International Flavors & Fragrances (IFF) has reported financial results for the second quarter ended June 30, 2014.
Reported net sales grew 4% to $788.4 million, up from $757.6 million in the second quarter of 2013. Local currency sales, which exclude the impact of foreign currency, also grew 4%. Operating profit increased 8%, or $10.7 million, to $153.1 million, up from $142.4 million in the second quarter of 2013. Adjusted operating profit, which excludes restructuring and operational improvement initiative costs and the gain on the sale of a non-operating asset in the prior year, also increased 8%.
“As expected, we delivered more moderate sales growth this quarter, reflecting a continued challenging environment in North America for our Flavors business,” said Doug Tough, chairman and CEO of IFF. “Due to the leverage inherent in our operating model, we were still able to expand both our gross and operating margins, enabling us to deliver high single-digit growth in adjusted operating profit and double-digit growth in adjusted earnings per share. On a year-to-date basis, we have achieved growth of 5% in local currency sales, 11% in adjusted operating profit and 16% in adjusted EPS. These metrics are in line with or above our long-term growth targets.”
“Our emphasis on R&D has resulted in a stronger pipeline of innovation, and we continue to see growth from new wins at normalized levels. However, we have now seen a higher level of volume erosion in our Flavors base business, especially in North America, and expect this trend to continue into the third quarter. As a result, we are revising our 2014 sales growth targets to 4% to 6%, including a%age point of growth from Aromor. For the full year, our profitability metrics remain intact and we are confident we will achieve double-digit growth in adjusted operating profit and adjusted earnings per share.”
The Flavors Business Unit reported net sales of $375.5 million in the second quarter, even with the prior year sales of $374.0 million. Excluding the impact of foreign currency, Flavors local currency sales growth was 1% this quarter, as new wins were largely offset by a higher level of volume erosion on existing business. The second quarter of 2013 was the strongest sales quarter of the year, with 8% like-for-like (LFL) sales growth, which excludes the exit of low-margin sales activities. Flavors achieved mid-single-digit local currency sales growth in the emerging markets, which accounted for 52% of total Flavors sales. In the developed markets, Flavors volume declined this quarter, notably in North America.
On a regional basis, Latin America delivered 15% local currency sales growth owing to a high level of new wins in Beverage using IFF’s proprietary technology systems and FlavorFit Health and Wellness Solutions. EAME delivered local currency sales growth of 2% led by gains in Beverage, while sales in Greater Asia were even with the prior year as gains in Savory and Sweet were offset by weakness in Beverage and Dairy. The collective gains achieved in these regions were largely offset by continued volume erosion in North America, where sales declined by 4% this quarter, compared with like-for-like growth of 11% in the year-ago quarter.
Gross margin in the Flavors business remained constant, year-over-year, due to the favourable net impact of price to input costs offset by cost increases and a slightly unfavourable sales mix. Input costs continue to remain at elevated levels. Flavors segment profit increased 1% to $90.8 million in the second quarter of 2014, up from $89.9 million in the prior year quarter. Flavors segment profit margin increased 20 basis points to 24.2% from 24.0% in the prior year quarter, due to lower incentive compensation accruals.
