Next, we are pleased to welcome back Erik Fyrwald, Chief Executive Officer of IFF. Erik, it's great to have you here. So much progress in the last year, I am excited to get started. IFF has gone through a significant amount of change over the last two and a half years. As you look at IFF today versus when you became CEO in early 2024, what would you say is the most different about the company today and its ability to grow?
We are a lot different, Lauren. Thank you for having me. It's great to be back here. We had this discussion two and a half years ago, and a lot has changed. First of all, when I got to IFF, we had a very weak balance sheet. We were 4.5x levered. We are now 2.5. We had missed consensus. We had missed guidance even a number of times. We now have a number of many quarters in a row of achieving guidance and doing what we say we are going to do. I think the most important change is that at the time, the attempt with the Frutarom acquisition, the Nutrition & Biosciences acquisitions, was to be a one-stop shop.
We have been very clear for the last almost two and a half years that our goal is to be an innovation leader, and an innovation leader with three great innovation-driven businesses: Scent, Taste, and Health & Biosciences. We have set those businesses up as standalone end-to-end businesses that have everything within them to succeed. They have the R&D, the production, and the commercial capabilities. Now they coordinate, collaborate across, and I think they do it much more effectively because they know what they need to do to win in their businesses and then can help each other to win with customers. We also have, I think, now a very strong leadership team in each of the businesses and corporately, and we have got the team and the capabilities to go out and drive profitable growth.
Yeah. Okay, great. When you say the company is more focused, where do you see that most clearly showing up? Is it in faster decision-making? Is it in better customer engagement, win rates, allocation of resources? What is the best way to articulate what more focus really means?
Well, I think if you look at where we were, and it was interesting because in my first weeks, I got calls and emails from a number of CEOs of very big CPG companies, asking me to come and say hello, and basically the message was, "IFF is a very important supplier, but you have kind of lost your way. You are not really delivering the innovation that we need and expect from IFF." I think if you ask our customers today, you will hear a very different story that IFF is back. Now, of course, we are not where we want to be. We want to keep getting better. But we have made a lot of progress to where we have significantly enhanced the engagement scores of our people. We were losing some really good talent.
I think not only are we retaining our good talent, we are attracting really good talent, and we have hired some outstanding perfumers, for example, in our Scent business. Across the company, we have really brought in some great talent to augment the great talent that we have. We have strengthened our commercial capabilities. We have focused on making sure that we do well in the developed markets and with global key accounts, but we have also put more emphasis on regional and local accounts and in emerging markets, and that is starting to pay off. We have also significantly enhanced our R&D spend, but also our R&D process around making sure that it is connected to what customers really value and will pay for, and stop stuff that was not important. Then in manufacturing, we fell behind in investing in CapEx.
We've upped our CapEx spend and are strengthening our ability to supply high reliability, high quality, and cost competitive. However, we're still getting the Food Ingredients business separated, and as we do that, there's still efforts that go into that. That separating the ERP systems, separating the contracts with third parties. We've got facilities, we've got products that we have to re-register because they had the same names, all kinds of things like that. So we still have effort to do that, but once that's finished first half of next year, it's all about how do we drive greatness in Scent, Taste, and Health & Biosciences.
Okay. So that's the new IFF, right?
Yes.
As we call it, and we've written called the new IFF, what do you think is the clearest internal proof point that this new company is now competing differently than it was two years ago?
One of the things is the engagement scores are up a lot. What are the main changes? The main changes were, if you talk to our people and I think customers and investors two and a half years ago, there wasn't clarity on what we were trying to do. Saying you're going to be a one-stop shop is a catchy phrase, but what does it really mean? What it meant was we were trying to do everything for everybody versus what are we going to be really good at? To be really good at Scent, Taste, and Health & Biosciences, we can clearly articulate that. What does that mean? That means in Scent business, you have great naturals. We're leaders in naturals. You have great synthetic chemistry molecules, and you have great biotech molecules. You have great encapsulation technology. You have pro-fragrance technology. We can describe that and how we bring it to customers. We have an R&D pipeline. We have a commercial pipeline. We now measure it. We now have a disciplined approach.
We have great talent making all that happen and working together in an end-to-end business unit process, and the same across all three businesses. I think if you ask our people, which I welcome investors to do, ask our customers, and even ask our competitors, "Is IFF different than it was two and a half years ago?" I think you'll hear very clearly that we've come a long way. We're not where we want to be, but we've come a long way, and we're headed in the right direction.
Okay, great. Revenue growth in the second quarter accelerated meaningfully, and growth was broad-based. You've talked about reinvestment in innovation, R&D, commercial, and CapEx the past couple of years. How much of the recent revenue acceleration do you believe is the early benefit of those reinvestments, and how much is actually just the market demand is better or timing?
I think the market demand is similar. It's maybe a little better, but it's choppy too with tariffs and oil prices and wars and all kinds of challenges all around the world. The market's choppy, and you see it in the stock market up and downs. I think we're performing better than we were relative to the market two and a half years ago, and I think that's a combination of things. I think we've got strong leadership in place now. We've got clarity on how the businesses work, the operating model of the company. We've strengthened our commercial capability, and we've made it very clear that we have four pillars. Engaged people, we want our people really engaged. Second is customer obsession. We love customers. It's all about winning with customers. The third is innovation powerhouse.
We've got to bring leading innovation in each of the businesses, and that's why these three businesses fit so well, because they're all innovation-driven. The last is operating excellence. We've got to do things well, and we've got to do them cost-effectively. I think all that is starting to happen, and you're seeing it in progress. I'll give you one example that I think is really important. In Consumer Fragrances, we had lost the edge and had lost some significant business, and were actually performing significantly below the market for a while there in 2023, 2024. We've got strong leadership now. In two and a half years, we've launched a really great ENVIROCAP encapsulation technology. We've launched SENSORA Pro-Fragrances. We had none in the marketplace. We were behind in encapsulation. Now we're very competitive, and we've gotten into the pro-fragrance.
We've launched molecules. We had not launched any new molecules for quite a while. We've now launched biotech, synthetic chemistry, and more natural molecules. It's an exciting time, and you saw the strong growth ahead of the market in the last quarter in Consumer Fragrances. It's just an example of where a lot of focus, right leadership, doing things all across the different areas, to get back to where we need to be with a customer obsession, which brings everybody together. When you're obsessed about winning with customers, it brings all the functions together to make things happen.
Yeah. Okay, so it sounds like, Consumer Fragrance is a strong example of where the reinvestment benefits are now starting to be visible. What do you think are the further leading indicators before it maybe appears in the P&L as we think about manifestation of some of these reinvestments? Is it new wins? How can we think about the runway to start to see all this investment show up?
Yeah, new wins is obviously an important one, but for us, we've put a lot of effort on making sure we've got an innovation machine that's working and measuring that, monitoring that, measuring it through the pipeline, and then the commercial pipeline. The commercial pipeline is a combination of what projects do we have in the pipeline with customers, and then what's the win rate? So we've worked on both increasing the commercial pipeline and the win rate. By the way, even though it's not a high R&D as a percentage of sales, even the Food Ingredients business benefited from that focus. We brought in, like we've done across the company, have a strong leader running that business. We put in place the commercial pipeline approach and the win rate approach.
Andy Muller and his team have started growing that business and improving the profitability with operational excellence, which enabled us to sell it at a very good price, and enables us to then invest in Scent, Taste, and Health & Biosciences, which are also strengthening their commercial pipelines, their innovation pipelines, and the win rates.
Yeah. Okay. One more near-term question. Last quarter, you'd mentioned that 3Q, on earnings, I mean to say, you'd mentioned that third quarter started well, but your expectation is for growth to be in the low single-digit range in the back half of the year. Is that still the case with one more month under your belt? Any categories that you would call out that are performing better or worse, relative to expectations?
Yeah. It's still the case that the third quarter has started off fine, and that we're increasingly confident in our full year guidance. But it is a crazy world, and you just want to make sure that you're doing the things and that you're agile enough and that your commitments are commitments that you can deliver upon in any reasonable scenario in a very challenging dynamic in the world. That's where we are.
Okay, great. Let's talk about customer mix a little bit.
Sure.
Some of your competitors seem to have a greater portion of their business with local and regional. I know you mentioned it earlier, it's an area of investment, and it's still early days. I think IFF still has over half its sales from large customers. In the past, you had Tastepoint by IFF with the Taste business to cater to smaller customers. Tell me a little bit about the degree to which this is becoming a bigger push for IFF overall, the degree to which you need a different business model to work with those smaller customers, and just elaborate on that a little.
First of all, our split is about a third, a third, a third. A third very large customers, a third medium-size, and a third smaller. We have historically been, I think, more successful with the larger customers, and we want to keep doing that. We want to be successful with the large CPGs because then you are bringing the leading innovation, and you are working with great co-creators at your customers, which is very important, and we want them to win. But at the same time, we are putting more emphasis on regional and smaller customers and in emerging markets, where they are popping up. A great example is Fairlife that was doing well, and then Coke bought them, and now they are doing fantastic.
We want to be with the Fairlifes of the world before they are bought by a Coke and be part of the formulation and then be part of the success as they get bigger and bigger. So we are putting more emphasis on small and medium-sized customers in emerging markets, but we are not doing that by taking away from our focus on the big accounts, the key accounts.
Okay, great. Can you talk about the maybe type of growth you are seeing across customer types? Local and regionals have been gaining share from larger players. Certainly see that in North America. We look at Nielsen data, we look at our big coverage and the big branded companies, and then there is an all other bucket, and the all other keeps growing. Is that also what you are seeing outside the U.S. on a more global basis?
Yeah, we are seeing that all around the world, but the result of that is that the larger customers are now focused more on innovation and how do they bring exciting innovation to capture the consumer, and whether it is scent in a shampoo, how are you going to win? You are going to win by having the superior shampoo, and scent is a critical part of superiority, and for a protein beverage, it is the taste. Somebody will try an exciting social media product because it sounds cool, but they will only redo it, they will only buy it again because it tastes great, and we make sure it tastes great.
We want to work more with the big accounts to drive innovation, but we also want to work with the smaller accounts, because if the ones that grow up, we want to be with them, either because they become big companies or because they get bought by the big CPGs. Part of what we are doing here is adding more resources to do this, but also what we are doing is using AI tools to help us better respond to briefs faster for big customers, but also to enable us to respond to briefs that previously we would say no to because they were too small. But if you can automate some of the brief response, do it faster, better, and then automate the sampling, you can serve more customers.
Okay, great. Let's get a little deeper into the three business units. Let's start with Taste. Taste has delivered broad-based growth driven by new wins, strong commercial execution, and innovation platforms like modulation has been a longtime hallmark of the company. What has changed in the Taste organization since you joined that is making the growth more repeatable and sustainable?
I think really important. When I got here, we did not have a Taste business. I will tell you an example. I was in a meeting, it was actually January of 2024. Before I officially joined, I went to an American Cleaning Institute meeting in Florida, and we had a review with a major CPG company around Scent. We get to the end of the meeting, and I am walking out, and their head of procurement comes to me and says, "Your company is losing share to our big global company in Taste, and I do not even know who to talk to. You do not have a Taste leader. You have a Nourish business, and I do not even know really what that is." That kind of triggered in my mind maybe Nourish is not a business, maybe Taste is a business and Food Ingredients is a business.
We went back, and we worked with the leadership, and we said, "Of course, Taste is a business and Nourish is a business." We separated them. I believe that and then creating the end-to-end business unit model was fundamental to the improvement of IFF, because then Yuvraj Arora takes the Taste business and unleashes the potential to make it great. It already had great people in it and great capabilities, but it was just getting muddled with this Nourish concept, this one-stop-shop concept. Then the Food Ingredients business got better too because they focused on what it takes to win in more commoditized, bigger volume markets, where running the assets full out is a key to winning versus R&D for naturals and synthetics and biotech molecules. Very different business in responding to briefs with Taste.
I think that change, strong leadership, figuring out where the world was going, and part of it was one of the questions we kept getting was, and I am on the board of Lilly so I am right in the middle of this, "Isn't GLP-1s going to really hurt your Taste business?" Yuvraj and his team leaned into it and said, "No, we're going to make it an opportunity because GLP-1 patients and even broader, people are going to want more protein." To make high-protein products taste good is a challenge that IFF is extremely well-suited to achieving. You take products that are beverages that have high protein content. You've got to have modulators, you've got to have flavorings, you've got to have stabilizers. You've got to make them taste good or taste great, and that's what we do.
We also are able to reduce sugar content, salt content, fat content in products which consumers want, but keep the exact same great taste. That's enabled us to grow this business in a market where caloric intake for many consumers is going down.
Yeah. Okay. You've already seen a tailwind to growth from reformulation, or actually have you seen a tailwind from reformulation to cleaner labels, or do you see that as more of a catalyst for faster growth for the industry over the next few years? Is that still to come?
I think it's been there for a while now, a desire for cleaner labels. I don't think it's accelerated a lot, but it's there. When consumers want cleaner labels, customers develop products with cleaner labels and reformulate, that's good for us. We're able to help make that happen and hope the trend continues and even strengthens. We see it, but it's not an overwhelming dynamic right now globally.
Okay. Let's move on to Scent. Just looking quickly, we've kind of touched on Consumer Fragrance, so let's talk about Fine Fragrance.
Yes.
As growth for the category continues to normalize, but certainly I would argue stronger than it was 10 years ago, as consumer habits have now embraced Fine Fragrance, how much of your future growth should we expect to be driven by commercialization of new launches? How should we think about growth over the medium term for Fine Fragrance?
I don't think it's going to stay in the double digits.
Yeah.
But I do think it's going to be in the mid to high single digits. I think it's an amazing business that is driven by better understanding of consumers around the world, partially through social media, of the benefits, the joy that Fine Fragrance can bring. It used to be more of an evening women's perfume market, and now it's through the day, different emotions that you want. You want energy in the morning, you want relaxation in the afternoon, you want romance in the evening. Men are increasingly using Fine Fragrances. Younger people are using more Fine Fragrances and layering them. There are markets like Brazil where they shower many times a day and each time put something on to make them smell better. I think there's still a long runway to go for healthy growth in fine fragrances.
Okay, great. Fragrance ingredients, it has been about a year since you started talking about building up a captive molecule pipeline. When should we start to see that be a more material driver of growth?
Yeah. Innovation takes time. But I have got to say that Shobo Boaz, who we brought in to lead our R&D, and his team, under the direction of Ana Mendonça, the President of Scent, have done a great job, great job of rejuvenating our pipeline, getting some things commercial already, but also having a nice pipeline that you will see a few more molecules come out toward the end of this year and into 2027. It takes a while for them to ramp up for perfumers to use them. But I think the latter half of 2027 into 2028, we will see benefits from that more and more.
Okay, great. Okay, last but not least, let us talk about Health & Biosciences. On the second quarter call, it sounded like efforts to stabilize North America health might be taking a little bit longer than expected. Is that a fair assessment, and why?
Yeah, it is a fair assessment. I think that we have significantly strengthened our team, we have strengthened our commercial capabilities, and we are strengthening our pipeline. But the North American probiotic market has slowed down for now. I think there is still a need, and I think health is a great business to be in, but I think customers are sorting out how to position clinically proven products like ours versus products that are not clinically proven that might not even be alive, but say probiotics on them. Consumers do not necessarily know. It is an ongoing effort to try and make sure that we are with our customers, educating consumers on what works and what is proven versus things that might be cheaper but do not necessarily work.
Then making sure that we are able to grow with digital channels and social media and influencers that are credible around the health benefits. My point is, I think we are strengthening. The market is weaker than I expected it, but I still believe long-term that this is a great place to be in. The innovation pipeline is very good, but innovation in health takes quite a while to get out there and ramp up. I am still very positive about the business. I am pleased with the progress, but more to come.
Okay. Health outside of North America, though, has been growing well. What are some of the reasons for that relative strength, and are there kind of things you can take from overseas back to North America?
Well, I will give you an example. Australia, I was in Australia a few months ago, and in Australia, we are doing very well, and they have got a very good regulatory process, and actually positioning with consumers, the customers positioning with consumers around what is clinically beneficially proven. So there is this consumer awareness and buying of products that really work versus products that are cheaper, that do not work.
Okay.
Learning from that and other markets that are more positive growth, like Korea and a few others, and talking to our customers about what we see there and what they see there and how we position that better in the U.S. will take some time, but I am still optimistic about the future.
Okay. Then over the past 18 months, you've been investing in capacity to support future growth in H&B. Can you just talk about where you are in this investment journey and how this will help IFF fulfill larger new contracts that maybe haven't been possible in the past?
Yes. The market is growing. Novonesis is growing the market, we're growing the market, others are growing the market, and it's a great opportunity. But we under-invested in capacity. As you noted, we have been increasing that in the last 1-2 years. It takes some time to get these fermenters in. We also drive capacity through strain improvement and other means. So we're de-bottlenecking, we're adding fermenter capacity. Some of that comes online early next year. Some of it comes online late next year and into 2028. So we are working hard to remove capacity as a constraint to growth to that business, and we'll get there by the end of next year.
Okay. Just looking at the time. Let's talk a little bit about. What do I want to talk about next? Okay. When you talk about having a stronger pipeline, say, commercial and innovation, what is it that really makes it different? Is it larger, more focused on higher ROI opportunities? Is it converting faster into sales than the past? What makes it a stronger pipeline?
What makes it a stronger pipeline is first focusing on a pipeline. If you just say, "Okay, we're going to measure sales." Sales is backward-looking in the mirror. If you measure the pipeline, you're looking forward at what's coming and how you're building that. If you measure the pipeline times the win rate, that tells you how you're doing in converting the pipeline to actual dollars, to revenue. Getting that discipline of the sales force, putting things into the pipeline, which, by the way, helps get the right resources to support to win the pipeline projects. Then on the win rate, if the win rate goes from 30% to 35%, that's huge.
You also, by doing that, you look at the 65% that you lost, and you can talk about why did we lose. You also can put into AI agents the data, and give you some advice about why you might have won or why you might have lost. So that discipline is really helpful in strengthening our ability to do better and better. What I would say is, it's giving us increased confidence for the future.
Okay. You mentioned AI, and I wanted to ask about AI in CPG innovation broadly. Do you think it's a threat to the F&F companies as your customers can bring more molecule discovery, send discovery in-house with the help of AI?
I think the players like IFF that have the history, that have the ability to discover molecules, for example, as one area, are enhanced by AI. If we do that really well, we'll be further advantaged because of our scale and ability to do that. I think that the AI enhancement of molecule discovery is good for IFF.
Okay. Great. I want to talk a little bit about reinvestment and margin expansion. How do you think about the balance between reinvesting for growth and delivering margin expansion over the next few years? What role does productivity play?
Productivity is very important. Investing for capacity expansion to make sure that we can meet the growth opportunities is important. We're doing that. That return's very high. What's great about these three businesses that are left is all the sales create shareholder value. It's not like we have to stop selling things because we're destroying value. It's a matter of where you put the emphasis so you grow faster at higher margins. Innovation is a key part of that. Investing in innovation enables us to create even higher value formulations for our customers, so we've got to keep doing that. We've got to keep investing in the capacity to make sure we have enough product, and that's all high return.
What I love about the three businesses that we have is the investments are all going to pay back well. What we have to do is make sure we decide where we are going to focus that investment, and we're doing that much better than we did before because the businesses are putting together their strategic plans, their five-year plans, and able to come forth with proposals that we can then talk about across the company and decide where to go. I think the other thing that's going to happen now is with Food Ingredients going out, and we take the funds that we'll get, the $3.8 billion roughly, and pay down debt to stay within the 2x-2.5x lever, and buy back shares to minimize dilution. We've already announced $2.5 billion of share buybacks.
After that, we still have really good cash flow, and that cash flow will enable us to invest in the businesses organically and where it makes sense to do bolt-on acquisitions that further strengthen those three businesses.
Okay. What are, I guess, the white space areas where bolt-on M&A would make sense?
The only white space area that I see today that clearly would make sense is active cosmetics. I think that we sold Lucas Meyer, that was before I got here. I think that was a very good business, a very good fit with beauty, but Fine Fragrance is doing extremely well. I think adding that at some point would be a good thing to do. We're not in a hurry to do it. The business is still doing fine. It's not a gap that hurts the other businesses, but it's a potential opportunity to enhance.
Okay. On investing in CapEx, I know we talked about H&B. Beyond that, are there areas where you're still capacity constrained, and is that a limitation to revenue growth or revenue acceleration?
No. We're not capacity constrained in Scent or Taste. We are investing in automation, and we will look to continue to invest in emerging markets opportunities because it's nice to have local facilities that you can quickly respond to customer needs. The automation allows us to not only automate sampling but automate production to where it's lower cost to enhance margins with existing business, but also to enable us to go after smaller briefs, as I talked about before.
Yeah. Okay, great. Let's close with a discussion about the medium-term growth algorithm, and how we should be measuring if this focused growth strategy is working. You've talked about mid-single-digit sales growth being the right target in the more normalized category growth environment, but already over the past two years, you've been at the low end of that target, 4% on the pro forma business. So what would it take for IFF to get to the middle and upper end of that range?
Well, I think what is really important now is to get the Food Ingredients sale closed and take all of our energy. If you can imagine the executive team and even the board discussions two years ago, it was like the focus was on, okay, how do we fix the balance sheet? What is it we want to be? How do we get all this stuff cleaned up, and how do we fix our systems? All this complexity. Now the discussion is all about how do we make Scent, Taste, and Health & Biosciences great. That is a completely different situation to be in.
So I think we already know what areas that we want to drive hard. Now we just got to go and make it happen. It is about execution of the plan we have got in place, and then bolt-ons where they make sense. But also, as we execute, we will learn more and just get better and better. But we are not distracted by things that do not enable us to do better in those three businesses. What I would say is we are pleased with the progress we have made, but we are not at all satisfied. We are going to have three great businesses that have huge potential, and we are starting to unlock that potential, but lots more to come.
Okay. If revenue growth does not accelerate as expected, what do you think would be the most likely reason? Is it market demand? I do not think it is capacity. Is it execution? But what are the things that make it break the wrong way?
I think it would be market demand. It would be some kind of hyperinflation or something that changes the consumer demand. Although we are well-positioned in quite a bit of our businesses and things that consumers have to have so that they would buy in any case. But there is some discretion that could reduce that. But I feel that we've come a long way in doing what we can control better. We've got to keep getting better and better, but we're doing better. So if the market changes like that, we'll do what we control as well as we can, and over time, I think these three businesses have been very resilient to market changes. Much less cyclical than the Food Ingredients and other businesses that we've divested, and the kind of businesses that you want to be in for the long term.
Okay, great. Thank you so much for being here today. I'm really glad to have you back at the conference. We're going to go into breakout, but please join me in thanking Erik for joining us this year.
My pleasure. Thank you.