IFF Reports Third Quarter 2008 Results
These results were driven by currency, new wins, pricing and volume gains, and were partially offset by mix and normal product erosion in the developed markets.
30/10/08 International Flavors & Fragrances Inc., a leading global creator of flavors and fragrances for the consumer staples and products industry, reported a third quarter sales increase of 6 percent to $618 million. These results were driven by currency, new wins, pricing and volume gains, and were partially offset by mix and normal product erosion in the developed markets. For the quarter, three of the Company's regions delivered high-single digit reported sales growth while the fourth, North America, was down 1 percent. On a local currency basis, sales increased 2 percent. Earnings per share (EPS) on a reported basis were $0.73, compared with $0.67 in the prior year quarter.
Year-over-year results were impacted by several items, which include:
Third Quarter 2008:
* Lower performance-based incentive compensation expense of $0.4 million in 2008 versus $10.4 million in the comparable 2007 period;
* $2.0 million charge for implementation costs associated with the Company's previously announced shared services plan; and
* $4.4 million in interest expense as a result of interest rate swaps and $6.3 million of interest expense related to the Company's 2007 accelerated share repurchase program.
Third Quarter 2007:
* $5.9 million charge related to the curtailment of the Company's U.S. pension plan in 2007.
Excluding the implementation costs in 2008 and the curtailment charge in 2007, third quarter 2008 Adjusted EPS were $0.75, as compared to $0.71 in the same period last year.
Chairman and Chief Executive Officer Robert M. Amen stated, "Given the enormous volatility in the financial markets and weak economic environment in which we have been operating, I am generally pleased with our third quarter sales and operating results. That being said, rising material and input costs have put pressure on our profitability throughout the year. And while we have made some progress toward our cost recovery goals, our year-to-date efforts have been insufficient to maintain our operating margins. As a result, we are increasing our focus on improving profitability while appropriately balancing the needs of our customers."
Mr. Amen continued, "IFF has a successful strategy, solid business, a strong balance sheet, and the proven ability to generate cash. We believe these factors will enable us to successfully navigate through the current economic environment and help us achieve our long-term objectives. We continue to make progress on our strategic initiatives in Flavors, which is driving positive trends across all categories - albeit at a slower rate than earlier in the year. In addition, we are seeing an improvement in our Fragrances business, though challenges still remain."
Flavors Business Unit
Flavors sales for the third quarter were $278 million, an increase of 9 percent on a reported basis and 5 percent on a local currency basis. The growth in Flavors sales resulted from both volume gains in emerging markets and higher pricing, which was partially offset by somewhat higher erosion primarily in the developed markets of North America and Western Europe. Latin America (LATAM) and Greater Asia continued to excel, delivering growth of 19 percent and 6 percent (in local currency), respectively, due to new wins in the beverage and confectionery categories.
Fragrances Business Unit
For the third quarter, Fragrances delivered sales of $339 million, an increase of 4 percent on a reported basis and flat in local currency.
Fine Fragrances & Beauty Care
Fine Fragrances & Beauty Care enjoyed good sales growth for most of the quarter, however, a significant diminution in customer demand during September resulted in a local currency sales decline of 1 percent. It is important to note, for comparison purposes, that Fine Fragrances & Beauty Care had very strong 2007 third quarter sales growth of 8 percent.
On a regional basis, Europe, Africa and the Middle East (EAME) reported sales increased by 10 percent and grew modestly on a local currency basis. These results were offset by a 14 percent decline in North America, which is an improvement over the first two quarters of 2008. LATAM and Greater Asia delivered strong growth on both a reported and local currency basis. New product launches in the fine fragrance and hair care categories contributed to this performance.
Functional Fragrances
Local currency sales in Functional Fragrances were flat on a quarter-over-quarter basis. In North America and Greater Asia the segment grew 7 percent and 4 percent (in local currency), respectively, due to new wins in the fabric care and personal wash categories. This growth was offset by volume decreases in the regions of LATAM and EAME, mostly in the product categories of fabric and home care.
Fragrance Ingredients
Sales of Fragrance Ingredients, which are building blocks for fragrance compounds, were unchanged in local currency. Pricing actions implemented earlier this year as well as new business favorably impacted sales, however planned product rationalization offset these results.
Third Quarter 2008 Overview
* Gross profit, as a percentage of sales, was 40.0 percent compared with 41.9 percent in the prior year quarter. This decrease primarily reflects a shift in sales mix toward lower margin products, both regionally and by market segment, as well as higher input costs that were only partially offset by pricing and cost recovery initiatives.
* Research and development spending, as a percentage of sales, was 8.4 percent versus 8.5 percent in third quarter 2007.
* Selling and administrative expenses, as a percentage of sales, were 15.0 percent as compared to 16.2 percent in third quarter 2007. Third quarter 2008 reflects reduced performance-based incentive compensation expense partially offset by $2.0 million of implementation costs for the Company's global shared services plan. For the nine-month period, 2008 expenses, as a percentage of sales, were 15.5 percent compared to 16.1 percent during 2007.
* Operating profit was 16.3 percent of sales during the third quarter 2008 compared to 15.5 percent during the comparable 2007 period. On a nine-month basis, operating margin was 16.1 percent versus 16.7 percent in 2007. The decline in operating margin for the nine-month period reflects higher input costs and a weaker sales mix that was only partially offset by cost control and margin recovery efforts.
* Interest expense totaled $18.0 million as compared to $8.6 million in the prior year period. The increase includes $6.3 million related to higher borrowings incurred in connection with the 2007 accelerated share repurchase program, plus $4.4 million attributable to costs associated with interest rate swaps.
* Effective tax rate was 27.5 percent compared to 27 percent in the prior year quarter. Neither period included any unusual items related to tax rulings or settlements.
* Average number of diluted shares (in millions) was 79.1 compared to 88.1 in third quarter 2007.
* Operating cash flow was $136 million for the nine month 2008 period. Cash and cash equivalents were $109 million up from $62 million at the comparable 2007 quarter-end. The Company has more than $430 million available on a multi-year revolving credit agreement.
