International Flavors & Fragrances Inc. (NYSE: IFF), a leading global creator of flavors and fragrances for consumer products, today reported financial results for the second quarter ended June 30, 2012.
Second Quarter 2012 Results
- Reported revenue for the quarter totaled $721.3 million, an increase of 1% from $715.6 million in the second quarter of 2011. Excluding the impact of foreign currency, local currency sales increased 4%. On a like-for-like basis, which excludes the exit of low-margin sales activities in Flavors, local currency sales increased 5%.
- Net income totaled $88.6 million or $1.08 per diluted share for the second quarter, compared with net income of $76.2 million or $0.93 in the second quarter of 2011.
- Excluding restructuring and other charges, which accounted for $0.04 per share in the second quarter of 2011, adjusted EPS increased 11% to $1.08, up from $0.97 in the second quarter of 2011.
Management Commentary
"We are pleased with our performance this quarter," said Doug Tough, Chairman and Chief Executive Officer of IFF. "We delivered solid top-line growth and even stronger double-digit EPS growth, despite the challenges presented by the ongoing difficulties in Western Europe and volume declines in Fragrance Ingredients. Our performance against this backdrop underscores the strength and diversity of our portfolio and geographic reach, as well as our ability to drive manufacturing efficiencies and control operating costs. As expected, increases in raw material costs are beginning to moderate and price realization has improved, resulting in margin expansion and operating profit growth."
"IFF´s growth this quarter was driven by our Flavors business, which achieved high single-digit local currency growth in every region and 8% growth overall, on top of 8% growth in the prior year, reflecting the balanced and consistent nature of this business. Our Fragrances Compounds business increased by 6% overall, led by strong growth in Latin America and Greater Asia, which offset continued softness in Ingredients."
Mr. Tough concluded, "We continue to be cautiously optimistic in our outlook, given the lagging economic growth and uneven recovery cycle. Although we achieved solid momentum in both Flavors and Fragrance Compounds, we believe we will continue to face a weak economic environment in Western Europe and softness in Fragrance Ingredients. Longer term, we see significant growth opportunities for the business and believe we are well positioned to achieve our long-term goals."
Second Quarter 2012 Operating Highlights
- Local currency sales in emerging markets, which account for 48% of total company sales, increased 9%.
- Gross profit, as a percentage of sales, was 41.8%, compared with 39.7% in the second quarter of 2011, driven by new business wins, pricing, and manufacturing efficiencies, which more than offset lower increases in raw material costs.
- Research, selling and administrative (RSA) expenses, as a percentage of sales, increased 80 bps to 23.5% compared with the second quarter of 2011. The RSA increase this quarter principally reflects higher incentive compensation accruals and increased expenses to support our ongoing growth initiatives.
- Operating profit increased 12% to $132.3 million, from $118.0 million in the second quarter of 2011. Adjusted Operating Profit increased 8% to $132.3 million, from $122.0 million in the second quarter of 2011 excluding restructuring and other charges of $4.0 million in the second quarter of 2011. The increased profitability was driven by pricing realization, volume and mix improvements, and manufacturing efficiencies that more than offset higher raw material costs and incentive compensation accruals.
- Interest expense declined $1.4 million year-over-year reflecting lower levels of outstanding debt, mainly due to long-term debt repayments in the second half of 2011.
- Other (income) and expense, net, improved $1.9 million in the second quarter of 2012 compared with the second quarter of 2011, due to favorable foreign exchange gains/losses on outstanding working capital balances.
- The effective tax rate increased 30 basis points to 27.7% in the second quarter from 27.4% in the second quarter of 2011. The marginal increase reflects increased provisions related to Spanish withholding taxes, and other provision adjustments on uncertain tax positions. The prior year rate included an R&D tax credit in the U.S. and a write-off related to deferred taxes caused by a change in U.S. state tax laws enacted during the quarter.
- Cash flow from operations increased by $133.2 million to $135.4 million in the first six months of 2012 compared with the first six months of 2011, reflecting the impact of lower year-over-year incentive compensation payments and lower tax payments made in 2012 compared to 2011, as well as improved core working capital.
Subsequent Events
- On July 24, 2012, the Company announced that its Board of Directors authorized a quarterly dividend of $0.34, an increase of $0.03 from the current quarter dividend of $0.31. The quarterly dividend will be distributed October 3, 2012 to shareholders of record at the close of business on September 19, 2012.
- On August 2, the Company announced that it had reached an overall agreement with the Spanish tax authorities regarding tax disputes for the years 2004 through 2010. The Company will pay Euro 86.0 million and take an after-tax charge to net income of $72.4 million, or $0.88 per share in the third quarter of 2012 as a result of the settlement. IFF also reached an agreement in principle regarding its tax position in Spain for 2012 and going forward.
Flavors Business Unit
- Reported revenue increased 5% to $361.4 million, compared with $345.4 million in the second quarter of 2011. Excluding the impact of foreign currency, local currency sales increased 8% on top of the 8% growth reported in the second quarter of 2011. This marks the 26th quarter of consecutive local currency sales growth for Flavors.
- On a like-for-like basis, which excludes the exit of low-margin sales activities, local currency sales increased 9% in the quarter, led by North America, which achieved like-for-like growth of 12%, and Greater Asia, which achieved like-for-like growth of 10%.
- The North America and EAME regions achieved local currency sales growth of 8% and 7% respectively, due in part to the Company´s focus on health and wellness initiatives, which increased sales.
- On a category basis, Beverage achieved double-digit local currency sales growth, with more than half of the growth coming from the North American region. Dairy, Sweet and Savory also achieved overall growth.
- Segment profit increased 14% to $80.6 million in the second quarter of 2012, up from $71.0 in the prior year quarter, driven by strong volume growth, price realization and favorable sales mix, that more than offset higher raw material costs and investments in R&D. Operating profit margin increased 170 basis points to 22.3% from 20.6%, reflecting improved operating leverage.
Fragrances Business Unit
- Reported revenue decreased 3% to $359.9 million, compared with $370.2 million in the second quarter of 2011. Excluding the impact of foreign currency, local currency sales were flat, with growth in Fine and Beauty Care and Functional Fragrance offset by volume declines in Fragrance Ingredients.
- Local currency sales growth in Fragrance Compounds, which includes Fine and Beauty Care and Functional, increased 6% in the second quarter. Fine and Beauty Care had local currency sales growth of 4%, driven by double-digit growth in Latin America and Greater Asia. Functional had local currency sales growth of 7%, due to strong growth in Latin America, EAME and Greater Asia.
- Segment profit increased 2% to $63.6 million in the second quarter, up from $62.3 in the prior year quarter. The improvement in segment profit is due to ongoing cost discipline, improved mix and pricing, combined with benefits from the strategic realignment plan announced in the first quarter of 2012.
Audio Webcast
A live webcast to discuss the Company´s second quarter 2012 financial results, and second half and full year 2012 outlook will be held today, August 8, 2012, at 10:00 a.m. ET. Investors may access the webcast and accompanying slide presentation on the Company´s website at www.iff.com under the Investor Relations section. For those unable to listen to the live broadcast, a recorded version of the webcast will be made available on the Company´s website approximately one hour after the event and will remain available on IFF´s website for one year.
About IFF
International Flavors & Fragrances Inc. (NYSE: IFF) is a leading global creator of flavors and fragrances used in a wide variety of consumer products. Consumers experience these unique scents and tastes in fine fragrances and beauty care, detergents and household goods, as well as beverages, sweet goods and food products. The Company leverages its competitive advantages of consumer insight, research and development, creative expertise, and customer intimacy to provide customers with innovative and differentiated product offerings. A member of the S&P 500 Index, IFF has more than 5,600 employees working in 32 countries worldwide. For more information, please visit our website at www.iff.com.
Cautionary Statement Under The Private Securities Litigation Reform Act of 1995
This press release includes "forward-looking statements" under the Federal Private Securities Litigation Reform Act of 1995, including statements regarding the Company´s outlook for its performance and the growth opportunities for the business, the term and impact of the Western European economic slowdown and the sales reductions in Fragrance Ingredients on the Company´s performance and the Company´s belief that it is well positioned, in the longer-term, to reach its long-term goals. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in the Company´s Securities and Exchange Commission filings, including the Company´s Annual Report on Form 10-K filed with the Commission on February 28, 2012. The Company wishes to caution readers that certain important factors may have affected and could in the future affect the Company´s actual results and could cause the Company´s actual results for subsequent periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. With respect to the Company´s expectations regarding these statements, such factors include, but are not limited to: (1) the economic climate for the Company´s industry and demand for the Company´s products; (2) the ability of the Company to successfully implement its recent restructuring initiative and achieve the estimated savings; (3) fluctuations in the price, quality and availability of raw materials; (4) decline in consumer confidence and spending; (5) changes in consumer preferences; (6) the Company´s ability to predict the short and long-term effects of global economic conditions, especially in Western Europe; (7) movements in interest rates; (8) the Company´s ability to implement its business strategy, including the achievement of anticipated cost savings, profitability, realization of price increases and growth targets; (9) the Company´s ability to successfully develop new and competitive products and enter and expand its sales in new and other emerging markets; (10) the impact of currency fluctuations or devaluations in the Company´s principal foreign markets; (11) any adverse impact on the availability, effectiveness and cost of the Company´s hedging and risk management strategies; (12) uncertainties regarding the outcome of, or funding requirements, related to litigation or settlement of pending litigation, uncertain tax positions or other contingencies, including the final assessment for the Company´s Spanish subsidiaries´ 2011 tax return and appeal regarding the tax assessments for the 2002-2003 fiscal years; (13) the Company´s ability to execute an agreement with the Spanish tax authorities for the tax treatment of its Spanish operations in 2012 and future years on the terms and conditions contemplated; (14) the impact of possible pension funding obligations and increased pension expense, particularly as a result of changes in asset returns or discount rates, on the Company´s cash flow and results of operations; (15) the effect of legal and regulatory proceedings, as well as restrictions imposed on the Company, its operations or its representatives by U.S. and foreign governments; (16) adverse changes in federal, state, local and foreign tax legislation or adverse results of tax audits, assessments, or disputes; (17) any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters or the responses to or repercussion from any of these or similar events or conditions; and (18) adverse changes due to accounting rules or regulations. New risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risks on the Company´s business. Accordingly, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
