International Flavors & Fragrances IFF will benefit from pricing actions, productivity initiatives and acquisition-related synergies. The company has been witnessing weak volumes lately mainly due to low consumer spending owing to persisting inflationary pressures.
Demand for consumer products will pick up steam as the situation normalizes which in turn will boost International Flavors’ revenues. IFF continues to make organic investments and strategic acquisitions while returning significant capital to its shareholders.
Q2 Volumes to Remain Weak, to Pickup Thereafter
International Flavors reported net sales of $3,027 million in the first quarter of 2023, which declined 6% year over year mainly due to lower volumes across most segments. Consumer spending has been weak due to the overall inflationary scenario which in turn has weighed on demand for International Flavor’s ingredients and solutions. The company anticipates volumes to remain impacted in the second quarter of 2023 and pick up in the second half of 2023.
International Flavors thus estimates sales of $12.3 billion for 2023, down from the prior-stated view of $12.5 billion. The updated guidance reflects the energy and raw material pass-through price adjustments and impacts of foreign exchange. Comparable currency-neutral sales growth for 2023 is expected to be approximately 5%. Adjusted operating EBITDA is estimated at approximately $2.34 billion for the year. Foreign currency translation will likely affect sales growth by 1% and adjusted operating EBITDA growth by 3%. On a comparable basis, adjusted operating EBITDA was roughly $2.37 billion in fiscal 2022.
Demand in Emerging Markets to Aid Growth
Despite the current weakness, demand for consumer products containing flavors and fragrances will eventually pick up as inflationary pressures abate. Also, demand in emerging markets has been strong for these products and has been identified as a key growth driver for the company.
Consequently, International Flavors is focused on gaining shares in emerging markets. Backed by its global presence, diversified business platform, broad product portfolio and global and regional customer base, the company will be able to capitalize on the expansion in flavors and fragrances markets and deliver long-term growth.
Acquisitions to Boost Offerings
Over time, International Flavors has made meaningful acquisitions, which helped expand its offerings and in turn, boosted profitability. The acquisition of Frutarom in 2018 was the biggest in its history, which made it a global leader in natural taste, scent and nutrition, with a broader customer base, more diversified product offerings and exposure to end markets, including those with a focus on naturals, and health and wellness.
International Flavors merged with DuPont de Nemours, Inc.’s DD Nutrition & Biosciences (N&B) business. IFF now holds leading positions in the core categories of nutrition, cultures, enzymes, probiotics, soy proteins, flavors and fragrances. The company has a three-year run-rate cost synergy target of around $300 million originating from the merger with DD’s unit.
In 2022, IFF acquired Health Wright Products, a leader in formulation and capsule manufacturing for the dietary supplement industry. The buyout will bring formulation and finished format capabilities to IFF’s Health & Biosciences probiotics, natural extracts and botanicals businesses, allowing innovation in custom formulation and combination products through joint capabilities.
New Strategic Plan Initiated to Aid Growth
In December 2022, International Flavors provided details of its new strategic plan that entails enhanced cost & productivity initiatives, operating model overhaul and portfolio optimization, to name a few. It intends to transform its operating model into a more customer-centric and market-backed one. To this end, it will conduct business in three core end markets which are Food and Beverage, Home and Personal Care and Health.
The company has identified certain businesses, which it intends to either exit or improve their results. In sync with this, International Flavors has entered into an agreement to divest the Savory Solutions Group and the Flavor Specialty Ingredients business, which is expected to close in the third quarter. The proceeds from these deals will be utilized to lower debt levels
To drive growth, IFF plans to step up its investment in high-return businesses such as Cosmetic Ingredients, Fine Fragrance, Flavors, Cultures & Food Enzymes, Health, Food Design (excluding the Savory Solutions unit that is being divested), Fragrance Ingredients and Consumer Fragrance. It also stated that it aims to continue optimizing its portfolio to improve its capital structure.
In 2022, International Flavors implemented several productivity and cost reduction efforts and has further set a target to realize net annual savings of approximately $350 million to $400 million between 2023 and 2025. The company is targeting sales growth of 4% to 6% and adjusted operating EBITDA growth of 8% to 10% on a comparable currency-neutral basis over 2024, 2025 and 2026.
In the past year, International Flavors’ shares have fallen 41.1%, compared with the industry’s decline of 24.5%.
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Zacks Rank & Key Picks
International Flavors currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Consumer Staples sector are Conagra Brands CAG and General Mills GIS.
Conagra Brands, which operates as a consumer-packaged goods food company, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CAG has a trailing four-quarter earnings surprise of 13.2%, on average. The Zacks Consensus Estimate for Conagra Brands’ current fiscal-year sales and earnings suggests increases of 7.1% and 17%, respectively, from the year-ago reported numbers.
General Mills, a food and beverage product company, currently carries a Zacks Rank #2 (Buy). GIS has a trailing four-quarter earnings surprise of 8.1%, on average.
The Zacks Consensus Estimate for General Mills’ current fiscal-year sales and earnings suggests year-over-year growth of 6.3% and 7.4%, respectively.
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