IFF’s $4.3B Food Divestiture: Growth Holds, Stranded Costs Loom

IFF reported a solid second quarter on a continuing operations basis, with sales up 6% and volume growth across all three remaining segments. But the earnings call, held Tuesday, also laid out a specific risk: $100 million in stranded costs from the $4.3 billion Food Ingredients divestiture that will temporarily pressure margins through 2027.

CEO Erik Fyrwald said the company is “confident in our ability to achieve our targets for the full year even as market conditions remain uncertain due to the events in the Middle East.” The divestiture to CVC Capital Partners, announced in April, values the business at about 10 times EBITDA. Post close, IFF will keep a 10% stake and focus on Taste, Scent and Health & Biosciences.

AlphaScala’s Alpha Score, which tracks fundamental health, rates IFF at 39 out of 100, a Mixed label.

Second quarter numbers

On a continuing operations basis, IFF generated just under $2 billion in revenue. Taste grew 4% to $688 million, Health & Biosciences 5% to $601 million, and Scent 8% to $665 million. Adjusted operating EBITDA came in at $408 million, up 6% from a year earlier. CFO Michael DeVeau said the EBITDA growth would have been a couple of points higher if not for a higher incentive compensation accrual tied to the strong first half.

“The team is really doing a good job at driving the top line dynamic of the business and then also capturing productivity,” DeVeau said.

Free cash flow for the first half totaled $378 million, up $284 million year over year, driven by better inventory management and tighter accounts receivable and payable controls. DeVeau warned of a working capital headwind in the second half related to the Food Ingredients separation, which could be “a couple of hundred million dollars.” Even so, he expects full-year free cash flow to exceed 2025 levels.

The stranded cost issue

The $100 million in stranded costs – employee expenses, systems, shared services and third-party contracts – were previously allocated to Food Ingredients and will remain with IFF after the close. Fyrwald said the company plans to eliminate two-thirds of those costs within 12 months of the transaction closing and the remainder within the second full year. “We are moving as fast as we can without harming Remainco’s growth,” he said.

DeVeau said the corporate costs are temporarily pressuring business unit margins. “These are temporary dissynergies,” he said. “We are not treating these as permanent.” The remediation plan includes redesigning processes, rationalizing activities, simplifying systems and reviewing third-party contracts.

Capital allocation and buyback

IFF will use more than $1 billion of the proceeds from the Food Ingredients sale to reduce debt, aiming for net debt to EBITDA of 2.0 to 2.5 times by the end of 2027. That would be a sharp improvement from the 4.5 times leverage at the start of 2024. The Board authorized a $2.5 billion share repurchase program, including about $400 million remaining under the prior authorization. IFF expects to execute $500 million of repurchases in the second half of 2026, before the transaction closes, and the remainder by the end of 2027.

“This reflects our confidence in IFF’s long-term value creation opportunities and the compelling return profile of repurchases at current valuation levels,” Fyrwald said.

Guidance and outlook

For full year 2026, IFF now expects sales of $7.4 billion to $7.6 billion on a continuing operations basis, representing 2% to 4% growth. EBITDA is forecast at $1.53 billion to $1.6 billion, up 4% to 8%. The low end of both ranges was lifted to reflect the strong first half. DeVeau said second-half growth will moderate from the 6% rate in Q2, with low single-digit volume growth expected. “We started the quarter well, and it’s kind of in line with this trajectory,” he said.

Foreign exchange is expected to add about 1 percentage point to sales growth and 2 percentage points to EBITDA growth for the full year. The comparable base for 2025, adjusted for the divestiture, is approximately $7.2 billion in sales and $1.44 billion in EBITDA.

Scent’s Middle East exposure

Scent was the standout segment in Q2, with Fragrance Ingredients growing more than 20%. DeVeau said part of that was an easy comparison – the year-ago period was down more than 10% – but the team also captured sales from supply chain disruptions and higher Brent crude prices. Fine Fragrance managed to eke out slight growth despite the Middle East conflict, beating the company’s expectation of a mid-single-digit decline. The company expects Fine Fragrance to soften in Q3 because of a tough comparable (last year’s Q3 was up 20%), then recover in Q4.

“The team really managed that uncertainty and volatility in the market,” DeVeau said.

Input costs and pricing

DeVeau said input costs – raw materials, energy and logistics – will increase modestly in the second half, with Scent the most affected. IFF is working with customers on surcharges, but there is a lag in Scent. “Over time, we will work with our customers to offset that,” he said. For the second half, pricing will be a “modest benefit, but I would consider it a rounding decimal at this point,” DeVeau said. Volume will be the primary driver of growth.

China competition and R&D

Asked about Chinese competitors, Fyrwald said IFF has increased R&D spending from about 7% of sales to 9% over the past two and a half years. “We will never underestimate Chinese competitors,” he said. The company will continue to invest in R&D, including potentially increasing the percentage of sales if it creates value. “We are absolutely committed to competing strongly against any competitor around the world, including the Chinese,” he said.

GLP-1 and ultra-processed foods

Fyrwald said the flavors and food-related Biosciences businesses have been growing strongly, partly because IFF has treated GLP-1 drugs and the shift to higher protein products as opportunities rather than risks. “We have been very proactively engaged with customers to enable them to have very high protein products that have great taste and are healthier,” he said. The company is also leaning into clean label trends.

The bottom line

Fyrwald said there are no further significant divestitures planned. “Now it’s all about scaling organically and through bolt-ons these three terrific businesses.” The Food Ingredients transaction is expected to close by the end of the second quarter of 2027. IFF will then begin the work of shedding the stranded costs and delivering on the margin expansion promise.