Glenn Richter
Executive Vice President and Chief Financial Officer at International Flavors & Fragrances
Thank you, Frank. Greetings, everyone. Let me add my apologies for the technical issue. You should have seen we're both sweating. So I'll start off by just reiterating, as Frank mentioned, the financial and operational initiatives we implemented during the year, they have proven valuable in helping buffer the broader economic headwinds. But at the same time, we recognize, while we've taken some important steps, we have not fully delivered against our financial objectives. We recognize we have more room for improvement to realize our goals and create a more profitable organization, and I assure you we continue to be intently focused on this going forward.
Looking at fourth quarter results, IFF generated $2.8 billion in sales revenue. On a comparable currency-neutral basis, sales were up 4% for the quarter with growth achieved across nearly all divisions. Our adjusted operating EBITDA in the fourth quarter was $441 million, and our comparable currency-neutral adjusted operating EBITDA declined 5%. As it was significantly impacted by lower volumes more than anticipated, which led to meaningful impact from negative manufacturing fixed cost absorption despite continued strong pricing and productivity gains. Because of this, we saw a year-over-year decline of approximately 200 basis points to our adjusted operating EBITDA margin. Despite being partially offset by lower effective tax rate, our Q4 EPS ex amortization was 12% lower due to lower adjusted operating profit.
Currency headwinds also present a significant challenge in the quarter with a seven point adverse impact on sales and an 11 point adverse impact on adjusted operating EBITDA versus the prior year, encouraging recent trends within the currencies have been promising. Clearly, a difficult market environment has weighed on our performance in the fourth quarter. However, I am confident in the steps that IFF is taking as part of our strategic refresh to create a stronger, more resilient business moving forward. Urgency is key and controlling what we can control is our focus: enhancing sales execution disciplines, continuing to price surgically to offset ongoing inflationary pressures, accelerating and importantly, expanding our productivity efforts and more aggressively managing cash flow.
On Slide 14, I want to provide more color on our sales performance in the quarter. In a very difficult operating environment, including strong currency headwinds, we realized 4% comparable currency-neutral sales growth. For the quarter, we saw growth in Nourish, Scent and Pharma Solutions. Health and Bioscience, which overlaps strong double-digit growth from prior year experienced a revenue decline. Factoring the strong year ago comparison, H&B is up 5% on a two year average in the fourth quarter. I'll go into more detail on the following slides. In the fourth quarter, we also saw a more pronounced slowdown in terms of volumes than we initially expected, down high single digits for the quarter. due mainly to consumer demand slowdowns and significant customer destocking actions. We estimate that about 75% of the drop in volume in Q4 is related to destocking, with the balance coming from softer consumer demand.
Turning to Slide 15. The fourth quarter market challenges also significantly affected our margins. Comparable currency-neutral adjusted operating EBITDA decreased by 5%, impacted by volume declines, including negative manufacturing fixed cost absorption and currency pressures. However, pricing actions allowed us to recover the total cost of inflation. Additionally, we delivered notable productivity gains and operational efficiencies, which helped offset some of the volume pressures we faced in the market.
Now let's take a look at segment performance on Slide 16. Overall, we saw top line growth across most of our segments in the quarter. Nourish's solid comparable currency-neutral sales growth of roughly 4% year-over-year was driven by continued growth in food design and ingredients. Health & Bioscience, which saw a 3% decrease in comparable currency neutral sales delivered solid performance in Animal Nutrition and Cultures & Food Enzymes despite declines in health and grain processing. Both Nourish and Health & Bioscience saves profitability pressures with 11% decline in comparable currency neutral adjusted operating EBITDA across both due to lower volumes.
Our Scent division performed particularly well in the quarter, delivering 6% year-over-year sales growth on a comparable currency-neutral basis that was supported by double-digit growth in Fine Fragrance and mid-single-digit growth in Consumer Fragrance. We were also encouraged by since 25% growth in comparable currency neutral adjusted operating EBITDA due to a combination of favorable product mix, to catch up in pricing to raw material costs and productivity gains. Our Pharma Solutions segment again delivered excellent performance in the quarter, totaling $221 million in sales, a 15% increase on a comparable currency-neutral basis, driven by another quarter of double-digit growth in our core pharma business. However, like Nourish and H&B, price increases and productivity were more than offset by lower volumes and higher energy costs.
Moving to Slide 17. I would like to provide some additional commentary on our free cash flow dynamics in the year and the progress towards our deleveraging targets. For the full year 2022, cash flow from operations totaled $345 million, while 2022 capex was $504 million or roughly 4.1% of sales. Our free cash flow for the full year was candidly disappointing at a negative $159 million. Our free cash flow included about $300 million of costs related to integration and transaction-related items. As we discussed in last quarter's call, our free cash flow for the year has been significantly impacted by growth in working capital, predominantly by higher inventories caused by inflation demand slowdown and destocking by our customers. Our priority, as Frank mentioned in 2023 is to take significant actions to improve net working capital with a major focus on inventories to drive cash flow. Accordingly, we have initiated a number of actions across our business and supply chain teams, including systems and process enhancements to rapidly reduce our inventories over the course of the year. And while we understand that this will result in negative manufacturing absorption, adversely impacting the P&L in the short term, we are prioritizing improved working capital to maximize cash flow results.
To keep you with our commitment to return value to our shareholders, we also paid out $810 million in dividends in '22. As I mentioned during our Investor Day, we are committed to continuing to grow the dividend and will balance dividend growth as we consider reinstituting our share repurchase program once we get debt below 3 times net debt-to-credit adjusted EBITDA. In terms of leverage, we remain focused on efforts to reduce our debt and finish '22 at 4.1 times net debt-to-credit adjusted EBITDA ratio. Our cash and cash equivalents totaled $535 million, including $52 million of assets currently in assets held for sale, while gross debt for the year totaled $11 billion.
As part of our strategic priorities, we remain committed to achieving our deleveraging target of 3 times net debt-to-credit adjusted EBITDA by 2024, including through deploying proceeds from completed divestitures. Importantly, as Frank mentioned, we will be exploring further opportunities to streamline our portfolio while dedicating resources to our highest growth businesses.
Turning to our consolidated outlook on Slide 18. For the fiscal year 2023, we expect revenue to be approximately $12.5 billion and adjusted operating EBITDA to be approximately $2.34 billion, representing comparable currency-neutral sales growth of approximately 6% and comparable currency-neutral adjusted operating EBITDA flat versus prior year. We expect year-over-year foreign exchange to have no impact to sales growth and have a modest or approximately 1% negative impact to operating EBITDA growth.
Let's move to Slide 19. Given the number of moving parts affecting our '23 outlook, we thought it would be helpful to unpack each of the components impacting year-over-year adjusted EBITDA. Adjusted portfolio, which includes the Health right products acquisition, the '22 sale of the Microbial Control business and the anticipated close of our Savory Solutions divestiture in May of this year, comparable 2022 EBITDA starts at $2.37 billion. As previously mentioned, we expect full year pricing to fully offset inflation with a net 0 EBITDA impact in the year. In our plan, we've assumed volume will be flat with high single-digit negative volumes in Q1, modestly down in Q2 and volume growth in the second half. In addition, we are anticipating mix to be slightly unfavorable for the year as we expect some of our higher-margin categories will experience volume pressure, particularly in the first half of '23.
In order to rebalance our inventories and with driving cash flow generation as an imperative for us this year, we anticipate negative manufacturing absorption will impact us significantly. Specifically, we expect that our actions to reduce inventory will adversely impact our adjusted EBITDA growth by several percentage points expressed in year-over-year growth terms. We anticipate that this will yield a strong improvement in inventories and be a core driver to our targeted 23% adjusted free cash flow of more than $1 billion, excluding costs related to restructuring and deal-related items. In terms of cost savings, we plan to drive significant productivity by accelerating our previous launch programs, which focus on end-to-end operations improvements, supply chain efficiencies, procurement and demand management, we are also undertaking additional actions to cut costs across the organization and reduce our overall spend where possible, including in our D&A line. We anticipate that these additional actions to deliver an annualized run rate savings of $100 million. We will also be reinvesting some of our productivity to drive our top line through strategic growth initiatives, specifically in R&D, our commercial teams and technology as we begin executing our long-term strategy.
Finally, we expect currency to have a modest year-over-year negative impact on EBITDA growth of approximately 1%. As mentioned in terms of the cadence throughout the year, we are anticipating the first half to be more challenging, particularly the first quarter, with a back half improvement. In particular, we expect first quarter comparable performance to be impacted by more challenging volume conditions offset by pricing benefits. For the quarter, we expect sales to be approximately $2.9 billion to $3 billion with adjusted EBITDA of approximately $470 million to $490 million.
As I conclude on the next slide, I want to highlight our four key areas of focus for '23 and provide further perspective relative to our detailed execution plans for each. First, we are committed to accelerating sales growth as we move through 2023. While we do expect volumes to be under pressure from the items I discussed earlier, we are sharpening our sales execution discipline and continue to be more surgical with our pricing actions with the goal of progressively improving throughout the year. The build-out of the commercial excellence team, targeted growth investments and increasing our focus on revenue synergies will allow us to capture new wins.
Second, as previously outlined, we are focused on enhancing our customer service levels and supply chain efficiencies. With this in mind, we will be setting more granular customer service and related inventory goals by business utilizing our ROIC framework to guide those goals. Supporting these efforts, we will be rolling out our redesigned sales, inventory and operations planning process. Third, as mentioned, we are determined to accelerate our synergy and productivity efforts this year as well. For your reference, included in our '23 guidance, we are targeting more than $200 million of gross cost reductions from productivity and restructuring benefits. Fourth and very importantly, we're intently focused on maximizing our cash flow and accelerating deleverage of our balance sheet. We are being extremely aggressive in managing our working capital through a heightened focus and improved processes and systems, and we are also actively working to complete our additional noncore divestitures in evaluating additional portfolio opportunities. With that, I'd like to turn the call back over to Frank.
