International Flavors & Fragrances Inc.'s (IFF; New York) second-quarter net income rose 16%, as growth in flavors offset challenges in Western Europe and weakness its fragrance ingredients business.
For the quarter ended June 30, the company said its net income rose to $88.6 million from $76.2 million a year earlier. Second-quarter total revenue increased 1% to $721.3 million from $715.6 million a year ago. Local currency sales in emerging markets, which account for 48% of total company sales, increased 9%.
By segment, the company's flavors business had high single-digit local currency growth in every region and 8% overall growth during the quarter. Its fragrances compounds business increased 6%, led by strong growth in Latin America and greater Asia, which offset continued softness in its ingredients business (which accounts for less than 10% of internal sales) and a tough economy in Western Europe.
Over the past year, IFF has continued its strategic review of its fragrance ingredients business. In particular, the segment faces pressure from its competitors due to the availability of cheaper materials in China and India, which is pressuring that particular segment's top line, executives said. As a result, IFF has been reworking its business model; however, it doesn't expect any material changes to the business.
"Although we achieved solid momentum in both flavors and fragrance compounds, we believe we will continue to face a weak economic environment in Western Europe and softness in fragrance ingredients," said Doug Tough, IFF's chairman and CEO. "Longer term, we see significant growth opportunities for the business and believe we are well positioned to achieve our long-term goals," he added.
Kevin Berryman, IFF's CFO, said during an investor's conference call that raw material costs were up 5% during the quarter, but are increasing at a slower rate. Still, "they remain at high levels," he said, later adding that he expects raw material cost increases to continue over the balance of the year and IFF plans to mitigate this through pricing (there is also some incremental pricing that is being discussed with customers for the balance of the year).
Still, company executives reiterated that IFF's flavors business is resilient, thanks to continual customer demand, and they expect "consistent sales growth in the second half of 2012" including top-line growth in the second half of the year in flavors and fragrances. Only one area, ingredients, faces top-line pressure into the third quarter, although gross margins are expected to be maintained.
As previously reported, IFF will record a third-quarter charge of $13.9 million, or 17 cents a share, as a result of its settlement with Spanish tax authorities.
