Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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International Flavors & Fragrances (IFF)

Q3 2011 Earnings Call

November 08, 2011 10:00 am ET

Executives

Kevin C. 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

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

Douglas D. Tough - Chairman and Chief Executive Officer

Analysts

Lauren R. Lieberman - Barclays Capital, Research Division

Erik Sjogren - Morgan Stanley, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

John E. Roberts - Buckingham Research Group, Inc.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Alec Patterson - RCM

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

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

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances Third 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 fourth quarter and full year 2011. These statements are based on how we see things today and contain 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 our cautionary statement and risk factors contained in today's 8-K and 10-Q filings with the SEC, as well as our 2010 10-K filed on February 24, 2011.

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 our reconciliation to comparable GAAP measures, which are also available on our website.

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

Douglas D. Tough

Thank you, Michael, and good morning and good afternoon to everyone. Reviewing our quarterly results, our category, customer and geographic diversity, once again, supported local currency sales growth in the third quarter. Our Flavors business, led by our health and wellness portfolio and double-digit growth in the emerging markets, continue to outperform the industry and gain market share. In Fragrances, results were pressured by a challenging year-ago comparison, price-driven volume declines in Ingredients and a general weakening of our more discretionary categories, such as Fine Fragrance & Beauty Care.

Focusing specifically on Ingredients, sales declined 15% year-on-year, as price increases to protect margin had an adverse effect on our volumes. The impact on our top line performance was pronounced, roughly a 300 basis point drag on Fragrance sales and a 150 basis point impact on total company sales growth, as Ingredients accounts for approximately 20% of Fragrance sales and 10% of overall total company sales.

It should also be noted that while we communicated in early September that we expected Q3 sales growth would be similar to Q2 levels, macroeconomic and global market instability throughout the month hurt overall volume performance in our discretionary categories.

Fortunately, from profitability perspective, the discipline of our organization in the areas of pricing and cost control continue to yield benefits. While gross margin was under pressure due to higher-than-anticipated raw material cost, we were successful in achieving sequential improvements in pricing, over 3 percentage points during the quarter, and again captured the benefits from our European restructuring.

In addition, our cost discipline, including the benefit of lower incentive compensation accruals and favorable foreign exchange, allowed us to deliver a 4% increase in adjusted operating profit and a 2% year-on-year increase in adjusted earnings per share. While quarterly results are important scorecards, performance over a longer period provides insight into how well an organization is executing its strategy. We therefore like to provide a few overview comments on the past 9 months of 2011.

From a local currency sales basis, all regions and all categories, with the exception of Fragrance Ingredients, were positive, despite comparing to very strong growth rates in the prior-year period. While gross margin was under pressure due to significant raw material cost inflation, our ability to increase prices and to capture and execute on important cost control initiatives, including our restructuring savings, allowed us to deliver 12% adjusted operating profit growth and a 70 basis point improvement in operating profit margin.

Extending our on performance beyond 2011 to incorporate a 2- and 3-year perspective, including the volatility of 2009 and '10, you'll see that our financial results remain strong, as top line adjusted operating profit and adjusted EPS growth are all in line with our long-term financial targets.

Before we review the full details of our Q3 performance, I'd like to provide an update on our strategic initiatives. As communicated at our Investor Day in March of this year, our fundamental business strategy is predicated on 3 strategic pillars: leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio.

As population growth and wealth creation in the emerging markets continues to increase, our geographic portfolio has not only laid the foundation for our success, it is a key element in our aspirations as a global growth company. In these markets, strong GDP growth and a significant expansion of the middle-class consumer are driving the demand for our customers' products.

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