Executive Vice President, Chief Financial Officer at International Flavors & Fragrances
Thank you for the warm welcome, Andreas, and good morning, afternoon and evening to everyone. Since joining IFF in late September, I've had the opportunity to briefly meet many in our investor community. And the most common questions I've been asked is why did I join IFF and what are my near-term priorities. Consequently, before I review our financial results, I thought it would be helpful to briefly provide these perspectives as an introduction. There were three very compelling reasons for me to join IFF. First, and perhaps most importantly, IFF is a company that is truly making a difference in helping solve some of the world's biggest challenges. We are delivering reliable, innovative and sustainable solutions that are directly helping address issues such as improved nutrition and wellness, reducing greenhouse gas emissions and creating a more sustainable environment. Second, the industry has very attractive organic growth characteristics, benefiting from continued strong consumer tailwinds from increased consumer focus on wellness and natural and sustainable products, increased demand in emerging markets and new consumer needs presented by aging demographics in developed markets. I also believe that scale will become an important basis of competitive advantage as customers demand leading ESG platforms, increased innovation and speed to market, global supply chain resiliency and help in navigating increasingly complex regulations. Third, I firmly believe that the combination of IFF with DuPont's legacy N&B business has uniquely created an industry-leading platform. And since joining IFF, I've tried to immerse myself in the business completely, visiting sites, meeting with our business and operations teams and spending time at our R&D and creative centers.
I've also prioritized hearing from you, our investors and analysts. And frankly, today, I'm even more bullish on the strength of IFF's global capabilities and the tremendous long-term potential we have to drive strong top and bottom line growth. Relative to my near-term priorities, I have four primary areas of focus. By far, our most pressing priority is to tackle the challenges from the global inflationary environment and to successfully execute broad-based pricing actions across all of our businesses. Second, I'm also focused on enhancing our core financial processes and metrics, including better forecasting, improved business-level return metrics and tighter disciplines for our investment decisions, so that we're maximizing our growth potential and return on invested capital. A third area of focus is ensuring we fully deliver on our merger synergies, while also accelerating our focus on sustainable productivity. And finally, while we have made very good progress to date on our portfolio optimization, there is significant opportunity remaining. In the days and months ahead, I look forward to learning even more about this organization and engaging with all of you. With that, I'd now like to provide an overview of our consolidated third quarter results. In Q3, IFF generated approximately $3.1 billion in sales, representing a 12% year-over-year increase, primarily driven by the continued double-digit growth in our Nourish division and strong increases in both Scent and Health & Biosciences. In terms of contribution, volume performance was the primary driver of our growth as pricing represented approximately two percentage points in the quarter.
Though our gross margin continued to be challenged by inflationary pressures, it was somewhat offset by our strong cost management focus, which resulted in adjusted operating EBITDA growth of 4%. And while we had solid year-over-year EBITDA growth, our gross margin was down by 210 basis points as our pricing actions recovered only about 65% of our raw material increases or approximately 50% in the third quarter when we include raw material, logistics and energy increases. As we move forward, we are squarely focused on improving this recovery rate relative to the total inflationary basis but expect that in the short term, specifically the fourth quarter, we will see a similar pressure given the time lag of price realization. Let me finish on this slide by saying that we achieved strong earnings per share, excluding amortization of $1.47. On the next few slides, I will dive deeper into the third quarter financial results for each of our four divisions. Turning to Slide 13, I'll start with our Nourish division, which had an exceptional quarter. In Q3, Nourish achieved 17% year-over-year sales growth or 15% on a currency-neutral basis, driven by robust double-digit growth in Flavors for the second consecutive quarter. Ingredients also grew double digits with all subcategories, protein solutions, pectin and seaweed extracts, emulsifiers and sweeteners and cellulosics, LPG and food protection, increasing double digits. Food Design also grew double digits, led by Food Service, where pandemic-related restrictions continue to be lifted with away-from-home consumer behaviors returning to more typical levels.
As a result of strong volume growth, price increases and our focus on cost management, Nourish achieved an adjusted operating EBITDA increase of 19% and margin expansion of 30 basis points. On Slide 14, you'll see that our Health & Biosciences division saw year-over-year sales growth of 7% or 5% on a currency-neutral basis, led by double-digit growth in Home & Personal Care and high single-digit growth in Cultures & Food Enzymes. Our Health category was soft this quarter due to a particularly strong double-digit year-ago comparison, so we are pleased with the results when we look at it on a 2-year basis. As Andreas mentioned earlier, inflationary pressures and higher logistics and energy costs to keep up with the robust customer demand has challenged our margins across our business, with H&B particularly impacted, which drove an operating EBITDA decrease of 12%. Unpacking this a bit deeper, the bulk or 70% of our year-over-year EBITDA decline came from higher air freight volumes, where we have increased intercompany shipments to manage available capacity. As we shared last quarter, we have increased capacity investments in this business to support long-term growth and have also invested in R&D and plant technology to increase output. Until then, we will be incurring higher costs to support our customer demand, and this will impact our EBITDA margin. Turning now to Slide 15. Our Scent division continues to perform extremely well and experienced strong growth, achieving 10% year-over-year growth or 9% growth on a currency-neutral basis.
This performance was driven by Fine Fragrances' continued rebound, which grew approximately 36%, led by new customer wins and improved volumes. Our Ingredients category also continues to perform well and contributed to Scent's overall success, seeing double-digit growth for the second consecutive quarter led by strong performance in both Cosmetic Actives and Fragrance Ingredients. While our Consumer Fragrances business saw modest low single-digit growth against a strong double-digit year ago comparison, this is a marked improvement from Q2, and we expect further growth as we move forward. On a 2-year average basis, Consumer Fragrance remained strong at 9% in the third quarter. Scent also experienced adjusted operating EBITDA growth of 10%, driven by strong volume growth and favorable mix. Margin was down modestly due to higher raw materials and logistics costs, a trend we see continuing. I will provide more context shortly. Lastly, in our Pharma Solutions business, we saw a currency-neutral sales decrease of 2% due to continued supply chain challenges related to raw material availability and logistics disruptions, which have made it challenging to meet persistent and growing customer demand. While Industrials has continued to recover from COVID-19 lows, our core Pharma business saw soft performance against its solid year-ago comparison. The division's adjusted operating EBITDA and margin also continue to be impacted by higher sourcing, logistics and manufacturing costs. We also continue to see the impact of force majeures and raw material shortages with suppliers and shutdowns due to Hurricane Ida, resulting in unplanned outages in some of our product lines.
While we expect the current market environment and macro supply chain problems to continue challenging the segment, we remain optimistic and as Andreas mentioned earlier, we remain focused on returning the division to profitability as these industry conditions stabilize. Now on Slide 17, I would like to review our cash flow position and leverage dynamics for the first nine months of 2021, both of which remain a top priority for us. So far this year, IFF has generated $884 million in free cash flow, with cash flow from operations totaling approximately $1.1 billion. As the team has mentioned in previous quarters, we are investing in our growth accretive businesses as well as integration activities. Year-to-date, we have spent $242 million or approximately 2.8% of sales on capex and expect a significant ramp-up in fourth quarter as our annual spend is traditionally more back half weighted. From a leverage perspective, we are continuing to make substantial progress toward achieving our deleveraging target, with our cash and cash equivalents finishing at $794 million, including $122 million restricted cash, with gross debt reduced by $446 million versus the second quarter to $11.5 billion due to our debt maturity schedule as part of our deleverage plan. Our trailing 12-month credit-adjusted EBITDA totaled approximately $2.7 billion, with a 4.1 times net debt to credit-adjusted EBITDA. With our continued strong cash flow generation, including proceeds from divested noncore businesses, we remain confident that IFF is on track to achieve our deleveraging target of less than three times net debt to EBITDA within 20 to 36 months, post-transaction close. Turning to Slide 18. I'd like to take a moment to discuss the cost inflation trends that have impacted our business this year. As I mentioned earlier, IFF and the industry at large have seen significant year-over-year inflation increases, which have been accelerating in the recent quarter.
The inflationary pressures we are seeing today are significant. Just as examples, vegetable oil prices hit a record high after rising by almost 10% in October. The price of wheat is up almost 40% in the last 12 months through October. Brent crude prices have more than doubled over the past 12 months to the highest level since October 2018. In the U.S., natural gas prices are up 100% from a year ago and in the U.K. grew up about 500%. And transportation rates have increased significantly given the high demand and limited capacity to ship. Across the raw materials, logistics and energy markets, like many industries around the world, we have seen costs accelerate each quarter, which has led to our margins being adversely impacted. For example, in the first half of 2021, gross margin was down about 150 basis points, while in the third quarter, we were down about 210 basis points. As we look ahead, we are being prudent in our planning as we expect these inflationary pressures will continue throughout the fourth quarter and over the course of 2022. Consequently, this will require us to successfully implement significant pricing actions across each of our businesses as well as improve our sourcing efficiencies, accelerate operational improvements and capture targeted integration synergies to drive profit growth. Now moving to Slide 19. I would like to share what this means for our consolidated financial outlook. For the full year 2021, we are maintaining the increased total revenue forecast we announced in September to account for the strong demand. For the full year 2021, we are targeting $11.55 billion in total revenue or approximately 8.5% growth, up from the forecast of $11.4 billion or 7% growth that we disclosed in the second quarter. We also expect our sales growth to continue in the fourth quarter as our Q4 quarter-to-date sales trend is solid. As mentioned, unprecedented macro supply chain challenges and inflationary pressures continue to impact our industry, and we do expect this to continue in the foreseeable future.
While we are intently focused on offsetting these inflationary pressures through pricing actions, these are lagging the inflationary pressures. And as a result, we have further revised our adjusted EBITDA margin to be modestly below 21%, down from approximately 21.5% that was forecasted in September. About half of this reduction is due to lower gross margin in the third quarter and the other half stemming from higher cost trends we see in the fourth quarter. For the full year, we are targeting low single-digit EBITDA growth, a solid improvement in light of the external challenges. We also adjusted our capex spend outlook down as we have been very thoughtful in balancing near-term operating priorities with the need to add capacity to support accretive growth across our businesses. Overall, we are pleased of the progress we've made to date, strong top line growth and a commitment to meet near-term macro cost pressures, and we're confident that IFF is on the right path and poised for continued success across our core business. I'll now turn the call back over to Andreas for some closing remarks.