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International Flavors (IFF) Q2 Earnings Beat, Improve Y/Y

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International Flavors & Fragrances Inc. (IFF - Free Report) reported adjusted earnings of $1.66 per share in second-quarter 2018, which surpassed the Zacks Consensus Estimate of $1.61. Also, the bottom line improved 11% from the year-ago tally of $1.50. On a constant-currency basis, the company’s adjusted earnings increased nearly 8% year over year.

Including one-time items, International Flavors & Fragrances posted earnings per share of $1.25 in the quarter compared with $1.38 reported in the year-ago quarter.

Segmental Performances Drive Net Sales

In the reported quarter, International Flavors & Fragrances’ net sales were $920 million, reflecting year-over-year growth of 9%. On a constant-currency basis, revenues climbed 5% from the prior-year period. Also, the top line surpassed the Zacks Consensus Estimate of $900 million by 2.2%.

Geographically, revenues generated from the North American operations rose 8% year over year, while revenues in Europe, Africa and the Middle East were up 13% or grew 2% on a constant-currency basis. Revenues from Latin American operations increased 6% year over year, while that from Greater Asia increased 8% or improved 5% on a constant-currency basis.

The company operates in two segments — Flavors and Fragrances. The segmental information is briefly discussed below:

Revenues generated from the Flavors segment came in at $451 million, increasing 9% year over year. On a constant-currency basis, revenues grew 6% year over year. It represented 49% of the quarter’s net sales.

The Fragrances segment’s revenues were $470 million, rising 10% year over year. It accounted for 51% of net sales in the quarter under review. On a constant-currency basis, revenues grew 5% year over year.

Margin Profile Mixed

In the quarter under review, International Flavors & Fragrances’ cost of goods sold rose 11% year over year to $522 million. Adjusted gross profit increased 4.3% year over year to $399 million, while the adjusted gross margin came in at 43.4% versus 45.4% witnessed in the year-ago quarter.

Research and development expenses flared up 3% year over year to $74.8 million. Adjusted selling and administrative expenses in the June-end quarter rose 5.7% year over year to $145 million. Adjusted operating profit increased 15.9% year over year to $169.8 million, while adjusted operating margin shrunk 100 basis points to 18.5%.

Balance Sheet and Cash Flow

Exiting the second quarter, International Flavors & Fragrances had cash and cash equivalents of $322 million, down from $368 million at the end of 2017. Long-term debt grew 5% to $1,717 million as of Jun 30, 2018 from $1,632 million as of Dec 31, 2017.

International Flavors & Fragrances generated $55 million of cash from operating activities during the six-month period ended Jun 30, 2018, compared with $58 million reported in the comparable period last year.

Capital invested in purchasing property, plant and equipment totaled $67.4 million during the six-month period ended Jun 30, 2018, increasing 46% from the comparable period last year. Dividend paid totaled $108.8 million, while treasury stocks worth roughly $15.5 million were purchased.

On Aug 1, the company raised its quarterly cash dividend by 6% to 73 cents per share. The dividend will be paid on Oct 5 to shareholders of record as of Sep 24, 2018.

Frutarom Merger

In May 2018, International Flavors & Fragrances signed an agreement to combine its operations with Frutarom Industries Ltd. under which it will acquire the latter’s entire shareholding for a total consideration of $7.1 billion. The combined business will lead all players, who are dealing with scent, natural taste and nutrition, globally. Exposure to small- and mid-sized customers, as well as increasing business scope in new categories, including natural colors, antioxidants, health ingredients and enzymes, will be beneficial for International Flavors & Fragrances.

Regarding the pending merger with Frutarom, International Flavors & Fragrances recently announced that Frutarom’s 94.6% shareholders voted in favor of the merger. The transaction is expected to close in fourth-quarter 2018, subject to customary closing conditions.


For 2018, International Flavors & Fragrances anticipates gaining from its efforts to check costs, strategic investments and expand businesses globally.

The company expects its sales and operating income will grow 4-7% and 6.5-8.5%, respectively, in 2018.  On a currency-neutral basis, sales growth is projected at 3-5% and operating income improvement is estimated to be 5-7%. Earnings per share are likely to be up 5.5-7.5% or 4-6% on a constant-currency basis.

Share Price Performance

Over the past year, International Flavors & Fragrances has underperformed the industry with respect to price performance. The stock has lost around 4%, while the industry recorded growth of around 4%, during the same time frame.

Zacks Rank & Key Picks

International Flavors & Fragrances currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same sector include Ingevity Corporation (NGVT - Free Report) , KMG Chemicals, Inc. and Ashland Global Holdings Inc. (ASH - Free Report) . While Ingevity and KMG Chemicals sport a Zacks Rank #1 (Strong Buy), Ashland Global carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingevity has a long-term earnings growth rate of 12%. The stock has surged 73% in a year’s time.

KMG Chemicals has a long-term earnings growth rate of 28.5%. Its shares have been up 43% in the past year.

Ashland Global has a long-term earnings growth rate of 10%. The company’s shares have gained 40% over the past year.

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