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Investing.com -- International Flavors & Fragrances Inc. (NYSE:IFF) has completed the sale of its Pharma Solutions segment, generating an estimated $2.3 billion in net disposal proceeds. Subsequently, the company announced several tender offers for a series of its senior unsecured notes, totaling up to $1.8 billion. This action is expected to lower its pro forma S&P Global Ratings-adjusted debt to EBITDA to about 3.3x, aligning with the company’s publicly stated leverage target.
In response to these developments, S&P Global Ratings has revised its outlook on IFF from stable to positive and confirmed all of its ratings, including the ’BBB-’ issuer credit rating. The revised outlook reflects the expectation that the company will maintain leverage of below 3.5x as it continues to enhance operating efficiencies in its soon-to-be restructured reporting segments, which include Taste, Food Ingredients, Scent, and Health & Biosciences.
The divestiture of the Pharma solutions segment and the subsequent debt repayment concludes the majority of IFF’s large-scale divestitures and brings its leverage back to the management’s long-term target. The company’s S&P Global Ratings-adjusted leverage has declined to 3.3x pro forma for the announced debt tenders, from 4x as of December 31, 2024. This indicates that the company is now operating at its publicly stated leverage target of less than 3x.
After the tender, the company’s capital allocation priorities are expected to remain balanced across capital expenditure (capex), additional debt repayment, and potential future increases in shareholder returns. IFF has indicated that it will increase its capex to 6% of its sales in 2025, up from approximately 4% historically. This increase primarily reflects catch-up investments following a period of deferred spending due to post-pandemic supply chain constraints.
The company’s improved margins in 2024, combined with lower interest costs and disciplined working capital management, are expected to boost its free operating cash flow (FOCF) generation by more than $200 million year over year in 2025. It is anticipated that IFF will primarily use this elevated cash generation for additional debt repayment to address its upcoming maturities, the first of which is around $400 million of term debt due in February 2026.
IFF remains focused on further improving its operating efficiencies under its new segment reporting structure. Part of the company’s decision to change its segment reporting and split its Nourish segment into two separate units (Taste and Food Ingredients) is to better align management accountability to meet its margin-expansion goals.
IFF’s tariff exposure appears manageable, although its sales volumes may be pressured by reduced consumer discretionary income. The company’s tariff exposure primarily relates to sourcing costs for its cross-border input purchases. However, the company’s continued execution of the already identified margin improvement initiatives under its existing operating plan remains a tailwind to its margins.
The positive outlook reflects IFF’s reduced leverage following the divestiture of its Pharma Solutions segment and the expectation that it will maintain leverage of below 3.5x. However, S&P Global Ratings could revise its outlook on IFF to stable if its leverage rises closer to 4x. This could occur if customer de-stocking and margin pressure recur, leading to a loss of market share, volume declines, and EBIDA margins of well below 18%; the company deviates from its leverage targets and pursues larger-than-expected M&A or shareholder returns; or new developments in the investigation into anti-competitive behavior lead to a belief that it could have a material negative financial impact on the company.
Conversely, S&P Global Ratings could raise its ratings on IFF if it continues to meet operating expectations while balancing its capital allocation with its stated leverage targets. This could occur if management continues to execute under its refocused operating model and the company continues to demonstrate a commitment to its financial policies by avoiding large debt-financed M&A and shareholder remuneration.
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