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International Flavors (IFF) Q2 Earnings Beat, Improve Y/Y

International Flavors & Fragrances Inc.IFF reported adjusted earnings of $1.66 per share in second-quarter 2018, which surpassed the Zacks Consensus Estimate of $1.61. Also, the bottom line improved 11% from the year-ago tally of $1.50. On a constant-currency basis, the company's adjusted earnings increased nearly 8% year over year.

Including one-time items, International Flavors & Fragrances posted earnings per share of $1.25 in the quarter compared with $1.38 reported in the year-ago quarter.

Segmental Performances Drive Net Sales

In the reported quarter, International Flavors & Fragrances' net sales were $920 million, reflecting year-over-year growth of 9%. On a constant-currency basis, revenues climbed 5% from the prior-year period. Also, the top line surpassed the Zacks Consensus Estimate of $900 million by 2.2%.

Internationa Flavors & Fragrances, Inc. Price, Consensus and EPS Surprise

Internationa Flavors & Fragrances, Inc. Price, Consensus and EPS Surprise | Internationa Flavors & Fragrances, Inc. Quote

Geographically, revenues generated from the North American operations rose 8% year over year, while revenues in Europe, Africa and the Middle East were up 13% or grew 2% on a constant-currency basis. Revenues from Latin American operations increased 6% year over year, while that from Greater Asia increased 8% or improved 5% on a constant-currency basis.

The company operates in two segments - Flavors and Fragrances. The segmental information is briefly discussed below:

Revenues generated from the Flavors segment came in at $451 million, increasing 9% year over year. On a constant-currency basis, revenues grew 6% year over year. It represented 49% of the quarter's net sales.

The Fragrances segment's revenues were $470 million, rising 10% year over year. It accounted for 51% of net sales in the quarter under review. On a constant-currency basis, revenues grew 5% year over year.

Margin Profile Mixed

In the quarter under review, International Flavors & Fragrances' cost of goods sold rose 11% year over year to $522 million. Adjusted gross profit increased 4.3% year over year to $399 million, while the adjusted gross margin came in at 43.4% versus 45.4% witnessed in the year-ago quarter.

Research and development expenses flared up 3% year over year to $74.8 million. Adjusted selling and administrative expenses in the June-end quarter rose 5.7% year over year to $145 million. Adjusted operating profit increased 15.9% year over year to $169.8 million, while adjusted operating margin shrunk 100 basis points to 18.5%.

Balance Sheet and Cash Flow

Exiting the second quarter, International Flavors & Fragrances had cash and cash equivalents of $322 million, down from $368 million at the end of 2017. Long-term debt grew 5% to $1,717 million as of Jun 30, 2018 from $1,632 million as of Dec 31, 2017.

International Flavors & Fragrances generated $55 million of cash from operating activities during the six-month period ended Jun 30, 2018, compared with $58 million reported in the comparable period last year.

Capital invested in purchasing property, plant and equipment totaled $67.4 million during the six-month period ended Jun 30, 2018, increasing 46% from the comparable period last year. Dividend paid totaled $108.8 million, while treasury stocks worth roughly $15.5 million were purchased.

On Aug 1, the company raised its quarterly cash dividend by 6% to 73 cents per share. The dividend will be paid on Oct 5 to shareholders of record as of Sep 24, 2018.

Frutarom Merger

In May 2018, International Flavors & Fragrances signed an agreement to combine its operations with Frutarom Industries Ltd. under which it will acquire the latter's entire shareholding for a total consideration of $7.1 billion. The combined business will lead all players, who are dealing with scent, natural taste and nutrition, globally. Exposure to small- and mid-sized customers, as well as increasing business scope in new categories, including natural colors, antioxidants, health ingredients and enzymes, will be beneficial for International Flavors & Fragrances.

Regarding the pending merger with Frutarom, International Flavors & Fragrances recently announced that Frutarom's 94.6% shareholders voted in favor of the merger. The transaction is expected to close in fourth-quarter 2018, subject to customary closing conditions.

Outlook

For 2018, International Flavors & Fragrances anticipates gaining from its efforts to check costs, strategic investments and expand businesses globally.

The company expects its sales and operating income will grow 4-7% and 6.5-8.5%, respectively, in 2018. On a currency-neutral basis, sales growth is projected at 3-5% and operating income improvement is estimated to be 5-7%. Earnings per share are likely to be up 5.5-7.5% or 4-6% on a constant-currency basis.

Share Price Performance

Over the past year, International Flavors & Fragrances has underperformed the industry with respect to price performance. The stock has lost around 4%, while the industry recorded growth of around 4%, during the same time frame.

Zacks Rank & Key Picks

International Flavors & Fragrances currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same sector include Ingevity Corporation NGVT , KMG Chemicals, Inc. KMG and Ashland Global Holdings Inc. ASH . While Ingevity and KMG Chemicals sport a Zacks Rank #1 (Strong Buy), Ashland Global carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Ingevity has a long-term earnings growth rate of 12%. The stock has surged 73% in a year's time.

KMG Chemicals has a long-term earnings growth rate of 28.5%. Its shares have been up 43% in the past year.

Ashland Global has a long-term earnings growth rate of 10%. The company's shares have gained 40% over the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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