International Flavors (IFF) Up 9.2% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for International Flavors (IFF). Shares have added about 9.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is International Flavors due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
International Flavors Misses on Q2 Earnings, Lowers View
International Flavors reported adjusted earnings of 86 cents per share in second-quarter 2023, missing the Zacks Consensus Estimate of adjusted earnings of $1.10 per share. The bottom line declined 44% from the year-ago quarter.
Including one-time items, the company reported earnings of 11 cents per share, compared with the prior-year quarter’s earnings of 43 cents per share.
International Flavors’ net sales were $2,929 million, which missed the Zacks Consensus Estimate of $3,107 million. On a comparable basis, currency neutral sales were down 4% compared to the last year quarter. Growth in Scent and Pharma Solutions were offset by weakness in Nourish & Health & Biosciences. Pricing remained strong and was up in high-single digits year over year. Volumes were down in low double-digits due to customer destocking.
Operational Highlights
In the reported quarter, International Flavors’ cost of goods sold was down 8% year over year to $1,996 million. The gross profit fell 18% year over year to $933 million. The gross margin came in at 31.9%, compared with 34.4% in the year-ago quarter.
Research and development expenses increased 2% year over year to $161 million. The selling and administrative expenses fell 2% year over year to $445 million in the second quarter.
The adjusted operating EBITDA came in at $510 million, down 27% from the prior-year quarter’s $700 million. On a comparable basis, currency neutral adjusted operating EBITDA declined 18% year over year. Strong pricing and productivity gains were offset by lower volumes and unfavorable manufacturing absorption. The adjusted operating EBITDA margin was 17.4%, compared with the year-ago quarter’s 22.3%.
Segment Performances
Revenues in the Nourish segment fell 14% year over year to $1,564 million in the June-end quarter. On a comparable basis, currency neutral sales were down 9%, primarily dragged down by more than 20% decline in Functional Ingredients volume. The figure came in below our estimate of segment sales of $1,739 million. The variance was mainly due to lower-than-expected volumes in the quarter.
The segment’s adjusted operating EBITDA was $181 million, down 50% year over year. On a comparable basis, currency neutral adjusted operating EBITDA declined 42%. Our estimate for the segment’s adjusted EBITDA was $278 million. Gains from price increases and productivity gains were more than offset by lower volumes and unfavorable manufacturing absorption related to the company's inventory reduction program.
Revenues generated in the Health & Bioscience segment were $522 million, compared with the year-earlier quarter’s $665 million. Currency neutral sales decreased 3% on a comparable basis. Growth in Cultures & Food Enzymes, Grain Processing and Home & Personal Care were negated by weakness in Health as a result of weak market conditions in North America and China. Our estimate was at $534 million.
The adjusted operating EBITDA was $145 million in the quarter, compared with $184 million in the prior-year quarter. Our model had projected EBITDA of $154 million for the segment.
The Scent segment’s revenues were $592 million, compared with the year-ago quarter’s $580 million. Currency neutral sales improved 5%, led by double-digit growth in Consumer Fragrance and a high-single digit increase in Fine Fragrance. The figure was higher than our model estimate of $576 million.
The adjusted operating EBITDA increased 26% year over year to $117 million. The figure was higher than our projection of $113 million.
Revenues in Pharma Solutions were $251 million in the second quarter, up 3% year over year, driven by growth in core pharma. The segment’s sales, as per our model, were $250 million. The adjusted operating EBITDA rose 16% year over year to $67 million, which came in higher than our expectation of $57 million.
Financial Position
International Flavors had cash and cash equivalents of $649 million at the end of the second quarter, up from the $493 million witnessed at the end of 2022. Long-term debt was $9.2 billion at the second-quarter end, down from $10.4 billion recorded as of Dec 31, 2022.
International Flavors generated $375 million in operating activities in the first half of fiscal 2023 against a cash utilization of $51 million in the prior year’s comparable period.
International Flavors has completed the divestiture of its Microbial Control, Savory Solutions and Flavor Specialty Ingredients businesses. It has taken the decision to launch a sale process for its Cosmetic Ingredients business. The company is taking up strategic transformation initiatives and is and focusing on improving the performance of its Functional Ingredients business.
2023 Guidance
International Flavors estimates sales of $11.3-$11.6 billion in 2023, down from $12.3 billion stated earlier. The revision reflects a slower recovery in volumes due to the ongoing customer destocking. Volume is expected to be down mid to high- single digits (on a comparable basis) and pricing is expected to have a favorable mid-single digit impact.
The adjusted EBITDA is expected to be $1.85-$2.00 billion, down from $2.34 billion guided earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -37.56% due to these changes.
VGM Scores
Currently, International Flavors has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise International Flavors has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
International Flavors belongs to the Zacks Consumer Products - Staples industry. Another stock from the same industry, Albertsons Companies, Inc. (ACI), has gained 4% over the past month. More than a month has passed since the company reported results for the quarter ended May 2023.
Albertsons Companies, Inc. reported revenues of $24.05 billion in the last reported quarter, representing a year-over-year change of +3.2%. EPS of $0.93 for the same period compares with $1 a year ago.
For the current quarter, Albertsons Companies, Inc. is expected to post earnings of $0.59 per share, indicating a change of -18.1% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.3% over the last 30 days.
Albertsons Companies, Inc. has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
International Flavors & Fragrances Inc. (IFF) : Free Stock Analysis Report
Albertsons Companies, Inc. (ACI) : Free Stock Analysis Report
