IFF’s new CEO on rightsizing business: ‘Synergy became the goal instead of a tool’

26-Feb-2024 - Last updated on 26-Feb-2024 at 15:27 GMT

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Fragrance and ingredient giant IFF could divest segments of its business as part of a larger strategy to rightsize the company after failing to capitalize on a merger with Dupont Nutrition and Biosciences that sent its stock price tumbling, new CEO J. Erik Frywald told investors last week at the Consumer Analyst Group of New York’s annual meeting.

“I'm absolutely convinced that although we've had a challenging performance record in recent years when we brought together the historic IFF and DuPont Nutrition and Biosciences businesses, I believe we have a set of great businesses that as we focus our full fanatical attention on better serving customers, with our leading innovation technologies, we have tremendous, profitable growth opportunities ahead of us. And we can add to that profitability on the growth by further accelerating our productivity initiatives,” Fyrwald said.

‘Everybody started chasing their tail’ to achieve synergies

Frywald takes the role of CEO as IFF has struggled to capitalize on recent M&A investments, which has dragged down the stock price. At the time of publication, IFF stock has lost nearly 37% of its worth, or approximately $47.30 dollars per share, over the last five years.

The company acquired Israeli-based flavor and fragrance house Frutarom in 2018 to expand its portfolio and go after small and medium-sized companies. It merged with DuPont’s Nutrition & Biosciences in 2021 to “create a leading ingredients and solutions provider for our customers across a broad range of end-markets,” former CEO Andreas Fibig said at the time of the completed merger.

As it tried to create synergies with these business, IFF took its eyes off its core business of food ingredients, flavors, and fragrances, Fyrwald explained.

“The challenge that IFF got into after the acquisition of DuPont and Frutarom was that, in my view, synergy became the goal instead of a tool. And when synergy becomes the goal, you bring in a lot of consultants, you spend a lot of time internally talking about things, you set up big corporate structures to try to leverage and you lose the sight of winning business by business.”

This focus on synergies also obstructed IFF’s goal of surpassing its market rival — Givaudan — and the company saw “lower margins and lower growth rates over the last five years” for both flavors and fragrances, Fyrwald admitted.

“We set a goal of $400 million ... in revenue synergies, and everybody started chasing their tail around trying to figure out how to get those rather than continuing to focus in flavors and fragrances [and] on how do we beat Givaudan. How do we bring more value to their flavors and fragrances customers than Givaudan does? By being great those businesses, and then where it makes sense to bring in [Dupont] for a new bio-based fragrance or a new bio-based flavor, bring it in, then you have more strength than you had without it.”

Divestments could be on the horizon

Supply-chain issues and consumer destocking have also challenged IFF’s business, the company’s executive VP and CFO, Glenn Richter, shared during the presentation.

“[2023] was a very challenging year for us ... because of very soft volumes. So, there's a tremendous destocking. We had a progression of downward negative volumes [in the] first quarter [and] second quarter, [but volumes] improved in the third quarter, [and] improved significantly in the fourth quarter. But overall, that resulted in a significant reduction in terms of currency-neutral sales, down 1%, which basically was all pricing, and ... volumes last year were down 7%,” Richter said.

Richter outlined several financial areas that IFF will be focusing on to improve the business from boosting revenue growth to accelerating its productivity agenda. The company will also take "a disciplined approach to cash flow and capital policy," including a recent reduction in its dividends, he added.

Additionally, IFF will focus on portfolio optimization, including divesting certain businesses, Richter said. Frywald added, "We've got full authority from the board to figure out if there are pieces within businesses or businesses that are better somewhere else."

Richter added that IFF has a “fundamentally different board,” and the goal now is to optimize its current businesses.

“We have either divested or will be closing one additional business [for] a total of five businesses. ... We will close the active cosmetics transaction at the end of this quarter that will bring in another $800 million of gross proceeds. All of that is directed to the lever on our balance sheet, but we also have other portfolio actions as well.”