The essence of Frutarom

Business couldn't be better: Flavors maker finds acquisitions tasty
Publish date:

The president of Haifa-based Frutarom, Ori Yehudai, recites the goal the company has set for itself every time a new quarter begins: $300 million in sales in 2005.

The plan to boost sales by 200% compared with 2001 figures may seem pretentious. But Yehudai believes the company is closer to the goal than it appears.

Frutarom, a manufacturer of food flavors, seasoning and fragrance compounds and the raw materials used in their production, is negotiating to buy a company with turnover of about $50 million to $100 million. It is also looking at buying two smaller companies from Britain and the U.S. with $5 million to $10 million turnover respectively.

Buying these companies, all of which manufacture flavors and aromas, will force Frutarom to bolster its capital base. Hence Frutarom's plans to float stock on Nasdaq in 2002, where it hopes to raise $30 million to $50 million.

A strategy that has borne fruit in the past
Frutarom's strategy of growth through acquisitions bore fruit in the second quarter of 2001. Also, given that the global capital markets have developed a taste for proven companies against live-wire dreamy ones, Nasdaq could well open its arms to an industrial company offering steady, moderate growth.

Frutarom's second quarter sales were up 32% from the comparable quarter in 2001, to NIS 113 million. The sharp growth in sales came from buying the flavor and aroma ingredients divisions of the British CPL Aromas.

Since CPL's activity generated $22 million in revenues in the year 2000, its addition to Frutarom's balance generated a huge chunk of the Israeli company's growth. It sin-house botanicals and extracts division posted a 10% growth.

Local activity not hurt by intifada
According to Yehudai, Frutarom's domestic sales have not really suffered despite the slump felt by soft drinks manufacturers, and the block placed on marketing in the Palestinian-controlled territories. It sustained its income from domestic activity partly because it increased its market share at the expense of imported rival products.

The company's botanicals and extracts division, responsible for 35% of its sales volume, is a key element in its growth strategy. The gross profitability of flavor extracts and compounds is greater than that of raw materials. Also, the prices of botanicals and extracts are less volatile.

Once food and beverage manufacturers begin using extracts in commercial quantities; they tend to stick with same supplier.

Yehudai said the company?s growth is also being supported by the growing U.S. taste for "clear" - transparent - alcoholic beverages, and the entry into the British breakfast-cereal market, under a private brand name sold in leading chain stores in the U.K.

As for raw materials, Yehudai says that sales fell by less than 5%. Demand did decrease, hurt by the slump in the U.S. and intensifying competition in the global market. But Frutarom took steps to handle the trend, by eliminating the production of products whose price dropped by 10%, and decreasing the production of other products.

All the steps together led to a 33% increase in gross profit for Frutarom in the second quarter of 2001 compared with the same quarter last year. Gross profit in Q2 came to NIS 35.8 million, or 31.8% of turnover. In the same period last year the gross profit constituted a similar 31.6% of turnover.

Consolidation cut costs
Acquiring CPL Aromas increased Frutarom's administrative and general expenses by 40% over the comparable quarter in fiscal 2000.

On the other hand, Yehudai says Frutarom merged its sales division in the U.S. with CPL's sales division, closed a factory in Britain, and cut back its Hong Kong workforce, which saved it $600,000 a year.

The merger with CPL temporarily reduced the company's cash flow. Its regular activity generated an NIS 18 million cash deficit in the first half of 2001, compared with a NIS 7.8 million surplus in the same period the previous year.

Co-operation with the Ben Gurion University
Besides the acquisitions, which could conceivably lift the company's sales from $105 million to $110 million in 2001 to $200 million in 2002, Yehudai identifies additional growth engines.

One is the company's agreement to produce peptide-related raw materials for biotechnological pharmaceutical companies. Frutarom, via its subsidiary ArtChem, began providing $3 million worth of these raw materials to a leading pharmaceutical company in May 2001. The company is now looking for more pharmaceutical companies interested in these raw materials.

Frutarom also has a co-operation agreement with the Ben Gurion University. Under the agreement, the raw materials division will begin manufacturing polysaccharides and seaweed-derived extracts. These substances are said to deter skin-aging processes and help treat infections. Frutarom makes these substances for cosmetics companies such as Estee Lauder.

Meanwhile, giant IFF bought smaller German firm BBA. The deal creates a business opportunity for Israel's Frutarom: The merged company stopped manufacturing hundreds of thousands of dollars worth of extracts for smaller clients.