Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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International Flavors & Fragrances (IFF)

Q1 2011 Earnings Call

May 10, 2011 10:00 am ET

Executives

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

Michael DeVeau - IR Manager

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

Douglas Tough - Chairman and Chief Executive Officer

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

Analysts

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Michael Sison - KeyBanc Capital Markets Inc.

Emily Klingbeil - Crédit Suisse AG

Silke Kueck-Valdes - JP Morgan Chase & Co

Erik Sjogren - Morgan Stanley

Andrew Sawyer - Goldman Sachs Group Inc.

Edward Aaron - RBC Capital Markets, LLC

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to introduce Michael DeVeau, Investor Relations Manager. You may begin.

Michael DeVeau

Thank you, operator, and good morning, everyone. With me on the call today 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. This call is being recorded and will be available for playback on our website. Please keep in mind that during this call, we will be making forward-looking statements about the company's performance, particularly with respect to the second quarter and full year of 2011.

These statements are based on how we see things today and contains elements of uncertainty. For additional information concerning factors that can cause actual results to differ materially from forward-looking statements, I ask that you refer to the cautionary statement and risk factors contained in our filings with the SEC.

Some of today's prepared remarks will discuss non-GAAP financial information, which excludes those items that affect comparability. These items are laid out in the reconciliation to comparable GAAP measures, which is also available on our website.

With that, I'm happy to introduce Doug.

Douglas Tough

Thank you, Michael, and good morning and good afternoon to everyone. While the rest of the IFF team will take you through the full details of our quarter one performance, I would like to provide a few preliminary high-level comments. First, we are pleased with our strong start to 2011, especially in the context of comparing against double-digit growth in the prior year period. Our worldwide local currency sales increased 9%, as strong growth was achieved across both our Flavor and our Fragrance businesses. The primary driver of our performance continues to be success in winning new business. This strong sales growth plus our margin improvement initiatives, pricing actions and focus on profitable businesses mix flowing from our strategic review drove a 30 basis point improvement in gross margin to 41.6%, despite a 4% rise in raw material costs. Complimenting this success, our continued focus on cost discipline and productivity provided substantial benefits to operating profit margin, which improved 190 basis points to 18.7%, the highest quarterly level in nearly 7 years.

The end result of our operational performance was significant as adjusted earnings per share increased 21% year-on-year to an all-time quarterly record. We feel this is impressive taking in the context of the 42% adjusted EPS growth, which we achieved last year. But from a non-financial perspective, I want to mention some customer awards that we won during the quarter. Serving our customers is vital to IFF's success, so customer recognition means a lot to us.

First, in Flavors, we were recognized in Australia and in India by a multinational food and beverage company for our outstanding contribution to their business in 2010. Specifically, these honors cite our consistent and excellent quality, service, innovation and technology. The customer noted the work we have done to upgrade their offerings to achieve healthier profiles by our sodium and our sugar reduction tools, as well as extensive work in naturals. In Fragrances, our team in Brazil once again received an award for superior service from one of that country's largest cosmetic companies. In addition to this honor, we also received a social environmental responsibility award for our current and ongoing sustainability initiatives taking place in that region.

Looking at our first quarter results in the context of the strategic priorities that we laid out at our Investor Day on March 15 in New York City, we have begun to make progress. While we're still early in the process, we believe that by leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio, we can drive commercial performance that should lead to long term shareholder value. In the first quarter of 2011, our strong top line performance was once again driven by double-digit growth in the emerging markets. In these critical markets where per capita disposable income is growing at nearly 3x that of the developed markets, the demand for our customers' products is great. As a result of our long-standing presence and recent investments in the emerging markets, we experienced 12% growth from these locations in the quarter. Highlights include 20-plus percent growth in key markets such as Russia, Indonesia, India, Turkey, the Middle East, South Africa, Poland and other countries. Under the direction of Dr. Ahmet Baydar, who many of you heard speak at our Investor Day, we believe our greatest opportunity as a company remains our ability to deliver superior innovation to our customers. For that reason, we try to have our innovative products and delivery systems carry a margin premium greater than our existing business, as our customers reward us for greater differentiation.

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