Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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Industry: Basic Industries
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International Flavors & Fragrances (IFF)

Q2 2011 Earnings Call

August 09, 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

Summit Roshan - KeyBanc Capital Markets Inc.

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

Silke Kueck-Valdes - JP Morgan Chase & Co

John Roberts - Buckingham Research Group, Inc.

Alec Patterson - RCM

Carlos LaBoy - Crédit Suisse AG

Edward Aaron - RBC Capital Markets, LLC

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances Second 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; Hernan Vaisman, our President of Flavors; Nicolas Mirzayantz, our President of Fragrances; and Kevin Berryman, our Executive Vice President and CFO. Please note that today's call is recorded and will be available for playback on the 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 third quarter, second half and full year of 2011. 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, 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 a reconciliation to comparable GAAP measures, which is also available on our website.

With that, I'd like to turn the call over to Doug.

Douglas Tough

Thank you, Michael, and good morning,, and good afternoon, everyone. Now in light of the instability in the financial markets around the world, I felt it was appropriate to reemphasize that IFF is a diversified and competitively advantaged organization. Now whether you analyze our portfolio by geography, where 75% of our sales come from outside the United States and 45% of sales come from the fast-growing emerging markets, or analyze IFF by our products, where 52% of our sales come from Fragrances and 48% from Flavors, the breadth and the diversity of our portfolio is great. And our innovative solutions are key components of consumer staple products that enjoy long-term growth stability. Our business strategy is sound, and we are an established partner with many global and regional consumer products companies around the world, which are themselves committed to growing their business.

Our management team, as well as all IFF employees, are capable of executing our strategic initiatives to deliver long-term value for shareholders. As we communicated at our recent Investor Day on March 15, 2011, we believe that by leveraging our geographic reach to capture growth in the emerging markets, by strengthening our innovation platform to achieve better margins and improving our portfolio by making better business decisions based on economic profit, we can deliver our long-term targets of 4% to 6% local currency sales growth, 7% to 9% operating profit growth and 10%-plus earnings per share growth annually. Despite the volatility in the financial markets and the factors impacting our recent share price performance, we continue to believe that these goals are attainable, and we remain confident that we can achieve these results in 2011 and beyond.

Now before the rest of the senior team reviews the full details of our quarter 2 performance, I thought I'd provide a few overview comments on our recent results. First, we are pleased with our second quarter local currency sales growth, in light of the challenging year-over-year comparisons. To put our performance into context, it is important to note that our sales growth last year was very strong, up 17%, as it included an elevated level of new business wins and restocking benefits. Fortunately, the diversification of our product and our geographic portfolio continued to provide us with the ability to grow our local currency sales 3%, as Flavors and the emerging markets drove the positive results.

As we previously indicated on our first quarter conference call, Fragrance's performance was soft as we were comparing to a very difficult 23% growth rate reported in Q2 of 2010. Gross margin percentage declined year-over-year as raw material increased significantly across both Flavors and Fragrances. Pricing actions, as expected, lagged the input increases, however, we were successful in achieving approximately 2 percentage points in the quarter. In addition, we also benefited from our European restructuring, which helped reduce the impact of the rising raw material costs.

Separately, our disciplined approach to cost management, including the benefit of lower compensation accruals and favorable foreign exchange, drove an 11% increase in adjusted operating profit and a 50-basis-point improvement in our adjusted operating margin. The solid operating profit performance led to a 14% increase in adjusted earnings per share to $0.97, a record for the second quarter.

Looking at our performance over the first half of 2011, it is clear that we have started the year well, despite the challenging raw material environment. Our local currency sales growth of 6% for the first half is a tribute to the strong momentum we have seen in the business. At the same time, our pricing actions and focus on controlling costs, including the benefits of our European restructuring and lower incentive compensation expense, helped to offset the significant raw material pressures and drive a 16% increase in adjusted operating profit and a 130-basis-point improvement in adjusted operating margin. This all culminated in strong adjusted EPS growth of 18% in the first half of 2011.

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