Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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International Flavors & Fragrances (IFF)

Q1 2013 Earnings Call

May 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

Hernan Vaisman - Group President of Flavors

Kevin C. Berryman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

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

Lauren R. Lieberman - Barclays Capital, Research Division

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

John Roberts - UBS Investment Bank, Research Division

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances First Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to introduce Shelley Young, Director of Investor Relations. You may begin.

Shelley Young

Thank you, operator. Good morning and good afternoon, everyone, and welcome to IFF's First Quarter 2013 Conference Call. Earlier today, we issued a press release announcing our first quarter 2013 financial results. A copy of the release can be found on our website at iff.com. Please note that this call is being recorded live at and will be available for replay for up to 1 year on our website.

Before turning the call over to 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 first quarter 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 2012 10-K filed on February 25, 2013, and our press release that we 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. A 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.

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 Group President of Fragrances; Hernan Vaisman, our Group 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, everyone. Our focus on the call this morning is to provide an overview of our first quarter results and operating performance and provide you with a more in-depth review of our Fragrance and Flavors business segments. We will also provide our current outlook for 2013 and after our prepared remarks, we will leave time for questions.

Turning to our first quarter results. We delivered solid local currency sales growth of 3%. On a like-for-like basis, which excludes the exit of low-margin sales activities in Flavors, we delivered local currency sales growth of 4%, which reflects underlying momentum in both our Fragrance Compounds and Flavors Compounds businesses, supported by strong new wins based on innovations and growth across diverse categories and geographies. Our top line performance continues to be driven by 9% growth in the emerging markets, which now account for nearly half of our sales. This is due to strong growth in many countries, including Brazil, Russia, China and Turkey.

Turning to the business segments. Flavors delivered modest growth of 2%. But on a like-for-like basis, which is a more consistent measure of growth, Flavors delivered growth of 6%. The 6% growth overlaps 6% like-for-like growth in the first quarter of 2012 and is consistent with historical growth rates in this business, once again showing the strength and stability of the business. Our Fragrances business delivered growth of 3% in total. Fragrance Compounds, which excludes Fragrance Ingredients, achieved growth of 7%. Our Fragrance Compounds business, which consists of Fine and Beauty Care and functional fragrances, was supported by strong new wins including products using our encapsulation technology as well as increased [indiscernible] participation.

Turning to our margins. This quarter, our adjusted margins improved 270 basis points over the prior year to 42.9%. The overall improvement reflects the combined benefit of pricing and declining raw material costs, volume growth, the benefits of our hedging programs as well as other cost improvement initiatives. Kevin Berryman, our CFO, will address our margin progression in more detail later in the presentation.

Our margin gains this quarter were also due to exit of low-margin sales activities in Flavors business, which has had an overall 30 basis point favorable impact on our margins. The solid top line performance and margin expansion more than offset increased RSA costs this quarter and resulted in 13% growth in our adjusted operating profit. And adjusted earnings per share, which includes a lower effective tax rate, increased 19% to $1.19.

As we have done in the past, this quarter, we continued to optimize our manufacturing footprint by making the decision to close both our Flavors plant in Sweden and our Fragrances plant in Jakarta, Indonesia and transferring the production from these facilities to our larger facility in The Netherlands and our new facility in Singapore, respectively. The company looks to operate as efficiently as possible to remain competitive, and these actions were taken with this objective in mind. Lastly, we also announced our intention to close our Fragrance Ingredients plant in Augusta, Georgia and consolidate the production into existing facilities. We provided a strategic review of our Ingredients business to our Board and are now executing on our plan to improve the profitability and the competitiveness of our Fragrance Ingredients business, thereby strengthening our competitive cost position in the Fragrance business.

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