Mr. Tough concluded, “We continue to be cautiously optimistic in our outlook, given the lagging economic growth and uneven recovery cycle. 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. Longer term, we see significant growth opportunities for the business and believe we are well positioned to achieve our long-term goals.”
Second Quarter 2012 Operating Highlights
- Local currency sales in emerging markets, which account for 48% of total company sales, increased 9%.
- Gross profit, as a percentage of sales, was 41.8%, compared with 39.7% in the second quarter of 2011, driven by new business wins, pricing, and manufacturing efficiencies, which more than offset lower increases in raw material costs.
- Research, selling and administrative (RSA) expenses, as a percentage of sales, increased 80 bps to 23.5% compared with the second quarter of 2011. The RSA increase this quarter principally reflects higher incentive compensation accruals and increased expenses to support our ongoing growth initiatives.
- Operating profit increased 12% to $132.3 million, from $118.0 million in the second quarter of 2011. Adjusted Operating Profit increased 8% to $132.3 million, from $122.0 million in the second quarter of 2011 excluding restructuring and other charges of $4.0 million in the second quarter of 2011. The increased profitability was driven by pricing realization, volume and mix improvements, and manufacturing efficiencies that more than offset higher raw material costs and incentive compensation accruals.
- Interest expense declined $1.4 million year-over-year reflecting lower levels of outstanding debt, mainly due to long-term debt repayments in the second half of 2011.
- Other (income) and expense, net, improved $1.9 million in the second quarter of 2012 compared with the second quarter of 2011, due to favorable foreign exchange gains/losses on outstanding working capital balances.
- The effective tax rate increased 30 basis points to 27.7% in the second quarter from 27.4% in the second quarter of 2011. The marginal increase reflects increased provisions related to Spanish withholding taxes, and other provision adjustments on uncertain tax positions. The prior year rate included an R&D tax credit in the U.S. and a write-off related to deferred taxes caused by a change in U.S. state tax laws enacted during the quarter.
- Cash flow from operations increased by $133.2 million to $135.4 million in the first six months of 2012 compared with the first six months of 2011, reflecting the impact of lower year-over-year incentive compensation payments and lower tax payments made in 2012 compared to 2011, as well as improved core working capital.
- On July 24, 2012, the Company announced that its Board of Directors authorized a quarterly dividend of $0.34, an increase of $0.03 from the current quarter dividend of $0.31. The quarterly dividend will be distributed October 3, 2012 to shareholders of record at the close of business on September 19, 2012.
- On August 2, the Company announced that it had reached an overall agreement with the Spanish tax authorities regarding tax disputes for the years 2004 through 2010. The Company will pay Euro 86.0 million and take an after-tax charge to net income of $72.4 million, or $0.88 per share in the third quarter of 2012 as a result of the settlement. IFF also reached an agreement in principle regarding its tax position in Spain for 2012 and going forward.
Flavors Business Unit
- Reported revenue increased 5% to $361.4 million, compared with $345.4 million in the second quarter of 2011. Excluding the impact of foreign currency, local currency sales increased 8% on top of the 8% growth reported in the second quarter of 2011. This marks the 26 th quarter of consecutive local currency sales growth for Flavors.
- On a like-for-like basis, which excludes the exit of low-margin sales activities, local currency sales increased 9% in the quarter, led by North America, which achieved like-for-like growth of 12%, and Greater Asia, which achieved like-for-like growth of 10%.
- The North America and EAME regions achieved local currency sales growth of 8% and 7% respectively, due in part to the Company’s focus on health and wellness initiatives, which increased sales.
- On a category basis, Beverage achieved double-digit local currency sales growth, with more than half of the growth coming from the North American region. Dairy, Sweet and Savory also achieved overall growth.
- Segment profit increased 14% to $80.6 million in the second quarter of 2012, up from $71.0 in the prior year quarter, driven by strong volume growth, price realization and favorable sales mix, that more than offset higher raw material costs and investments in R&D. Operating profit margin increased 170 basis points to 22.3% from 20.6%, reflecting improved operating leverage.
- Reported revenue decreased 3% to $359.9 million, compared with $370.2 million in the second quarter of 2011. Excluding the impact of foreign currency, local currency sales were flat, with growth in Fine and Beauty Care and Functional Fragrance offset by volume declines in Fragrance Ingredients.
- Local currency sales growth in Fragrance Compounds, which includes Fine and Beauty Care and Functional, increased 6% in the second quarter. Fine and Beauty Care had local currency sales growth of 4%, driven by double-digit growth in Latin America and Greater Asia. Functional had local currency sales growth of 7%, due to strong growth in Latin America, EAME and Greater Asia.
- Segment profit increased 2% to $63.6 million in the second quarter, up from $62.3 in the prior year quarter. The improvement in segment profit is due to ongoing cost discipline, improved mix and pricing, combined with benefits from the strategic realignment plan announced in the first quarter of 2012.