M&A has boosted growth at International Flavors and Fragrances Inc., which saw sales in both divisions increase, but profits decline for its first quarter.
“Disappointing organic sales growth was largely a result of weakness in Fragrances (52 percent of sales), with an organic sales decline of 1 percent,” wrote Stifel analyst Mark Astrachan in a note. “Flavors growth of 4 percent was in line with expectations, as was total M&A contribution of 500 [basis points]. We believe sales growth was negatively impacted by weakness in China, Latin America, particularly Fragrances, and North America fine fragrances, while North America flavors showed modest sequentially improvement.”
IFF posted a 6 percent increase in net sales for the quarter, with $828.3 million compared with $783.3 million in the prior-year period. Net income was $115.70 million, down 2 percent year-over-year. Earnings per share were $1.45, a decline from $1.47 year-over-year.
The earnings decline came from a $1.8 million loss associated with contamination-caused product recall in the flavors division, as well as unplanned expenses at multiple manufacturing facilities, executives said on the company’s earnings call Tuesday morning. Earnings results “would have been more in line with our expectations” if IFF hadn’t had those expenses, chief financial officer Richard O’Leary said. IFF’s shares traded down more than 5 percent Tuesday, to about $130.04.
For the quarter, the company’s’ fragrance division logged $422.1 million in sales, a 3 percent increase from the prior year. Acquisitions added 4 percent to that sales figure, according to the company. Profit for the fragrances segment was down 8 percent.
IFF said profitability suffered as volume and productivity increases were offset by price to input costs and unplanned expenses. Chief executive officer Andreas Fibig pointed to a decline in fragrance division sales in Latin America as a factor that offset growth in other markets. The region faced “abnormally high volume erosion due to weak economic conditions,” said O’Leary.
Fibig also acknowledged the changing distribution climate in the U.S., where department stores have struggled. “It is of the essence to make sure we as well and our customers find the right mix of products between the prestige, premium and mass and masstige market…at the moment its very much a North America issue,” he said.
The flavors division was up 9 percent, with 6 percent of that due to acquisitions.
IFF has made a handful of acquisitions recently, including Fragrance Resources, which the company bought as a means to add to its fine fragrances business. IFF previously acquired Lucas Meyer Cosmetics, which develops ingredients for the cosmetics industry. The business also invested in Canadian research and development laboratory Bio ForeXtra last July, aiming to add further access to cosmetic ingredients.
IFF’s most recent purchase, PowderPure, could extend IFF’s business into new categories, including nutraceuticals, Fibig said Tuesday.
“On a comparative basis, IFF’s result is weaker than market leader Givaudan, especially in Fragrances, potentially indicating modest share loss,” Astrachan wrote. “We broadly think weak customer volume contributes to an increasing focus on M&A, particularly in adjacent categories, to drive incremental sales growth.”