I would now like to introduce Michael Davoe, Head of Investor Relations.
You. Good morning, good afternoon and good evening, everyone. Welcome to IFS' Q1 2021 conference call. Yesterday evening, we issued a press release announcing our financial results for the Q1 as well as our outlook for the full year 2021. A copy of the release can be found on our IR website at ir.
Iff.com. Please note I ask that you please take a moment to review our forward looking statements.
During the call, we will
be making forward looking statements about the company's performance and outlook based on the current state and our expectations for 2021. These statements contain elements of uncertainty, which we have laid out on Slide 2 under the cautionary statement. 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 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'll be using combined historical results for the Q1 as defined as 3 months of legacy IFF results and 2 months February March of N and D results in both the 2020 2021 periods to allow for comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Phibig and our Executive Vice President and CFO, Rustom Jilla. We'll begin with our prepared remarks and then take any questions that you may have. With that, I would now like to turn the call over to Andres.
Thank you, Mike, and thank you to everyone for joining us today. I will begin today's call by providing an overview of our first regarding our efforts to integrate DuPont NMB business, which continues to progress well following the completion of our transaction in February. Will then provide a more detailed financial review of the business highlighting segment level business dynamics and performance and cover cash flow and leverage as well. IFF is off to a strong start in 2021, and I'm confident that the momentum we have built will continue For the remainder of the year and beyond. Now beginning with Slide 6, I would like to review our performance and notable developments In the Q1, we achieved 3% in combined sales growth of 1% on currency neutral basis Compared to the Q1 of 2020.
Also, because of our change to a fiscal calendar rather than a traditional 4, 4, 5 calendar, we have had less 2 days less in Q1. If we were to normalize for that, Our combined currency neutral growth in the Q1 would also have been approximately 3%. And on a 2 year average basis, To factor in our strong 7% year ago comparison, growth would be strong at approximately 5%. Our adjusted operating EBITDA margin improved by 30 basis points, reflecting our team's diligent execution of our cost management strategy. IFF also continues to generate strong free cash flows, and we remain on track to meet our deleveraging target.
For the Q1, our leverage ratio was 4.3 times. I'm also pleased to say we have reached an agreement to divest our food preparation business to FoodLact, who specializes in food preparations for the food and beverage industry. The divestiture is expected to close in the Q3 2021, Pending customary closing conditions, including regulatory approvals. The Food Preparation business contributed approximately 70,000,000 dollars to IFS new segment pro form a sales in 2020. This is our first step in terms of our portfolio optimization strategy, So expect more news as we progress through 2021.
As you can see, we have established a solid foundation to carry us forward. We We've started with solid momentum, thanks to our disciplined focus on execution. As we have said before, the opportunity is in front of us And our mission is to execute on our plan to deliver industry leading returns for our shareholders. As we move into the 2nd quarter, We remain squarely focused leveraging our new capabilities to reach our business objectives and further establish ourselves as an innovation leader in a global value chain for consumer goods and commercial products. Now on Slide I would like to briefly discuss the regional sales dynamics that have influenced our Q1 financial results.
As you all know, there are notably significant differences in how different countries are managing the continued impacts of the pandemic. So we want to talk to the dynamics we are seeing in our business across the world. We are pleased to report that most of our operating regions sales growth in Q1. In North America, we achieved solid performance across our portfolio with growth in nearly all our segments. This performance in North America reflects the impressive results in our Ascent segment.
We continue to see healthy performance across our Asian markets, Achieving a 6% increase in combined currency neutral sales, primarily driven by double digit growth in China and India. While we are pleased to see growth across many of these key markets, we must recognize that our growth in India could be challenged in the near term In Latin America, we saw an 11% increase in overall sales for the region, growth primarily driven by local currency sales. Two highlights that I would like to call out in Brazil and South Cone, who both grew double digits In Q1, COVID-nineteen and related ongoing restrictions continue to heavily impact Western and Central Europe, It has resulted in challenges across the entire EMEA region and a 5% decline in overall sales. That said, we remain optimistic about the region's recovery as global vaccination rates increase and related restrictions ease. As we press ahead, we will continue to work diligently with our regional teams and communities, particularly those that remain under most pandemic related pressure Let's move to Slide 8.
I would now like to review our Q1 sales performance across IFF's key business segments so you can get We are pleased to report solid growth across our Nourish Pharma Solutions and Sand divisions. Our largest group, Nourish achieved combined currency neutral sales force of 1%, led by robust performance in flavors. We continue to see pandemic driven headwinds in food design, which is driven primarily by continued declines in food service. This channel will improve further 4th quarter trends, was down mid single digits in the 1st quarter. Scent continued its strong performance achieving combined currency neutral sales growth of 5%, the largest growth driver across our 4 divisions, by continued strength in consumer fragrances, double digit growth in cosmetic actives and a strong rebound in fine fragrance.
For our Pharma Solutions division, we achieved combined currency neutral sales growth of 3% with continued strong performance Across the entire division and all subcategories. For our Health and Biosciences division, combined currency neutral sales Decreased 3% against a strong double digit year ago comparison. Increases in both Health And Home and Personal Care were offset by pressures in microbial control and grain processing. Together, we have an in demand and diversified portfolio that is meeting the needs of our core end markets. I feel we are very well positioned to continue executing our ambitious growth initiatives and the complexity of the global marketplace.
Now turning to Slide 9. I want to show a summary that highlights our business performance, particularly with regards to segment level adjusted operating EBITDA margin. As you know, we are focused on driving overall group operating efficiencies as we execute on our integration plans. Karsten will cover our Q1 segment performance in much more detail, but I wanted to present this slide As it will be included in our standard earnings package going forward, specifically focusing on year to year performance. Some highlights for Q1 that are worth mentioning.
Within our largest division, Nourish, I'm very pleased to see early We achieved strong results in our scent division. The team did a great job driving higher volumes benefiting from the rebound Fragrance, which drove favorable mix and continued the effort to capture productivity savings. In HMB and Pharma Solutions, adjusted operating EBITDA margins were pressured by increased raw materials and logistics costs, Which overshadowed the strong cost of discipline the team has accomplished. Now on Slide 10, I would like to provide you with an update on our integration progress with NMD. Since completing our combination in February, we have achieved several financial and organizational Congratulations, which reflect the incredible efforts of our global team.
From an organizational perspective, we have established a comprehensive operating and leadership structure for our combined company, having identified and announced roles all the way from CEO down to third level leaders. These leaders are working closely with the integration management office to ensure that all employees are provided with the tools and resources they need to succeed. We've also completed all IT migration from DuPont to IFF and are on schedule regarding exiting many of our transition service agreements with DuPont. On the revenue synergy front, we have a robust pipeline of projects, including both cross selling and integrated solutions That we expect will accelerate our ability to meet our $20,000,000 synergy target this year. This quarter, we achieved a significant cross selling win within our Health and Bioscience divisions by detergents, and we've invoiced our first sales in April.
We are pleased with our project pipeline and with the efforts so far and continued expressions of demand from customers. We are confident in our ability to meet our 3 year run rate synergy target of $400,000,000 From a cost synergy perspective, we are underway and already seeing modest P and L benefits, Given we are in early days, we expect these cost savings to increase over the course of the year, putting us well on track to meet our $45,000,000 cost synergy target in the full year 2021 and our year 3 run rate cost synergy target of $300,000,000 I would now like to pass the call over to Rustem, who will provide a more detailed review of our financial performance
Thank you, Andreas. First, let me go a bit deeper into our consolidated financial results. In the Q1, IFF generated $2,500,000,000 in sales, a 3% combined year over year increase, including foreign Exchange benefits or up 1% on a currency neutral basis, primarily led by strong performances In our Scent and Pharma Solutions division. As you may recollect, from 2021 onwards, we are applying prior year average FX rate to our current year non U. S.
Dollar revenues to derive currency neutral growth rates. This is the more common practice and makes us more comparable to our competitors. Our gross margin was impacted in Q1 at Nourish H and B and Pharma by higher raw material and logistics cost headwinds arising from input cost inflation and higher freight rates, tight inventories and weather related plant disruption. Meanwhile, our aggressive cost management program led by headcounts and other expense reductions enabled us to improve RSA to sales by 120 points basis points and deliver year on year adjusted operating EBITDA growth of 4%. As an aside, Q1 2020 It was our most difficult comp with 7% combined currency neutral sales growth and strong adjusted operating EBITDA growth.
ISF also delivered adjusted earnings per share, excluding amortization of $1.60 for the Q1. Now on Slide 12. I'd like to discuss the Q1 performance of Nourish, which now includes the enhanced capabilities of NNB's former Food and Beverages business. Nourish sales totaled $1,300,000,000 quarter, representing 1% growth on a combined currency neutral basis. Adjusted operating EBITDA grew 6% With a 60 basis point margin expansion led by strong cost management.
Looking at Nourish's performance by business, Flavors drove growth in nearly all our regions. Within Ingredients, which was flat year over year, Protein Solutions grew double digits, But this was offset by softness in emulsifiers and sweeteners. Continued pandemic related challenges impacted food design, Particularly foodservice, which declined mid single digits year over year. As the effects of the COVID-nineteen pandemic lessen And retail and away from home channels continue to recover, returning to growth in this area while maintaining our strong performance in Nourish's other segments We remain a top priority for the remainder of 2021. Moving to Health and Biosciences on Slide 13.
As Andreas noted, H and B had a combined currency neutral sales decline of 3%, but this was against a robust 11% positive year over year comparison. It should be noted that on a 2 year average basis, currency neutral growth was solid at 4%. Adjusted operating EBITDA was also pressured and operating margin declined by 70 basis points, primarily driven by lower segment volumes and higher raw material and logistics costs. Our Home and Personal Care business grew strong double digits this quarter, Supported by evolving consumer buying trends related to the pandemic that have persisted through Q1. But declines in Animal Nutrition this year When compared to mid teen growth in the prior year period offset that performance and impacted overall year over year growth.
Microbial Control and Grain Processing were also impacted by continued pre COVID cycling, which impacted H and B's overall growth by approximately 5 percentage points. We are pleased to say that over the course of the Q1, these businesses showed improvement And we're positive in April as we cycle the comparable. We are encouraged by the tremendous performance of Home and Personal Care, which is a testament to evolving consumer that prioritize individual health more than ever before. Turning now to Slide 14 to discuss the results of our Scent division. Overall, we are very pleased with scent's strong performance, which has been a significant contributor to our company wide growth.
Our scent division generated 5 $9,000,000 in total sales, representing 5% combined currency neutral growth against a strong 7% growth in the year ago period as well. On a 2 year basis, growth is exceptional at approximately 6%. Adjusted operating EBITDA improved 8% with 70 basis point margin expansion predominantly driven by volume growth across the entire segment as well as favorable mix from fine fragrance recovery And continued productivity. As we began to see last quarter, our Fine Fragrance business experienced solid recovery as away from home restrictions continued to lift and consumer behavior returned to more traditional levels. Coupled with this rebound, continued strength in consumer fragrances and mid teens growth in cosmetic actives Resulted in another quarter of strong performance for the entire division, driven by volume recovery and new business wins across the segment.
Our new call lists are also providing strong contributions with all three customers growing double digits in the Q1. Now on Slide 15, I would like to discuss the results of Pharma Solutions, our 4th division. As previously mentioned, Pharma Solutions had an impressive quarter of broad based growth and made a solid contribution to IFF's overall higher Q1 sales. Pharma Solutions delivered 100 and $62,000,000 in net sales, representing 3% in combined currency neutral growth, while adjusted operating EBITDA grew 2%. Taken in the context of their 11% growth in the prior year period, growth is impressive on a 2 year basis average basis at approximately 7%.
Looking at Pharma Solutions performance by business, Core Pharma and Industrial Pharma led the division with volume growth for Metocell, While we're very pleased with Pharma Solutions sales performance in the Q1, we saw adjusted EBITDA margin decline Due to higher cost of goods related factors. More specifically, gross margin was hurt by higher raw material and logistics costs Related to supply chain challenges and force majeures due to the bad weather in the Midwest earlier this year. We had 2 plants shut down temporarily, Which impacted raw material availability and caused higher distribution costs. Now turning to Slide 16, I'd like to review our cash flow dynamics and capital allocation, which remain a top priority. As you will see, Our operating cash flow was very strong at $358,000,000 We are quite pleased with Q1 cash generation.
For legacy IFF, Q1 is usually the lowest cash flow quarter of the year. We typically have net working capital headwinds as we reset off Q4's lows And we make annual bonus payments in March. And this year, we also had large deal related costs such as cost to achieve, investment banking fees, consulting expenses, etcetera. A large part of our Q1 success came from core working capital, where we generated 193,000,000 Dahl, a great job by our global team and a great outcome, but we don't expect this quarter after quarter as we'd like to build inventory up in Or 3.5 percent of sales, up from last Q1's combined comparative $76,000,000 or 2.6 percent of sales. Free cash flow generation was therefore a strong $265,000,000 and we distributed $82,000,000 in dividends to our shareholders.
Our leverage, which is net debt divided by credit adjusted EBITDA ended at 4.3 times as Andreas noted back on Slide 6. This is ahead of our expectation of 4.5 times 1st quarter post merger leverage. Now to provide some full year context. Legacy IFF generated $520,000,000 of free cash flow in 2020 And combined, we expect to generate $1,000,000,000 in 2021. In 2021, we will invest more in legacy NNB production capacity to meet expected strong future demand, but will only be slightly above our original full year CapEx projection of approximately 4.5% of sales.
The dividend payment this year will be this quarter will be $197,000,000 reflecting our higher post merger share count. And we remain on track to meet our long term deleveraging target of 3 times net debt to credit adjusted EBITDA In 24 to 36 months from deal close. Turning to Slide 17, I'd like to provide an update on our full year 2021 Consolidated Financial Outlook. But before doing so, I want to remind everyone that in mid April, we provided sales and adjusted EBITDA metrics For each of IFF's 4 segments on a 2020 pro form a and combined basis and additional detail on a segment level via our Learning Lab series. We are now in the appendix of this presentation providing an additional look back at the combined company's historical quarterly results For 2020, as part of our commitment to transparency and helping our shareholders understand the new IFF.
On a combined basis, IFS generated $10,600,000,000 of revenue for the full year 2020 with currency neutral growth of approximately 2%. And our combined adjusted operating EBITDA margin for 2020 was approximately 22%. Please remember that combined includes 11 months of NNB and 12 months of ISS in 2020 2021. In our Q4 conference call in February, we gave initial pro form a guidance, which assumed the full 12 months of IFS and NNB, In order to be directly comparable to our previously provided S-four. Moving forward, to be more aligned with actual results and reporting, we are Transitioning to guiding on 11 months of NNB, which excludes January 12 months of IFF in the 2021 year, in light of the merger completing on Feb 1.
Also please note that in January 2021, NNB's actual sales were approximately $507,000,000 And adjusted operating EBITDA was $107,000,000 Given our Q1 results, our April preliminary sales, Our rest of year FX expectations, incremental pricing to recover costs and the fact that Q1 was our toughest comparative period quarter, we are forecasting stronger sales growth through the rest of 2021. We have therefore increased our sales expectation for 2021 to be approximately 11 25,000,000,000 in combined revenues or plus 6% growth with an approximately 23% adjusted operating EBITDA margin. Since the beginning of the year, we have seen a rise in the cost of goods driven by input costs, including raw materials and logistics. In terms of raw material costs, we are seeing a large increase in selected commodities, soy, locust bean kernel, vegetable oil, turpentine And propylene glycol. In addition, freight costs are higher as a result of greatly increased rates.
For example, the Global Freight Index is up 3 times Due to non availability of containers at contracted rates. And we're also seeing an uplift in airfreight volumes due to strong demand and supply chain challenges like This has required us to go back to have additional pricing discussions to cover our exposure. While we are confident that over time we can fully pass along the increase, there is a time lag before pricing is fully realized, which can pressure gross margin in the short term. Ultimately, by the end of the year, we are confident that through pricing and our ongoing focus on cost reduction, we can achieve our full year adjusted Operating EBITDA goal on a combined basis. With regard to Q2, we are pleased that we've started the quarter strong, a nice growth acceleration versus where we ended the first We're optimistic that for the full second quarter revenue growth including currency benefits should be in the high single digits range With an adjusted EBITDA margin also around 23%.
To assist with understanding and modeling the new IFF, We're also sharing our expectations with regard to depreciation and amortization, interest expenses, CapEx, our adjusted effective tax rate excluding amortization and our weighted average share count, all on a combined basis. While most of these metrics probably don't need to be elaborated It's worth noting that we expect moderately higher CapEx in 2021 as we invest for growth and work to exit Some of our IT related transition services agreements with DuPont more quickly than planned. We're also providing a 2021 adjusted effective tax rate excluding amortization for the first time. And the 21.5% It's broadly in line with our early expectation. This is still preliminary and will change as we finalize purchase accounting and intangibles by jurisdiction.
The equivalent for Heritage IFF on a similar basis for the full year 2020 was approximately 18.5%. Collectively, these metrics and decisions reflect our confidence in IFF's ability to deliver solid results Even in this qualified global environment. With that, I'd now like to turn the call back to Andreas, who will provide some closing remarks.
Thank you, Rustam, and thanks again to all for joining us today. I would like to wrap up today's call by first giving an enormous thank you to our Thousands of employees around the world who have worked tirelessly over the last quarter to successfully execute our business initiatives, deliver for our customers and achieve solid top and bottom line business results, all while making exceptional strides Integrating NNB into the IFF family. It has truly been a busy quarter, and we all have much to be proud of, especially As this all was accomplished during a global pandemic. Looking beyond our solid Q1 financial results, I want to Reemphasize the important first step that we took in tightening our business and optimizing our portfolio strategy I agree to divest our food preparation business. By divesting this non core business, IFF will be more efficient organization with a greater capacity to focus on growth and innovation across our key businesses, ultimately generating greater value for our shareholders.
As we enter Q2 together, we are confident that we have the right team and the right structures in place to ensure that our newly combined company will meet our financial and operational goals. As I mentioned, we are targeting strong year over year financial improvements With accelerated sales growth over the coming quarters, back to our commitment to delivering industry leading innovative products and services to our customers around the world. And as Wissom stated, we are pleased that we have started Q2 strong and optimistic that our full second quarter Sales growth should be in a high single digit range. I'm tremendously proud of all we have accomplished and I firmly believe That the best is yet to come. We're taking each and every learning from the NMB integration process to create a stronger, more agile and diversified company That defines the future of our industry and showcases what it means to be a leading ingredients and solutions partner.
We'll take our first question from Mike Sison with Wells Fargo. Please go ahead.
Hey guys, nice start to the year. In Slide 8, I thought that was really helpful. You do show some businesses at that 4% to 5% sales growth range. If you think about you've owned the business for about 3 months now. Can you maybe talk about what needs To happen to the other businesses below that 4% to 5% and your confidence since you've owned the business now That you can get each of these product lines sort of in that range over the next couple of years.
Yes. Thank you, Hi, for the question. Yes, first of all, I think that we really expect that the growth will accelerate over the course of the year. And that's driven, as Rustam said, as well, with a good start into the 2nd quarter, which was actually The first quarter was our toughest comparison. So that's the reason why we raised our sales expectations for the year.
I That's important. So now coming to the different parts of the business. I would say, first of all, we If you look at the scent business unit, a real good recovery on fine fragrances, which is really fantastic In the Q1 and also starting the Q2, which is good. We see still a great growth on cosmetic actives. So that's basically super important for us as well.
And the consumer fragrances stay on an elevated level. If you go to the Health and Bioscience business, you see a couple of elements. You see that Health And the cultures and food enzyme business should grow mid single digits. And you will see a recovery of the microbial control business, It was very much heard by the situation last year. So that's important as well.
And then on the Nourish side, Very solid performance on taste, particularly the legacy flavors, doing very well. But on the new parts, Protein Solutions via alternative proteins are doing very well. And then you will see a turnaround in the food service as well if The countries and economies are opening up. And that's probably a general remark. We have seen good growth, As you have seen in the presentation, in most of the regions, but in Europe.
And Europe will turn around as soon as these economies are opening up after the pandemic as well. So I hope, Mike, that gives you a bit more color, yes.
Our next question from Mark Astrachan with Stifel. Please go ahead.
Yes, thanks and good morning everyone.
Good morning.
I guess, broader question, it's something that we hear probably most frequently from folks out there asking about your company is Why or what gives confidence that IFF can sustain the share gains implied by the 4% to 5% currency neutral long term targets that you have when growth has been below peers in recent years even adjusting for And I guess related to that, Q1 growth was below peers who also had tough comparison, It's not as tough as yours, but it's still tougher comparison. So what gives confidence that you can see an acceleration implied by guidance over balance of the year as well as longer term. And I wanted to just kind of squeeze in a related question, which is just How do we measure or how do you measure maybe your peer performance? What is the group Did you use to measure your share performance versus peers? Traditionally, it's been Jiv and Simrise.
Now it's Novozant, Christian Hansen. Who should we all be paying
So let me start with the last question. First, I think you Basically named all the companies which are relevant for us. Maybe you should put Carrie in the mix as well, in particular Food service and some of the ingredients. And then you have actually a very nice peer group together. So what we want On the midterm, it's actually what we are doing.
We have done completely our strategic assessment of all the categories where We believe that we have growth and margin potential. We certainly will emphasize in terms of our resources behind these categories. Some of these categories are just for example, in health, like the probiotics business, for example, where we put good resources behind to make sure that we can Outgrow the competition here. And I think if you look at the start into the year, It's 3% growth if you adjust for the days, and there was a very strong comparison with 7% In the last year. So we're actually quite happy with the start.
And we have seen some of the portfolio pieces Performing very well. Like the Flavors business is coming well. You see it in the everything which Plant based and protein related. And we see some, let's say, turnaround as well. And I mentioned before when Mike Sison asked On the Microbial Control, which is coming back.
We see the foodservice business are coming back. These are all good signals We're on a really solid track now to accelerate our growth. And that's the reason why we said We raised our expectation for the rest of the year.
And we will take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thanks. Good morning, everyone.
Good morning.
Good morning. So I was hoping to ask about some of the color On raw materials and cost trends, obviously, a very dynamic kind of raw material environment. The increases in freight are noted. Just trying to make sure I understand kind of the magnitude of how much that has increased relative the To your initial look at the year provided a few months ago, how much incremental price you're calling for or expecting and Benefit reformulation and how we think we end the year on that kind of price cost balance.
Right. Adam, it's Rustom. Let me take that action. So we started 2021 expecting our inflation to be low single digits, It's okay with some modest increases, mostly offset by cost declines, right, some cost declines. But since then, we've seen some large increases in raw materials.
We've I talked about them, soy, Locust being turned on a whole bunch of them, right? Also higher freight costs due to sharply increased rates, plus higher air freight volume In specific areas where we have strong demand coupled with inventory and supply chain challenges. But in any case, to answer your last part of your question, We do now expect raw material and logistics inflation combined to be in the mid single digits this year. And obviously, this requires us to go back to our
And we will move next with John Roberts
This is Lucas Beaumont on for John. Thanks for the Learning Lab videos on the website for the 4 segments. The extra details there were quite helpful. The Just on the 5th one on R and D, could you provide some breakdowns of the new R and D budget? Do you spend roughly the same percent of sales for each segment?
And how much of the R and D is centralized versus how much is in control of the 4 segments?
Thanks.
Sure. Lucas, thank you for the question. So the combined company budget for R and D is approximately USD 6.20 1,000,000. It's around about 5.5% of our annual sales. And we are a leader in terms of R and D within the industry.
What we have done is we went through all the different categories and technologies and looked Well, we can put actually the best R and D dollars behind. So we are prioritizing our investment towards the highest return And that means that we spend actually a fair amount of money on health and Bioscience, I think that's very, very important. So the biotech area is one of the main investment areas. For example, probiotics, enzymes and cultures, just to name one. And then we have certainly a centralized R D approach.
And we have probably at least half of it on the centralized R and D and the rest goes into application in Application Labs. But as I said, a big piece of our investment goes into the biotech area, Which I think is super important for our customers and certainly for the development of some of our technologies going forward. I hope that
helps. And we will take our next question from Faiza Alwy with Deutsche Bank. Please go ahead.
Yes. Hi. Good morning. So I wanted to ask about we're in a time when a lot of CPG companies are looking to reduce their COGS. And I know for legacy Flavors and Fragrances business, these only comprise about to 5% of COGS.
So, often we've seen customers leaning in on these ingredients to differentiate their products While cutting some more expensive items or more expensive maybe active ingredients, but how should we think about this Sort of in context of the combined business, enzymes can be used to lower other more But just would be great to get more color from you on this and if there are any sort of early examples of how IFF is being impacted so far By your customers' need to lower costs and if there are any sort of areas of the business that stand to benefit versus those that stand to get hurt.
Thank you. Good question, and it ties very well with the R and D question previously. So certainly, We are not just offering, let's say, the flavors and fragrances. So we have now a much broader set of technologies and innovative solutions. We can play with it.
And that can, 1st of all, differentiate us in the marketplace, but also can help to reduce costs. For example, On the legacy IFF side, we can partner with our customers. We reformulate, allowing them to reduce cost. For For example, we can use our modulation technology for that to reduce cost for sweeteners in their products. But also in terms of our new platforms, we have now really the leading biotech platform, And that gives us really endless opportunities to use their fermentation technology, reduce import costs and basically I create some of the ingredients via Biotech Pathways.
So actually bringing everything together It gives us a very synergistic approach to help our customers not justifying. We have super innovative solutions, Which are helping them to win their own clients and customers, but also reduce costs. I think we are in a very, very good spot And position here.
We'll take our next question from Matthew Deo with Bank of America. Please go ahead.
Hi, yes. So,
Simon made some comments About India exposure in the legacy N and B business on its 1Q earnings call. Just kind of wondering if you could walk through what your exposure is to India and what you're seeing there? Is it The commentary made it seem like there was some elevated exposure, perhaps it's relative to their current portfolio, but We did receive a number
of questions on it into the quarter.
Yes, Matt, thank you for the question on India. We have probably run about 5% of our business in India. Actually, the Q1 was up double digits, so it was a very good performance. And it's interesting that you're asking because it's such a, Let's say, desperate situation in terms of the pandemic right now. So I talk on a regular basis with our country manager.
And We haven't seen any slowdown of the business, which is kind of interesting, but we are cautious with India. So, so far, we haven't We've seen any negative impact on the business, but we are cautious and the business is around about 5% of our total business.
We will move next with Ghansham Panjabi with Berg. Please go ahead.
Thank you. Good morning, everybody. Good morning. Andreas, As vaccines get deployed and mobility has improved in regions such as the U. S.
And China, are you seeing a related increase in new product development at the customer level as they sort of position For perhaps a broader recovery. And then also separately to clarify on the early question on raw material cost inflation. What are the positive Offsets as it relates to the updated EBITDA guidance, given your cost inflation has been raised from the low to mid single digits? Thanks so much.
Yes. Let me get started, and then I hand it over to Ruston for the raw material part. So we see more demands coming in from our customers, which is really good. So new product development is happening. And we don't see it just With our big customers, we see it with some of the small customers coming back as well, which is I think it's a good and Excellent, excellent sign.
And we see it in many of our categories, even on the fine fragrance side, which has shown actually very strong development in the Q1 And a good start or excellent start into the Q2 as well. So short answer, yes, we see an uptick the 2nd part to it and we see it also with smaller customers as well. Wusten, if you go on the wrong math?
Yes, absolutely. So we do expect negative pressure on our gross margin this year. And that's because it takes us time To go back to our customers, just have the additional pricing discussions and all the rest of it. So we do not expect to be able to in this fiscal year to be able to recover the Full extent of the raw material increases that we are seeing and we envisage, okay? However, I mean, we do have positives.
We do have positives coming from FX coming through. We do have positives from higher sales volumes And we do have the positives from lower RSA as a percentage of sales. So on an operating margin perspective, that reduces The negative down quite a bit. And at the end of the day, your EBITDA, I mean, combined with our focus on everything we've talked about, the cost We are confident that we can achieve our full year adjusted operating EBITDA goal on a combined basis, the dollars.
I think that's an important point, what Wrastem is just saying, because we have now with the integration, good flexibility on the RSA side, Basically to buffer these developments.
We will take our next question from Gunther Fichman with Bernstein. Please go ahead.
Hi, good morning Andreas, Wristam and Mike. Can I just ask on your organic sales growth outlook? You have in the slide, Page 17, 6%, I believe that's reported Sales growth. Can you, first of all, split out how much of that is like for like, please? And then coming back, Usdan, to the discussions around raw materials, How much of that would be pricing?
Because I believe when you last gave guidance still with a 12 months, You gave a 3% organic sales growth guidance, but most, if not all of that, would have been volumes. Thank you.
Look, maybe I get started and then as usual, Austin can comment on the raw mix. The organic sales The course will be 4%. That's what we are currency neutral. That's what we are planning. Roastem?
Okay. So I mean that was the the
I mean, I was going to
say the same thing that effectively FX is helping us as well in the 6% number as we see for the whole year. So the On the Gunther, the other part of your question was just in terms of recovery, right? And we do expect to recover parts But not all. We haven't quantified that yet and specified, but part but not all of the increase in material costs. Does that clarify?
And we will take our next question from Jeff Zekauskas with JPMorgan. The deck, please go
ahead. Thanks very much. I was wondering, what's the magnitude of the divestitures that you Contemplate, is it $500,000,000 in sales or $700,000,000 in sales or $1,000,000,000 What's the scale? And secondly, in looking at your global sales review, it seems that the issue was Western and Central Europe, which contracted 5%. What is it about your business in Europe that's so different Then your businesses in the other region such that you have a negative growth rate?
And how does that region look for the remainder of the year?
Yes. Let me Jeff, thank you for the questions. The magnitude of the divestitures For the noncore business, it might be around about 5% of sales growth. That's what we what we are targeting right now. And in terms of Europe, I think what is really important that you see the COVID impact on Europe, And that's probably the biggest impact we see right now because the composition of the business has a lot of food Service Inn, for example, we have the at least up to end of last year, fine fragrance was impacted because A lot of it comes out of Europe as well.
And that was probably the main impact. And now with the hopefully opening up Of the economies in Europe and increasing vaccination rates, we expect actually good Turnaround on with our European business. And actually, we have seen the first signs already in April, Which is really, really good for us. I hope that helps to answer the question here.
Andreas, you've talked about food service business and fine fragrances as 2 businesses that kind of took a hit during the pandemic. As the economy opens up and people start going out, how quickly can they get to pre pandemic level? And then one question for Rustam. You mentioned sort of your top raw materials who rattled them off. But can you talk about sort of your top 5 or 6 rank order So we understand what is the raw material exposure of the combined company?
Thank you.
Okay. Let me get started. First, I would say on the fine fragrance side, faster than we had expected. I believe We expect that end of last year is still that it takes us until 2022 to get back To pre pandemic levels. But now I will be more optimistic in what we are seeing right now, which is really good.
Foodservice might take a A little longer and particularly out of Europe to get back to the pre pandemic levels. I think we will hit it probably Next year. But I would say it's very, very dependent what's happening now in the second and in the third Q3. But as we said, fine, more optimistic than end of last year. Foodservice, we will see and the focus here is on Europe.
Russen, I hand it over to you.
Yes. I would say that soy and locust bean kernel do stand out as 2 of the largest in there. The and the vegetable oil is much smaller and several of them. The And I mean turpentine is something we have as well, but much smaller in a dimension. And of the last one that we mentioned, propylene glycol, that one is fundamentally it was force majeure related and will work its way back.
We'll take our next question from Brian Tompkins with Jefferies. Please go ahead.
Thanks very much. Hello, everyone. Yes, I was just wondering if you could give an idea now that you've secured your first invoice for the cross selling and solution selling of what you might think the profile of the customer will be or who you're getting better traction with maybe in terms of Size, geography, products, any information would be interesting there.
And then just more of
a housekeeping one. I noticed since Q4, The D and A guide has gone up a little bit and it looks like the tax rate guiding for is quite a bit higher than what was implied in Q1. So whether we could just have a comment about that, that would be appreciated. Thank you very much.
Sure. Absolutely, I take the first one, Ruslan takes the second one. So the first thing we are seeing in cross selling is that we had the first big win with a big customer, It was actually a cross sell in between our Scent business and our Health and Bioscience business. So it's a combination Where basically, we get something on the enzyme side because we have good access to our scent business. So bigger customer, a European but a global customer.
And I think on the product side, As I said, it's in the detergent area, which I think is very, very good and very Promising because we see a good pipeline now also on the food side coming in so far with our Nourish division. So It's going actually very, very well. And I think we can make the €20,000,000 we have promised for this year Actually quite, quite nicely in 2021. And now I hand it over to Rustam.
Thanks, Andreas. There's no change really. I mean we had never before We specifically guided to the P and L ex amort. We thought that would be more useful because as people have pointed out, Truss, that When doing the modeling, I mean, we are talking about our EPS, our EBITDA, all the rest of that. So that's really what we did.
I I mean, if you look at 2020 to clarify, I mean, the adjusted P and L number that we had for the whole year was 17.5% and the the P and L ex amort 18.5%, right? And so the number this year, what we're going to at 21.5% is It reflects roughly about 100 basis points simply for the difference between those 2. And then the rest of it is just the fact that
question from Mark Connelly with Stephens. Please go ahead.
Thanks. So, Russ, if we look past the nice progress on working capital. Do you think that the normal progression of working capital has changed very meaningfully, leaving out any discrete benefits
No. Look, for the rest of the year, I wouldn't be expecting working capital To improve the same way at all. I mean, we had a very, very strong Q1. I mean, we had roughly an 8 The improvements in working capital days, right? And that was driven by HIF and F inventory, legacy IFF inventory and legacy NNB payables As we go forward in the year, we'll actually be building inventory at legacy NNV To satisfy demand and lessen the strain in our supply chain and also the raw material cost increases we're talking about are going to increase the The dollars on hand, right?
I mean DSO pretty stable through the rest of the year. And so we haven't Specifically forecast core working capital. But basically, by the end of the year, I would think we'd expect it to go up a little And that's all factored in. We're still pretty much able to deliver the the €1,000,000,000 of free cash flow that we have in mind for the year as well. And that's with the working capital, with the CapEx, with everything.
We'll take our next question from Lisa DeNeve with Morgan Stanley.
Hi, guys. Just 2 from my side. So far, we've talked about the segments where you expect sales to return back to growth. So talking about the other side of the coin, I mean, which segments, should we perhaps consider could normalize as we're going through the coming quarters, especially as it relates to, for example, consumer fragrance, Immunity exposed sales, which some categories have done incredibly well. But as well some of your peers have flagged quite a level of destocking in some categories in the Q1, so it would be very helpful to sort of get your view on this.
Thank you.
The Sure, Lisa. Absolutely. If I look at the different categories here, the good news is if we look at our forecast, Actually, almost all of the categories will see some growth going forward, which is actually a Great situation where we are being in. I agree with you on the consumer fragrance side where we had double digit developments in the last We might see a bit of a normalization, but we still expect good growth and maybe single digit growth in that very important category. Another, let's say, category where we have very strong comparables is probiotics.
You might have seen this for a couple of months. It was For legacy NMB double digit growth last year. So we will see a normalization here, but still a growth in the mid single digit range going forward. So these are the 2 categories, which I would call out. All the others are looking actually quite strong Going forward in terms of growth.
We'll take our next question from James Targett with Berenberg. Please go ahead.
Hello. Good afternoon. I just wanted to go back to pricing and just ask about, is there anything about the new And the business which makes past price through harder or easier than legacy IFF thinking in terms of how long pricing Sorry, input costs may take a pass on that. And just to follow-up on the I think on the last question, just in the Health and Biosciences division, You're flagging softer growth in health and negative in cultures and food enzymes. Is that just down to the tough comp?
Or is there anything sort of more underlying in terms of market demand there? Thank you.
Yes. Let me take it and start with the second question first. It is basically tougher comparisons. That's what it is because last year, end of Q1 and into the second quarter, It was very, very, very strong, very double digit. And that was hard to, let's say, To make up this year, we have seen, let's say, in Q1, for example, On the Health and Bioscience piece, really double digit growth.
And as soon as that normalizes, we will see good growth coming the Out of H&B as well, because the underlying business is actually very good and the demand is strong. On the pricing side, it's basically a pass through. As you were saying, it's easier To raise prices compared with some of the legacy F and F businesses and so that the time lag is not as Long as it is for some of the F and F businesses. I hope that answers the question in the first part.
And we will take our final question from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks. Good morning. I know we've covered a lot. One more thing I was curious about was the free cash flow guidance Being at $1,000,000,000 for this year, it just strikes me as a bit low given that, I think the ISF, the management case for management case for NNB was originally calling for something closer to like $1,300,000,000 for 2021.
I know that's It's a 12 month number, we're only looking at 11, but that wouldn't really explain all the difference. So I was just curious, kind of thoughts on why that lower free cash flow
Yes.
So Lorne, the 12 months versus 11 is a factor, of course, right, Coming through the number. We expect slightly higher CapEx than we originally envisaged as we invest in the business, the Integration, capacity, normal run, maintenance, all the rest of that, right? We're also building, as we said, a little For inventory, then we expect it to and in the legacy NNB end of the business. And so that's going to add as well. And fundamentally, I mean, the rest of it is strong EBITDA, and then the business just flows through.
And shows that we have no further questions at this time. I would now like to turn the call over to Andreas Pippeck for any closing remarks.
Yes. Thank you for the participation. Certainly, a very And good quarter for us because it was the 1st 2 months as a combined company, and you have seen Lots of moving parts also in the external environment, but I believe IFF handled it well. And I would like to thank the employees again for that 1st robust Q1 and then and also we see actually a positive sales development and expectations for the rest of the year.