International Flavors & Fragrances Inc. (NYSE: IFF) (“IFF” or the “Company”) reported earnings per share for the second quarter 2006
Second quarter 2006 sales totaled $531 million, increasing 3% over the prior year quarter; fragrance and flavor sales increased 3% and 2%, respectively. Reported sales for the 2006 period were affected by the strength of the U.S. dollar; had exchange rates remained constant, sales would have been one percentage point higher.
Fragrance sales were led by fine fragrance, which increased 9%; much of the growth resulted from new product introductions. Sales of functional fragrances increased 1% while fragrance ingredient sales declined 3%.
The flavor sales performance benefited from new wins as well as from ease of comparison with the prior year quarter, when flavor sales were affected by a vendor-supplied raw material contamination issue, the impact of which approximated $5.0 million in the 2005 quarter.
“The improvements in sales and costs are very encouraging. The IFF team will continue to focus on customers, innovation and people to drive our growth,” said Robert Amen, Chairman and Chief Executive Officer of IFF. “We continue to perform very well in fine fragrances, and in many of the markets we've targeted for growth – notably Eastern Europe, India and Latin America. Near term, our emphasis is on meeting or exceeding our 2006 targets for growth and profitability. The Fine Fragrance team is executing its strategy of building customer brands around the world very well. We need to build on this strength. We are assessing our Company plan and performance to determine what adjustments are needed to accelerate our growth in sales and profitability.”
“IFF is an outstanding company that is differentiated by its innovation, strong customer base, quality management team and dedicated employees. I am pleased to have the opportunity to lead IFF through its next stage of growth and look forward to leveraging our strengths as we work to accelerate IFF's value creation.”
Second Quarter 2006
Sales performance by region and product category in comparison to the prior year quarter follows:
- North America fine fragrance and flavor growth was driven mainly by new product introductions while increases in ingredients and functional fragrances were primarily volume related.
- European growth was strongest in Eastern Europe, Africa and the Middle East, collectively increasing 15% over the 2005 quarter; a 2% decline in Western Europe offset this growth. Fine and functional fragrance growth was mainly the result of new product introductions while the decline in ingredients and flavor sales was mainly volume related.
- Latin America fine fragrance sales growth resulted from new product introductions while declines in functional fragrance and ingredients were primarily volume related. Flavor sales were strong throughout the region; this growth was mainly the result of new product introductions.
- Asia Pacific fine and functional fragrance sales growth resulted mainly from new product introductions, while volume declines negatively impacted ingredient sales. Flavor sales growth was mainly the result of new product introductions.
- India fragrance sales performance in all product categories resulted primarily from volume fluctuations while flavor sales increased due to the combined benefit of new product introductions and volume growth.
- Gross profit, as a percentage of sales, improved nearly 1% compared to the prior year quarter. The improvement resulted mainly from the local currency sales performance, improved manufacturing expense absorption and favorable product mix. The 2005 margin was unfavorably impacted by costs attributable to the raw material contamination matter.
- Research and Development (“R&D”) expenses totaled 8.6% of sales, consistent with the prior year quarter.
- Selling, General and Administrative (“SG&A”) expenses, as a percentage of sales, increased to 16.5% from 16.1%, mainly as a result of higher incentive plan accruals and equity compensation expense than the 2005 quarter.
- Interest expense increased 4% from the prior year, primarily due to higher average levels of debt in the quarter and slightly higher interest rates.
- The effective tax rate was 28.0% compared to 30.8% in the prior year quarter; variations in the effective rate are mainly attributable to fluctuations in earnings in the countries in which the Company operates.
For the six-month period ended June 30, 2006, sales totaled $1,042 million, essentially flat with the 2005 period. Reported sales for the 2006 period were affected by the strength of the U.S. dollar; had exchange rates remained constant, sales would have been three percentage points higher.
Sales performance by region and product category in comparison to the prior year period follows:
- North America fine fragrance and flavor growth resulted mainly from new product introductions while the decline in functional fragrances was volume related. Ingredients sales growth was due to a combination of volume and price.
- European growth was strongest in Eastern Europe, Africa and the Middle East, which was offset by an overall sales decline in Western Europe. Fine and functional fragrance growth resulted from new product introductions while the decline in ingredients was volume related, as was the decline in flavor sales.
- Latin America fine fragrance sales growth resulted from new product introductions while increases in functional fragrance and ingredients were primarily volume related. Flavor sales were strong throughout the region, mainly benefiting from new product introductions.
- Asia Pacific fine fragrance sales growth resulted mainly from new product introductions, while volume declines unfavorably impacted functional fragrance and ingredients. Flavor sales growth was mainly the result of new product introductions.
- India fragrance sales performance in all product categories resulted primarily from volume growth while flavor sales increased due to the combined benefit of new product introductions and volume growth.
Outlook for 2006 Reaffirmed
Consistent with prior guidance, IFF currently expects 2006 sales to increase in the low single digits in both local currency and reported dollars, in comparison to 2005.
Based on the foregoing and consistent with previous guidance, IFF currently expects earnings per share for 2006 to be in the range of $2.20 to $2.28.
About IFF
IFF is a leading creator and manufacturer of flavors and fragrances used in a wide variety of consumer products—from fine fragrances and toiletries, to soaps, detergents and other household products, to beverages and food products. IFF is dedicated to The Pursuit of Excellence in every area of its business, using knowledge, creativity, innovation and technology to continually provide customers with the highest quality products and service and superior consumer understanding. IFF has sales, manufacturing and creative facilities in 30 countries worldwide. For more information, please visit our Web site at www.iff.com.
Cautionary Statement Under The Private Securities Litigation Reform Act of 1995
Statements in this report, which are not historical facts or information, are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Certain of such forward-looking information may be identified by such terms as “expect”, “believe”, “may”, "outlook", "guidance" and similar terms or variations thereof. All information concerning future revenues, tax rates or benefits, interest savings, earnings and other future financial results or financial position, constitutes forward-looking information. Such forward-looking statements involve significant risks, uncertainties and other factors. Actual results of the Company may differ materially from any future results expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in the Company's markets, including economic, population health and political uncertainties; interest rates; the price, quality and availability of raw materials; the Company's ability to implement its business strategy, including the achievement of anticipated cost savings, profitability and growth targets; the impact of currency fluctuation or devaluation in the Company's principal foreign markets and the success of the Company's hedging and risk management strategies; the outcome of uncertainties related to litigation; uncertainties related to any potential claims and rights of indemnification or other recovery for customer and consumer reaction to its earlier contamination issue; the impact of possible pension funding obligations and increased pension expense on the Company's cash flow and results of operations; and the effect of legal and regulatory proceedings, as well as restrictions imposed on the Company, its operations or its representatives by foreign governments. The Company intends its forward-looking statements to speak only as of the time of such statements and does not undertake to update or revise them as more information becomes available or to reflect changes in expectations, assumptions or results.
Conference call
There will be a conference call today at 10:00 AM Eastern Time, at which time the Company will discuss operating results for the second quarter 2006, and its current expectations for 2006. The dial in number for U.S.-based participants is 1-877-704-5381; for international participants, the number is 1-913-312-1295. The pass code will be 4210967.
A replay of the call will be available from 1:00 PM Eastern Time beginning Wednesday, July 26, 2006 and ending at Midnight Wednesday, August 9. The dial in number for the replay for U.S.-based listeners is 1-888-203-1112; for international listeners, the number is 1-719-457-0820. The replay pass code will be 4210967.
The call can also be monitored via the World Wide Web at www.iff.com. Real Network's Real Player or Microsoft Media Player is required to access the webcast. They can be downloaded from www.real.com or www.microsoft.com/windows/mediaplayer. A replay of the conference call will be available on the Company's website for twelve months.
Contact
Douglas J. Wetmore
Senior Vice President and Chief Financial Officer
Phone: 212-708-7145