International Flavors & Fragrances' CEO Discusses Q2 2012 Results - Earnings Call Transcript

International Flavors & Fragrances Inc. (IFF)

Q2 2012 Earnings Call

August 8, 2012 10:00 am ET

Executives

Shelley Young – Director-Investor Relations

Douglas D. Tough – Chairman and Chief Executive Officer

Hernan Vaisman – Group President, Flavors

Nicolas Mirzayantz – Group President, Fragrances

Kevin Berryman – Executive Vice President and Chief Financial Officer

Analysts

Mark Astrachan – Stifel, Nicolaus & Co.

Lauren Lieberman – Barclays Capital

Edward Aaron – RBC Capital Markets

Jeffrey Zekauskas – JPMorgan

John Roberts – Buckingham Research

Edward Yang – Oppenheimer & Co.

Presentation

Operator

At this time, I would like to welcome everyone to the International Flavors & Fragrances’ Second Quarter 2012 Earnings Conference Call. All participants will be on a listen-only mode until the formal question-and-answer portion of the call. Participants will be announced by their name and company, and in order to give all participants an opportunity to ask their questions, we request a limit of one question per person.

I would now like to introduce Shelley Young, Director of Investor Relations. You may begin.

Shelley Young

Thank you, operator. Good morning and good afternoon, everyone and welcome to IFF’s second quarter conference call. Earlier today, we issued a press release announcing our second quarter 2012 financial results. A copy of the release can be found on our website at iff.com. Please note that this call is being recorded live and will be available for replay for up to one year on our website.

Before turning the call over to management, I’d like to take care of a few housekeeping items. Please keep in mind that during this call, we will be making forward-looking statements about the company’s performance, particularly with regard to the second half and full-year 2012. These statements are based on how we see things today and contain elements of uncertainty.

For additional information concerning factors that could cause actual results to differ materially from forward-looking statements, please refer to our forward-looking statements and risk factors contained in today’s 10-Q filing with the SEC as well as our 2011 10-K filed on February 28, 2012 and our press release that we filed this morning, all of which are available on our website.

Some of today’s prepared remarks will discuss non-GAAP financial measures, which exclude those items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in our press release that we issued earlier today and on our website.

Now I’d like to introduce the participants on today’s call. With me today is Doug Tough, our Chairman and CEO; Hernan Vaisman, our President of Flavors; Nicolas Mirzayantz, our President of Fragrances; and Kevin Berryman, our Executive Vice President and CFO.

Now I’d like to turn the call over to Doug Tough, our Chairman and CEO.

Douglas D. Tough

Thank you, Shelley, and good morning and good afternoon everyone. We are pleased with our performance this quarter, especially in light of the macroeconomic challenges presented by the ongoing difficulties in Western Europe and external sales volume declines in our Fragrance Ingredients business. Despite these challenges, we were able to deliver solid top line growth and even stronger double-digit earnings per share growth due to our efforts to diversify our revenue base, focus on our customers and control our costs.

Our diversity in terms of our customers, our end-use categories and our geographic footprint allowed us to continue to grow our business this quarter and deliver local currency sales growth of 4% and on a like-for-like basis, local currency sales growth of 5%. The growth we achieved this quarter, the highest since the first quarter of 2011 is due to the momentum we have established in many areas of the business. Our global reach and our customer intimacy enable us to better serve our customers and capitalize on opportunities that are available today for market share growth.

IFF’s growth this quarter was driven by our Flavors business, which delivered 8% local currency growth on top of 8% local currency growth in the prior year quarter. The year-over-year performance reflects the balanced and the consistent nature of our business, and a strong and growing presence we have in emerging markets. We also saw growth in our Fragrance Compounds business this quarter, which delivered 6% local currency sales growth.

Solid growth in both the Fine & Beauty Care and the Functional Fragrance categories offset continued erosion in Ingredients. Nicolas Mirzayantz will provide more details on our Ingredients business later in the call. As anticipated this quarter was an inflection point for our business in terms of volume, costs and profitability and we are pleased with the results.

Raw material cost increases started to ease this quarter. However, they remain at high levels. As you know, raw material prices have been increasing for the last five quarters on average by 11% each quarter. We have been able to mitigate this inflation through pricing resulting in a more favorable relationship between raw material price increases and pricing this quarter.

Our other margin enhancing efforts including cost efficiencies and volume leverage when combined with pricing led to gross margins expanding 210 basis points to 41.8% this quarter versus 39.7% in the year-ago and 40.2% in the first quarter of 2012. Our adjusted operating profit increased 8% to $132.3 million driven by gross margin expansion and our cost management discipline. Our adjusted operating margin expanded 130 basis points to 18.3% of sales from the second quarter of 2011.

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