International Flavors & Fragrances Inc. (IFF)
2013 Investor Day
June 05, 2013 8:00 am ET
Shelley Young - Director of Investor Relations
Douglas D. Tough - Chairman and Chief Executive Officer
Hernan Vaisman - Group President of Flavors
Nicolas Mirzayantz - Group President of Fragrances
Ahmet Baydar - Senior Vice President of Research and Development
Kevin C. Berryman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Francisco Fortanet - Senior Vice President of Operations
John Roberts - UBS Investment Bank, Research Division
Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division
Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division
John D. Staszak - Argus Research Company
Previous Statements by IFF
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Today's presentations 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 are available on our website at www.iff.com.
With that, it's my great pleasure to introduce Doug Tough, our Chairman and Chief Executive Officer.
Douglas D. Tough
Thanks, Shelley. Good morning, everyone. Welcome to IFF's 2013 Investor Day. I'm delighted that you are here with us today, and also good morning, and good afternoon to those of you who are listening to us over the webcast.
The theme of this year's event is innovation, the foundation of our success. It is our goal today to share the many things we are doing that set us apart from the competition, that drive our performance and position us for continued profitable growth. We take a holistic approach to innovation at IFF. I am not just talking about the new molecules we create in R&D or the regional flavors we develop in our creative and applications laboratories. We are talking about how our IFF people in procurement, in engineering, human resources, information technology, finance, marketing, communications and operations are finding new and better ways to deliver improved performance. You will have a chance to hear from some of our senior management team, as well as to meet IFF-ers from other areas in the organization. It is our goal to help you develop a better understanding of our business, as well as to gain increased knowledge of the initiatives that are driving our business. You will also have the opportunity to experience 4 of the technologies that are driving our growth and increasing our new win success rate. In case you can't tell, we are proud of what we have accomplished since our 2011 event and excited about the future of IFF.
I would now like to introduce our operating committee, which is made up of our senior managers who lead our business units and our functions. In some respects, these 8 individuals are as global and diverse as the regions of the world in which we do business. Six of them have either lived or worked in various countries around the globe. I'll ask each of our operating committee members to stand as I call their name. Many of you have already met Kevin Berryman, our Chief Financial Officer. Kevin will provide financial perspective on our progress; Hernan Vaisman, our Group President of Flavors who will provide an overview of his business segment and its strategy for future growth and profitability. Nicolas Mirzayantz, our Group President of Fragrance will update you on Fragrances and also discuss their strategy for continued growth. Dr. Ahmet Baydar, our Senior Vice President of Research and Development will shed light on our disciplined approach to R&D at IFF. Francisco Fortanet, our SVP of Operations will talk more about how we optimize our manufacturing footprint while reducing our cost structure. Francisco will also discuss sustainability and review the improvements we have made in some of our key sustainability metrics. We have us -- with us today 2 members of our operating committee who are not presenting, but they will participate in the question-and-answer session. They are Anne Chwat, our Senior Vice President and General Counsel; and Angelica Cantlon, our Senior Vice President of Human Resources.
As you can see from the agenda, we have planned an exciting day for you. For the next 80 minutes, members of the operating committee will provide you with an overview of what's happening with our business units in R&D and our operations functions. Then, we'll take a short break. Then, you'll have the opportunity to experience firsthand some of our winning technologies. We will then come back at 11:00 for more presentations, and following my closing remarks, we will open the floor for questions. I will ask you all to hold your questions until the end. We've also prepared box lunches for you, which will be available after the Q&A session.
We are excited about the technology demonstrations and hope you will enjoy them today. We have a few objectives with those demonstrations. Firstly, they will be presented in a way that will hopefully make the technology come alive. They will provide you with a better understanding of why we are confident about our position in the marketplace. You will be able to taste and smell these innovations, and we will also be providing you with samples that you can enjoy in the future in your gift bags.
Here is what I expect -- here's what you can expect. Upstairs, we have 2 Flavors technologies. In the front of the building, we have a FlavorFit exhibit, which is our portfolio of health and wellness solutions. Consumers have a need for healthier choices without compromising on taste, and we are satisfying that need through our technologies. We have also prepared a sample of our beverages using our Citrus Toolbox and expect you will be impressed with the authentic citrus flavors and understand how we are winning in this important business segment. Downstairs, you will experience the lasting freshness of encapsulated fragrances, learn about the birth of a new fragrance, which is on its way to becoming a classic and also experience some classic fragrances of IFF. We want to feel just as excited about our future growth potential as we do and gain insight into why we are winning business.
Turning now to our public profile, IFF is a member of the S&P 500 and is listed on the New York Stock Exchange. We have been in business for over 100 years and started trading on the NYSE in 1965. We have a current market cap of approximately $6.5 billion, and as you may know, the stock has appreciated nearly 47% in the past year. In 2012, we had $2.8 billion in sales and generated $488 million in adjusted operating profit. We are a leading innovator in the field of creating flavors and fragrances for food and beverage and beauty companies, and we create scents and tastes that people enjoy.
The next slide touches on the key components of IFF's investment thesis: Our strong geographic reach, diversified product portfolio and outstanding customer base. From a geographic perspective, we have approximately 5,700 employees working in 32 countries worldwide, working with customers who are serving consumers in more than 100 countries over the year at the end of 2012. It is important to note that the fast-growing emerging markets made up approximately 47% of our total sales in 2012. This represents tremendous progress, and we believe we are on track to exceed 50% on a full year basis by 2015. We also believe that we are -- we benefit from our diversified product portfolio, both within Flavors and Fragrances and across numerous subcategories. This diversity provides tremendous stability and opportunity for sustainable, profitable growth in almost any operating environment. On a business unit basis, Flavors represented 49% of our business, and Fragrance represented 51% of sales. Fragrance Ingredients represented about 9% of total IFF sales as of year end. The business has been facing additional pressure in the high-volume, low-margin part of the business, and we have put a plan in place to improve the performance of this business, and Nicolas will tell you more about it. Lastly, as an established partner with key global and regional customers, we are strongly positioned to support our stable customer base in both the developed world and the emerging markets, as they in turn are committed to growing their business.
Turning now to our business model. The IFF business model is really quite simple. We start with rigorous consumer research all around the world and across categories. We conduct over 400,000 interviews every year to come up with that database. Because of our geographic reach, we are interested in and collect research data on consumer trends in China, in India, in Indonesia, as well as the United States, which is very valuable to our customers who are looking to grow their global businesses. We use this research to create innovative solutions for customers. Our customers are looking for differentiated products with more value add for their consumers not only to capture market share but as a basis for charging a premium for their products. We invest our energies in innovation because it is a differentiator for IFF and also because it benefits our customers. The innovation needs to be tailored locally around the world since Flavors is a local business. You can appreciate that perhaps in this country, a barbecue chip is a wonderful concept. It does not play well in parts of Asia where the lead seller might well be a seaweed chip, which in turn may not be a hit in other parts of the world. My point is that our R&D allows our customers to adapt our products locally anywhere in the world.
The next component of our business model is operational excellence, which we define as improving efficiency in everything that we do. This leads to increased productivity and margin improvement. And the final component is customer intimacy. We want to know more about the customer than they know about themselves and anticipate what their needs are going to be 5 years from now and demonstrate that we can help them address those needs. The key component is our innovation, which differentiates IFF. Innovation may be superior scent, superior taste and all the elements that are captured in what customers are looking for all around the world.
But during our last Investor Day in 2011, we told you that we have put certain plans in place to better manage the business for improved growth and profitability. We did several things to provide ourselves with a roadmap for future profitable growth, which I will briefly summarize. Firstly, we created a process for targeted R&D spend. We spend approximately 8% of our sales on research and development, and we put a more rigorous process in place to make sure that we are focusing on those R&D platforms that we believe have the highest potential for success. Second, we ingrained the philosophy of investing resources behind advantaged product categories while fixing those businesses that are not carrying their investment either by lessening the investment in those businesses or raising their margin profile. Third, using economic profit, we created a roadmap for achieving strong financial results by maximizing the portfolio and hence, the profitability of our business. Fourth, we instituted a process for evaluating our portfolio and tracking and measuring the progress and improving the economic profit of our overall business. We did all this with the goal of maximizing our returns on investment.
What has changed since the strategic review presented in 2011? The strategic review confirmed that both Flavors and Fragrances are attractive businesses with long runways for growth and at the bulk of our portfolio is, in fact, economically profit positive. Some categories and customers needed remediation, and we put plans in place to address those situations.
We have substantial growth opportunities in the business. We also know that M&A can be used to accelerate our organic growth. Since our review, we made progress in spreading the concept of EP throughout the organization. Our top management team embraces it and uses it in their approach to evaluating new investment opportunities and also as a way to manage the business for everyday growth and profitability. With our more rigorous and targeted approach to R&D, our pipeline has strengthened, and it is the strongest it has been in over a decade. We formed a scientific advisory board comprised of 5 leading lines in their field to help guide our investment spend. We announced 2 biotech alliances. We are in a preproduction mode with Evolva, a Swiss biotech company to create a natural, cost-effective, sustainable vanillin. We also announced an agreement with Amyris, a United States biotech company, to create cost-effective, renewable ingredients for Fragrances.
We embraced the concept of open innovation and have increased the number of external partnerships for the purpose of accelerating our innovation. We invested in new creative centers and facilities in the emerging markets, and we also made difficult decisions like the closing of our facility in Sweden and the partial closing of a Fragrances plant in Indonesia and the recent decision to close our Augusta, Georgia plant. We believe these decisions were necessary to strengthen the long-term competitiveness of our company, and we expect to achieve operating efficiencies in the future. As a result of all of these actions, we improved our financial performance and achieved solid operating results, in line with our long-term objectives.
With that as a backdrop, there are 3 forward-looking strategic pillars that comprise our growth strategy. Firstly, we want to accelerate our growth in the attractive markets especially in the faster-growing emerging markets by leveraging our geographic footprint, increasing understanding of local customers and consumers and providing technical expertise to leverage our strong geographic presence all around the world. Secondly, we want to strengthen the innovation platform to drive profitable growth by focusing on consumer trends, commercializing new ideas and products and working with third parties to commercialize cost-effective, sustainable ingredients. And thirdly, we look to maximize the value of our product portfolio by focusing on margin-enhancing opportunities and the profitable growth categories while remediating or exiting lower margin businesses.
Now let me review each of those in a bit more detail. Firstly, leveraging our geographic reach. Our broad and diverse operating base enables us to work with customers on a global basis by providing them with advanced solutions that meet the needs of millions of consumers in both developed and emerging markets both IFF and our customers can grow profitably. On a long-term basis, we believe that the emerging markets, which we consider to be Latin America, Eastern Europe and Middle East, Africa and areas of Asia, will grow at a rate at least double that of the developed markets. By being in these markets for substantial periods of time, such as India for more than 80 years, we are able to better anticipate consumer and market trends and needs. This strategy has reached dividends for IFF where the share of emerging markets sales to our total portfolio has grown from 43% in the first quarter of 2010 to 49% in the first quarter of 2013. On the right, you can see that we are well balanced across the 4 regions with 75% of our sales outside the United States in 2012. Of our top 10 countries, 5 of them are in the emerging markets, and we have a leadership position in India, Indonesia and in Brazil.