The goal is to have a very clear strategy for our functional ingredients business. How are we going to profitably grow our market share with customers by delighting the customers with our solutions approach, with our innovation, and then do that in a productive way with our assets and our functions, very productive. We have the potential to significantly improve the performance of this business. I’ve spent time with our business leaders. I think they’re headed in the right direction and we’re going to further accelerate the progress and make sure that we profitably grow our food ingredients business and fully compete with our competitors, the leading competitors in food ingredients, because we have so much value to bring customers. If we do it right, when we do it right, we’ll have a very good business.
And then, in terms of the organization structure, no decisions today, but what I will tell you is I’m a big fan of business units that have end-to-end accountability and responsibility to drive all the levers of the P&L, making sure that everything we do is to delight customers, profitably grow our market share, but do it in a way that’s efficient and effective so each business unit can win. And I find when business units are winning, all of a sudden synergies become clearer and become more powerful and easier to access. So we’re going to ensure that our businesses are on the right track and that our synergies are additive to further strengthen each of our businesses.
Operator: Thank you. The next question comes from the line of Kevin McCarthy with Vertical Research Partners. Your line is now open.
Kevin McCarthy: Yes, thank you and good morning. Erik, welcome back. Glenn, two questions from my side, please. Your Health & Bio segment margin was the best in more than three years. Can you just maybe rank order the drivers of the improvement there? And more importantly is the 30% plus level sustainable into 2024. And then secondly, what are your input cost trends and the outlook that you’re baking into your guidance for this year?
Glenn Richter: Yes, so I think for the H&B had a very good year and that was a result of a progressive improvement in volumes. As we noted, the health business, one of our largest segments, actually had a very good fourth quarter. Secondarily, productivity, so we’ve driven a lot of productivity across the business. And third, really net price. So there’s been — to your second question, a decline in input cost in that business as well. So that got us to the 30% range for the business. I did note on the call that we are anticipating H&B like all four of our businesses that demonstrate both EBITDA growth and margin expansion this year. So we expect that to be the case for H&B. In general, our input costs, as I mentioned, are anticipated to be down this year.
Energy is flattish at this point, logistics are down, and we’re seeing some raw materials deflation. As a reminder, it takes about four months for a purchase to run through the balance sheet. So that’s a positive momentum. That’s a net zero, as I mentioned, for the overall enterprise for the year. So thanks for the question.
Operator: Thank you. The next question comes from the line of Laurence Alexander with Jefferies. Your line is now open.
Laurence Alexander: Good morning. If end markets do not cooperate, can you provide more granularity on how you can de-lever in 2024 and 2025 in terms of reviewing business lines, Brexit, productivity relative to comp and so forth? And Erik, given your initial impressions on IFF operating culture and discussion around productive solutions, can you speak more to the mindset around productivity and R&D? Is it more about operational fixes, or do you see structural or philosophical issues around how the firm has targeted ROIC margins or profit growth?
Glenn Richter: Yes, thanks. This is Glenn. I’ll answer the first part of your question. In general, we’re pretty cautious on our outlook on volume. So we’re, as I mentioned, flattish to three. So we haven’t expected a giant recovery this year in our base case. So that’s kind of a starting point. In the absence of that materializing, we have been very good at delivering productivity, as Erik mentioned in his opening comments. We are accelerating both ongoing efforts, and we have additional efforts underway to take costs out that aren’t reflected in the plan. So that would be my second comment. Relative to the de-leverage, so that gives you some sense on the earnings profile and offsets if there’s additional softness in the external market.
The de-leverage will largely be accomplished through divestitures. As Erik mentioned, we are on path. We feel very good in terms of our activities underway, and we do think we’ll accomplish our targeted divestitures, which will be the biggest driver of achieving our de-leveraged goal.
Erik Fyrwald: Now, on your second question, Laurence, my initial impressions of IFF’s capabilities are we’ve got really great people. We’ve got really great capabilities in each of our businesses, and we have just under-performed. But there are pockets of examples where we are performing tremendously well that give me so much confidence that we can make this happen across the company. I spent time with the leadership of arguably the largest consumer products company in the world, where we have a very strong relationship, very much innovation-driven, their innovation people to make sure that the best consumer products are being developed. And we were meeting both with our scent teams and their fragrance team, and with our Health & Biosciences team and their consumer products teams.
And it was the best relationship, the best dynamic that I’ve ever experienced in my 42 years of customer interactions. And then I had another interaction with the top management of a leading beauty care company in Europe. And same thing, our people were working hand in glove with their people to create great, great consumer products that consumers love. So we can do it. We do it. We just need to do it more across the company. And I’m really excited by helping our teams, stop being so internally focused, get more focused by business unit on winning with customers, and then collaborate where it makes sense to enhance across our portfolio, to bring even more to customers so that the customers win more and we win more. Now in terms of productivity, as Glenn mentioned, their pocket’s there where we’re doing very well, but there’s more we can do on productivity.
Ralf Finzel and his production team are really driving tremendous productivity in our operations, and it’s still early phase, but they’re ramping that up very nicely. We’ve already had efforts in back office productivity for our corporate functions. That’s going okay, but we’re going to accelerate that. You’ll see more shared service centers and more activity with IT systems to make sure that we’re effective serving the businesses and very efficient. So I love what I see. There’s so much excellence here, but we’ve got to get it across the company, and we will.
Operator: Thank you. The next question comes from the line of Patrick Cunningham with Citi. Your line is now open.
Patrick Cunningham: Hi, good morning. Just a question on the Q1 guide. So, it’s about 487 [ph] 488 [ph] at midpoint in a seasonally weak quarter. And you noted some nice volume ramping productivity throughout the year. So even annualizing that is above the low end of the guide. So can you help us understand if that guide is just conservative? And then just a small follow-up, when do you expect to see the end of de-stocking within your Pharma Solutions business?
Glenn Richter: Yes, I’ll start with the second. Generally, we’ve seen de-stocking basically, I’ll say it’s done everywhere with exception of pharma largely, and it’s the second half of the year. Pharma just started late as an industry part of the de-stocking for logical reasons given the margin structure, but we do anticipate the second half of this year to be done with pharma. The Q1 we think is a very reasonable guide, 475 to 500. We have started off the year generally pretty good on the volume side, but we just want to be cautious as we sort of go through the quarter. Generally, the volume slightly lower than the average for the year, so that’s a little bit of the impact there, Patrick.
Operator: Thank you. The next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.
Adam Samuelson: Yes, thank you. Good morning. A couple of questions on cash flow and investment. One, just wants to clarify on the deleveraging targets. It had previously been three times by the end of calendar ’24. Are you no longer committing to that timeline? Second, the last slide of the deck references high return growth investment. Can you provide any more clarity on what those are, size, and timing of those? Then finally, Glenn, I think you said earlier a question, the $500 million free cash flow guidance for the year. Can you bridge $2 billion of EBITDA to $500 million free cash flow, but even acknowledging some deal-related charges, cash flow would be down year-on-year, and I just want to make sure I understand the context and implications of that?
Erik Fyrwald: Thank you, Adam. I’ll start, and then Glenn can add on. First of all, I fully am aligned with and agree with a target of three times net leverage debt as a target to get to. I think the year end ’24, I’d like to see us get there by the end of ’24, but we’re not going to do something stupid that destroys significant value to get there in ’24, but I can tell you we’re going to make very good progress at least towards that goal in ’24. In terms of high return growth investments alluded to, I’ll just reinforce that flavors and fragrances, we call it scent, and health & biosciences are strong business units in great markets. I’ve been in many chemistry and biological markets. These are great markets, and we’re going to invest in them to win.
Glenn Richter: Yes. So hey, good morning, Adam. So let me take you through the cash flow reconciliation. It’s a good question. And I’ll start from the top with EBITDA. So the midpoint of our guide is $2 billion. We are forecasting $345 million of interest expense. Cash taxes are roughly $450. That includes the Reg G or transaction related. I’ll back them out later. We have networking capital, slightly a negative. We’re being a little cautious in terms of the overall full year. Part is just the growth of the business. And then there’s miscellaneous, sort of others, about $100 million of other items to get an operating cash flow of $1.50 billion-ish. As we mentioned, we have a CapEx target up this year. We’re trying to invest in our growth business of about $540 for the year.
That gets us to a free cash flow, including Reg G of $500 million. I would note, as I mentioned, there’s $200 million of Reg G items, $100 million of that’s transaction, largely taxes, a little bit of other deal costs, but largely taxes. And then there’s $100 million of other miscellaneous Reg G items as well. So that gets you to, if you back those out on adjusted free cash flow around $700 million for the year. The other note I’d say, Adam, the biggest shift year-over-year is networking capital. We had an improvement last year of $500 million. We’re being sort of conservative and flattish to slightly down this year.
Operator: Thank you. The next question comes from the line of Mike Sison with Wells Fargo. Your line is now open.
Mike Sison: Hey, good morning. Hey, Erik, welcome back. I’m sure you’ve seen several chemical businesses go awry over the years for a lot of different reasons. What’s your sort of playbook in terms of turning around a business and clearly functional ingredients has been a sore spot here? Anything in particular you’re going to sort of work on to get that business back? And then, just a quick follow-up on pharma, Glenn, since Erik’s only been here a couple weeks. But where do you think margins can get back to for that business? The last two quarters have been pretty light relative to its historical past.
Erik Fyrwald: Well, thanks, Mike. And I’ll start with the functional ingredients question. First of all, I like the functional ingredients business. It is a very good business with lots of opportunity to bring value to customers. And by having multiple elements of the solution set, you can bring value in terms of helping customers achieve their goals and what food products they want to have to delight customers, delight consumers. So I think what we really have to do here is, and the team is working on this, is make sure that we’re clear on what is our strategy, how are we going to create value in this business, how are we going to make sure that we’re focused on the right consumers, excuse me, the right customers in the right way, profitably growing our market share, and how do we make sure that our assets are very competitive, that our costs are very competitive, that we’re driving productivity so that we can be competitive with our product portfolio both in terms of the value we bring and the costs to deliver that value.
And then we’re spending money on innovation. We’ve got lots of great innovation. Make sure that innovation is tied to real customer needs that they’re willing to pay for that can be part of the solution set. And I think that we’ve taken our eye off the ball, as I said before, too much internal focus, listening to too many consultants going all different directions. We get clear what we’re trying to do, what the goals are, and execute well against those goals. This business will significantly improve in 2024 and beyond.
Glenn Richter: Yes, good morning, Mike. Good to hear your voice. Regarding pharma, as you know, this business quarter-to-quarter can be a little lumpy based on demand. And fourth quarter is typically a lower volume quarter. The margins are always compressed seasonally for the fourth quarter, so it’s difficult to look at that. We are very optimistic on the strength of this business and the go-forward plan. We do expect the business to be in approximately the mid-20s from an EBITDA margin this year from a standpoint. And there’s tons of other initiatives to continue to drive up the margin further. So I think what you’re seeing is a function de-stocking, idle mills, seasonality over the last couple of quarters, but just not reflective of the fundamentals of the business.
Operator: Thank you. The next question comes from the line of Mark Astrachan with Stifel. Your line is now open.
Mark Astrachan: Yes, thanks and good morning, everybody. I guess lots of questions, but I’ll try to keep it narrow here. So today’s IFF was created to provide a suite of products to customers. At least that was the initial idea in merging the legacy IFF into the DuPont business. I guess, Erik, how do you think about that as an effective go-to-market strategy? The corollary to it, we hear a lot from investors that this is arguably a better business, pre-even cruder on, is there a scenario where you can divest nearly all of those assets of the acquired businesses? How integrated are they? Is that possible? And sort of, just holistically thoughts on kind of all of that together, and then just one follow-up to you, Glenn, the flat expected plus three volumes, considering how easy the comparisons are, would still suggest that two years is strongly negative.
How do you think about that from a competitiveness standpoint, meaning it would suggest that you’re still losing share? And I guess, it’s not across all of the businesses equally, but it’s still a pretty stark difference relative to your closest peers? Thank you.
Erik Fyrwald: Okay. Thank you. I’ll start by saying that I believe that the historical IFF plus the DuPont nutrition and biosciences business are stronger together than they were separately. The potential, the opportunity is greater than it was separately. So I believe in that combination very strongly. Now, as I said before, we haven’t executed it well, and I’ve seen this happen before. When I got to Syngenta almost eight years ago, the seeds in the crop protection businesses had been mushed together, and the focus was on synergies versus having a great crop protection business and a great seeds business. We made clear that we were going to have those two businesses as business units, end-to-end business units. And as soon as we did that, we found out that we had been losing share, losing margin versus the competition.
We started regaining that, and by the way, when the business units were clearing what they were trying to do, the synergies grew a lot because there were synergies. I see the same thing here at IFF as we’re really good at flavors, at fragrances or scents, at health & biosciences, at food ingredients, those businesses, when they’re performing well the synergies will increase, not decrease. The ability to help each other, the different businesses to help each other, to help customers more together will increase, but we’ve got to get the businesses performing extremely well by themselves and not have synergy of the goal, have synergy of tools. When we do that, I can assure you that the combination will be very strong.
Glenn Richter: Hey, good morning, Mark. Hey, thanks for the question. You’re right, if you look at a three-year stack, we would still be negative over the three-year average by about 1%, 1.5% over, including if you hit the 3% this year. But I would note, as we said in the past, I think you have to sort of think about the performance of the business between 75% and 25%. 75% of the business, our core scent business is forming very well. Flavors has pockets of strength, H&B, both enzymes, probiotics, culture’s business are doing well, pharma overall is doing well. It’s really the other 25, which is functional ingredients we’ve talked about, that actually has been a drag on the overall results of the business. So if you separate that, I think you clearly have a very different view in terms of that three-year stack, and the 75% is nicely positive, and I would submit it’s in line with competition.
For the most part, we have opportunities, as Erik said, to perform better, but it’s focused on that 25%. I also will note once again, as we’re trying to be realistic, there’s prospects that the markets improve more significantly. Certainly the start of the year knock on wood is pretty encouraging, but it’s too early to call anything above that range until we see a consistency month-by-month in terms of volumes coming back. So, I appreciate the question.
Erik Fyrwald: The only thing I would add is that even in the 75%, there is significant improvement opportunity, and we’ve got businesses that are looking at that, and we’re going to work with those businesses to support them, both for the businesses to win more and for the corporate cost overheads to be lower and more effective at supporting the businesses. So there is great opportunity, of course, in food ingredients to turn it around, but even the rest of the company to significantly improve performance, and we’re going to do it.
