Press Release

Fourth Quarter Local Currency Sales Up 8% and Adjusted EPS up 12%

Full Year Local Currency Sales Up 4%; Reported Sales up 1%

Full Year Adjusted Earnings per Share Increased 6% to $3.98

NEW YORK--(BUSINESS WIRE)--Feb. 7, 2013-- International Flavors & Fragrances Inc. (NYSE: IFF), a leading global creator of flavors and fragrances for consumer products, today reported financial results for the fourth quarter and full year ended December 31, 2012.

Fourth Quarter 2012 Results

• Reported revenue increased $37 million or 6% to $681 million from $644 million in the prior year quarter. Excluding the impact of foreign currency (by translating current and prior year sales at the same exchange rates), local currency sales increased 8% reflecting a high level of new wins and positive volume on existing business. Our expanding footprint in emerging markets accounted for 49% of fourth quarter sales.
• On a like-for-like (LFL) basis, which excludes the exit of Flavors low-margin sales activities, local currency sales increased 10%.
• Net income for the quarter totaled $68.1 million, or $0.83 per share, compared with net income of $24.4 million or $0.30 per share in the prior year quarter. Net income in the fourth quarter of 2011 included an aggregate charge of $36.8 million, or $0.44 per share, related to a patent litigation settlement and restructuring and other charges.
• Excluding the patent litigation settlement and restructuring charges from the prior year’s results, adjusted net income increased 11% to $68.1 million from $61.1 million in the prior year quarter, and adjusted earnings per share (EPS) increased 12% to $0.83 per share from $0.74 per share in the prior year quarter.

Full Year 2012 Results

• Reported revenue for the full year increased 1% to $2.8 billion. Local currency sales increased 4% for the full year, reflecting accelerated momentum throughout the year. On a like-for-like basis, sales increased 5%. The emerging markets accounted for 47% of full year sales.
• Net income for the full year totaled $254.1 million, or $3.09 per share, compared with net income of $266.9 million or $3.26 per share in the prior year. Net income for the full year includes special charges of $73.4 million, or $0.89 per share, almost all of which is related to the previously-announced Spanish tax settlement. Net income for the prior year included an aggregate charge of $39.3 million, or $0.47 per share, related to a patent litigation settlement and restructuring and other charges.
• Excluding these charges from operating results, adjusted net income increased 7% to $327.5 million from $306.2 million and full year adjusted EPS increased 6% to $3.98 from $3.74.
• Cash flows from operations for the full year were $333.1 million, or 11.8% of sales, compared with $189.2 million, or 6.8% of sales in the prior year. Cash flow from operations for 2012 includes a $105.5 million cash outflow arising from the Spanish tax settlement, and for 2011 includes a $40 million payment for a patent litigation settlement. Excluding these items, the Company’s cash flow from operations nearly doubled in 2012.

Management Commentary

Doug Tough, Chairman and CEO, said, “We had a strong finish to the year, driven by our diverse product portfolio, expanding geographic footprint and commitment to providing customers with innovative and superior products that are desired and enjoyed by consumers all around the world. This diversification allowed us to achieve strong broad-based growth in the fourth quarter, led by double-digit growth in the emerging markets. Both business units contributed to our gross margin performance, reflecting strong new wins from our continued focus on innovation, ongoing manufacturing leverage, and the impact of exiting lower margin sales activities. Our strong top-line performance enabled us to achieve local currency sales, operating profit and EPS growth in line with our long-term targets.”

“For the full year we delivered local currency sales growth of 4%, marking the third consecutive year of top-line growth in line with our long-term growth targets. We made targeted investments to expand our footprint in the growing markets of Greater Asia, which included opening a new manufacturing facility in Singapore and a creative center in India, continuing construction on our facility in China, and initiating investments behind our recently-announced capacity expansion project in Turkey. Based on our consumer insights and market knowledge, our research programs are aligned under our key R&D platforms, which are designed to meet the consumer needs of today while anticipating the consumer preferences of tomorrow. We announced earlier this week that we are have made further progress with our biotechnology partner, Evolva, on creating an alternative route for vanillin, which we believe will provide us with a sustainable source for this key flavoring ingredient and give us a strong competitive advantage.”

“We are very well positioned in the market, and enter 2013 with a strong R&D pipeline and solid growth momentum. We have confidence in our strengths and will continue to focus on excellence in execution of our strategies.”

Fourth Quarter 2012 Operating Highlights

• Local currency sales increased 8%, supported by 11% growth in the emerging markets, and 6% growth in the developed markets. On a like-for-like basis, local currency sales increased 10%.
• Gross profit margins, as a percentage of sales, improved to 42.2%, compared with 37.9% in the fourth quarter of 2011. The improved performance was driven by favorable manufacturing leverage due to the strong volume growth, cost savings initiatives, an improved sales mix including benefits associated with exiting low-margin sales activities in Flavors, and the continued benefits of pricing which helped to offset the continued high level of input costs.
• Research, selling and administrative (RSA) expenses, as a percentage of sales, was 27.6% compared with 29.0% in the fourth quarter of 2011. Excluding the impact of the 2011 patent litigation settlement, adjusted RSA, as a percentage of sales, increased 380 basis points to 27.6% compared with 23.8% in the prior year quarter, primarily as a result of higher incentive compensation accruals owing to the strength of our strong performance this quarter and its impact on the achievement of our full year sales growth targets. Before the impact of incentive compensation, adjusted RSA as a percentage of sales would have shown a decrease versus a year ago.
• Operating profit totaled $99.2 million, compared with $47.8 million in the prior year quarter. Operating profit in the prior year quarter included an aggregate charge of $43 million related to the patent litigation settlement and restructuring charges. Excluding these items, adjusted operating profit increased $8 million, or 9%, to $99.2 million from $91.1 million in the prior year, as a result of volume growth, mix improvements and manufacturing leverage, which more than offset increased incentive compensation accruals. Adjusted operating profit margin increased 50 basis points to 14.6% from 14.1% in the prior year.
• Interest expense decreased by $0.2 million in the fourth quarter compared with the prior year quarter, reflecting lower levels of outstanding debt.
• The effective tax rate for the quarter was 23.2% compared with 39.8% in the prior year. The prior year tax rate was negatively impacted by the patent litigation settlement and restructuring charges. The quarter-over-quarter reduction also reflects favorable adjustments to provisions for uncertain tax positions and a lower cost of repatriation. These items were partially offset by the absence of the R&D tax credit in 2012.

Fourth Quarter 2012 Segment Results

Fragrances Business Unit

• Reported revenue increased 10% to $354 million in the fourth quarter, compared with $322 million in the fourth quarter of 2011. Local currency sales increased 13% in the fourth quarter. Fragrance Compounds momentum continued this quarter with local currency growth of 15%, marking the third consecutive quarter of accelerated growth.
• Fragrance Ingredients delivered local currency sales growth of 6%, which marked the first quarter of growth since Q1 2011.
• Strong new customer wins and broad-based growth in our Fragrance Compounds business drove local currency sales growth of 15%, with double-digit growth in Latin America, Greater Asia and North America and solid growth in EAME. Fine Fragrance and Beauty Care achieved 19% local currency sales growth and Functional Fragrance delivered 12% local currency sales growth.
• Fragrances gross margins increased over the prior year quarter primarily due to strong new wins, favorable category mix, cost savings initiatives and the continued benefits of pricing which is helping to offset the continued high level of input costs.
• Segment profit totaled $53 million in the fourth quarter of 2012 compared with $37 million in the fourth quarter of 2011, or an increase of 44%. The improved segment profit is due to strong volume growth combined with gross margin expansion, which offset increased incentive compensation expenses this quarter. Segment profit margin increased 360 basis points to 15.1% from 11.5%.

Flavors Business Unit

• Reported revenue increased 1% to $326 million in the fourth quarter from $323 million in the prior year quarter.
• Local currency sales increased 3% in the fourth quarter fueled by stronger growth in the emerging markets of Southeast Asia and Latin America combined with steady growth in the developed markets of North America and Western Europe. On a like-for-like basis, local currency sales increased 7% over the prior year quarter, led by 15% LFL growth in North America.
• From an end-use category perspective, local currency sales growth was fueled by double-digit growth in Beverages, particularly in North America, followed by solid growth in Savory and Dairy, primarily in Greater Asia.
• Flavors gross margins increased over the prior year quarter primarily due to favorable category mix, the impact of exiting low-margin sales activities, and the continued benefits of previous pricing to help offset the continued high level of input costs.
• Segment profit totaled $62 million in the fourth quarter of 2012, compared with $63 million in the fourth quarter of 2011. Overall sales growth and expanded gross margins due to favorable category mix and pricing realization were more than offset by higher RSA expenses, including increased incentive compensation expense. Segment profit margin decreased 60 basis points to 19.0% from 19.6%.

Full Year 2012 Operating Highlights

• Local currency sales increased 4%, reflecting 8% growth in emerging markets. On a like-for-like basis, local currency sales increased 5%.
• Gross profit margins, as a percentage of sales, improved to 41.7%, compared with 39.6% in 2011. The improved performance was due to an improved mix of business, the benefits associated with exiting low-margin sales activities, continued pricing, moderating raw material cost increases and ongoing manufacturing efficiencies.
• Research, selling and administrative (RSA) expenses, as a percentage of sales, was 24.4% compared with 23.8% in 2011. Excluding the impact of the 2011 patent litigation settlement, the adjusted RSA, as a percentage of sales, increased 180 points to 24.4% compared with 22.6% in 2011, primarily as a result of higher incentive compensation accruals and pension expenses.
• Operating profit totaled $487 million in 2012 compared with $428 million in 2011. Excluding an aggregate charge of $46.7 million related to the patent litigation and restructuring charges from the prior year’s results, and $1.7 million of restructuring charges form the current year’s results, adjusted operating profit increased $14 million or 3% to $488 million in 2012 from $474 million in 2011. Adjusted operating profit margins increased 30 basis points to 17.3% from 17.0%.
• Interest expense decreased by $3 million year-over-year, reflecting lower levels of outstanding debt.
• The effective tax rate was 42.7% in 2012 as compared to a rate of 28.6% in the prior year. Excluding the impact of the 2011 and 2012 items previously noted, including the 2011 patent litigation and restructuring charges and the 2012 Spanish tax settlement and restructuring charges, the adjusted effective tax rate for 2012 was 26.4%, compared with 27.1% in the prior year. The year-over-year reduction reflects favorable adjustments to provisions for uncertain tax positions in 2012, combined with a lower cost of repatriation. These favorable impacts were partially offset by the absence of the US R&D tax credit in 2012.

Full Year 2012 Segment Results

Fragrances Business Unit

• Reported revenue for the full year of $1.4 billion was flat compared with the prior year. Fragrance local currency sales increased 3%. The Fragrances segment contributed 51% of the total consolidated revenue.
• For the full year, Fragrance Compounds had local currency growth of 7%, compared with 1% local currency growth in 2011. Fragrance Ingredients, although improving over the course of the year, declined 10% in local currency sales in 2012 versus 2011.
• Fragrance Compounds showed positive local currency sales growth across all regions, with double-digit growth in Latin America and solid growth in Greater Asia, North America and EAME. Both Fine Fragrance & Beauty Care and Functional delivered full year local currency sales growth of 7% due to strong new customer wins.
• Fragrances gross margins increased over the prior year primarily due to new customer wins, favorable category mix, and productivity gains from cost savings initiatives and continued pricing to offset higher input costs.
• Segment profit totaled $238 million in 2012 compared with $227 million in the prior year, or an increase of 5%. The segment profit improvement is due to improved category mix and pricing, combined with ongoing cost discipline including the benefit from the strategic realignment plan announced in the first quarter of 2012, which more than offset higher raw material costs. Segment profit margin increased 80 basis points to 16.5% from 15.7%.

Flavors Business Unit

• Reported revenue for the full year increased 2% to $1.4 billion. The Flavors segment contributed 49% of the total consolidated revenue.
• Local currency sales increased 5% for the full year and increased 8% on a LFL basis, supported by 9% growth in emerging markets. Greater Asia, Flavors largest region, delivered growth of 7% for the full year growth, or 8% on a LFL basis. The developed market of North America delivered like-for-like growth of 9%.
• From an end-use category perspective, local currency growth was fueled by double-digit growth in Beverages, followed by solid growth in Savory and Dairy.
• Flavors full year gross margins increased over the prior year primarily due to favorable category mix, the impact of exiting low-margin sales activities and continued pricing.
• Full year segment profit for Flavors totaled $298 million compared with $284 million in the prior year. The improved segment profit is due to strong volume growth, favorable category mix and pricing realization that more than offset higher raw material costs, ongoing investments in R&D and increased incentive compensation expenses. Segment profit margin increased 50 basis points to 21.6% from 21.1%.

Audio Webcast

A live webcast to discuss the Company's fourth quarter and full year 2012 financial results, and first quarter and full year 2013 outlook will be held today, February 7, 2013, at 10:00 a.m. EST. Investors may access the webcast and accompanying slide presentation on the Company's website at www.iff.com under the Investor Relations section. For those unable to listen to the live broadcast, a recorded version of the webcast will be made available on the Company's website approximately one hour after the event and will remain available on IFF’s website for one year.

About IFF

International Flavors & Fragrances Inc. (NYSE: IFF) is a leading global creator of flavors and fragrances used in a wide variety of consumer products. Consumers experience these unique scents and tastes in fine fragrances and beauty care, detergents and household goods, as well as beverages, sweet goods and food products. The Company leverages its competitive advantages of consumer insight, research and development, creative expertise, and customer intimacy to provide customers with innovative and differentiated product offerings. A member of the S&P 500 Index, IFF has more than 5,700 employees working in 32 countries worldwide. For more information, please visit our website at www.iff.com.

Cautionary Statement Under The Private Securities Litigation Reform Act of 1995

This press release includes “forward-looking statements” under the Federal Private Securities Litigation Reform Act of 1995, including statements regarding (i) the Company’s belief on the impact of its research strategy on future consumer needs and preferences, (ii) the Company’s expectation regarding the impact of its partnership with Evolva and (iii) the Company’s expectations regarding its competitive position in the market and its financial operational expectations for 2013. These forward-looking statements are qualified in their entirety by cautionary statements and risk factor disclosures contained in the Company’s Securities and Exchange Commission filings, including the Company’s Annual Report on Form 10-K filed with the Commission on February 28, 2012. The Company wishes to caution readers that certain important factors may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. With respect to the Company’s expectations regarding these statements, such factors include, but are not limited to: (1) the general worldwide economic climate and the economic climate for the Company’s industry and demand for the Company’s products; (2) fluctuations in the price, quality and availability of raw materials; (3) changes in consumer preferences; (4) the Company’s ability to implement its business strategy, including the achievement of anticipated cost savings, profitability, realization of price increases and growth targets; (5) the Company’s ability to successfully develop new and competitive products and enter and expand its sales in new and other emerging markets; (6) the impact of currency fluctuations or devaluations in the Company’s principal foreign markets; (7) unanticipated costs and construction delays in the expansion of the Company’s facilities; (8) the effect of legal and regulatory proceedings, as well as restrictions imposed on the Company, its operations or its representatives by U.S. and foreign governments; (9) adverse changes in federal, state, local and foreign tax legislation or adverse results of tax audits, assessments, or disputes; (10) the direct and indirect costs and other financial impact that may result from any business disruptions due to political instability, armed hostilities, incidents of terrorism, natural disasters, or the responses to or repercussion from any of these or similar events or conditions; (11) the ability of Evolva to develop an alternative route for vanillin which will meet consumers and the Company’s clients’ needs and (12) adverse changes due to accounting rules or regulations. New risks emerge from time to time and it is not possible for management to predict all such risk factors or to assess the impact of such risks on the Company’s business. Accordingly, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Note: Local currency sales growth is calculated by translating prior year sales at the exchange rates used for the corresponding 2012 period

The following information and schedules provide reconciliation information between reported GAAP amounts and certain adjusted amounts. This information and schedules is not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

The following information and schedules provide reconciliation information between reported GAAP amounts and certain adjusted amounts. This information and schedules is not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

In the fourth quarter of 2012, there were no items impacting comparability.

The following information and schedules provide reconciliation information between reported GAAP amounts and certain adjusted amounts. This information and schedules is not intended as, and should not be viewed as, a substitute for reported GAAP amounts or financial statements of the Company prepared and presented in accordance with GAAP.

Source: International Flavors & Fragrances Inc.

Investor Relations:
International Flavors & Fragrances Inc.
Shelley Young, 212-708-7271
Director, Investor Relations