The taste of food and smell of cosmetics typically doesn’t come from the manufacturer of those products. Instead, there are specialty chemical companies that provide these flavors and smells to these manufacturers. The leader in that field is International Flavors & Fragrances Inc (IFF, Financial). The company manufactures and sells cosmetic active and natural health ingredients for use in various consumer products around the world.
Customers are primarily manufacturers of perfumes, cosmetics, personal care products, soaps, detergents, cleaning products, dairy, meat, processed foods, beverages, snack foods, sweet and baked goods, dietary supplements, infant and elderly nutrition, pharmaceutical excipients and oral care products.
Business segments
The Nourish segment provides flavor compounds that are added to soups, sauces, meat, fish, poultry, snacks, beverages, candy products, cereal, chewing gum and dairy products. The Scent segment provides fragrance compounds for perfume and colognes and other consumer products where certain smell is an important component.
The Health & Biosciences segment produces enzymes, food cultures, probiotics and specialty ingredients for both food and non-food applications. The Pharma Solutions segment produces and sells cellulosics and seaweed-based pharma excipients.
The company has a history dating back to 1889 and is headquartered in New York. The current market capitalization is $17.1 billion.
Financial results
International Flavors & Fragrances reported second-quarter results on Aug. 7. Net sales were $2.93 billion, which was roughly flat versus the prior-year period. On a comparable basis, currency neutral sales declined 4% versus the prior-year period, as solid growth in Scent and Pharma Solutions was more than offset by softness in Nourish abd Health & Biosciences.
The business environment remains mixed, where pricing continues to be strong, increasing high-single digits year-over-year, yet volume was pressured primarily related to destocking which declined low double-digits versus the prior year period. Approximately 60% of the total volume decline was due to a more than 20% volume decline in the Functional Ingredients segment. Excluding the impact of the Functional Ingredients segment decline, company volume performance was down mid-single digits in quarter.
Adjusted operating Ebitda for the quarter was $510 million. On a comparable basis, adjusted operating Ebitda declined 18% compared to the prior-year period, as strong pricing and productivity gains were more than offset by lower volumes and unfavorable manufacturing absorption related to the company's inventory improvement program. Reported earnings per share for the second quarter was 11 cents, while adjusted earnings excluding amortization was 86 cents per share.
The company’s balance sheet is somewhat levered after recent merger and acquisition activity. As of the end of the second quarter, cash balances were $659 million and total debt stood at $10.6 billion. The net debt-to-credit-adjusted Ebitda ratio was 4.5.
CEO Frank Clyburn said, “Amid the current operating environment, IFF has performed near expectations across the majority of our portfolio, led by strong top- and bottom-line results in Scent and Pharma Solutions. The continued customer destocking and volume pressures in the second quarter reflect the broader macroeconomic challenges facing our industry, and for IFF, this softness has been largely isolated in our Functional Ingredients business within Nourish. From a profitability perspective, our adjusted operating Ebitda was in line with our guidance range, excluding a one-time inventory write-down due to unprecedented cost fluctuations for one ingredient. Our focus on cash flow generation has also yielded solid results - improving sequentially and versus the prior year period - as we successfully executed on our inventory reduction program."
Valuation
Company guidance calls for full-year 2023 sales to be in the range of $11.3 billion to $11.6 billion and adjusted Ebitda in the range of $1.85 billion to $2 billion.
Consensus analyst earnings estimates for 2023 are $3.29 and for 2024 the estimate is $4.47. The legacy functional ingredients business, which is approximately 25% of revenue, is facing volume and margin pressures in 2023. The current price-earnings ratio is not reflective of the company’s true earning power in a normalized environment. The forward-looking 2024 price-earnings estimate is more reasonable at 14.
The GuruFocus discounted cash flow calculator creates a value of $52 per share when using 2023 estimates of $3.29 and an 8% 10-year growth rate. However, when using more normalized earnings of $4.47 in 2024, the target value increases to $74.
There are 16 Wall Street analyst that cover the company with an average price target of $81.63. The high target is $116 and the low target is $60.
The company pays a dividend but has had difficulty paying the cash dividend from free cash flow recently. The current annualized dividend is $3.24,which equates to a dividend yield of 5.02%.
Guru trades
Gurus who purchased the stock recently include Steven Romick (Trades, Portfolio) and Robert Olstein (Trades, Portfolio). Investors who reduced or sold out of their positions include T Rowe Price Equity Income Fund (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Summary
International Flavors & Fragrances has recently experienced underperforming segments where the company likely underinvested. However, the company has initiated a strategic plan to fix and revitalized these businesses. With the stock selling near 52-week lows and better earnings expected in 2024, the stock may represent a solid investment opportunity for long-term investors.
