International Flavors & Fragrances Inc.'s (IFF; New York) first-quarter net income rose 18% and sales climbed 6% with the strongest sales growth coming from its fragrances business unit.
Results included:
- Reported net sales for the first quarter totaled $770 million, an increase of 6% from $728 million in the first quarter of 2013. Excluding the impact of foreign currency, local currency sales increased 7%. As expected, the January 15 acquisition of Aromor contributed approximately 1% of growth to the sales increase.
- Fragrances business net sales increased 9%; flavors business unit net sales increased 3%.
- Net income totaled $106.7 million, or $1.30 per diluted share, for the first quarter, compared with net income of $90.7 million, or $1.10 per diluted share, in the prior year first quarter. Adjusted EPS excludes the impact of restructuring and operational improvement initiative costs from the current year quarter, and a Spanish tax charge and other items impacting comparability from the prior year quarter.
- Adjusted EPS increased 11% to $1.32 per diluted share in the first quarter, up from an adjusted $1.19 per diluted share in the first quarter of 2013.
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Management Commentary
Doug Tough, Chairman and CEO of IFF, said “We are pleased with our strong operating results in the first quarter. Our 7% local currency sales growth reflects balanced growth between our Flavors and Fragrances businesses and includes a percentage point of growth from our Aromor acquisition completed in January. We delivered solid emerging and developed market local currency sales growth of 7% and 5%, respectively, indicating the strength and diversity of our portfolio supported by a high level of technology-driven wins in attractive end-use categories. “Our 7% local currency sales growth resulted in a 14% adjusted operating profit improvement and an 11% increase in adjusted EPS, as a result of our strong operating performance. These year-over-year gains reflect the diligent and collaborative efforts of our people to leverage our consumer insights, R&D and creative capabilities to provide outstanding results to our customers and shareholders.”
Mr. Tough continued, “This quarter we completed the acquisition of Aromor, and we are pleased to welcome their talented teams to our organization and excited about the opportunities that lie ahead. Our R&D, commercial and financial teams are working closely with Aromor to ensure a smooth integration, which is proceeding on plan and contributing to our improved results this quarter. We expect the addition of their specialty ingredients to our portfolio to enhance our creative processes and result in higher win rates. Their expertise in R&D is a real benefit to the entire organization and our joint programs will lead to a stronger IFF.” “Given our robust performance in the first quarter of 2014, our outlook for the full year remains unchanged,” concluded Mr. Tough. “We expect to achieve 5-7% top line growth, which includes a percentage point of growth from Aromor, and expect to deliver double-digit growth in adjusted operating profit and adjusted EPS.
We remain highly focused on leveraging our geographic reach, strengthening our innovation platform and maximizing our portfolio to better serve our customers with high performance products and drive profitable growth for our shareholders. At the same time, we are making important strategic investments in technology, research and talent development that will support our people in serving our customers and open new avenues of growth for our Company.”
First Quarter 2014 Operating Highlights
Local currency sales growth was 7% in the emerging markets and 5% in the developed markets. Sales to the emerging markets accounted for 49% of total company sales. Gross profit, as a percent of sales, was 44.3% compared with 42.8% in the prior year quarter. The 150 basis point adjusted gross margin improvement was due to a high level of new wins and favorable end-use category mix, the favorable net impact of price to input costs, and cost savings initiatives.
Research, selling and administrative (RSA) expenses, as a percent of sales, increased 10 basis points to 24.0% compared with 23.9% in the first quarter of 2013. The modest RSA increase this quarter primarily reflects the inclusion of Aromor’s results and higher incentive compensation accruals. Operating profit increased 13%, or $18.5 million, to $156.1 million from $137.6 million. Adjusted operating profit increased 14%, or $20.0 million, to $158.8 million from $138.8 million in the first quarter of 2013. The improvement in adjusted operating profit was primarily due to strong volume growth combined with gross margin expansion. Adjusted operating profit margin increased 150 basis points to 20.6% from 19.1% in the prior year. The results of Aromor were not significant to the consolidated financial results of the Company for the first quarter of 2014.
Excluding items impacting comparability, the adjusted effective tax rate was 25.5%, or 150 basis points higher than the prior year adjusted effective tax rate of 24.0%. The increase in the adjusted effective tax rate was primarily driven by the absence of the U.S. R&D tax credit in the current quarter. Cash flow from operations was $35.0 million, or 4.5% of sales, compared with $18.7 million, or 2.6% of sales in the prior year quarter. The increased cash flow from operations reflects the absence of a $30 million pension contribution which was made in the first quarter of 2013, offset by higher incentive compensation payments in the first quarter of 2014.
Fragrances Business Unit
Reported net sales increased 9% to $403.7 million in the first quarter of 2014 compared with $371.5 million in the first quarter of 2013. Excluding the impact of foreign currency, local currency sales growth was 8%. Local currency sales growth was high single-digit in the developed markets and low single-digit in the emerging markets. The recent acquisition of Aromor contributed two percentage points of growth to the Fragrance business unit’s local currency sales growth of 8%. Fragrance Compounds consists of two newly-defined market categories; Fine Fragrance and Consumer Fragrances. Consumer Fragrances consists of five end-use categories: Fabric Care, Home Care, Personal Wash, Hair Care and Toiletries.
Fragrance Compounds achieved local currency sales growth of 6% this quarter, reflecting double-digit growth in Greater Asia and North America, and solid growth in the EAME region, offset by a single-digit decline in Latin America.
Fine Fragrance delivered double-digit local currency growth of 10% due to a high level of new wins and strong sales of our classic fragrances, particularly in the developed markets.
Consumer Fragrance delivered solid local currency growth of 4% this quarter, compared with growth of 9% in the prior year quarter. Hair Care achieved double-digit growth and Fabric Care delivered high single-digit growth due to the continued demand for our encapsulation technology, particularly in the emerging markets.
Fragrance Ingredients local currency sales growth of 22% this quarter includes 14% growth associated with our Aromor acquisition and 8% local currency growth excluding Aromor. Strong sales of specialty ingredients within Fragrance Ingredients, which includes the benefit of the Aromor acquisition, drove increased growth. Excluding the planned migration of modest volume to Fragrance Compounds, Fragrance Ingredients achieved growth of 12%. Fragrances gross margins improved over the prior year quarter primarily due to strong volume growth and favorable end-use category mix, the favorable net impact of price to input costs, and ongoing cost reduction initiatives.
Fragrance segment profit increased 28%, or $18.8 million, to $87.2 million in the first quarter of 2014, up from $68.4 million in the first quarter of 2013. Segment profit margin increased 320 basis points to 21.6%. The improvement is due to strong volume growth, gross margin expansion, and increased cost discipline.
Flavors Business Unit
Reported net sales increased 3% to $366.5 million, compared with $356.4 million in the first quarter of 2013. Excluding the impact of foreign currency, Flavors local currency sales growth was 5% this quarter, reflecting strong volume growth from a continued high level of wins. Flavors achieved double-digit local currency growth in the emerging markets, which accounted for 52% of total Flavors sales. On a regional basis, Latin America delivered 23% local currency sales growth due to a very high level of new wins in Beverage. Greater Asia and EAME both delivered solid local currency growth of 8% and 4%, respectively, reflecting positive single-digit growth across all end-use categories, more than offsetting weakness in North America. Gross margins in the Flavors business increased over the prior year quarter reflecting higher volume and favorable end-use category mix, the favorable net impact of price to input costs, and ongoing manufacturing efficiencies.
Flavors segment profit increased 6% to $88.1 million in the first quarter of 2014, up from $83.0 million in the prior year quarter. Flavors segment profit margin increased 70 basis points to 24.0% from 23.3% in the prior year quarter, as a result of strong volume growth from new wins, gross margin improvement and disciplined cost control.
