IFF Reports Second Quarter 2019 Results; Increases Quarterly Dividend
International Flavors & Fragrances Inc. (NYSE: IFF) (Euronext Paris: IFF) (TASE: IFF) reported financial results for the second quarter ended June 30, 2019 and provided updated full year 2019 guidance.
“I am pleased to report that we delivered on our profitability objective for the second quarter in light of a softer top-line dynamic, as expected,” said Andreas Fibig, IFF Chairman and CEO. “Through our core productivity program, as well as acquisition related synergies, we achieved an 80 basis point improvement in adjusted operating profit margin excluding amortization - a marked acceleration versus our first quarter performance.
“Our integration efforts are well underway and we are making excellent progress. For those businesses where we have aligned our go-to-market approach, growth was strong, increasing high single-digits. We are also executing well against our cost synergy plan as our realized savings were $15 million for the first half of 2019. Based on our performance to date and our outlook for the remainder of the year, we have increased our expected 2019 savings to approximately $40 million -- above our previous $30 to $35 million estimate.
“For the full year, we remain confident in our ability to achieve an improvement in adjusted operating profit as productivity initiatives and integration-related synergies largely offset a modest revision in sales expectation. We also revised our adjusted EPS excluding amortization to be $6.15 to $6.35, driven by a change in the average effective tax rate on the amortization of intangible assets and a change in redeemable non-controlling interests.
“To reflect our confidence in our long-term strategy and strong cash flow generation, we are pleased to announce we are raising our quarterly dividend. This marks a decade of consecutive dividend increases and underscores our future growth prospects and strong financial position.”
Second Quarter 2019 Consolidated Financial Results
- Reported net sales for the second quarter totaled $1.3 billion, an increase of 40% from $920 million in 2018, including the contribution of sales related to Frutarom. On a combined basis, currency neutral sales increased 1%, including the net contribution of acquisitions and divested businesses.
- Reported earnings per share (EPS) for the second quarter was $1.20 per diluted share versus $1.25 per diluted share reported in 2018. Excluding those items that affect comparability, adjusted EPS excluding amortization was $1.61 per diluted share in 2019 versus $1.71 in the year-ago period, as adjusted operating profit growth was more than offset by higher interest expense and shares outstanding -- both related to the Frutarom acquisition.
Scent Business Unit
- On a reported basis, sales increased 1%, or $6.2 million, to $475.7 million. Currency neutral sales improved 4%, with growth in nearly all regions and categories. Performance was strongest in Fragrance Ingredients and Consumer Fragrances, both increasing mid single- digits. Fine Fragrance grew low single-digits led by strong new wins, particularly in EAME.
- Scent segment profit increased 13% on a reported basis and 19% on a currency neutral basis reflecting cost and productivity initiatives, along with more favorable price to input costs.
Taste Business Unit
- On a reported basis, sales decreased 4%, or $16.4 million, to $434.2 million. Currency neutral sales decreased approximately 1%, as growth in Greater Asia and EAME were more than offset by continued volume erosion with multinational customers in Latin America and North America. From a category perspective, growth was strongest in Savory and Beverage.
- Taste segment profit decreased 11% on a reported basis and 6% on a currency neutral basis as the benefits from productivity initiatives were more than offset by volume declines, unfavorable price to input costs and mix.
Frutarom Business Unit
- On a reported basis, sales were $381.7 million. On a standalone basis, currency neutral sales remained constant, including the net contribution of acquisitions and divested businesses. Results were driven by the benefit related to acquisitions offset by declines in F&F ingredients - notably CitraSource - as well as raw material-driven price decreases in Natural Colors and weakness in EAME Taste, Savory Solutions and Trade & Marketing.
- Segment profit contributed $37 million in the second quarter, or $77 million excluding amortization. Margin performance continued to be driven by disciplined cost management and acquisition-related synergies.
- On August 5, 2019, the Board of Directors authorized a 3%, or $0.02 increase, in the quarterly dividend to $0.75 per share of the Company’s common stock. The quarterly dividend is payable on October 4, 2019 to shareholders of record as of September 23, 2019. Including this authorization, IFF has increased its quarterly dividend payment for the tenth consecutive year.
During the integration of Frutarom, IFF was made aware of allegations that two Frutarom businesses operating principally in Russia and Ukraine made improper payments to representatives of a number of customers. IFF promptly commenced investigations of such allegations with the assistance of outside legal and accounting firms. IFF’s investigations are not yet complete, but preliminary results indicate that improper payments were made and that key members of Frutarom’s senior management at the time were aware of such payments. IFF has not uncovered any evidence suggesting that such payments had any connection to the United States.
Based on the results of the investigations to date, IFF believes that such improper customer payments are no longer being made and the estimated affected sales represented less than 1% of IFF’s and Frutarom’s combined net sales for 2018. IFF does not believe the impact from these matters is or will be material to IFF’s results of operations or financial condition.
IFF is committed to the highest standards of ethics and compliance and has strict compliance policies in place that are regularly reviewed and updated. Consistent with such policies, IFF has taken or will take appropriate remedial actions with respect to the matters described above. Although the investigations are continuing, based on the results to date and other compliance-related integration activities IFF is not currently aware of similar instances of misconduct.
For the full year, the Company now expects to deliver between $5.15 and $5.25 billion in sales in 2019. On a combined basis and excluding the impact of currency, growth is expected to be 3 to 5%.
The Company now expects adjusted EPS excluding amortization to be $6.15 to $6.35, principally due to a change in the average effective tax rate associated with the amortization of intangible assets and changes in redeemable non-controlling interests. On a combined basis, and excluding the impact of currency, adjusted EPS excluding amortization is expected to be 6 to 9%. The Company also expects adjusted EPS to be $4.85 to $5.05 versus the original guidance range of $4.90 to $5.10.
A live webcast to discuss the Company’s second quarter 2019 financial results will be held on August 6, 2019, at 10:00 a.m. ET. The webcast and accompanying slide presentation may be accessed on the Company's IR website at ir.iff.com. For those unable to listen to the live webcast, a recorded version will be made available on the Company's website approximately one hour after the event and will remain available on IFF’s website for one year.
Cautionary Statement Under The Private Securities Litigation Reform Act of 1995
This press release includes “forward-looking statements” under the Federal Private Securities Litigation Reform Act of 1995, including statements regarding guidance for full year 2019, expected impact of the acquisition of Frutarom, including cost savings, the status and preliminary results of our ongoing investigations regarding improper payments made in Frutarom businesses operating principally in Russia and the Ukraine and the expected impact of such investigations on our results of operations or financial condition, and our ability to accelerate growth and profitability in 2019. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in the Company’s Securities and Exchange Commission filings, including the Company’s Annual Report on Form 10-K filed with the Commission on February 26, 2019 and subsequent filings with the SEC, including the Company’s Quarterly Reports on Form 10-Q. The Company wishes to caution readers that certain important factors may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. With respect to the Company’s expectations regarding these statements, such factors include, but are not limited to: (1) risks related to the integration of the Frutarom business, including whether we will realize the benefits anticipated from the acquisition in the expected time frame; (2) unanticipated costs, liabilities, charges or expenses resulting from the Frutarom acquisition, (3) risks relating to the Company’s ongoing investigations into improper payments made in Frutarom businesses principally operating in Russia and the Ukraine, including expenses incurred with respect to the investigations, the cost of any remedial measures or compliance programs arising out of the investigations, legal proceedings or government investigations that may arise relating to the subject of the Company’s investigations, and the outcome of any such legal or government investigations, such as the imposition of fines, penalties, orders, or injunctions, (4) the impact of the failure to comply with U.S. or foreign anti-corruption and anti-bribery laws and regulations, including with respect to the Company’s ongoing investigations into improper payments made in Frutarom businesses principally operating in Russia and the Ukraine, (5) the impact of the outcome of legal claims, regulatory investigations and litigation, including any that may arise out of the Company’s ongoing investigations into improper payments made in Frutarom businesses principally operating in Russia and the Ukraine, (6) the increase in the Company’s leverage resulting from the additional debt incurred to pay a portion of the consideration for Frutarom and its impact on the Company’s liquidity and ability to return capital to its shareholders, (7) the Company’s ability to successfully market to its expanded and decentralized Taste and Frutarom customer base, (8) the Company’s ability to effectively compete in its market and develop and introduce new products that meet customers’ needs, (9) the Company’s ability to successfully develop innovative and cost-effective products that allow customers to achieve their own profitability expectations, (10) the impact of the disruption in the Company’s manufacturing operations, (11) the impact of a disruption in the Company’s supply chain, including the inability to obtain ingredients and raw materials from third parties, (12) volatility and increases in the price of raw materials, energy and transportation, (13) the Company’s ability to comply with, and the costs associated with compliance with, regulatory requirements and industry standards, including regarding product safety, quality, efficacy and environmental impact, (14) the impact of any failure or interruption of the Company’s key information technology systems or a breach of information security, (15) the Company’s ability to react in a timely and cost-effective manner to changes in consumer preferences and demands, (16) the Company’s ability to establish and manage collaborations, joint ventures or partnership that lead to development or commercialization of products, (17) the Company’s ability to benefit from its investments and expansion in emerging markets; (18) the impact of currency fluctuations or devaluations in the principal foreign markets in which it operates; (19) economic, regulatory and political risks associated with the Company’s international operations, (20) the impact of global economic uncertainty on demand for consumer products, (21) the inability to retain key personnel; (22) the Company’s ability to comply with, and the costs associated with compliance with, U.S. and foreign environmental protection laws, (23) the Company’s ability to realize the benefits of its cost and productivity initiatives, (24) the Company’s ability to successfully manage its working capital and inventory balances, (25) the impact of the failure to comply with U.S. or foreign anti-corruption and anti-bribery laws and regulations, including the U.S. Foreign Corrupt Practices Act, (26) the Company’s ability to protect its intellectual property rights, (27) the impact of the outcome of legal claims, regulatory investigations and litigation, (28) changes in market conditions or governmental regulations relating to our pension and postretirement obligations, (29) the impact of future impairment of our tangible or intangible long-lived assets, (30) the impact of changes in federal, state, local and international tax legislation or policies, including the Tax Cuts and Jobs Act, with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes, (31) the effect of potential government regulation on certain product development initiatives, and restrictions or costs that may be imposed on the Company or its operations as a result, and (32) the impact of the United Kingdom’s expected departure from the European Union. New risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risks on the Company’s business. Accordingly, the Company undertakes no obligation to publicly revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Use of Non-GAAP Financial Measures
We provide in this press release non-GAAP financial measures, including: (i) currency neutral sales; (ii) adjusted operating profit; (iii) adjusted operating profit (margin) ex. amortization; (iv) adjusted EPS; (v) adjusted EPS ex. amortization.
Our non-GAAP financial measures are defined below.
Currency Neutral metrics eliminate the effects that result from translating international currency to U.S. dollars. We calculate currency neutral numbers by comparing current year results to the prior year results restated at exchange rates in effect for the current year based on the currency of the underlying transaction.
Adjusted Operating Profit excludes the impact of operational improvement initiatives, acquisition related costs, integration related costs, restructuring and other charges, net, losses on sale of assets, FDA mandated product recall, and Frutarom acquisition related costs ("Operating Profit Items Impacting Comparability").
Adjusted Operating Profit (Margin) ex. Amortization excludes the impact of Operating Profit Items Impacting Comparability and the amortization of acquisition related intangible assets.
Adjusted EPS excludes the impact of operational improvement initiatives, acquisition related costs, integration related costs, restructuring and other charges, net, losses on sale of assets, FDA mandated product recall, U.S. tax reform, and Frutarom acquisition related costs (often referred to as “Items Impacting Comparability”).
Adjusted EPS ex. Amortization excludes the impact of Items Impacting Comparability and the amortization of acquisition related intangible assets.
These non-GAAP measures are intended to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. In discussing our historical and expected future results and financial condition, we believe it is meaningful for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of the Company’s results under GAAP and may not be comparable to other companies’ calculation of such metrics.
In the fourth quarter of fiscal year 2018, we began including Adjusted EPS ex. Amortization as a key non-GAAP financial measure of our business. Full amortization expense of intangible assets acquired in connection with acquisitions will be excluded from Adjusted EPS ex. Amortization calculation. The exclusion of amortization expense allows comparison of operating results that are consistent over time for newly and long-held businesses and with both acquisitive and non-acquisitive peer companies. We believe this calculation will provide a more accurate presentation in this and in future periods in the event of additional acquisitions. Further, this allows the investors to evaluate and understand operating trends excluding the impact on operating income and earnings per diluted share. In addition, the Frutarom acquisition related costs have been separated from costs related to prior acquisitions. The Frutarom acquisition costs represent a significant balance and we believe this amount should be shown separately to provide an accurate presentation of the acquisition related costs. Our GAAP results and GAAP metrics do not change, and this change has no effect on day to day business operations, or how we manage our business. For Frutarom, we present segment profit excluding amortization expense as it allows comparison of operating results that are consistent over time for newly and long-held businesses and with both acquisitive and non-acquisitive peer companies.
Forward-Looking Non-GAAP Metrics. This press release also includes our expectations for 2019 with respect to (i) sales growth; (ii) Adjusted EPS growth; and (iii) EPS ex. amortization growth. The closest corresponding GAAP measures to these non-GAAP measures and a reconciliation of the differences between the non-GAAP metric expectation and the corresponding GAAP measure is not available without unreasonable effort due to length of the forecasted period and potential variability, complexity and low visibility as to items such as future contingencies and other costs that would be excluded from the GAAP measures, and the tax impact of such items, in the relevant future period. The variability of the excluded items may have a significant, and potentially unpredictable, impact on our future GAAP results.
Combined 2018 Financials
We calculated “combined” numbers by combining (i) our fiscal year 2018 results (including Frutarom from October 4, 2018 to December 31, 2018) with (ii) the results of Frutarom from January 1, 2018 to October 3, 2018, and adjusting for divestitures of Frutarom’s businesses since October 4, 2018, but do not include any other adjustments that would have been made had we owned Frutarom for such periods prior to October 4, 2018.
Welcome to IFF
At IFF (NYSE:IFF) (Euronext Paris: IFF) (TASE: IFF), we’re using Uncommon Sense to create what the world needs. As a collective of unconventional thinkers and creators, we put science and artistry to work to create unique and unexpected scents, tastes, experiences and ingredients for the products our world craves. Learn more at www.iff.com , Twitter, Facebook, Instagram, and LinkedIn.
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