Glenn Richter
Executive Vice President, Chief Financial Officer at International Flavors & Fragrances
Thank you, Andreas, and welcome, everyone. Thank you again for being with us today. As Andreas highlighted, 2021 was a strong year for sales growth, including a strong fourth quarter finish. Looking more closely at our consolidated fourth quarter results, IFF generated greater than $3 billion in sales, representing a 10% year-over-year increase on a currency-neutral basis, our third consecutive quarter of double-digit growth, primarily driven by double-digit growth in our Health and Biosciences division as well as high single-digit growth across our Nourish, Scent and Pharma divisions.
As with our full year results, our fourth quarter margin performance continued to face inflationary pressures, much like our entire industry which offset positive volume growth, solid price increases and the benefits of synergies and productivity. Early in the fourth quarter, we recognized a significant escalation in inflationary pressures and as a result, we quickly mobilized to prepare to implement significant pricing actions across all businesses to protect overall profitability. I'll discuss these actions as well as our efforts to accelerate productivity and operational excellence when I discuss our 2022 outlook. On the next several slides, I will briefly dive deeper into the fourth quarter financials of each of our four business segments. Turning to Slide 13. I'll begin with our Nourish segment, which experienced both a solid quarter and overall performance in 2021. In the fourth quarter, Nourish achieved 9% year-over-year sales growth on a currency-neutral basis, driven by strong volume growth and price increases.
Our Flavors business, in particular, realized strong growth with increased sales across all regions. Ingredients grew by strong double digits due to increasing customer demand and both Food Design and Food Service also drove growth for Nourish in the fourth quarter. Adjusted operating EBITDA declined slightly due to inflationary pressures. Pressure on profitability occurred despite strong volume growth, increased productivity and strategic price increases in this segment. On Slide 14, our Health and Biosciences division delivered fourth quarter year-over-year sales growth of 13% on a currency-neutral basis, led by double-digit growth in Health, Microbial Control, Animal Nutrition and Grain Processing. Additionally, Cultures and Food Enzymes and Home and Personal Care each grew at a high single digits against strong year-over-year comparisons. Our adjusted operating EBITDA increased to 4% due to volume growth and higher productivity, while margins faced pressure due to inflation and higher logistics costs. Turning now to Slide 15.
Our Scent division continued to perform well and achieved strong growth in the fourth quarter, delivering 6% year-over-year growth or 7% growth on a currency-neutral basis. This performance was supported by a continued rebound in Fine Fragrances, which saw double-digit growth driven by new wins and increased volume. Our Consumer Fragrances category delivered single-digit growth against a strong high single-digit year ago comparison. The Ingredients business continues to contribute to the success of the overall segment, with double-digit growth in Fragrance Ingredients. Despite solid volume growth and favorable mix in the business, Scent's adjusted operating EBITDA growth was affected by higher cost of raw materials, which we continue to take action to mitigate. On Slide 16, our Pharma Solutions segment delivered year-over-year currency-neutral sales growth of 9% from 2020 as a result of volume strength and price increases. Both our core pharma and industrials categories contribute to our strong performance in the quarter. For Pharma Solutions, adjusted operating EBITDA and margin was also impacted by higher raw material and energy costs.
We recognize the challenges this segment is experiencing due to the current market environment and macro supply chain constraints and are optimistic that as the global situation recovers, we will recognize the full potential of Pharma Solutions. Now on Slide 17, I would like to review our cash flow position from progress in deleveraging. For the full year 2021, we delivered strong cash flow of over $1 billion and are on track to meet our deleveraging goals. 2021 capex was $393 million or approximately 3.4% of sales as we made strategic investments in the most attractive segments of our portfolio. Overall, our capital expenditures were lower than originally planned, in part due to slower implementation of projects due to some vendor delays and a continuation of the COVID environment. We also paid out $667 million in dividends to our shareholders in 2021. From a leverage perspective, we continue to make substantial progress towards achieving our deleveraging target, finishing 2021 with 4.1 net debt-to-credit adjusted EBITDA ratio. IFF reduced gross debt by $124 million to $11.4 billion versus Q3, and we finished 2021 with cash and cash equivalents of $716 million. We remain confident that IFF is on track to achieve our deleveraging target of 3 times net debt to credit adjusted EBITDA by year three post close, further supported by additional divestitures that I will touch on in a moment. Turning to Slide 18, I'd like to provide commentary on our business outlook for 2022. For fiscal year 2022, we expect revenue between $12.3 billion and $12.7 billion, with adjusted operating EBITDA in the range of $2.5 billion to $2.6 billion.
We also are forecasting foreign exchange rates will be a headwind in 2022, approximately two percentage point headwind to our revenue and a four percentage point headwind to adjusted operating EBITDA in '22. As you are all well aware, we continue to operate in a complex market environment with ongoing uncertainties from the pandemic, global political tensions and supply chain challenges. IFF and our industry at large have been impacted by these issues, and we expect and have planned for that these challenges will remain into 2022. As I shared on our third quarter call, we expect inflationary pressures to be significant in 2022 as we see large cost increases in raw materials, energy and logistics. As a result, we are taking significant pricing actions to fully offset our dollar cost exposure, which we expect will result in strong sales and profit growth but will depress margin. Longer term, we remain confident in our ability to recover margins to pre-inflation levels as we are focused on improving returns to generate strong value creation for our shareholders. We also remain intently focused on driving cost reductions through synergies and increased productivity efforts throughout our business.
In addition, we are increasing capex in 2022 to approximately 5% of sales as a result of '21 capex carryover and increased investments in capacity expansion in key technologies, which will help support growth while also lowering logistics costs. Finally, we will also be increasing inventory by approximately $300 million to more appropriate levels to ensure we can continue to serve our customers well. Now moving to Slide 19, I would like to focus more specifically on the cost inflation trends that we saw in '21 and now forecast to see in '22. Heading into 2022, we expect certain costs, including raw materials, energy and logistics, will continue to rise much as they did in '21. Overall, we expect '22 cost increases to be double digits, call it approximately 10%. We are seeing most of these increases related to inflation in raw materials with double-digit increases in hydrocolloids, oils, cellulose, pulp, turpentine, aroma chemicals, petrochemicals, fragrance specialty chemicals, savory ingredients, specialty chemicals, agriculture, grains and sweeteners. The inflationary pressures manifest themselves differently between the legacy N and B and IFF businesses. Most of the higher energy and logistics cost in '22 are related to legacy N and B. With added capacity coming online later this year, we hope to start to mitigate some of the logistics headwinds we have been facing due to an imbalance in supply and demand. If you look at legacy IFF portfolio, we are seeing high single-digit raw material inflation similar to our flavor and fragrance peers.
Recognizing these challenges, we have been aggressively pursuing broad-based pricing actions and accelerating synergy and productivity efforts. Turning to Slide 20. I will provide a bit more insight into our sales guidance for 2022. Our $12.3 billion to $12.7 billion sales expectation represents continued momentum on top of our strong 2021 results. To get a more comparable revenue basis, you must add back approximately $500 million of sales related to N and B in January of 2021 as N and B results were not part of IFF until February 1, 2021. Our sales guidance also accounts for the removal of June to December '21 revenue results following the anticipated completed sale of our Microbial Control business as well as the first nine months of '21 sales for the Fruit Prep divestiture which we closed in October of last year. That gets you to our comparable '21 revenue base of $11.85 billion as indicated on the slide. As I said earlier, we are significantly increasing our prices in order to fully offset the dollar cost exposure of our inflation for 2022.
With that in mind, we anticipate pricing to be significantly larger contributor to the top line in '22. This pricing impact, plus [more months] volume growth following a strong '21, will be central to our overall sales performance in '22 where we expect to grow approximately 6% to 9% year-over-year on a comparable currency-neutral basis. Now in terms of our guidance on the adjusted operating EBITDA front, we also had to make adjustments for comparability. If you add back EBITDA related to N and B January results and subtract the EBITDA related to seven months of EBITDA as a result of the anticipated divestiture of our Microbial Control business as well as the EBITDA related to the Fruit Prep business for the first nine months of '21, you get to a comparable '21 base of approximately $2.5 billion. As mentioned, implementing broad-based pricing actions to offset inflationary pressures is critical to our '22 plan. Over the last 3-plus months, each of our business has executed pricing actions across essentially our entire customer base.
As a result, we anticipate to completely offset projected '22 inflationary pressures with pricing actions. The majority of these actions will be implemented in the first and second quarter. I would also note that we anticipate that 2023 will benefit from an additional $200 million of net pricing benefit due to the full annualization of our pricing actions, which will be equal to 100% capture of the combined 2021 and 2022 inflation impact on our business. Importantly, we also continue to closely monitor the global supply chain environment and we'll be prepared to execute additional price actions as appropriate. By adding anticipated volume leverage plus synergies and productivity, we expect comparable EBITDA growth in '22 to be strong, up approximately 4% to 8%. It should be noted that the synergy and productivity contribution here is a net number wherein the combination of the benefits of synergy and productivity net of cost of living increases and reinvestments in the business. Our guidance implies that our adjusted operating EBITDA margin will be down modestly versus '21, principally due to our net dollar cost recovery which equates to approximately 100 basis points.
Over the course of '21 and '22, we will see more than $1 billion of total inflation. And while we are working rapidly to cover via price increases, it has impacted margins significantly. To give you a perspective of the magnitude, our margins for full year '22 on an inflation-adjusted basis, will be approximately 300 basis points higher or approximately 23.5%. In terms of margin cadence throughout '22, we expect the first half to be down year-over-year, with expansion coming in the second half. While sales are expected to be strong in the first quarter, year-over-year adjusted operating EBITDA margin performance will be the most challenged of the year, down over 300 basis points versus our reported first quarter 2021 margin, with each quarter after that including. Much of this will be driven by price to total inflation, where we expect to turn positive starting the third quarter. As I conclude, I want to highlight our four key areas of focus for '22 and provide further color into our detailed execution plans for each. First, we are committed to building on our strong '21 sales momentum. Our 6% to 9% targeted '22 currency-neutral sales growth anticipates that we will continue to maintain volume growth consistent with overall industry growth rates.
We believe that our exceptional R and D pipeline and scaled global commercial teams, including targeted '22 investments, will allow us to continue to deliver superior customer solutions and support strong growth. In addition, as I mentioned previously, we are making substantial investments to increase capacity across constrained portions of our portfolio and enhancing supply chain efficiencies. Lastly, we will be sharpening our focus on our revenue synergy opportunities as we are behind our original planned pace, as much of last year was focused on addressing near-term supply chain issues. That said, we are confident that the breadth and depth of our platform will allow us to build meaningful revenue synergies over time. Second, as previously outlined, we are intently focused on broad-based pricing actions to offset inflation. And importantly, as the macro environment evolves, we are prepared to quickly execute additional pricing actions throughout the year as needed. To enhance our ability to react more quickly to the dynamic environment, over the last several months, we have undertaken a comprehensive end-to-end review of our procurement processes, implemented new pricing tools and established core pricing teams for each one of our businesses. Our focus has been to compress the time between inflation signals and customer pricing actions, ensuring we optimize product segment and customer-specific pricing actions and closely monitor the level and pace of pricing realization.
Going forward, we are focused on further enhancing our procurement processes and pricing programs. Third, we are determined to accelerate our synergy realization and more broadly, our productivity efforts in 2022. For your reference, included in our '22 guidance, we are targeting approximately $200 million of cost reductions from synergies, yield enhancements and reformulations, logistics efficiencies and other operational improvements. Net of wage inflationary pressures and targeted investments to help drive top line growth, we are targeting net cost efficiencies of approximately $100 million for the year. While we feel this is good progress, we also recognize that there is more work to do. Consequently, in addition to the end-to-end review of procurement, we are undertaking a comprehensive review of our global manufacturing and logistics platform, constructing a plan to accelerate the scope and scale of our global shared service capabilities, and developing a detailed technology and digital integrated road map, all with the goal of driving meaningful efficiencies while also ensuring we provide superior customer solutions and service. Fourth, we are actively working to accelerate our noncore divestitures.
As we have discussed, we are on track to successfully complete the sale of our Microbial Control business, which will enhance the efficiency and profitability of our portfolio. We are also targeting additional portfolio optimization to further delever our balance sheet and focus on core growth opportunities. Over the coming quarters, we will proceed with marketing a handful of nonstrategic businesses, call it three or 4, where we believe that over the next 18 months, we can generate expected proceeds of approximately $1.5 billion to $1.7 billion. Similar to our Fruit Prep and Microbial Control businesses, these are nonstrategic and the transactions will be accretive to our go-forward growth rate and margin profile. With this action plan, together with our current sales momentum and strength in our leading portfolio, I am confident that IFF will deliver strong results in 2022.
With that, I would like to turn the call back to Andreas.
