International Flavors & Fragrances' CEO Discusses Q1 2012 Results - Earnings Call Transcript

International Flavors & Fragrances (IFF)

Q1 2012 Earnings Call

May 08, 2012 10:00 am ET

Executives

Douglas D. Tough - Chairman and Chief Executive Officer

Nicolas Mirzayantz - Group President of Fragrances and Member Temporary Office of the Chief Executive Officer

Hernan Vaisman - Group President of Flavors and Member Temporary Office of the Chief Executive Officer

Kevin C. Berryman - Chief Financial Officer, Executive Vice President and Member Temporary Office of the Chief Executive Officer

Analysts

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

John E. Roberts - The Buckingham Research Group Incorporated

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances First Quarter 2012 Earnings Conference Call. [Operator Instructions] Speaking on the call today is Doug Tough, Chairman and CEO; Nicolas Mirzayantz, President of Fragrances; Hernan Vaisman, President of Flavors; and Kevin Berryman, Executive Vice President and CFO.

This call is being recorded and will be available for playback under the Investor Relations section of iff.com. Please keep in mind that during this call, the management team will be making forward-looking statements about the company's performance, particularly with respect to the second quarter and full year of 2012, which can be identified by such terms as expect, anticipate, believe, outlook, guidance, may or similar terms and variations thereof. These statements are based on how IFF sees things today and contain elements of uncertainty. Accordingly, these forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in IFF's business that could cause actual results and events to differ materially from what is discussed today. For more detailed information about these risks and uncertainties, please refer to the cautionary statement and risk factor disclosure contained in IFF's filings with the SEC, including IFF's annual report on Form 10-K filed with the SEC on February 28, 2012.

Please keep in mind that all numbers referenced, unless specifically stated otherwise, are on a comparable basis, which exclude items that impact comparability to accurately reflect on how IFF manages business. The reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, as defined in regulation G, is available under the Investor Relations section of iff.com.

I would now like introduce Doug Tough, Chairman and CEO. You may begin.

Douglas D. Tough

Thank you, operator. And good morning and good afternoon, everyone. Michael DeVeau, our Head of Investor Relations, is unable to join us today as he is participating in an offsite weeklong, IFF leadership development program. He asked that I remind anyone who has follow-up questions to please contact him by e-mail and he will respond as soon as he gets a moment.

Now reviewing our Q1 results. Excluding a 2-percentage-point impact related to foreign currency, the diversity and the strength of our category and geographic presence allowed us to continue to grow our business as worldwide local currency sales increased 1% in the first quarter, on top of the 9% growth we reported a year ago.

In Flavors, local currency sales increased 5%, or 3% on a reported basis, led by double-digit performance in the emerging markets. If we exclude a 1 percentage point impact associated with an intentional, strategic exit of low-margin businesses in the year ago period, local currency sales on a like-for-like basis, or as we refer to it, LFL, grew 6%.

As expected, Fragrance results were pressured by volume declines in ingredients, which had a 300-basis-point impact on total local currency Fragrance sales, as well as a challenging year ago comparison when Fine & Beauty Care grew 14% in local currency.

We were encouraged by the trends seen throughout the quarter as each month improved sequentially, a trend that has continued in the month of April. From a profitability perspective, despite a pricing benefit of nearly 3%, overall gross margin declined 140 basis points due to a 9% increase in raw material costs. This was an improvement relative to the fourth quarter when gross margin was down 220 basis points from the previous year.

Research, selling and administrative expenses as a percentage of sales were down 10 basis points as a result of ongoing cost control and modest benefits from our restructuring. However, as we have previously indicated, adjusted operating profit and adjusted EPS declined versus the prior year period, but results are in line with our expectations.

After Nicolas, Hernan and Kevin finish their respective sections, I will give you some perspectives on our outlook for the full year.

And with that, I would like to introduce our group President of Fragrances, Nicolas Mirzayantz.

Nicolas Mirzayantz

Thank you, Doug, and good morning and good afternoon, everyone. Comparing to a 7% local currency growth rate in the year ago period, which was a record first quarter and our strongest quarterly growth in 2011, local currency sales in the first quarter declined 3% as new business wins and pricing benefits were more than offset by volume declines on existing business.

Volume in Fine & Beauty Care remained under pressure, down 2% versus 14% growth last year, particularly in Western Europe, as we compared to a 2011 period which included both new wins and volume that was stronger than historical averages.

Sales in our EAME region decreased 7% on top of 22% growth last year. However, local currency sales increased 4% in North America, and 5% in Latin America. Fine & Beauty Care sales trend improved versus the fourth quarter of 2011, primarily driven by an improved win rate in Fine Fragrance.

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