IFF Reports Strong Fourth Quarter and Full Year 2013 Results

14 Feb 2014 --- International Flavors & Fragrances Inc., a leading global creator of flavors and fragrances for consumer products, reported financial results for the fourth quarter and full year ended December 31, 2013.

Fourth Quarter 2013 Results

- Reported revenue increased $44 million, or 7%, to $725 million from $681 million in the prior year quarter. Local currency sales increased 7% reflecting solid sales growth in both the Flavor and Fragrance business units, fueled by double-digit growth in the emerging markets. In the fourth quarter, our expanding footprint in the emerging markets accounted for 50% of consolidated sales.
- Reported net income for the quarter totaled $61.5 million, or $0.75 per share, compared with net income of $68.1 million, or $0.83 per share, in the prior year quarter. Net income in the fourth quarter of 2013 included a $9.1 million after-tax Spanish capital tax charge, a $1.9 million after-tax loss on the sale of a non-operating asset, and other costs associated with previously announced restructuring or improvement initiatives.
- Excluding the Spanish capital tax charge and other costs included in the Reconciliation of Income table from the current year’s results, adjusted net income increased 11% to $75.5 million from $68.1 million in the prior year quarter, and adjusted earnings per share (EPS) increased 11% to $0.92 per share from $0.83 per share in the prior year quarter.

Full Year 2013 Results

- Reported revenue for the full year increased 5% to $3.0 billion. Local currency sales increased 5% for the full year, reflecting strong growth from new business wins and positive volume on existing business. On a like-for-like basis (LFL), which excludes the exit of Flavors low-margin sales activities, local currency sales increased 6%. The emerging markets grew by 10% and accounted for 49% of full year sales.
- Reported net income for the full year totaled $353.5 million, or $4.29 per share, compared with net income of $254.1 million, or $3.09 per share, in the prior year. The current year’s net income included charges of $22.9 million related to a Spanish capital tax charge and other costs associated with the recently announced restructuring and operational improvement programs. These charges were partially offset by an $8.5 million after-tax net gain on the sale of non-operating assets. The prior year’s net income included charges of $73.4 million (or $0.89 per share), primarily related to the Spanish income tax settlement.
- Excluding these charges from both years’ operating results, adjusted net income increased 12% to $368.0 million from $327.5 million in 2012 and full year adjusted EPS increased 12% to $4.46 from $3.98 in the prior year.
- Cash flows from operations for the full year were $407.6 million, or 13.8% of sales, compared with $323.8 million, or 11.5% of sales in the prior year. The current year’s cash flow from operations included $48 million of cash payments related to the Spanish tax cases and incremental U.S. pension contributions. The prior year cash flow from operations included a $105.5 million cash payment due to the Spanish income tax settlement. Excluding these payments from the Company’s operating cash flow, adjusted cash flow from operations would have increased 6% from $429 million in 2012 to $456 million in 2013.

Subsequent Events

On January 16th, IFF announced it had completed the acquisition of Aromor Flavors and Fragrances, Ltd, a privately-held manufacturer and marketer of complex specialty ingredients. Aromor would have represented approximately $35 million of incremental sales to IFF’s 2013 results on a pro-forma basis. Aromor is expected to be accretive to IFF’s earnings per share in 2014. The acquisition of Aromor, with its strong R&D capabilities, supports IFF’s strategic focus on creating consumer-preferred Fragrance Compounds using specialized, value-added, cost-effective molecules.

Management Commentary

“We are very pleased with our fourth quarter performance, which benefited significantly from the diversity of our businesses and end-use categories in both the developed and emerging markets,” said Doug Tough, Chairman and CEO of IFF. “The emerging markets continue to be a primary driver of our topline growth, and accounted for half of our consolidated sales and a majority of our top line local currency sales increase. This strong, continued growth further validates our emerging market strategy and is yet one more data point that underpins our commitment to these markets.”

Mr. Tough continued, “We once again delivered local currency sales growth and adjusted operating profit improvements that exceeded our long-term targets, while continuing to make important investments in our people and portfolio to strengthen our company and position IFF for continued success.”

Mr. Tough added, “2013 was an extremely productive year for IFF. By executing on our three strategic priorities, we have delivered on our long-term growth targets for full year 2013, achieving 5% local currency growth (6% LFL), 11% adjusted operating profit growth and 12% adjusted EPS growth, while having the financial flexibility to invest in the future growth of IFF, and return capital to our shareholders.”

“We are very excited about the future profitable growth of IFF and believe we are well-positioned to deliver another strong year in 2014.”

Fourth Quarter 2013 Operating Highlights

- Local currency sales increased 7%, supported by 12% growth in Greater Asia and 10% growth in both Latin America and EAME.
- Gross profit margins, as a percent of sales, improved to 43.2% from 42.2% in the fourth quarter of 2012. Excluding previously announced restructuring and other improvement initiative costs from cost of goods sold, the adjusted gross profit margin increased 160 basis points to 43.8% from 42.2% in the prior year quarter. The improved performance reflects moderating input costs combined with the implementation of our strategic initiatives, including mix, innovation and cost reductions.
- Research, selling and administrative (RSA) expenses, as a percent of sales, were 30.1% in the fourth quarter of 2013 compared with 27.6% in the fourth quarter of 2012. The current quarter RSA expense includes a $13 million pre-tax charge related to the Spanish capital tax case. Excluding the impact of the Spanish capital tax charge, adjusted RSA, as a percent of sales, increased 70 basis points to 28.3% compared with 27.6% in the prior year quarter, reflecting increased investment in R&D, increased incentive compensation accruals resulting from our strong full year 2013 performance, as well as $5 to $6 million of non-structural expenses.
- Operating profit in the fourth quarter totaled $94.9 million, compared with $99.2 million in the prior year quarter. Excluding $17.2 million of expenses primarily related to the Spanish capital tax case and other costs, adjusted operating profit increased approximately $13 million, or 13%, to $112 million from $99.2 million in the prior year quarter. Operating profit benefited from strong sales growth and gross margin enhancements, which offset higher RSA and incentive compensation accruals related to our strong 2013 performance. Adjusted operating profit margin increased 80 basis points to 15.4% from 14.6% in the prior year quarter.
- Interest expense increased by $0.7 million in the fourth quarter compared with the prior year quarter, primarily reflecting new long-term borrowings from our senior note offering in the second quarter of 2013 to take advantage of attractive borrowing rates and maintain efficiency and flexibility in our capital structure.
- The effective tax rate for the quarter was 25.9% compared with 23.2% in the prior year quarter. Excluding the impact of the pre-tax Spanish capital tax charge and other previously announced restructuring and operational improvement costs, the adjusted effective tax rate for the Q4, 2013 would have been 26.1%. The quarter-over-quarter increase in the adjusted effective tax rate reflects a higher cost of repatriation and loss provisions, partially offset by a favorable mix of earnings and the reinstatement of the U.S. federal R&D tax credit in 2013.

Fourth Quarter 2013 Segment Results

Fragrances Business Unit

- Reported revenue increased 8% to $382 million in the fourth quarter of 2013 compared with $354 million in the fourth quarter of 2012.
- Local currency sales growth of 7% in the fourth quarter of 2013 benefited from strong growth in the emerging and developed markets, and follows 13% growth in the fourth quarter of 2012.
- Fragrance Compounds, including both Fine Fragrance and Beauty Care and Functional Fragrances, achieved sales growth of 9%, as volume growth from new business wins more than offset volume erosion on existing business. This growth was on top of 15% growth in the prior year quarter.
- Fragrance Compounds growth was supported by double-digit growth in Greater Asia and EAME and solid growth in both Latin America and North America.
- Fragrance Ingredients had a small decline of 3% this quarter, driven by the planned transition of some volume from Ingredients to Compounds. Excluding the transition, Fragrance Ingredients would have experienced positive growth for the second consecutive quarter.
- Fine Fragrance and Beauty Care achieved 9% local currency sales growth, due to strong growth in Fine Fragrance owing to strong new business wins in EAME. Functional Fragrance achieved 10% local currency sales growth due to strong growth in Fabric Care, supported by our proprietary encapsulation technology.
- Fragrances gross margins improved over the prior year quarter primarily due to moderating input costs and other strategic initiatives including mix, innovation and cost reductions.
- Segment profit increased 16%, or $9 million, to $62 million in the fourth quarter of 2013 compared with $53 million in the fourth quarter of 2012. The improved segment profit is due to strong sales growth combined with further gross margin expansion and cost discipline. These gains more than offset increased incentive compensation expenses and higher research and development expenses this quarter. Segment profit margin increased 110 basis points to 16.2%, up from 15.1% in 2012.

Flavors Business Unit

- Reported revenue increased 5%, or $16.5 million, to $343.0 million in the fourth quarter from $326.5 million in the prior year quarter.
- Local currency sales increased 7% in the fourth quarter driven by double-digit growth in the emerging markets, and accounted for 53% of Flavors sales.
- Sales growth this quarter was supported by growth from new business wins and increased volume on existing business. The Savory, Beverages and Sweet end-use categories all experienced low- to mid-single digit sales growth.
- Flavors achieved the highest regional growth in Latin America. Other strong regions included EAME and Greater Asia.
- Flavors gross margins improved over the prior year quarter primarily due to the net benefit of moderating input costs versus pricing, as well as other strategic initiatives to improve efficiency.
- Segment profit increased 12%, or $8 million, to $70 million compared with $62 million in the prior year quarter. Segment profit growth reflects strong sales growth combined with further gross margin enhancements, which offset increased incentive compensation and higher allocated expenses for shared corporate resources. Segment profit margin increased 130 basis points to 20.3% from 19.0%.

Full Year 2013 Operating Highlights

- Local currency sales increased 5% to $3 billion, reflecting 10% growth in emerging markets and 2% growth in the developed markets. On a LFL basis, which excludes the exit of low-margin sales activities, local currency sales increased 6%.
- Gross margins, as a percent of sales, increased 180 basis points to 43.5% from 41.7% in 2012. Excluding previously announced restructuring charges and operational improvement initiative costs, adjusted gross margins increased 210 basis points to 43.8% from 41.7% in the prior year. The improved performance reflects moderating input costs combined with other strategic initiatives to improve efficiency.
- RSA expenses, as a percent of sales, were 25.9% compared with 24.4% in 2012. Excluding the impact of the 2013 Spanish capital tax charge included in administrative expense, adjusted RSA, as a percent of sales, increased 110 points to 25.5% from 24.4% in 2012 primarily as a result of higher incentive compensation accruals.
- Operating profit totaled $516 million in 2013 compared with $487 million in 2012. Excluding the Spanish capital tax charge and restructuring costs from the current year’s results as well as previously announced restructuring charges from the prior year’s results, the adjusted operating profit would have increased 11%, or $52 million, to $540 million in 2013 from $488 million in 2012. Adjusted operating profit margins increased 100 basis points to 18.3% from 17.3% in 2012.
- Interest expense increased by $5 million year-over-year, primarily reflecting new long-term borrowings from our senior note offering in the second quarter of 2013 to take advantage of attractive borrowing rates and maintain efficiency and flexibility in our capital structure.
- The effective tax rate was 27.1% in 2013 compared to a rate of 42.7% in the prior year. Excluding the impact of the 2012 and 2013 items previously noted, including the 2012 Spanish income tax settlement and the 2013 pre-tax Spanish capital tax charge, the adjusted effective tax rate in 2013 was 25.7% compared with 26.4% in the prior year. The year-over-year reduction reflects the reinstatement of the U.S. federal R&D tax credit in 2013, partially offset by a higher cost of repatriation.

Full Year 2013 Segment Results

Fragrances Business Unit

- Reported revenue for the full year increased 6% to $1.5 billion. The Fragrances segment contributed 52% of the Company’s consolidated revenue in 2013, up from 51% in 2012.
- Local currency sales increased 6% for the full year, supported by double-digit growth in Greater Asia and Latin America and solid growth in EAME. For the full year, Fragrance Compounds had local currency growth of 8%, following 7% local currency growth in 2012. This growth was supported by 8% growth in both Fine and Beauty Care and Functional Fragrances owing to strong new business wins. Fragrance Compounds benefited from solid growth in each end-use category, including double-digit growth in Fabric Care and high single-digit growth in Fine Fragrance.
- Fragrance Ingredients local currency sales growth declined 4% for the year. Excluding the planned transition of volume to Fragrance Compounds, the Ingredients business would have been flat year-over-year.
- Fragrances gross margins improved over the prior year primarily due to moderating input costs combined with productivity initiatives, including mix and productivity programs.
- Segment profit margins improved 200 basis points to 18.5%, up from 16.5% in the prior year. Segment profit increased 19% or $45.2 million to $283.6 million, up from $238.4 million in 2012. The improved segment profit is due to strong sales growth combined with further gross margin expansion and ongoing cost discipline, which more than offset increased incentive compensation accruals and increased investments in R&D.

Flavors Business Unit

- Reported revenue for the full year increased 3% to $1.4 billion. The Flavors segment contributed 48% of the Company’s total consolidated revenue.
- Local currency sales increased 4% for the full year. Growth from new business wins offset a slight sales decline on existing business and the exit of low-margin sales activities. Excluding the impact of exiting these low-margin sales activities, LFL growth would have been 6%.
- LFL growth of 6% was due to positive growth in every region, led by double-digit growth in Latin America, and high single digit growth in Greater Asia and EAME.
- Full year sales were supported by strong growth in the emerging markets, which accounted for 51% of Flavors total sales, and continued to outpace the growth in the developed markets. From an end-use category perspective, local currency sales growth was fueled by double-digit growth in Beverages and solid growth in Savory.
- Flavors gross margins increased over the prior year primarily driven by moderating input costs and the exit of low-margin sales activities, combined with strategic initiatives.
- Full year segment margin increased from 21.6% to 22.7%, or a 110 basis point improvement. Flavors segment profit totaled $324 million versus $298 million in the prior year, or an increase of 9%. The improved segment profit reflects strong volume growth combined with further gross margin expansion, which more than offset investments in R&D, increased incentive compensation expenses, and increased corporate allocated expenses.