International Flavors & Fragrances Inc. (NYSE: IFF) (Euronext Paris: IFF) reported financial results and strategic achievements for the fourth quarter and full year ended December 31, 2017.
“2017 was another notable year in terms of progress, both strategically and in regards to our financial performance,” said Chairman and CEO Andreas Fibig. “We continued to advance our long-term strategy that will enable us to deliver strong returns for our shareholders. We successfully launched three new captive fragrance ingredients, commercialized three natural modulators, expanded our core list participation with several key accounts, and launched Tastepoint℠ by IFF - a fully dedicated organization within IFF designed to service middle-market customers in North America. In addition, we continued to make progress towards our M&A ambition, adding nearly $90 million in expected annualized revenue with the acquisitions of Fragrance Resources & PowderPure.
“In terms of full year financial performance, we achieved currency neutral growth across all of our key metrics. Both business units successfully delivered solid top-line growth – with a marked acceleration in the second half of 2017. Bottom-line performance was supported by strong benefits from cost and productivity initiatives and value-enhancing acquisitions.”
Full Year 2017 Consolidated Financial Highlights
- Reported net sales for the full year totaled $3.4 billion, an increase of 9% from $3.1 billion in 2016. Excluding the impact of foreign exchange, currency neutral sales also increased 9% over the prior year, including approximately five percentage points related to our recent acquisitions.
- Reported operating profit for the full year was $581 million versus $567 million reported in 2016, an increase of 2%. Excluding the impact of foreign exchange and those items that affect comparability, currency neutral adjusted operating profit grew 5%, principally driven by volume growth, the benefits associated with cost and productivity initiatives and acquisitions.
- Reported earnings per share (EPS) for the full year was $3.72 per diluted share versus $5.05 per diluted share reported in 2016. Excluding the impact of foreign exchange and those items that affect comparability, currency neutral adjusted EPS improved 9%, driven by adjusted operating profit growth, a more favorable year-over-year effective tax rate, and lower year-over-year shares outstanding.
U.S. Tax Reform
- On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). As a result, the Company recording a provisional net charge of $139 million in the quarter ended December 31, 2017, which includes a transition tax on the Company’s historic unremitted foreign earnings and the revaluation of the Company’s net deferred tax assets.
Full Year 2017 Strategic Highlights:
- Sweetness and savory modulation portfolio sales increased strong double-digits
- Encapsulation related sales continued to grow, led by Fabric Care and Personal Wash
- Middle East & Africa improved mid-single-digits, with growth in both flavors and fragrances
- Launched Tastepoint℠ to serve dynamic mid-tier customers; grew strong double-digits
- Cosmetic Active Ingredients continued to grow double-digits
- Added approximately $90 million of expected annual revenue with the acquisitions of Fragrance Resources - increasing our participation in specialty fine fragrances and strengthening our market position with regional customers & PowderPure - expanding our expertise by offering clean label solutions that do not compromise taste, nutrition and color
- Reaffirmed sustainability leadership with CDP “A” Rating & EcoVadis “Gold” Status
Flavors Business Unit
- On a reported basis, sales increased 9%, or $135.6 million, to $1.6 billion. Currency neutral sales grew 10% driven by growth in all categories, and the contribution of sales related to the acquisitions of David Michael and PowderPure.
- EAME increased 6% on a reported basis and 8% on a currency neutral basis, with growth in Central, Southern, Eastern and Western Europe as well the Middle East and Africa. Growth was achieved across all categories, led by strong performances in Dairy and Beverage.
- North America improved 23% reflecting additional sales related to acquisitions as well as mid-single-digit growth on an organic basis. Performance was also driven by strong new wins in Savory.
- Latin America increased 7% on a reported basis and 6% on a currency neutral basis led by double-digit growth in the South Cone and Andean Pact sub-regions. Growth was achieved in all categories, led by strong new wins in Savory and Dairy.
- Greater Asia increased 1% on a reported and on a currency neutral basis, with strong double-digit growth in India and Thailand. On a category basis, growth was strongest in Beverage, Savory and Sweet.
- Flavors segment profit increased 11% on a reported basis and 14% on a currency neutral basis, driven by volume growth, the contribution of acquisitions and the benefits from productivity initiatives.
Fragrances Business Unit
- On a reported basis, sales increased 9%, or $146.7 million, to $1.8 billion. Currency neutral sales also improved 9%, with broad-based contributions from the organic business and sales related to the acquisition of Fragrance Resources.
- Fine Fragrances increased 18% on a reported basis and 16% on a currency neutral basis, inclusive of additional sales related to the acquisition of Fragrance Resources. Results were driven by strong double-digit growth in EAME, North America and Greater Asia.
- Consumer Fragrances grew 7% on a reported and currency neutral basis led by growth in Home Care, Fabric Care and Personal Wash. On a geographic basis, growth was achieved in all regions, led by growth in EAME and North America.
- Fragrance Ingredients grew 8% on a reported and currency neutral basis, led by strong growth in LATAM and EAME as well as double-digit growth in Cosmetic Active Ingredients.
- Fragrances segment profit remained constant on a reported basis and declined 1% on a currency neutral basis as volume growth, the benefits from cost and productivity initiatives and the contribution of acquisitions was offset by unfavorable price to input costs, and higher research, selling and administrative expenses, including higher incentive compensation.
Flavors Business Unit
- On a reported basis, sales increased 6%, or $24.2 million, to $401.9 million. Currency neutral sales grew 5%, with growth in Savory, Beverage and Sweet.
- EAME increased 8% on a reported basis and 5% on a currency neutral basis led by strong growth in Middle East, Africa and Central, Southern and Eastern Europe.
- North America grew 9% driven by strong double-digit growth in Savory as well as additional sales related to the acquisition of PowderPure.
- Latin America increased 5% on a reported and 6% on a currency neutral basis led by growth in the South Cone sub-region.
- Greater Asia increased 3% on a reported and 2% on a currency neutral basis principally driven by strong growth in India and the Asean region.
- Flavors segment profit grew 10% on a reported basis and currency neutral basis, driven by volume growth and the benefits from productivity initiatives.
Fragrances Business Unit
- On a reported basis, sales increased 18%, or $67.8 million, to $452.7 million, while currency neutral sales improved 15%. Growth was broad-based, with double-digit increases in all regions.
- Fine Fragrances grew 31% on a reported basis and 27% on a currency neutral basis, inclusive of additional sales related to the acquisition of Fragrance Resources. All regions achieved strong double-digit growth.
- Consumer Fragrances improved 14% on a reported and 12% on a currency neutral basis, inclusive of additional sales related to the acquisition of Fragrance Resources. Performance was also driven by strong growth in Personal Wash, Home Care and Toiletries. On a geographic basis, growth was strongest in North America and Greater Asia – both increasing double-digits – as well as increases in EAME and Latin America.
- Fragrance Ingredients grew 17% on a reported basis and 14% on a currency neutral basis driven by strong growth in Latin America, North America and Greater Asia as well as double-digit growth in Cosmetic Active Ingredients.
- Fragrances segment profit grew 4% on a reported basis, and remained constant on a currency neutral basis as volume growth and the benefits from productivity initiatives were offset by softer mix, unfavorable price to input costs and higher research, selling and administrative expenses, including higher incentive compensation.
FY 2018 Financial Guidance: Percent Change vs. Prior Year
Mr. Fibig continued, “As we enter 2018 – recognizing that uncertainty remains in the operating environment – we are targeting growth across all of our key financial metrics. We are doing so by taking action to accelerate sales growth in advantaged categories, deliver innovation that is truly differentiated and generate higher returns via continued cost and productivity initiatives. This in turn is expected to lead to currency neutral adjusted operating profit growth in line with our long-term target, absent of a two percentage point headwind related to a supply issue of a commonly used raw material, and ultimately generate strong returns for our shareholders.”
U.S. Tax Reform
- Based on our current assessment and understanding of the Tax Act and the Company’s current global operating structure, the Company believes its effective tax rate will be approximately 21% in 2018. The ultimate impact of the Tax Act may differ from this estimate, due to, among other things, changes in interpretations and assumptions the Company has made, additional guidance that may be issued by the taxing authorities as well as operating and/or structural changes that the Company may take as a result of the Tax Act.
FASB Amendment: Compensation - Retirement Benefits
- In March 2017, the FASB issued amendments to the Compensation - Retirement Benefits guidance which requires employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and postretirement costs in operating expenses. Interest cost, asset returns and amortized gains and losses will now be included in Other Income and Expense.
- In conformity with this guideline, and effective in 2018, the Company expects an increase in operating expenses of approximately $30 million for 2018 as compared to the presentation prior to the change. The amounts of the increases in operating expenses in fiscal year 2017 and 2016, which will be revised in 2018, were $30 million and $15 million, respectively. In each case, the increase in operating expenses is offset by increased income in Other Income/Expense. The change does not impact Net Income or EPS in any period.
A copy of the Company’s Annual Report on Form 10-K will be available on its website at www.iff.com or at sec.gov by February 27, 2018.
A live webcast to discuss the Company’s fourth quarter and full year 2017 financial results will be held on February 15, 2018, at 10:00 a.m. ET. Investors may access the webcast and accompanying slide presentation on the Company's IR website at ir.iff.com. For those unable to listen to the live webcast, a recorded version 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.
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 our outlook in 2018, including accelerated sales and profitable growth, the expected impact of and benefits from cost and productivity initiatives, the impact of the Tax Act on 2018 the Company’s effective tax rate, and the impact of our actions on value creation for our shareholders. 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, 2017. 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) macroeconomic trends affecting the emerging markets; (2) the Company’s ability to implement and adapt its refreshed Vision 2020 strategy; (3) the Company’s ability to successfully identify and complete acquisitions in line with its Vision 2020 strategy, and to realize the anticipated benefits of those acquisitions; (4) the Company’s ability to realize the benefits of its cost and productivity initiatives, (5) the impact of the disruption in supply of citral from BASF on the price and availability of citral in 2018; (6) the Company’s ability to effectively compete in its market, and to successfully develop new, cost-effective and competitive products that appeal to its customers and consumers; (7) changes in consumer preferences and demand for the Company’s products or a decline in consumer confidence and spending; (8) the Company’s ability to benefit from its investments and expansion in emerging markets; (9) the impact of recently enacted U.S. tax legislation on the Company’s effective tax rate in 2018 and beyond; (10) the impact of currency fluctuations or devaluations in the principal foreign markets in which it operates; (11) the economic and political risks associated with the Company’s international operations, including challenging economic conditions in China and Latin America; (12) the impact of any failure or interruption of the Company’s key information technology systems or a breach of information security; (13) the Company’s ability to attract and retain talented employees; (14) the Company’s ability to comply with, and the costs associated with compliance with U.S. and foreign environmental protection laws; (15) the Company’s ability to realize expected cost savings and efficiencies from its profitability improvement initiative and other optimization activities; (16) volatility and increases in the price of raw materials, energy and transportation; (17) price realization in a rising input cost environment (18) fluctuations in the quality and availability of raw materials; (19) the impact of a disruption in the Company’s supply chain or its relationship with its suppliers; (20) any adverse impact on the availability, effectiveness and cost of the Company’s hedging and risk management strategies; (21) the Company’s ability to successfully manage its working capital and inventory balances; (22) uncertainties regarding the outcome of, or funding requirements related to litigation or settlement of pending litigation uncertain tax positions or other contingencies; (23) the effect of legal and regulatory developments, as well as restrictions or costs that may be imposed on the Company or its operations by U.S. and foreign governments; (24) adverse changes in federal, state, local and international tax legislation or policies, including with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes; and (25) changes in market conditions or governmental regulations relating to our pension and postretirement obligations. 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 revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Use of Non-GAAP Financial Measures
We provide in this press release (1) Currency Neutral Sales, (2) Adjusted Operating Profit and Currency Neutral Adjusted Operating Profit and (3) Adjusted EPS and Currency Neutral Adjusted EPS, which exclude restructuring costs and other significant items of a non-recurring and/or nonoperational nature such as legal charges/credits, gain on sale of assets, operational improvement initiatives and acquisition related costs (often referred to as “Items Impacting Comparability”) and, with respect to the currency neutral items, the impact of foreign currency movements. We provide these metrics as we believe that they are useful in providing period to period comparisons of the results of our operational performance. When we provide our expectations for our currency neutral metrics in our full year 2018 guidance, we estimate the anticipated FX impact by comparing prior year results to the prior year results restated at exchange rates in effect for the current year based on the currency of the underlying transaction. When we provide our expectations for our Adjusted Operating Profit and our Adjusted EPS in our full year 2018 guidance, the closest corresponding GAAP measures (expected reported Operating Profit and EPS) and a reconciliation of the differences between the non-GAAP expectation and the corresponding GAAP measure generally are not available without unreasonable effort due to inherent difficulty of forecasting the timing and amount of reconciling items that would be excluded from the GAAP measure in the relevant future period and the relevant tax impact of such reconciling items on EPS. The variability of the excluded items may have a significant, and potentially unpredictable, impact on our future GAAP results. Currency Neutral Sales, Adjusted Operating Profit, Currency Neutral Adjusted Operating Profit, Adjusted EPS and Currency Neutral Adjusted EPS should not be considered in isolation or as substitutes for analysis of the Company’s results under GAAP and may not be comparable to other companies’ calculation of such metrics.
International Flavors & Fragrances Inc. (NYSE:IFF) (Euronext Paris: IFF) is a leading innovator of sensorial experiences that move the world. At the heart of our company, we are fueled by a sense of discovery, constantly asking “what if?”. That passion for exploration drives us to co-create unique products that consumers taste, smell, or feel in fine fragrances and beauty, detergents and household goods, as well as beloved foods and beverages. Our 7,300 team members globally take advantage of leading consumer insights, research and development, creative expertise, and customer intimacy to develop differentiated offerings for consumer products. Learn more at www.iff.com, Twitter , Facebook, Instagram, and LinkedIn.
International Flavors & Fragrances Inc.
Michael DeVeau, 212-708-7164
VP, Corporate Strategy, Investor Relations & Communications