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IFF Reports Third Quarter 2020 Results

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International Flavors & Fragrances Inc. (NYSE: IFF) (Euronext Paris: IFF) (TASE: IFF) reported financial results for the third quarter ended September 30, 2020.

Management Commentary

“Despite the COVID-19 related headwinds, we achieved a strong sequential improvement in our financial results in the third quarter,” said Andreas Fibig, IFF Chairman and CEO. “Our business continues to be resilient, growing 3% excluding the impact of Fine Fragrance and Food Service, led by a third consecutive quarter of robust growth in Consumer Fragrance. Fine Fragrance and Food Service improved relative to the second quarter, yet still declined as a result of COVID-19.

IFF Executive Vice President and CFO, Rustom Jilla commented, “From a profitability perspective, we have also seen a sequential improvement in the third quarter even as we continued to incur higher pandemic related operating costs. The focus on cash remained intense with lower working capital days and higher free cash flow – both sequentially and versus the prior year. Looking ahead to the fourth quarter, while the level of COVID-19 uncertainty remains too high to provide guidance, we face a roughly 400 basis point sales headwind solely as a result of 2019’s fourth quarter which included an additional week of sales.”

Andreas Fibig concluded, “We also made great progress towards our combination with DuPont Nutrition and Biosciences. To date, we have received antitrust clearance in nearly all markets, obtained overwhelming approval from our shareholders and, in conjunction with N&B successfully completed the permanent financing, including a $6.25 billion senior notes offering at attractive interest rates. While there are a few remaining items, including outstanding regulatory approvals, we continue to expect to complete the merger in the first quarter of 2021.”

Third Quarter 2020 Consolidated Financial Results

  • Reported net sales for the third quarter were $1.27 billion, flat when compared to the prior year period. Currency neutral sales increased 1%, representing a sequential improvement versus the second quarter, with year-over-year growth driven by Scent. Fine Fragrance and Food Service, impacted most as a result of the COVID-19 pandemic, improved relative to their second quarter performance, yet declined 14% on a currency neutral basis or 15% on a reported basis. The rest of the portfolio, excluding Fine Fragrance and Food Service was solid, growing 3% on both a currency neutral and reported basis.
  • Reported operating profit for the third quarter was $150.3 million, a decrease of 19% from $184.7 million in 2019. Adjusted operating profit excluding amortization increased 1% on a currency neutral basis as margin improvement in Scent was offset by challenges in Taste.
  • Reported earnings per share (EPS) for the third quarter was $0.75 per diluted share versus $1.13 per diluted share reported in 2019. Adjusted EPS excluding amortization was $1.40 per diluted share in 2020 versus $1.53 in the year-ago period as the devaluation of emerging market currencies versus the US dollar and Euro adversely impacted Other Income/Expense. On a currency neutral basis, adjusted EPS excluding amortization increased 1% driven primarily by adjusted operating profit performance.

Scent Segment

  • On a reported basis, sales increased 4% to $502.8 million, and 4% on a currency neutral basis. Consumer Fragrance growth remained strong, increasing double-digits both on a reported and currency neutral basis, with growth across nearly all sub-categories. Fine Fragrance experienced a marked sequential improvement versus the second quarter, yet declined mid-teens on a reported and currency neutral basis due to the temporary disruptions of consumer access to retail markets related to COVID-19. Fragrance Ingredients returned to growth in the third quarter led by double-digit growth in Cosmetic Actives, both on a reported and currency neutral basis.
  • Scent segment profit increased 15% on a reported basis and 20% on a currency neutral basis led primarily by higher sales volume and strong benefits of productivity initiatives.

Taste Segment

  • On a reported basis, sales decreased 2% to $765.2 million, or declined 1% on a currency neutral basis. Food Service, while improved versus the second quarter, experienced continued pressure, declining double-digits on a reported and currency neutral basis. The rest of the portfolio excluding Food Service was solid, growing low single-digits on a currency neutral basis and flat on a reported basis. From a geographic perspective, North America increased double-digits, with growth in nearly all categories. In EAME, growth was challenged primarily by pressures in Savory Solutions while Latin America and Greater Asia continued to be impacted by COVID-19.
  • Taste segment profit decreased 16% on a reported basis and 13% on a currency neutral basis principally as acquisition-related synergies were more than offset by lower sales volume, unfavorable price versus input costs and higher COVID-19 related costs.

Financial Guidance

As the COVID-19 pandemic continues to evolve, there is uncertainty around its ultimate impact. Therefore, the Company's full year financial results cannot be reasonably estimated at this time.

For the fourth quarter of 2020, the prior year comparison included an additional week of sales or a 53rd week, which represented approximately 4 percentage points of currency neutral sales as disclosed in the fourth quarter 2019.

Audio Webcast

A live webcast to discuss the Company’s third quarter 2020 financial results will be held on November 10, 2020, at 10:00 a.m. ET. The webcast and accompanying slide presentation may be accessed 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 the expected impact of the COVID-19 pandemic on the Company’s near term results, expectations regarding sales and profit for the fourth quarter of 2020, the volatility of the economic environment and uncertainty about the duration and impact of the COVID-19 pandemic; revenue from its categories with retail channel exposure, such as Fine Fragrance and Food Service; the expected impact of the COVID-19 pandemic on the global economy; the Company’s ability to manage through the COVID-19 pandemic and to mitigate the near-term impact; the Company’s expectations regarding growth in the Taste segment in the medium-term; and the Company’s expectations regarding the proposed combination with N&B. 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 (“SEC”) filings, including the Company’s Annual Report on Form 10-K filed with the SEC on March 3, 2020, Quarterly Report on Form 10-Q filed with the SEC on May 11, 2020 and subsequent filings with the SEC. 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 effect of economic conditions in the industries and markets in which IFF operates in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand, the impact of weather conditions, natural disasters, public health issues, epidemics and pandemics, including the novel coronavirus (COVID-19), or the fear of such events, and the financial condition of IFF’s customers and suppliers; (2) the risks to the Company’s business from the COVID-19 pandemic, including operational risks, supply chain risks, and customer related-risks; (3) risks related to the integration of the Frutarom business, including whether the Company will realize the benefits anticipated from the acquisition in the expected time frame; (4) unanticipated costs, liabilities, charges or expenses resulting from the Frutarom acquisition; (5) the impact of the outcome of legal claims, regulatory investigations and litigation; (6) the increase in the Company’s leverage resulting from the additional debt incurred to pay a portion of the consideration for Frutarom and its impact on the Company’s liquidity and ability to return capital to its shareholders; (7) the Company’s ability to successfully market to its expanded and decentralized Taste and Frutarom customer base; (8) the Company’s ability to effectively compete in its market and develop and introduce new products that meet customers’ needs; (9) the Company’s ability to successfully develop innovative and cost-effective products that allow customers to achieve their own profitability expectations; (10) the impact of a disruption in the Company’s manufacturing operations; (11) the impact of a disruption in the Company’s supply chain, including the inability to obtain ingredients and raw materials from third parties; (12) volatility and increases in the price of raw materials, energy and transportation; (13) the Company’s ability to comply with, and the costs associated with compliance with, regulatory requirements and industry standards, including regarding product safety, quality, efficacy and environmental impact; (14) the impact of any failure or interruption of the Company’s key information technology systems or a breach of information security; (15) the Company’s ability to react in a timely and cost-effective manner to changes in consumer preferences and demands; (16) the Company’s ability to establish and manage collaborations, joint ventures or partnership that lead to development or commercialization of products; (17) the Company’s ability to benefit from its investments and expansion in emerging markets; (18) the impact of currency fluctuations or devaluations in the principal foreign markets in which it operates; (19) economic, regulatory and political risks associated with the Company’s international operations; (20) the impact of global economic uncertainty on demand for consumer products; (21) the inability to retain key personnel; (22) the Company’s ability to comply with, and the costs associated with compliance with, U.S. and foreign environmental protection laws; (23) the Company’s ability to realize the benefits of its cost and productivity initiatives; (24) the Company’s ability to successfully manage its working capital and inventory balances; (25) the impact of the failure to comply with U.S. or foreign anti-corruption and anti-bribery laws and regulations, including the U.S. Foreign Corrupt Practices Act; (26) the Company’s ability to protect its intellectual property rights; (27) the impact of the outcome of legal claims, regulatory investigations and litigation; (28) changes in market conditions or governmental regulations relating to the Company’s pension and postretirement obligations; (29) the impact of future impairment of the Company’s tangible or intangible long-lived assets; (30) the impact of changes in federal, state, local and international tax legislation or policies, including the Tax Cuts and Jobs Act, with respect to transfer pricing and state aid, and adverse results of tax audits, assessments, or disputes; (31) the effect of potential government regulation on certain product development initiatives, and restrictions or costs that may be imposed on the Company or its operations as a result; and (32) the impact of the United Kingdom’s departure from the European Union. 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 non-GAAP financial measures, including: (i) currency neutral sales; (ii) adjusted operating profit; (iii) adjusted operating profit (margin) ex. amortization; (iv) adjusted EPS; (v) adjusted EPS ex. amortization and (vi) currency neutral adjusted EPS ex amortization.

Our non-GAAP financial measures are defined below.

Currency Neutral metrics eliminate the effects that result from translating international currency to U.S. dollars. We calculate currency neutral numbers by comparing current 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.

Adjusted Operating Profit excludes the impact of operational improvement initiatives, integration related costs, restructuring and other charges, net, losses (gains) on sale of assets, FDA mandated product recall, Frutarom acquisition related costs, compliance review & legal defense costs, and N&B transaction related costs ("Operating Profit Items Impacting Comparability").

Adjusted Operating Profit (Margin) ex. Amortization excludes the impact of Operating Profit Items Impacting Comparability and the amortization of acquisition related intangible assets.

Adjusted EPS excludes the impact of operational improvement initiatives, acquisition related costs, integration related costs, restructuring and other charges, net, losses (gains) on sale of assets, FDA mandated product recall, Frutarom acquisition related costs, compliance review & legal defense costs, N&B transaction related costs, and redemption value adjustment to EPS (often referred to as “Items Impacting Comparability”).

Adjusted EPS ex. Amortization excludes the impact of Items Impacting Comparability and the amortization of acquisition related intangible assets.

These non-GAAP measures are intended to provide additional information regarding our underlying operating results and comparable year-over-year performance. Such information is supplemental to information presented in accordance with GAAP and is not intended to represent a presentation in accordance with GAAP. In discussing our historical and expected future results and financial condition, we believe it is meaningful for investors to be made aware of and to be assisted in a better understanding of, on a period-to-period comparable basis, financial amounts both including and excluding these identified items, as well as the impact of exchange rate fluctuations. These non-GAAP measures 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.

In the fourth quarter of fiscal year 2018, we began including Adjusted EPS ex. Amortization as a key non-GAAP financial measure of our business. Full amortization expense of intangible assets acquired in connection with acquisitions will be excluded from Adjusted EPS ex. Amortization calculation. The exclusion of amortization expense allows comparison of operating results that are consistent over time for newly and long-held businesses and with both acquisitive and non-acquisitive peer companies. We believe this calculation will provide a more accurate presentation in this and in future periods in the event of additional acquisitions. Further, this allows the investors to evaluate and understand operating trends excluding the impact on operating income and earnings per diluted share. In addition, the Frutarom acquisition related costs and N&B transaction related costs have been separated from costs related to prior acquisitions. The Frutarom acquisition related costs and N&B transaction related costs represent a significant balance and we believe this amount should be shown separately to provide an accurate presentation of the acquisition related costs. Our GAAP results and GAAP metrics do not change, and this change has no effect on day to day business operations, or how we manage our business.

Welcome to IFF

At IFF (NYSE:IFF) (Euronext Paris: IFF) (TASE: IFF), we’re using Uncommon Sense to create what the world needs. As a collective of unconventional thinkers and creators, we put science and artistry to work to create unique and unexpected scents, tastes, experiences and ingredients for the products our world craves. Learn more at www.iff.com, Twitter, Facebook, Instagram, and LinkedIn.

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Contact information

Michael DeVeau
Head of Investor Relations and Communications
212.708.7164
Michael.DeVeau@iff.com

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