IFF Reports Q1 Sales Growth of 4%
08 May 2013 --- International Flavors & Fragrances Inc. (IFF), has reported net sales for the first quarter totaled $727.8 million, an increase of 2% from $710.6 million in the first quarter of 2012. Excluding the impact of foreign currency, local currency sales increased 3%.
On a like-for-like basis, which excludes the exit of low-margin sales activities in Flavors, local currency sales increased 4%. Net income totaled $90.7 million or $1.10 per diluted share for the first quarter, compared with net income of $81.1 million or $0.99 per diluted share in the prior year first quarter. Adjusted EPS, which excludes the impact of a charge related to the Spanish Tax ruling as well as charges related to plant closings, increased 19% to $1.19 per diluted share in the first quarter, up from an adjusted $1.00 per diluted share in the first quarter of 2012.
“We are pleased with our performance this quarter, which resulted in an adjusted EPS improvement of 19%. In the first quarter, we delivered like-for-like sales growth of 4%, supported by strong underlying momentum in both Fragrance Compounds and Flavors, reflecting the diversity and strength of our category and geographic portfolios,” said Doug Tough, Chairman and Chief Executive Officer of IFF.
“This quarter we achieved strong new win rates owing to the innovative abilities of our business segments, combined with our expertise in proactively providing customers with solutions based on the strength of our creative, consumer insight, and research and development teams. Our overall sales were also supported by 9% local currency growth in the emerging markets, with double-digit sales growth in many developing countries, including Brazil and China.”
“As expected, gross margins in the first quarter benefited from the combined impact of previous price increases and modest raw material cost declines. Based on our strategy of maximizing our portfolio, gross margins also benefited from strong innovation-based wins, an improved product mix in part due to the exit of low-margin sales activities in Flavors, as well as various other cost savings and value-enhancing initiatives.”
Mr. Tough continued, “We took several actions during the quarter to enhance our manufacturing efficiency and consolidate our geographic footprint. During the quarter, we made the decision to close our Flavors facility in Knislinge, Sweden and our Fragrances facility in Jakarta, Indonesia and transfer production to our larger facilities in The Netherlands and Singapore, respectively. We also announced the formal opening of our technologically-advanced Flavors manufacturing facility in Guangzhou, China to provide dry and liquid flavors to the Company’s regional and global food and beverage customers, as we continue to support future growth in the region.”
“And, last week we took further steps to strengthen our innovation platform, improve operating efficiencies and meet customers’ growing needs. On Tuesday, we announced our multi-year collaboration with Amyris, a leading biotechnology company, to develop and commercialize sustainable and cost-effective ingredients using a biotechnology platform. On Friday, we announced our intention to close our Fragrances Ingredients manufacturing facility in Augusta, Georgia, and consolidate production into existing Ingredients plants. The plant closure is one of several actions we are taking to ensure the long-term profitability of our Fragrance Ingredients business and strengthen our competitive position.”
Mr. Tough concluded, “We entered the year with increased optimism with the expectation for an improving operating environment, a robust R&D pipeline, and strong customer relationships and partnerships. We see solid momentum in each of our business units, and expect to deliver stronger sales growth in the second quarter as we continue to focus on leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio. We believe that by executing on these three strategic pillars, we will be able to grow our business this year in line with our long-term targets.”
First Quarter 2013 Operating Highlights
• Local currency sales in the emerging markets accounted for 49% of total company sales in the first quarter and experienced growth of 9%.
• Gross profit, as a percent of sales, was 42.8% compared with 40.2% in the prior year. Excluding the impact of plant closings in the current quarter, the adjusted gross profit was 42.9%, compared with 40.2% in the first quarter of 2012. The 270 basis point adjusted gross margin improvement was due to modest declines in raw material costs, residual pricing, our cash flow hedging activities, strong new wins owing in part to our innovations, improved mix due to the exit of low-margin sales activities in Flavors, as well as ongoing cost reduction efforts. Although raw material prices have experienced a modest decline this quarter, they remain near historically high levels.
• Research, selling and administrative (RSA) expenses, as a percent of sales, increased 100 basis points to 23.9% compared with 22.9% in the first quarter of 2012. The RSA increase this quarter primarily reflects higher incentive compensation costs, adjustments to deferred compensation plan assets, and increased pension expenses.
• Operating profit increased 14% or $16.7 million to $137.6 million from $120.9 million. Excluding the $1.2 million cost related to closing two smaller facilities in Europe and Asia this quarter, and a $1.7 million restructuring charge in the prior year quarter, adjusted operating profit increased $16.2 million, or 13% to $138.8 million, from $122.6 million in the first quarter of 2012. The improvement in adjusted operating profit was principally due to volume growth combined with gross margin expansion, offset in part by higher incentive compensation charges. Adjusted operating profit margin increased 190 basis points to 19.1% from 17.2% in the prior year.
• The effective tax rate for the quarter was 28.9% compared with 26.5% in the prior year quarter, and includes a tax charge relating to the Spanish tax ruling. Excluding the impact of the Spanish tax charge and taxes related to the plant closings in the current quarter, as well as taxes related to restructuring costs from the prior year’s quarter, the adjusted effective tax rate was 24.0%, or 270 basis points below the prior year adjusted effective tax rate of 26.7%. The decrease was primarily driven by the benefit associated with the U.S. tax legislation enacted in the first quarter of 2013, which includes the R&D tax credit.
• Cash flow from operations for the three months ended March 31, 2013 was $18.7 million, or $33.9 million lower than the prior year quarter of $52.6 million. The decrease primarily reflects higher year-over-year incentive compensation payments and additional pension contributions in the U.S.
Flavors Business Unit
• Reported sales increased 2% to $356.4 million, compared with $349.9 million in the first quarter of 2012. The foreign currency impact was negligible this quarter.
• On a like-for-like (LFL) basis, which excludes the exit of low-margin sales activities, local currency sales increased 6% in the quarter, driven by strong new wins and residual benefits of previously taken pricing.
• On a regional basis, Greater Asia, Latin America and EAME delivered LFL local currency sales growth of 6%, and North America delivered LFL local currency sales growth of 4%.
• On an end-use category basis, LFL local currency sales growth was led by high single digit growth in Dairy and Beverage due to increased sales using our modulation technologies. Savory increased mid-single digits, and Sweet also had positive growth this quarter.
• Gross margins in the Flavors business increased over the prior year quarter primarily as a result of the benefit of favorable raw material costs and residual pricing, as well as mix improvements including the continued exit of low-margin sales activities. The Company expects to have one additional quarter that will be impacted by the exit of low-margin sales activities. Starting with the third quarter of 2013, the Company will have largely completed this effort.
• Flavors segment profit increased 4% to $83.0 million in the first quarter of 2013, up from $79.7 million in the prior year quarter. Segment profit margin increased 50 basis points to 23.3% from 22.8%, as a result of volume growth from new wins combined with the gross margin improvement.
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