Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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International Flavors & Fragrances (IFF)

Q2 2013 Earnings Call

August 06, 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

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

John Roberts - UBS Investment Bank, Research Division

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances Second 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 second quarter 2013 conference call. Earlier today, we issued a press release announcing our second 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 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 statements. 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 third quarter and our outlook for the balance of the year. 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 risk factors contained in our 2012 10-K filed on February 26, 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 will 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.

With me this morning are Doug Tough, our Chairman and CEO; Kevin Berryman, our CFO; Nicolas Mirzayantz, our Group President, Fragrances; and Hernan Vaisman, our Group President, Flavors.

Now I'd like to turn the call over to Doug Tough.

Douglas D. Tough

Thank you, Shelley. The company achieved strong operating growth this quarter with both business units reporting double-digit segment profit growth. The improved performance demonstrates the continued benefits of our strategy. By focusing on expanding our geographic reach and strengthening our innovation platform and maximizing the value of our portfolio, we achieved top line growth of 6% and 8% on a like-for-like basis and continued margin expansion. Operationally, we had an excellent quarter with all of our profitability metrics up over the prior year quarter.

Our top line growth reflects momentum in many areas of the business, notably in Fine Fragrance and Beverage as well as continued growth in other areas of the business. All of the regions contributed to our second quarter performance led by double-digit growth in Latin America and high-single digit growth in the other regions. The emerging markets continued to grow at a rate of 10% or twice the rate of the developed markets. We achieved strong levels of growth in Western Europe, Brazil, China, Indonesia, Thailand and Argentina. Both business units contributed to the growth with a high level of new wins from both segments based on our technology, creativity and customer intimacy.

I'd like to say a few words about our strong level of new wins. We recently hosted our biannual Investor Day which was focused on the theme of innovation at core competency that informs all of our actions. As part of the event, we showcased 4 of our leading technologies to let our investors experience the Flavors and Fragrances technology for themselves. These included Fine Fragrance; Fragrance encapsulation; FlavorFit, which is our umbrella of modulation technologies that address the large and growing health and wellness segment of the market; and our Citrus Toolbox.

We received very favorable feedback on the technology demonstrations, and some of you completed our survey and told us that the technology demonstrations improved your understanding of IFF and how we are driving our growth. Well, this quarter clearly demonstrates the extent to which our technology is driving our new wins as well as our margin gains. Our customers' purchase orders are testimony to the fact that our innovations are adding value to their brands. We're very proud of our heritage of innovation and believe it will support future growth.

Our gross margins also benefited from the new wins this quarter. Gross margins were up in both business units. And on a consolidated basis, our adjusted gross margins of 44.2% this quarter increased 240 basis points over the prior year quarter. This is our fifth consecutive quarter of margin enhancements. The gross margin expansion this quarter was due to favorable growth, volume growth and mix, new wins that are based on our technology, moderating input costs, as well as the exit of low-margin sales activities and manufacturing efficiencies. The improved gross margins were more than sufficient to offset higher research, selling and administrative expenses this quarter versus the prior year quarter. The higher volume combined with expanded margins resulted in an adjusted operating profit increase of 10% to $145 million from $132 million.

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