NYSE:IFF International Flavors & Fragrances

Sector financial performance:

This company, which manufactures flavor compounds used in savory, beverages, sweet and dairy and fragrance compounds used in perfumes and consumer products, has been grouped into flavors &fragrance ingredient and compounds sector of flavor &fragrance industry.

Our data indicates that the companies in this sector have presented as high as 5% organic annual growth in sales in the past four years and, among those increases, 80% has come from developing market/business. The demands from existing business, mainly developed market, as indicated in the data of sales volumes seem to have been declining between 2015 and 2017 but may be gaining support from increasing demand across all regions.

The deep reasons behind sales’ growth in developing market and sales’ declining in developed market between 2015 and 2017 are actually the ones that we have been seeing across the whole food industry, which are increased disposal incomes, resulted from global economy growth and increasingly accumulated wealth, and increased health and wellness awareness. They help bring a larger range of choices for consumers of developing market in terms of food and beverage’s quantities and qualities, which in fact explains why the existing products in developed market have had increasing consumption volumes in developing market. At the same time, increased disposal incomes, working with increased health and wellness awareness, also enable consumers in developed market to pursue healthier lifestyle including foods with more natural and organic ingredients. Limited by demographic structure and high consumption level of consumers in developed market, the new lifestyle of consumers will not bring increased consumption volumes for developed market. However, it can bring improved margins and profits for those companies who are more competitive in products innovation since the consumer would like to pay more for their new healthier life. 

In fact, it also explains why sales growth did not bring improvement in margins for those companies when sales growth comes primarily from developing market where the existing products have low margins and as well are costly during the process of developing new market. We think some of them will be seeing increased margins as existing product’s sales and new products catch up developed market.

The typical gross margin in this sector is 43% and operating margin is 19%.According our analysis, a typical ratio of enterprise price/adjusted EBI is 44 with interest/EBI of 23%.

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Company performance:

While it seems that the emerging market had been the driver for this company to keep its sales growing in the most of time in the past several years as indicated from the sales data that most of growth had come from new developing market for both segments and demands from existing business/market for both segments (sales volumes) kept declining, demand seems to be picking up in all regions and categories in 2018.

For first nine months of fiscal 2018 compared with same period of 2017(20180920)

Sales increased by about 6% overall excluding acquisition and currency impacts. The increases came from sales of all categories, new developed business, and price increase as a result of increase in costs. 

For fiscal 2017 compared with 2016

Sales increased by about 4% overall excluding acquisition and currency impacts. The increases came from sales of all categories and from new developed business. 

For the first half year of 2017, sales increased by 2% overall excluding acquisition and currency impacts. The increases mainly came from sales of new business in new market (increased 4%).  The sales volumes for existing customers decreased and price declined.

For 2016, organic sales increased by 5%, reflecting increased sales from new market &business for flavor &fragrances products. (80% of the growth came from developing market). There are no changes in sales volume for existing business.

For 2015, organic sales increased by 5% attributable to increases in new market for flavor & fragrance products but offset by reduced sales volume of existing business.

Gross margin varied in a small range (44%-45%) in the past several years due to relatively stable price and production costs.

SG&A as percentage of sales has been kept below 18% and R&D as percentage of sales has been kept at 8%.

While its operating margins went down from about 19% to current 17% in 2017 due to unfavorable acquisition impacts, the operating margin came back to about 19% again in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of about 44, which we think, is relatively overvalued considering the uncertainty caused by impacts of its newly acquired business.  

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