Internationa Flavors & Fragrances, Inc. (IFF)

IFF 
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International Flavors & Fragrances (IFF)

Q3 2012 Earnings Call

November 06, 2012 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 and Member Temporary Office of the Chief Executive Officer

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

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

Analysts

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

Silke Kueck-Valdes - JP Morgan Chase & Co, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

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

Erik Sjogren - Morgan Stanley, Research Division

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances Third Quarter 2012 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 third quarter conference call. Earlier today, we issued a press release announcing our third quarter 2012 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 Doug Tough and our senior management team, I'd like to read our forward-looking statement. 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 fourth quarter and full year 2012. 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 forward-looking statements and risk factors contained in today's 10-Q filing with the SEC, as well as our 2011 10-K filed on February 28, 2012, and our press release that we filed this morning, all of which are available on our website.

Some of today's prepared remarks will discuss non-GAAP financial measures, which 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.

Now I'd like to introduce the participants on today's call. With me 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.

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

Douglas D. Tough

Thank you, Shelley, and good morning, and good afternoon, everyone. Our focus on the call this morning is a review of our third quarter results and a short discussion on our outlook for the remainder of the year.

As a company with significant operations in New York and in New Jersey, we are very well aware of the impact that Hurricane Sandy has had on people in the area. Our thoughts and our prayers go out to everyone who was affected by this storm, including our own numerous employees in the region.

The solid growth we achieved this third quarter is due to the strategic priorities we have implemented over the past few years to deliver profitable growth, by improving the profitability of our product portfolio, strengthening our innovation platform and leveraging our geographic reach. You have heard us say many times that the diversity of our business model, in terms of geographies and use categories and customers, helps to provide us with stable results in good times and bad.

This quarter, we are seeing the cumulative effect of our strategy, combined with the diversity of our business model, resulting in solid momentum and strong growth in both Flavors and Fragrances even with ongoing economic uncertainty in many parts of the world. We are very pleased with our progress and encouraged by our results and believe we are on the right path.

Both our Flavors and Fragrances Compounds businesses delivered strong top line growth and margin recovery this quarter, and we saw strong contributions to overall profitability from both our businesses.

For the total company, we delivered top line local currency sales growth of 5%, which is the highest quarterly sales growth we have seen since the first quarter of 2011. On a like-for-like basis, which excludes the impact of the exit of low-margin sales activities, our local currency sales growth was, in fact, higher at 7%.

This quarter, we continued to execute on our plan to exit lower-margin sales activities in Flavors. We also saw a better mix of business, both in the developed and in the emerging markets.

As expected, we are seeing lower increases in raw material costs, although they remain at elevated levels and we continue to take pricing. These factors, in addition to ongoing manufacturing efficiencies and other elements, such as product mix and new business wins, resulted in gross margin expansion of 350 basis points this quarter to 42.5%, up from 39% in the prior year quarter.

Our adjusted operating profit increased $6 million, or 5%, to $164 million -- $134 million in the third quarter compared with $128 million in the third quarter of 2011. Also, our adjusted operating profit margins expanded 100 basis points this quarter to 18.9% compared with 17.9% in the year ago quarter.

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