It's worth noting that part of the destocking trend in the first quarter was market-related, and the other is due to Pharma Solutions' initiative to reduce reliance on distributors and convert more of its core excipients business into a direct distribution model. We believe the shift to a more direct approach will enhance our customer relationships, reduce supply chain complexity, and provide greater access to technical resources while also improving margins. Also, as mentioned, we agreed to divest the Pharma Solutions business as part of our portfolio optimization efforts and are confident the business will be positioned to thrive and succeed in partnership with Roquette. Now on Slide 10, I'd like to discuss our cash flow and leverage position. Cash flow from operations totaled $99 million this quarter while CapEx was $118 million or roughly 4.1% of sales. In the first quarter, normal seasonality impacted our free cash flow results. As a reminder, Q1 is usually the lowest cash flow quarter of the year as we make annual cash bonus payments in March. Our free cash flow position totaled negative $19 million in the quarter versus negative $48 million in the year-ago period. We also paid $207 million in dividends through the end of the first quarter. Our cash and cash equivalents totaled $764 million, including $32 million in assets held for sale. IFF continues to make progress in our deleveraging efforts and reduced our gross debt by almost $1 billion versus year ago for a net debt to credit adjusted EBITDA ratio of 4.4x at quarter end. Our trailing 12-month credit adjusted EBITDA totaled approximately $2.2 billion. Please note that the proceeds from the sale of LMC of $810 million were received in April and consequently not reflected in the quarterly results. With the announced Pharma Solutions transaction, we are confident that we will achieve our net debt to credit adjusted EBITDA target of 3x following the transaction close, which we expect will be completed in the first half of 2025. On Slide 11, I'd like to now turn to our outlook for 2024. Based on our improved financial and operational performance in the first quarter and our expectations for the balance of the year, we remain cautiously optimistic about the year ahead and, as Erik mentioned, now expect results to trend towards the higher end of our previously announced guidance ranges. This reflects our belief that volumes will also be towards the high end of our previously announced 0% to 3% with improving trends across the majority of our portfolio. We also saw pricing increases due to FX-related pricing in emerging markets in the first quarter, and therefore, raised our previously announced pricing guidance to approximately 1% for the full year 2024 versus the previous expectation that pricing would decline approximately 2.5%. With these foreign exchange rate changes, we now expect currency will have an adverse impact of 3% to 4% versus 0% to 1% as previously expected on our sales growth, which is essentially offsetting the FX pricing contribution. On the bottom line, for 2024, we are now trending towards the high end of our previously announced adjusted operating EBITDA guidance range of $1.9 billion to $2.1 billion. This assumes continued improvements in volumes as well as strong productivity. While it is still early in the year, volume trends are encouraging, and consequently, we have increased confidence in our ability to achieve our full-year guidance. For the second quarter, we expect sales to be approximately $2.75 billion to $2.85 billion, driven by improved volumes with an adjusted operating EBITDA of approximately $500 million to $525 million.

Thank you, Glenn. Now, as I shared at the top of the call, my first 90 days on Team IFF have been energizing as I see so much potential. We have great talent and capabilities across our global teams, and our solid top and bottom line results from the first quarter show that we are building positive momentum. And it's an honor to lead IFF during this transformative time, and I am encouraged by our positive start to the year and our outlook. Yet we still have a lot of work to do. As the market continues to be very competitive, we are committed to bringing products and innovation that differentiate us from our peers and give customers what they need to win and, in turn, helps them and us drive sustainable profitable growth. And with a solid start to the year, I'm excited to see what we can accomplish going forward. And with that, I'd like to now open it up for questions.

Our first question comes from Kevin McCarthy with Vertical Research Partners.

This is Matthew Hettwer on for Kevin. It's nice to see a strong start to the year. Erik, could you give us some additional context and detail regarding how you've seen the individual businesses react to your new operating philosophy through the first 90 days?

Yes. Thanks for the question, Matthew. As you probably know, I've been on a listening tour since right after the January 11 announcement of my joining IFF. And it's been really great to hear from our employees all around the world and our customers all around the world. What I've discerned from that is that we've had multiple companies coming together with different operating models and philosophies. There was significant uncertainty about the organization structure and how we were going to do things. The executive leadership team has come together very nicely, and I'm proud of the team, and we've been able to clarify the structure and operational model that we have going forward and the four pillars that we're focused on to drive our performance. We've had town halls all around the world, both live and by video. We've touched all our employees and spent special time with our leadership. I think we've gotten really clear on how we're moving the company forward. What I love about it is I feel the engagement of our people around the world. I feel their energy growing. I think there's great acceptance and enthusiasm for the empowered business unit model, for the focus on customers that the job of all of us is to support our teams to win with customers and help us profitably grow our market share. We're also driving our innovation, which, at the core, we're an innovation company, and we need to make sure that we have leading innovation that we're bringing to our customers and ensuring that we're delivering innovation that customers value. And that we have healthy productivity, productivity that helps us strengthen the company and invest more in growth and innovation while doing this with smart productivity, like reducing consultants, reducing layers, driving functional shared service centers where it makes sense, and using technology and information technology. My feeling is that there are great capabilities and great people in this company, and the executive leadership team is coming together to try and unleash that full potential of our people all around the world. Thank you.

Our next question comes from the line of Nicola Tang with BNP Paribas.

Firstly, Erik, you talked there about sort of the change in operating model. Can you talk a little bit about the portfolio? Following the announcement to divest Pharma Solutions, do you intend to pursue any further divestments? Or is that it for now? And then if I could squeeze in another one for Glenn on cash flow, are you still confident in your free cash flow target of $500 million for the year or $700 million on an adjusted basis? And is there potentially upside, given the upward revision in your EBITDA guidance? And could you explain what drove the increase in trade receivables in the quarter?

Okay. I'll start and then hand it over to Glenn. And thanks for the question, Nicola or questions. So on the portfolio, first of all, the Pharma Solutions business will be with us for another year. We see a lot of opportunity to further strengthen the performance of Pharma Solutions over the next year and then beyond that with Roquette. But we have the other four business units that we're going to really focus on driving forward, of course, with Nourish, both the Flavors and the Functional Ingredients. We have the Scent business, and we have the Health & Biosciences business. All our focus now is on supporting those businesses to perform well, to drive profitable market share growth, to drive healthy productivity, to make sure that we're bringing leading innovation and deliver the best performance we can in the second quarter and full year 2024, but do it in ways that strengthen us for '25 and beyond. We're also going through a strategy review process for each of the businesses. We'll examine what it takes to win in each of those businesses in the coming years, what we have to do investment-wise, and make sure that each of the businesses has the right portfolio to win going forward. So you'll hear more about that in the coming quarters and years. But right now, our focus is all on making sure we've got the right strategy, the right capabilities in each business, and the right collaboration culture across businesses to win with customers by bringing leading innovation.

Thanks, Erik. Thanks for the question, Nicola. We're actually trending more favorably in terms of our full-year outlook for free cash flow and adjusted as well. As mentioned, a combination of earnings momentum, actually, working capital is performing better than planned, and we expect actually some improvement and then just some timing on taxes. We're probably going to be closer to $600 million versus the $500 million. I would note that, that also includes higher Reg G costs related to pharma. So we gave you a $200 million number in February that did not include pharma for obvious reasons. The heavy lifting, as Erik mentioned, is the balance of this year separating systems, legal entities, etc. That's roughly about $100 million. So on an adjusted basis, $900 million on a free cash flow reported basis, directionally, $600 million.

Our next question comes from the line of Josh Spector with UBS.

I wanted to ask on your expectations of volume cadence. I mean, clearly, very strong first quarter, so congrats on that. But I think some of the comps on a year-over-year basis actually get a bit easier. So is there something you'd call out that you would say is a headwind we should consider? Or would you characterize your view as just conservatism?

Thanks, Josh. Let me start, and then Glenn can give you more details. But as I see it, still fairly new coming into the company, clearly, CPG company volumes are still soft in the U.S. and the EU. We can't expect a whole lot of market tailwind growth. I do think we've seen the end of most of the destocking outside of Pharma Solutions. Glenn alluded to the Pharma Solutions destocking, both a market destocking and our change in channel strategy. But the bottom line is we can expect a lot of growth from the marketplace, although there are some emerging markets that we're going after that are seeing very attractive volume growth. But overall, our focus has to be growth through bringing leading innovation and winning business with customers. I've heard a lot already about commercial projects that we're winning. But we're also going to increase the focus and understand the projects that we didn't win. Why didn't we win them? What does it take for us to be even more successful with our customers and win even more projects and bring that leading innovation so that customers are growing their market share profitably, and we're growing with them?

Thanks, Erik. Again, Josh, I think, as Erik mentioned, until we see a strengthening in the consumer environment, which has yet to appear, and until we have a few more months underneath our belts, it's sort of hard for us to be incredibly optimistic on the second half. As a reference point, the first half volumes of circa 4% to 5% and the second half, basically 1% to 2%. As a reminder, the first half of last year, because of the aggressive destocking, was down 9%, and the second half, down 5%. So a little bit of it is the lapping as well as we sort of think about providing guidance. But I think the end market, as Erik said, we need to see greater strength there before we're more confident in higher volume growth in the second half.

Our next question comes from the line of Mike Sison with Wells Fargo.

Really nice start to the year. When I think about the first-quarter EBITDA run rate and EBITDA margins, really good improvement of 20%. Guidance would sort of imply that the levels fall sequentially. So any sort of one-time positives during the first quarter that wouldn't reoccur? And just curious, if demand and volume levels remain here, why wouldn't EBITDA margin stay sort of in this 20% range for the rest of the year? And congrats on retirement, Glenn.

Thank you, Mike. So, good question. So 20% for Q1, sort of the implied balance of the year is around 18.5%. That 150 basis points of change, half of that is related to volume and mix, inclusive of LMC. So LMC, you take out about $12 million per quarter and about $25 million of revenue. So it's relatively high margin. Everything normalized, that gets you from the 20% down to basically 19% in a quarter. The residual 75 basis points really is a little bit more net price-to-cost realization in Q1 versus the forecast and then just some timing of expenses. But to answer your direct question, if volumes were to maintain, then we should be somewhere in the 19%, probably 19%-plus range for the balance of the year.

Our next question comes from the line of Patrick Cunningham with Citi.

This is Eric Zhang on for Patrick. What are your expectations for price and cost for the full year? The price guidance appears to be slightly favorable when you account for foreign exchange. Are there specific areas where you are seeing structural pricing changes, or is this just less decrease than you anticipated?

Yes, Eric, you're right. I mean, for the full year, we're expecting a small net positive, as I mentioned, a little more biased towards Q1 than the balance of the year. Our pricing actions, which were largely givebacks this year, were highly focused on the Functional Ingredients space. We are tracking well against the expectations that we set for the year. We believe that the improved performance in the business is in part related to these pricing actions on top of the other actions. We don't see sort of any additional pricing for the balance of the year at this point in time. In general, if we look at the inflationary environment for the balance of the year, it's pretty stable. I think commodities are flattish to maybe a tad up. Generally, energy is trending down, particularly in Europe. And logistics is trending slightly up, particularly ocean freight, given what's happening in the Red Sea. But generally, stability and, as we mentioned, a little more positive net price in the first quarter than the balance of the year. Thank you, Eric.

Our next question comes from the line of David Begleiter with Deutsche Bank.

Erik, does the improvement in Functional Ingredients mark a turn in this business? And looking forward, can the entirety of this business return to prior levels of sales and earnings? Or is there some portion of the business that will not due to low-cost Asian competition?

Thanks for the question, David, and glad to be back with you again after some years. Absolutely, it marks the beginning of improvement in the Functional Ingredients business, and I'm very pleased to see that after a long, tough spell. What I would say is that we are putting more focus on the Functional Ingredients business. I'm very pleased to see the start of what the team is working really hard to make a sustained turnaround. In addition to better execution, which is happening, we are doing a strategy refresh and looking at all the product families and our systems approach across the Functional Ingredients business. We are focused very much right now on delivering a strong improvement in 2024 but also on what it takes to ensure that, that improvement continues into 2025, starting with the second quarter '24, then the third quarter, but the full year of this year, but ensuring that we're doing the right things to strengthen for '25 and beyond. You'll hear more about that in the coming quarters. But it is the start of a turnaround, and I'm very pleased with the progress that the team is making and the actions they're taking both with customers and on productivity. We will see how good we can do in '24 and then we'll focus on '25, but making progress.

Yes. I would just add to that, David. As we've mentioned in the past, we've stated we didn't think we're going to get to full recovery until '25. We're pleased by the start of this year. A lot of the service elements are 100% back to where they should be. Pricing actions have been effective, with more innovation in the pipeline. The last piece of the equation is on the cost side. We're going through a very extensive review of our manufacturing and procurement operations. That probably will be implemented late this year into early next year as the final piece to get to the margin structure where we need to be. Thanks for the question.

Our next question comes from the line of Adam Samuelson with Goldman Sachs.

Would love to get your perspective on volume trends by region in the first quarter and if there's anything you would call out as notable areas of outsized strength or weakness versus the portfolio as a whole up mid-single digits. And I think we could probably exclude pharma from that discussion. And again, given that first-quarter performance, is there anything where the regional performance would differ materially over the balance of the year?

Adam, good question. Regionally, we have seen greater strength in the combination of Asia and LatAm, so more of the emerging markets from a volume standpoint, and generally a little softer in North America and in EMEA. That's probably not dissimilar from what others are seeing in the marketplace. If we look by business, Scent had a phenomenal start to the year, with 9% plus volumes. Nourish and H&B in the 4% range. As we think about the balance of the year, we're not planning on Scent continuing at these very, very high levels, so some softening from these there and then a little bit softer for H&B and Nourish, and then pharma actually improving because they were down about 9% in Q1 and actually getting to flattish as we move into Q2 and the balance of the year. But generally, we're seeing the regional balance, more emerging markets, and we're expecting that to continue at least through the second quarter.

Our next question comes from the line of John Roberts with Mizuho.

Best wishes, Glenn, and thanks for all your help. Erik, IFF has had more opportunities than most companies to promote from within for the CEO and CFO positions. Do you think there's anything that needs to change in the organization to develop a deeper bench, so the C-suite transitions are smoother? Or is there just a culture on the Board to look outside for C-suite positions?

Well, thanks for the question, John. I think it's a really important one. To me, the most important thing we do as leaders is make sure that we have the right talent in the company, that we develop the right talent, and we give them the opportunities through promotion to continue to advance their careers. I always prefer internal promotions. But sometimes external talent needs to come in to fill gaps or when we don't have the right talent inside. I can tell you that, like at Syngenta, I very much want to have my successor come from inside when I do retire at some point. Also, I'll point out that the one significant executive leadership change that we've made so far was Ana Paula Mendonça being promoted to run the Scent division as the President of Scent. If you look at her background and talk to the people across the company and customers, there was great enthusiasm for her promotion, and I like that. I will continue to work with the executive leadership team and with the Board to ensure that we're developing the right talent inside the company to promote from within wherever we can.

Our next question comes from the line of Ghansham Panjabi with Baird.

I guess, Erik, first off, as you sort of meet with customers and go on your listening tour, how would you sort of objectively assess the moats of the residual businesses that will be part of IFF going forward? In terms of Scent, what drove the first quarter in terms of high performance, especially Consumer Fragrances? Was that sort of share gains? And if it was, what was that driven by?

Thank you, Ghansham. It's great to reconnect with you. In the remaining businesses, we have significant innovation capabilities and exceptional people who understand customers and possess consumer insight. We have both the personnel and capabilities, including innovation, to achieve great success. However, after discussions with our team and customers, it's evident that we haven't fully realized our potential. Our leadership is focused on unlocking full potential through clear decision-making, end-to-end business operations, and well-defined strategies and execution, all while nurturing a collaborative culture that enhances our ability to provide solutions to customers and improve productivity. I believe we are making progress, but there is still much potential to uncover. Conversations across the company reveal a strong enthusiasm about IFF's current initiatives and future opportunities. Specifically regarding Scent, it has primarily been customer-focused, bringing significant innovation. I have spent time with our talented perfumers, and I am proud to be part of a company that values their expertise. Leading consumer packaged goods companies have recognized our perfumers by name for their contributions to success. We need to engage not only our perfumers but also their entire teams to co-create exceptional fragrances and consumer products, whether those are shampoos, laundry detergents, dishwashing liquids, or body wash. I've realized that scent plays a crucial role in the success of consumer products. Our talented perfumers and their teams provide advanced scent technology and formulations that help clients develop leading consumer products, which has driven our growth. I anticipate that under Ana's leadership and with her outstanding team, we will maintain strong performance.

Our next question comes from the line of Salvator Tiano with Bank of America.

If I remember correctly, you mentioned $150 million in productivity gains for the year. Can you discuss what the benefit in Q1 was? What do you expect for the rest of the year? And considering the strong gains in the first quarter, is this number likely to increase for the remainder of the year?

Good question, Salvator. We are trending towards approximately $200 million for the full year in productivity, which informs our guidance towards the upper range of our EBITDA projections. That's roughly $50 million per quarter, making it a consistent achievement. As we've mentioned in earlier calls, we've made significant strides with our operations and procurement teams in driving a disciplined approach to cost reduction, including SKU rationalization and assessing best practices at each plant. There are plenty of additional opportunities ahead. We're applying a zero-based methodology to our ingredients platform, which will unlock further possibilities. We've also been exploring opportunities within RSA to leverage our global shared services and focus on indirect spending, ensuring we maximize every dollar while advancing technology to automate and streamline work processes. We're confident about achieving $200 million, and as we look ahead, we plan to maintain strong productivity results. Thanks for your question.

Our next question comes from the line of Lisa De Neve with Morgan Stanley.

Congratulations on the strong first quarter. My first question, so with the announcement of the pharma division, which is expected to complete in the first half of next year, can you just share where you see potential scope for optimizing your balance sheet position and maybe where you see some debt that could be reduced or be up for redemption or that may not require any refinancing? And then I'm going to sneak in a second question. During the presentation, you mentioned that your finance and HR departments, amongst others, are now directly feeding into your divisions. Can you shed some light on their compensation structure of the variable pay they may or may not receive and what key KPIs they have to deliver on this?

Sure. Lisa, this is Glenn. So we're in the early innings of deciding our liability management strategy. As you know, we will bring in circa net proceeds of $2.4 billion from pharma. Coincidentally, we have maturities cumulatively for '25 and '26 that are $2.4 billion. But we're actually taking a more holistic look, balancing the trade-off between interest cost savings and notional debt repayment, so how we think about bringing in some of the cheaper debt, as well as refinancing risk. We'll think about bringing some towers down as part of that. So there'll be more to come as we get closer to finalizing the close of the deal. But we're thinking about not just the immediate maturities but how to optimize the structure going forward. So with that, Erik, I'm happy to take the next question. Do you want to take the next question?

Yes. So on the functions feeding into the business units, it's clearly being done so that the business units can drive their performance. There will be no changes to the 2024 plan because everybody is set and clear about it, and we're not making changes. But effective in 2025, those functions that will be reporting into the business units will be incentivized on the business unit performance. A large part of their incentives will also continue to be centered around overall corporate performance and collaboration across business units. The more senior level the people are, the more their corporate component. But clearly, we want to drive business unit alignment and ensure that everyone on that business team is driving their business unit's performance while collaborating to enhance their business performance and that of others. I would also say we will continue to have corporate functional leadership that ensures functional best practices across the business units and that each functional person has great career opportunities across the company. So it will be a combination. But clearly, each business unit will be highly incentivized to drive its performance with collaboration to enhance their performance and that of other businesses.

Our next question comes from the line of Mark Astrachan with Stifel.

Two clarifications and a question. It sounds like there was a lot of benefit in Scent volumes in the quarter. I guess, that partly explains the big EBITDA number and growth rate on a year-on-year basis. Is it fair to say that, specifically the Scent EBITDA growth will normalize as we head through the year? And I guess, broader picture, the same thing on the total business. If you could maybe tell us how much you think the Q1 volume growth had to do with channel refill from the reversal of destocking and how much is really what your customers are ordering from you, that would be helpful.

So your second question, Mark, hard to definitively understand what's going on downstream in terms of the supply chain. However, in general, there was a little bit of volume that went from Q4 into Q1, but probably less than 0.5 point. We were reducing prices in certain segments. Customers decided to push some orders into Q1. But overall, we feel there isn't any restocking in the marketplace. There's an absence of destocking but no view that customers are restocking at this time. In terms of your question on Scent volumes, Scent had a very strong first quarter. Note that it was stronger in consumer versus fine, making it sort of mix-neutral versus the enterprise standpoint. We're not anticipating that those high single-digit volume gains will continue through the balance of the year, so that is a piece that's reflected in our balance of the year guide being lower from a volume standpoint.

Our next question comes from the line of Lauren Lieberman with Barclays.

I had two questions. First was just on the Nourish performance in the quarter and volumes being up. Food industry volumes are still quite weak. So I was kind of curious if you could square for us your performance outside of inventory rebuilding versus kind of what we're seeing in end market demand. The second thing was, Erik, it was very helpful to hear the update on the org structure and the direction you're moving in. I was curious though, that's a little bit backwards question, the org structure that was in the process of being set up, and Glenn, you were obviously a part of that. I understand the notion that it's been deemed not the right path forward, but there were surely merits to that plan. There were elements there that would bring something positive or there was an intention. So I'm just curious what, if anything, you think you could give up or forgo in not pursuing that model and if there are ways to kind of bring that into the structure org that you're going to be setting up? If that didn't make sense, I can try to clarify.

No, no, I'll start, and then Glenn can add to it. First of all, the organization structure idea was to have a market-based structure. For example, Health & Biosciences would have been split into four different units. As we've come together as an executive leadership team and discussed it, the belief is that you gain the most by ensuring that your innovation and R&D engine stays within the business and the manufacturing and the commercial so that you have that end-to-end and are going to customers with expertise that connects all the way back to R&D and what we call IC&D, the innovation, creation, and design capabilities we bring. We have different businesses that hit the same markets. Home & Personal Care, both our biosciences business, and our Scent business have a lot in common with customers. We'll continue to have a global key account leader for large accounts that represent the company, but then we'll have experts from the business units coming into that account and working with that account, which is what the accounts want. They want both that overall IFF relationship, which will include the business presidents and will include me and others, but also that coordinated effort. They want to see the experts who know the innovation details and can bring that innovation to them.

Yes. The original premise, which predates me, was that combining Flavors and Ingredients would represent a significant revenue synergy opportunity through cross-sell. The focus was put on synergies as opposed to optimizing the individual businesses. That is being shifted the other way, where these businesses will run much better with a single focus on either Flavors or Ingredients. As Erik said, there are other mechanisms to help cross-sell, particularly with the global key accounts to develop long-term plans, etc. We’ve seen that the more we get our Ingredients team focused only on Ingredients, the better results we achieve. So I think that's the big shift from three-plus years ago when the view was put together. To your first question, very early innings but cautiously optimistic. Our trends in our Flavors business were over 4% in volumes and the Ingredients business was about 3.5%. Based on what we can measure relative to our competitive set, we feel that we're at parity or gaining share on both sides. I would caution, particularly on the Ingredients business; it is early. There's a lot of remediation needed in that business. But it’s encouraging that we’re starting off relative to our peers in a good place.

What I would just add is that I think Flavors had a good pipeline that the commercial team was able to land, and in Ingredients, it was a combination of a strengthening pipeline and also pricing actions that led to regain some share that was lost due to prior high pricing increases. We've now recovered some of that with some price givebacks.

Our next question comes from the line of Laurence Alexander with Jefferies.

I just want to follow up on the comments about the inventory dynamics downstream. If you look a little bit further out, what are you hearing from customers about either them shifting their innovation strategies and therefore having more demand pull for your product or, longer term, needing to reset inventory levels in terms of working capital days or other metrics? And then would that be a net tailwind or headwind for you from current levels?

Since joining, I’ve had the opportunity to meet with over 20 or 30 customers. A consistent message is that they are shifting from focusing on growth through price increases to needing innovation, which has become increasingly essential. This highlights the importance of our end-to-end business units that can deliver innovation quickly and effectively, as it is what our customers desire in order to grow their businesses profitably. They are looking for more innovation, and that is what we plan to provide. Their growth depends on it, as does ours.

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

Given your revenue forecast for the second quarter, which at the midpoint is down about 5%, are your April volumes down 5%, on a sequential basis, that is? Or can you talk about what’s happened sequentially? And then second, when you look at your first quarter performance versus your fourth quarter performance, your revenues were up about $200 million, and your cost of goods sold was up, I don't know, maybe $30 million. Can you discuss what the dynamic is behind that, which allowed your...

And Jeff, that second part of your question, was it Q4 to Q1? What was your reference point?

Yes, exactly right. Because there's not much change in cost of goods sold and revenues were up a couple of hundred million.

Yes, yes, yes. Well, there are several timing elements in the fourth quarter and sort of the mix of the business in the fourth quarter vis-à-vis Q1. Generally, the productivity and net price dynamics are quite similar, so I'd say the fundamentals were. But you have some mix dynamics and one-time items related to that when considering Q4 to Q1. Yes, you mentioned the decline. The decline sequentially is about $100 million from Q1 to Q2. About a quarter of that is associated with the absence of LMC in the mix. The other part is just sort of the outlook in the business, which includes a little bit of seasonality. Versus prior year, at this time last year, we had savory solutions, and we also had LMC in the mix. So there’s a substantial reduction in revenue on a year-over-year comparison. Volumetrically, regarding what we're seeing in the second quarter, we’re obviously well into the quarter at this point. We're anticipating a 5% to 6% all-in volume growth versus the 4% for Q1. April was an extremely good month, but last year, it was an extremely poor month. So there's a little overlap from that standpoint. But May and at least the June book is trending towards approximately 5% plus in terms of performance for the quarter.

There are no questions registered at this time. So I will pass the call back over to Erik for concluding remarks.

Thank you all for joining today. Let me just close with two comments. First of all, Glenn did announce his pending retirement, but I just want to ensure he’s not leaving yet. There’s lots more work to do, and we're enjoying having him as part of the executive leadership team to help us unleash our full potential. The second point is it's really great being part of Team IFF. We've got terrific people and great innovation capabilities. We're going to do all we can to unleash our full potential and try to delight our customers, employees, and shareholders. Thank you very much.

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