Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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International Flavors & Fragrances (IFF)

Q4 2012 Earnings Call

February 07, 2013 10:00 am ET

Executives

Shelley Young - Director of Investor Relations

Douglas D. Tough - Chairman and Chief Executive Officer

Nicolas Mirzayantz - Group President of Fragrances and Member Temporary Office of the Chief Executive Officer

Hernan Vaisman - Group President of Flavors and Member Temporary Office of the Chief Executive Officer

Kevin C. Berryman - Chief Financial Officer, Executive Vice President and Member Temporary Office of the Chief Executive Officer

Analysts

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] I would now like to introduce Shelley Young, Director of Investor Relations. You may begin.

Shelley Young

Thank you, Jennifer. Good morning, and good afternoon, everyone, and welcome to IFF's fourth quarter and full year 2012 conference call. Earlier today, we issued a press release announcing our fourth quarter and full year 2012 financial results. A copy of the release can be found on our website at ir.iff.biz. Please note that this call is being recorded live and will be available for replay for up to 1 year on our website.

Before turning the call over to Doug Tough and our senior management team, I'd like to read our forward-looking statement. Please keep in mind that during this call, we will be making forward-looking statements about the company's performance, particularly with regard to the fourth quarter and full year 2012 and our outlook for 2013. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning factors that could cause actual results to differ materially from forward-looking statements, please refer to our forward-looking statements and risk factors contained in our 2011 10-K filed on February 28, 2012, and the press release filed this morning, all of which are available on our website.

Today's presentation will include non-GAAP financial measures, which exclude those items that we believe affect comparability. Reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued earlier today and on our website.

For those of you who are new to our conference calls, I'd like to introduce the participants on today's call. With me on the call is Doug Tough, our Chairman and CEO; Nicolas Mirzayantz, our President of Fragrances; Hernan Vaisman, our President of Flavors; and Kevin Berryman, our Executive Vice President and CFO. Now I'd like to turn the call over to Doug Tough.

Douglas D. Tough

Thank you, Shelley, and good morning and good afternoon to everyone. Our focus on the call this morning is to provide an overview of our fourth quarter and full year operating performance, give you an update on our strategy, take you through a review of each of our business units and provide our current outlook on 2013. After the prepared remarks, we will leave time for your questions.

Turning to the fourth quarter. We achieved local currency sales growth of 8%, which continues the accelerating growth momentum we have seen in each quarter this year. If we exclude the impact of the exit of low-margin Flavors businesses to get a more consistent year-over-year comparison, then on a like-for-like basis, we achieved 10% growth, which is the highest we have achieved since the third quarter of 2010. This broad-based growth across all categories and regions was due to strong new customer wins in both business units, as well as growth in our base business, owing to our ability to create consumer-preferred flavors and fragrances. Once again, our growth was buoyed by double-digit growth of 11% in the emerging markets, which accounted for 49% of sales in this quarter, up from 47% last year, as well as 6% growth in the developed markets.

If we exclude the impact of the exit of low-margin Flavors business to get a more consistent year-over-year comparison, then on a like-for-like basis, we achieved 10% growth, making this the highest performance we have achieved since Q3 of 2010.

Looking at our growth by business unit. Our Fragrance business delivered 13% growth this quarter, and our Flavors segment achieved 7% like-for-like growth. Our top line performance says a lot about the progress we have made this year, in finding new and better ways to serve our customers and provide them with innovative products that are desired by consumers all around the world. Our ability to deliver strong top line performance demonstrates the diversity of our global organization, our ability to work with regional and global customers and our continued focus on innovation.

Importantly, our gross margin performance increased 430 basis points over the year-ago quarter. This reflects our strong volume growth, increased manufacturing leverage and volume gains, as well as portfolio optimization through the exit of low-margin Flavors sales activities.

In addition, this quarter, the net positive impact of price in relation to input costs resulted in margin expansion. Raw material costs, however, remain at historically high levels, and on a year-to-year -- year-to-date basis, are up nearly 4%, and over the past 2 years, they are up 14%.

The strong top line performance also allowed us to achieve an adjusted operating profit growth of $8 million or 9% and adjusted EPS growth of 12% this quarter to $0.83 per share.

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