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
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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. Read the rest of this transcript for free on seekingalpha.com