Please stand by, your program is about to begin. At this time, I would like to welcome everyone to the IFF Third Quarter 2021 earnings conference call. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. . Participants will be announced by their name and Company.

In order to give all participants an opportunity to ask their questions, we request a limit of 1 question per person. I would now like to introduce Michael DeVeau, Head of Investor Relations. You may begin..

Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to IFF's third quarter 2021 conference call. Yesterday, we issued a press release announcing our third quarter financial results and our outlook for the remainder of 2021. A copy of the release can be found on our IR website at ir.iff.com.

Please note that this call is being recorded live and will be available for replay. I ask that you take a moment to review our forward-looking statements. During the call, we'll be making forward-looking statements about the Company's performance and business outlook.

These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially from our forward-looking statements, please refer to our cautionary statement and risk factors stated in yesterday's press release.

Today's presentation will include non-GAAP financial measures which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.

Please also note that we will be using combined historical results for the Third Quarter defined as 3 months of legacy IFF results, and 3 months N&B results.

And for 9 months year-to-date, defined as 9 months of legacy IFF, January to September, and 8 months of N&B, February to September in both the 2020 and 2021 periods to allow for comparability in light of the merger completion on February 1st, 2021.

With me in the call today is our Chairman and CEO, Andreas Fibig and our recently appointed Executive Vice President and CFO, Glenn Richter. We will begin today's call with our prepared remarks, and then we'll take any questions that you may have at the end. I would now like to turn the call over to Andreas..

Thank you, Mike. Good morning, good afternoon and good evening, everyone. And I thank you for joining us today.

Before I dive into our performance results, I would like to take a moment to thank all of our dedicated colleagues throughout the world, who have continued to work tirelessly in a challenging environment to fuel the global consumer goods supply chain and meet our customer’s needs.

I can't thank each and every one of you enough for your hard work, dedication, and focus. I also want to take a moment and welcome Glenn Richter, who is joining us on today's call for the first time. As you know, Glenn joined us a little over a month ago as our new Executive Vice President and Chief Financial Officer.

I'm sure you will all find that his experience aligns perfectly with our strategic goals, making him an incredible asset to our team. I also want to thank Rustom for his leadership and contributions during his time as IFF's CFO. Rustom played an important role in our combination with N&B, and for that we are immensely grateful.

He has been important putting IFF in the strong position it is today. We wish him all the best in his future endeavors. On today's call, I will begin by providing an overview of year-to - date performance, including the progress we have made so far on our integration.

I will then turn it over to Glenn (ph) who will provide a more detailed look at our third quarter financial results. Before we conclude today's call with a question-and-answer session, Glenn (ph) will also speak to our outlook for the remainder of the year.

Now, as I mentioned, I'd like to kick us off on Slide 6 by discussing our financial highlights for the first 9 months of 2021. Throughout the third quarter, we remained laser focused on extending the momentum IFF established in the first half of 2021.

In the first 9 months of 2021, IFF achieved $8.6 billion in sales, representing 10% growth with 7% on currency-neutral basis. A strong reflection of the strength of our market-leading platform, and the compelling position we have established with our customers as a combined Company.

We delivered a 22% adjusted operating EBITDA margin and a combined EBITDA growth of 5%. As we will discuss in more detail, we continue to confirm meaningful inflationary pressure due to higher raw material, logistic, and energy costs.

We have maintained our robust cost discipline efforts and are entering the fourth quarter with continued financial strengths, having achieved $884 million free cash flow or approximately 10% of our trailing 9 months sales, driven by strong cash generation. This cash generation has enabled us to stay on track to meeting our deleveraging target.

Finally, as I've mentioned in previous quarters, continued refinement and optimization of our portfolio is a critical component of our ongoing integration efforts.

I am pleased to share that we have completed divestiture of our food preparation business, and are on track to complete the divestiture of all Microbial Control business in the second quarter of 2022.

Together, these 2 important divestitures will create a more focused IFF, allowing us to hone in on the constraints of our core business segments and create a stronger, more-focused business.

We will continue to evaluate and optimize our portfolio as we move forward with our integration, looking for opportunities to rapidly divest in other non-core businesses. We started this year with a simple commitment, to focus on execution and deliver on the potential of the new IFF.

I'm pleased to say that even in a very challenging global environment, our team has met our integration objectives by delivering strong results with continued sales momentum and profit growth. Now, turning to Slide 7, I'd like to walk you through some of the regional sales dynamics underpinning our results for the last 9 months.

First, I'm excited to share that we continue to experience strong growth in all 4 of our key operating regions despite ongoing and unique market uncertainties that have persisted across each geography. In North America, we achieved 7% growth across all 4 of IFF's business divisions, led by high-single-digit growth in Nourish and Scent.

These 2 divisions have continued to perform exceptionally well quarter after quarter. In Asia, we experienced a 7% increase in sales led by continued double-digit growth in India, as well as a low single digit growth in China, even in it's particularly strong recent market complexities in the region.

From a business unit perspective, Nourish, Scent and Pharma Solutions continued to carry the region's growth throughout the year to-date.

Latin America continues to be our strongest performing region and sales growth leader, having achieved 12% growth largely fueled by double-digit growth in our Nourish and Scent divisions and continued local currency strengths.

Perhaps, most impressive is a 7% sales growth at our EMEA region achieved to date, which includes a robust double-digit increase in the third quarter and prices performance on our Scent and Norridge divisions stock.

This encouraging rebound, with Scent delivering double-digit growth led by our client fragrance business, and Norridge delivering high single-digit growth, led by our food service business.

We expect this momentum to continue through the remainder of the year and we will stay diligent to ensure our business remain nimble, positioned to perform against any new supply chain challenges that may arise. Moving now to Slide 8, I'd like to take a closer look at our 9 months year-to-date sales performance across our key business segments.

Our largest division, Nourish, has been a strong performer throughout the year, achieving currency-neutral sales growth of 9% with broad-based strength from all flavors, ingredients, and food design businesses.

Scent has had a similar strong year delivering 8% in currency-neutral gross to date led by impressive double-digit growth in fine fragrance, as well as strong growth in Consumer Fragrance and ingredients. Health & Bioscience has seen strong demand in key focus areas, including Home and Personal Care, animal nutrition, and food enzymes.

As you know, we are in the process of selling our microbial control unit, which has continued to experience headwinds through this year, but has rebounded from COVID impacted loss with growth in both Q2 and Q3. This divestiture should further enhance the performance of this important division.

Pharma Solutions, despite significant challenges, is flat so far for the year. Supply chain challenges have had an outsized impact on this divisions throughout the year. While we have seen encouraging growth in our industrial business, the division still struggles to meet customer demand due to all mature availability challenges and logistics issues.

Now on slide 9, you will see that we have outlined some of the factors influencing the gross profitability of each of our 4 divisions so far this year. As I previously mentioned, Nourish had had a strong year with Flavors & Ingredients experiencing double-digit growth.

We have been working hard in our execution to manage the volume and costs to limit margin impact from higher raw material costs, which continue to be a headwind on our profitability.

While we have seen some margin impact of about 20 basis points in the year, we are proud of how our execution has mitigated much of the negative headwinds while delivering meaningful growth. Our team has done an exceptional job increasing prices to combat inflationary pressures, something that will continue to be critical as we move forward.

At Health & Biosciences, we mentioned broad-based growth across the markets. But here we are seeing significant margin impact from higher logistic costs.

As shared on our second quarter call, part of this that freight rates have increased significantly, but also, we have -- having higher logistic costs to balance robust customer demand and available capacity. We have increased capacity investments in this business to support long-term growth.

Investing in R&D and Plant technology to increase output later this year and into 2022. The Scent division is certainly realized the strongest all-around bounce back as consumer demand rises across end markets.

Notably, Fine Fragrances alone as realized, 36% growth year-to-date was double-digit growth in cosmetic active, and continued solid performance in Consumer Fragrances. At the time, since profitability expansion of a 110 basis points has been led by higher volume, favorable mix, and higher productivity.

As I mentioned, Pharma Solutions was the only division in which we did not experience sales growth due to continued global supply chain challenges that have impacted our ability to meet strong customer demands.

These challenges, including supply and logistic constraints and ongoing inflation, have in turn, significantly pressured our margin compared to the first 9 months of 2020.

Moving through the fourth quarter and entering 2022, we will be closely tracking supply chain dynamics and will continue to prioritize returning our Pharma Solutions business to the profitability we know is achievable. And in the fourth quarter, we're expecting year-over-year, top and bottom-line performance to improve.

As we have been talking about today, IFF is realizing very strong sales momentum across our business. This is a reflection of a powerful new position we have created through our combination with the N&B business, and the compelling value proposition we can offer to our customers.

While we are pleased to put many of the gross hesitance relates to the pandemic behind us, it is important to understand that our growth this year, is in fact meaningful above pre-pandemic results. If you look at the total business, you will see that on a comparable 9 months proforma basis, the new IFF has realized 9% sales growth over 2019 results.

This strength is broad-based to each segment is realizing strong rose above pre-pandemic levels. Nourish as a business that was particularly hard hits with the pandemic involves strongly growing with sales growth of 9% compared to performance 2019 in 9 months period.

And for important, especially given that much of the integration work is coming from within this division. These results showcase how acquisition in the market has been fundamentally strengthened through the merger and how our teams are delivering the full potential of IFF to our customers.

Moving to slide 11, I would like to discuss a strong progress we have made in terms of synergy realization. For just 9 months since completing our merger with N&B, our synergy progress reaffirms the tremendous opportunity we have in front of us as a combined Company.

Having received significant and highly encouraging positive feedback from our customers, along with persistent robust customer demands, we are confident in our ability to meet our revenue target. To date, revenue synergies have started to contribute to our top-line performance and we are pleased that our project pipeline is strong and growing.

The first 9 months of 2021, we've achieved approximately $40 million in cost synergies, representing nearly 90% of our 2021 cost synergy target was 1 quarter to go. This was largely a result of the comprehensive savings programs we have implemented, where we are leveraging our increased scale and optimizing on our organization.

I'm confident that we will more than exceed our $45 million year-one synergy target. And I'm encouraged by the continued progress we're making towards achieving our three-year run rate of cost synergy target of $300 million. Now, before I turn the call over to Glenn (ph), I want to spend a second to really underscore what he brings to us here at IFF.

His background is perfect, but there are 2 areas I think really standout. First, he brings a tremendous was private and public companies and leading finance teams to enhance discipline and built processes that drive towards a goal of shareholder value creation.

He has time and time again shown an ability to help businesses accelerate top-line growth while driving margin expansion. In this way, he consistently implements productivity initiatives with lasting impact. Second, he has been through several large-scale M&A integrations with a track record of strong success.

As we continue to execute on our multi-year transformational integration, this experience is invaluable. With that, I'd like to turn the call over to Glenn (ph)..

Thank you for the warm welcome, Andreas, and good morning, afternoon and evening to everyone. Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community.

And the most common questions I've been asked is why did I join IFF? And what are my near-term priorities? Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction. There were 3 very compelling reasons for me to join IFF.

First and perhaps most importantly, IFF is a Company that is truly making a difference in helping solve some of the world's biggest challenges.

We're delivering reliable, innovative, and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions, and creating a more sustainable environment. Second, the industry has very attractive organic growth characteristics benefitting from continued strong consumer tailwinds.

From increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets, and new consumer needs presented by aging demographics in developed markets. I also believe that scale will become an important basis of competitive advantage.

As customers demand leading ESG platforms, increased innovation and speed-to-market, global supply chain resiliency and help in navigating increasingly complex regulations. Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry leading platform.

And since joining IFF, I've tried to immersed myself in the business completely. Visiting sites, meeting with our business and operations teams, and spending time at our R&D in creative centers.

I've also prioritized hearing from you, our investors and analysts and frankly, today I'm even more bullish on the strength of IFF 's global capabilities and the tremendous long-term potential we have to drive strong top and bottom-line growth. Relative to my near-term priorities, I have 4 primary areas of focus.

By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses.

Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics, and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital.

A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity. And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining.

In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you. With that, I'd now like to provide an overview of our consolidated third quarter results.

In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division, and strong increases in both Scents and Health & Biosciences. In terms of contribution, volume performance was the primary driver of our growth.

As pricing represented approximately 2% points in the quarter. So, our gross margin continued to be challenged by inflationary pressures. It was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%.

While we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points, as our pricing actions recovered only about 65% of our raw material increases, or approximately 50% in the third quarter when we include raw material, logistics, and energy, increases.

As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis. But expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization.

Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of a $1.47. On the next few slides, I will dive deeper into the third quarter financial results for each of our 4 divisions. Turning to slide 13, I'll start with our Nourish division, which had an exceptional quarter.

In Q3, Nourish achieved 17% year-over-year sales growth, or 15% on a currency neutral basis. Driven by robust double-digit growth in Flavors for the second consecutive quarter.

Ingredients also grew double-digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosic, LPG and food protection increasing double-digits.

Food Design also grew double-digits led by Food Service, where pandemic related restrictions continued to be lifted with away-from-home consumer behaviors returning to more typical levels.

As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points.

On Slide 14, you'll see that our Health and Biosciences division saw year-over-year sales growth of 7% or 5% on a currency neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures and Food Enzymes.

Our health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a two-year basis.

As Andreas mentioned earlier, inflationary pressures and higher logistics, and energy costs to keep up with the robust customer demand has challenged our margins across our business with H&B particularly impacted, which drove an operating EBITDA decrease of 12%.

Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher airfreight volumes, where we have increased inter-Company shipments to manage available capacity.

As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output. Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin. Turning now to Slide 15.

Our Scent Division continues to perform extremely well and experience strong growth, achieving 10% year-over-year growth or 9% growth on a currency neutral basis. This performance was driven by Fine Fragrances continued rebound, which grew approximately 36%, led by new customer wins and improved volumes.

Our ingredients category also continues to perform well, and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter, led by strong performance in both cosmetic actives and Fragrance ingredients.

While our consumer Fragrances business saw modest low single-digit growth against a strong double-digit year-ago comparison, this is a marked improvement from Q2 and we expect further growth as we move forward. On a 2-year average basis, Consumer Fragrance remains strong at 9% in the third quarter.

Scent also experienced adjusted operating EBITDA growth of 10% driven by strong volume growth and favorable mix. Margin was down modestly to the higher raw materials and logistics costs a trend we see continuing. I will provide what content shortly.

Lastly, in our Pharma Solutions business, we saw a current seat neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistic disruptions, which have made it challenging to meet persistent and growing customer demand.

While has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison. The division's adjusted operating EBITDA margin also continue to be impacted by higher sourcing, logistics, and manufacturing costs.

We also continue to see the impact of force materials and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines. While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic.

And as Andreas mentioned earlier, we remained focused on returning the division to profitability as these injured sheet conditions stabilize. Now, on Slide 17, I would like to review our cash flow position, and leveraged dynamics for the first 9 months of 2021, both of which remain a top priority for us.

So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion. As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities.

Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back-half weighted.

From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target with our cash and cash equivalents at finishing at $794 million, including $122 million restricted cash with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan.

Our trailing 12-month credit adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt-to-credit adjusted EBITDA.

With our continued strong cash flow generation, including proceeds from divested non-core businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than 3 times Net Debt to EBITDA by within 20 to 36 months post transaction close.

Turning to slide 18, I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year. As I mentioned earlier, IFF's and the industry at large has seen significant year-over-year inflation increases, which have been accelerating in the recent quarter.

The inflationary pressures we are seeing today are significant. Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October. Price of wheat is up almost 40% in the last 12 months through October. Brent crude prices have more than doubled over the past 12 months to the highest level since October, 2018. In the U.S.

natural grass prices are up 100% from a year ago. And in the U.K., they're up about 500%. And transportation rates have increased significantly given the high demand and limited capacity to ship.

Across the raw materials, logistics, and energy markets, like many industries around the world, we have seen cost accelerate each quarter, which has led to our margins being adversely impacted. For example, in the first half of 2021, gross margin was down about 150 basis points. Following the third quarter, we were down about 210 basis points.

As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022.

Consequently, this will require us to successfully implement significant pricing actions across each of our businesses, as well as improve our sourcing efficiencies, accelerate operational improvements, and capture targeted integration synergies to drive profit growth.

Now moving to slide 19, I would like to share with this means for our consolidated financial outlook. For the full-year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand.

For the full year 2021, we are targeting $11.55 billion in total revenue, or approximately 8.5% growth up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter. We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid.

As mentioned, unprecedented macro supply chain challenges and inflationary pressures continued to impact our industry. And we do expect this to continue in the foreseeable future. While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures.

And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21% down from approximately 21.5% that was forecasted in September. About half of this reduction is due to lower gross margin in the third quarter, and the other half stemming from higher cost trends we see in the fourth quarter.

For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges. We also adjusted our capex spend outlook down, as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses.

Overall, we are pleased of the progress we've made to-date. Strong, top-line growth, and the commitment to meet near-term macro cost pressures. And we're confident that IFF is on the right path. Employees continued success across our core business. I'll now turn the call back over to Andreas for some closing remarks..

Thank you, Glenn. Before I wrap it up, I'd like to reiterate how proud I am of IFF and our thousands of employees around the world who have showcased a remarkable resilience toward an evolving and continuously uncertain industry environment.

They have continued to deliver strong year-over-year sales and profit growth and I'm confident that with our top notch financial operational structure supported by Glenn's financial leadership, we will be able to maintain and bolster our strong financial profile by continuing to deliver for both our shareholders and our customers.

Q4 is off to a solid start, and I know that our momentum will propel us to achieve strong sales growth for the full year and bring us another step closer to achieving our synergy targets. In some, it is clear to me that IFF is in an incredible strong position. We knew entering this year that the new IFF was poised to change our industry.

But to do so, we had to execute. As we look at industry-leading sales growth for the full year, I'm just so proud of how everyone here stepped up and executed on our vision and delivered against our potential. IFF is once again the clear leader of this field, creating another iconic chapter in this Company's 132-year legacy.

This core strength of the business is why I felt now was the perfect time to start to transition to find IFF's next CEO. I have every confidence that now is the right time to let the next chapter of IFF's legacy begin. As we announced, the search has begun for my successor, and we expect that person to be in place by early 2022.

I'm fully committed to a seamless transition and look forward to talking to you all about this more in the near future. Thank you all for your support. With that, I would like to open the call for questions. Thank you..

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

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

Yeah, good morning. Thanks for the question. I would have to break them down relative to component parts. First of all, relative to topline, as we mentioned, we're very pleased for tracking extremely well versus the long-term targets and then when you take a look at how we're tracking versus competition, which is another great indicator.

We're actually very pleased in terms of yards. So, we check that we'd say relative to our deleveraging target, getting below 3 times by year 3. We are feeling very comfortable with that. Combination of the cash flow generation from the business remains strong.

And as you know, we've announced a couple of divestitures and we'll continue to look at other non-core businesses. So, I would check both that -- both the deleverage as well as our free cash flow. The area that really needs to work is around our long-term margin objective.

As you know, we have a 26% EBITDA margin target that was easier when we started off with a higher number at the beginning of the year and versus the most recent guidance. We're now about 500 basis points off that relative to the guidance this year. So, as we approach our '22 plan, we're spending energy thinking about that multiyear target.

I think structurally, there are couple of factors that we think still play in the favor of not only increasing where we are from an EBITDA margin, but potentially getting us back to that. 1, is clearly the biggest impact this year unexpected, has been the inflationary environment.

And we thought would talk more about this, but we lost about 200 basis points this year at our margin, relative to inflation, net of what we expect to price, and in addition, we've had some pockets of higher use of freight costs in a couple of our business. So that's about 200 basis points.

We still feel very confident on achieving the long-term synergy objectives, the cost synergies. And I would submit there are probably additional productivity in the business. I believe we strip out the material side of our business.

We have over $4 billion of costs between our manufacturing operations and then our S&A, and I think we just sort of begun to scratch the surface relative to that with our synergy targets.

That being said, we are working very intently right now to sort of think about -- and actually -- our pricing initiatives and also think about a longer-term productivity as well..

Thank you..

Thank you..

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

Good morning. I appreciate all the added detail in the slides on the cost side, but just trying to understand better the margin contraction a bit, and how we got to the point where we're cutting the guidance again. If I look at 3Q and then moving into 4Q, could you talk a little bit about how costs are coming in versus where you had budgeted them.

And on that end, can you push price to offset logistics costs for businesses that you've just won recently, or is this just a cost of doing business in that margin component is going to come down or improve when cost and capacity come out..

Yes. So good morning, Matthew. This is Glenn. I'll start with answering and maybe turn it over to Andreas. In general, the biggest hit as I just mentioned, on our business this year has basically been material costs, broadly impacting our business.

Of the 200 basis points, it has impacted us and anticipated impact is about 200 basis points in terms of margin. About 2/3 of that is related to rate increases. So that's a combination of our raw materials, our energy, and our logistics costs.

What's happening relative to each of those buckets is earlier in the year, we were thinking mid-single-digit relative to inflation and raw materials. It's now high-single-digit approaching 10% in terms of the annual inflation. We're seeing logistics costs continue to accelerate that to the mid-teens.

And then energy, as everyone is well aware, has been extremely volatile, and it's been trending up about 30% year-over-year. By the way, the planning posture for '21 is we really had relatively flat inflationary pressure, so we didn't expect at any of our material costs to go up.

So, we have a much, much more significant impact relative to what we'd anticipated just a couple of quarters ago. I would say the rest of our cost structure is working quite well.

We have actually delivered strong results against our R&D sales, and administrative expenses were actually exceeding plan relative to our costs, so we're actually lower at that point.

In general, manufacturing is working on productivity, although constraints in our system have limited some of the capacity gains, we can get and some of the efficiencies out of the system. The pricing dynamics that we are working very, very aggressively on capturing the pricing.

But today, we're capturing and expect to capture only about $0.50 on the dollar from inflation this year. And that's simply a lag factor relative to our ability to go to market and implement.

I will note that as we look out in '22, we are anticipating those inflationary trends to continue into next year, and we are basically planning our pricing actions accordingly. I.e., each of our businesses are thinking about not only what has hit this year, but what we anticipate to hit next year, and we're executing against that.

To your last point on pace, that depends by business. We have some but not a lot of multiyear contracts. In a lot of most cases, we have annual contracts. And in many, if not most of those cases, they tend to run on a fiscal cycle, so beginning of year forward.

But my last comment I would make is, we're in, I'd say unprecedented environments given the level of inflation. So, it is affording us an opportunity to go back in almost all cases to our customers and discuss the inflationary environment this will be our pricing going forward, even when we have sort of contractual relationships in place.

So, let me maybe turn it over to Andreas..

Thank you. Thank you, Glenn, I think it's very comprehensive. So just on 1 aspect, you asked Matt on the logistics.

Obviously, we go back on logistics as well, either as price increases or surcharges, and it's a bit tough up for newly won contracts, obviously, but we try what we can do because that has a huge impact in all businesses, particularly on the Health & Biosciences business.

But here, I think there's another element in it is -- we are working to increase capacity because there's a lot of demand for -- in particular for Enzyme business. And we are building -- we just installed a new fermenters and.

And there's more to come for the first half of next year which will help us to decrease logistic costs as well and pull through when we get in terms of demand from our customers. We're very optimistic on this one because the technology is superior and then certainly good growth driver for us going forward..

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

Yes. Thanks. And good morning, everyone.

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

Hey, thanks for the question, Mark (ph). You semi answered it with the intro is -- we're in the early phases of locking down a '22 plan. We desire to go out early in the year with it as much as we can, relative to our pricing actions.

However, the pace at which we're able to implement that vis -a - vis the pace of inflation, we're not sure if you will when the curves will cross over from a standpoint. It's likely to be sort of late second quarter into the second half of the year, but I would say stay tuned. We're really still working on that..

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

Yes, thank you. Good morning, everyone. I guess first, Andreas, you talked through some of the regional and business sales trends a little more on a year-to-date basis. Hoping you could frame that from the third quarter and into the fourth, where some of the pluses and minuses are.

And specifically, with that organic sales guidance, where pricing was in the third quarter and where you think it's going to be in the fourth as we evaluate what the tailwind in 2022 could be, as you go back to customers on price.

And if I could just sneak a quick other one in on synergy realization and just help us think about the cadence of cost and revenue synergy realization in '22, especially on the cost side, where would seem like an inflationary environment makes it harder to risk to achieve some of the procurement savings that had been previously targeted. Thanks..

Yeah, thank you, Adam, for the question. So, what we have seeing in Q2 and Q3 is that we have grown about percent price. The risk was for volume going forward. We might see a little bit more in the fourth quarter in terms of price. But as you said, we had a good start sales wise into the fourth quarter. So, October can come in.

Good that we don't have the final P&L here, so we can't talk about that. Synergy realization is going, actually, on the cost synergies extremely well. As you have seen, we have already realized the 40 million in the first 3 quarters of the 45-worth promised. So, it's very, very likely that we will over-achieve.

On the sales synergies, we are very much on track. And I see, when I visit our facilities and I was basically out in the field, the last week in Europe, but the teams are working very nicely and very, very well together. So, we see that more sales synergies are coming in.

And that shows that we are building a very, very strong position for the Company going forward. In terms of the different categories as well, we see still a good performance on the Fine Fragrance side, which is very, very helpful. So just a good recovery, but its growth -- with growth rate here as well.

And that's helping the whole results for the Company going forward. I think that's what we can say about the fourth quarter..

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

Hi, thanks for taking my question and welcome, Glenn. The photo on the flight looks very youthful so it must be an active ingredients from Lucas Meyer Cosmetics. Thanks for sharing the percentage change in raw materials. Can I just check if the numbers you gave earlier, Glenn are what you include in the full-year guidance, or current run rate.

And then pricing is up to 2% of sales in Q3. Can you share the exit run rate out of Q3 or and October if you have it? And what further increases you expect to push through, please..

Maybe, yeah. Good morning or good afternoon, Gunther. Good to hear from you. I'll answer the second question first. Q4 pricing rate from Q3 is going to be very consistent with Q3, so it's about 2 points. It's slightly higher in Q4 versus Q3.

And as a result of that, actually the inflation pressures are going to slightly outpace once again within the quarter, just given the cost increases from the standpoint, just as a follow-up to that, really we are focused on aggressively implementing late this year into '22 on that front.

Of the full-year margin guidance and relative to the freight impact, we have about 200 basis points associated with cost.

About 2/3 of that is pure rate and about 1/3 of that, or about 60 basis points is related to higher usages of freight, principally air and principally to support our H&D business because of capacity limitation, so that piece as Andreas had mentioned, will take us some time to work out through '22 as we address some of the capacity constraints..

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

Thank you. And best wishes, Andreas, for the future, and welcome, Glenn. Andreas, your customers are seeing a lot of bulk raw material cost increases, so they're probably feeling even more cost pressure than you are.

Do you see more reformulation going on? And is that providing any opportunities for more wins if your customers are reformulating their products a little bit more frequently here, because of their cost pressures?.

So, I'm saying -- first of all, thank you for the question. It's -- we see reformulation. Is it massively more than what we have seen before? Probably not. But what we see in general, what comes in terms of projects, are bigger projects -- less projects, but bigger projects, which is actually good for us.

Taking into consideration that we will win more of these projects, the cost for us is reducing in terms of the average projects, so that's what we see it at the moment. Indeed, many of our customers see good balance increases.

But the discussion with the procurement people on the customer side is going okay and well because they know what's happening on the raw material front here. So, I think that's where we are, what we see is still that we have really good strong demand from most of our customers.

And that's very helpful in terms of the business and also in terms of the momentum we have as a business growing going forward because we have to take into consideration, we are still in the integrational phase, and we're gaining share. That's what we see or some comparison to our competitors.

And we are making good, good progress in the integration as well. So that's all what I am to..

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

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

And what's the arc of capital expenditures? And what are the priorities to spend on?.

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

On the capex, I hand it over to Glenn (ph)..

Sure. Good morning. So, as you recognize, we updated our guidance for this year relative to our full-year capex spend at 4%. And that's in part because of just the ability to execute our capital programs well.

given all of the different priorities we have in the business and far that is just continuing to be more surgical I'll say, relative to our investing capital. We do anticipate that that will ramp up next year as we're putting together our '22 plans, largely focused on our higher margin and higher growth businesses.

And a big piece of that actually is really the bottlenecking and enhancing our capacity situation into next year. So, I'll say more to come around the plan standpoint. We had -- I think previously guided to having spent a little bit more capex around the business playing forward for capacity reasons.

And then the other area I would just note although it's a much smaller portion around IT. So, IT through an integration activity. We have some additional activities as we go into next year as well..

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

Great. Thanks. Good morning. I had two questions. First, was the generally operating expenses in the quarter, both SG&A and then R&D specifically, were down quite a bit. And I was curious if you could comment on how sustainable those changes were.

If it reflects maybe incentive compensation again or more tactical reductions given the gross margin pressures. I was curious about that piece. And then the second thing unrelated, was on Pharma. You've given the capacity constraints that you've seen and demand outstripping supply, which is great.

The question is, what -- where is that demand going? What's the risk that rebuilding, if you call it relative market share, when you do get capacity up is a challenge? I mean, where is that business going, and how confident can we be that that will come back when you get the capacity up? Thank you..

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

Good morning, Lauren. As a relative to our R&D sales and administrative expenses, as I mentioned, we are favorable to plan and down from prior year, but that is not R&D. Actually, R&D is trending right on plan.

And by the way, of our roughly 2.1 billion of annual spend for RS&A, about 30% is, R&D, and the residual is fairly equally split between sales, our commercial team, and an administrative. We're seeing actually more efficiencies in the commercial teams as they come together post-integration and the back-office. So, the administrative teams as well.

So that's really where we're seeing and are pushing more of the productivity, not R&D, we're always looking for ways to more efficiently spend our R&D budget, but we sort of directionally want to make sure that we continue to stay within the guidance we provided relative to our ongoing R&D spend..

On the former part of the question. They're seem to be about the Pharma recipients, businesses, is such as a very stable business.

And it's predictable in the sense because you know, when you're in the product or in the pharmaceutical that you stay in because everything else would execute require a change that with the FDA that means that our customer base is very stable.

So, there's probably no big groups that if we increase our capacity, that we have too much capacity in place. We see as I said, good and stable demand.

And despite the capacity on our manufacturing side, we had some issues with CB harvesting, which goes into one of the products of our big, big customers, which is -- I can give you, are all one-to-one.

And harvesting now is going better because we have new fields in front of Norway, which we're discovering right now and using much to increase our manufacturing on the side. So just to give you a bit of detail around the Pharma business but there's certainly no danger that the overbooking..

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

Hi, good morning. This is actually Mark Kreuer (ph) here, sitting in for Ghansham. Sorry to belabor the point a little bit here, but can you talk about where we are at from a price cost perspective across both the legacy IFF businesses and then the legacy Du Pont businesses, maybe on a dollar basis. That would be helpful.

And then what's the historical price costs catch-up period for the 2 legacy businesses? Is there any meaningful difference in catch-up period across your various segments or regions?.

Yeah, relative to -- good set of questions. It's relatively inflation, we're seeing higher rates in legacy N&B then IFF, although we're seeing inflation across all businesses. But generally, we're in mid-single-digit range for legacy IFF and then low double-digit relative to legacy N&B. Catch-up period, generally 3 to 6 months.

Certain businesses like H&B may have slightly larger percentage that are either an annual contract or a multi-year, so they might be slower..

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

Great. Thank you very much.

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

No. Thank you for the question. So, you will see probably the biggest expansion on our side on capacity in the health and bioscience area, in particular, on the enzyme business, where we believe that our technology is really top notch, and we see a huge demand from our customers as well. So, most of the investments goes into that area.

We've seen some capacity increases, as we said on the Pharma business, but not to the same degree as on the IFF's Health & Biosciences business. The rest is basically a business that's usually on Scent and on Nourish, which is partly legacy N&B as well. But more, let's say, maintain than it is investment into new plans..

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

Hi. Thanks very much for getting me in. Just a quick one.

As the pricing process and your assessment of how easy that is to do, the dialogue, is there any significant difference in the acquired N&B businesses in the legacy businesses that you're running into? Because I did notice that it seems like the lag is a little bit greater in the segments that are heavier on acquired revenue, but there may be other ex-plant nations for that.

So just curious about the general nature of the business.

Is it tougher to take pricing there?.

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

Absolutely..

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

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

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