Company Overview: International Flavors & Fragrances, Inc. (NYSE: IFF) creates and manufactures fragrance and flavor products meeting the demands of global, regional, and local customers around the world. The company has commenced reporting its numbers under two reportable segments, effective from 1QFY20, namely (1) Taste and (2) Scent. Notably, the company currently has greater than 128,000 products within its portfolio, serving customers across 200 countries.

IFF Details

IFF Rides on Product Expansion and Acquisition Synergies: New York-based, International Flavors & Fragrances, Inc. (NYSE: IFF) is engaged in the production and manufacturing of fragrance and flavor products in the United States and globally. The company had bought Frutarom in October 2018, establishing itself as a global leader in natural taste, scent, and nutrition with a wider customer base. This, in turn, gave IFF room to diversify its product offerings and strengthen its exposure in the end markets.

The company’s total sales in FY19 came in at nearly $5.1 billion thus making it the second largest company in the taste, scent, nutrition, and specialty ingredient industry. The company remains on track to diversify its customer base and leverage its technical expertise to radically increase its worldwide small and mid-sized customer base. Centred on 2019 sales, the company has around 38,000 customers, out of which a major portion, ~65% are small and mid-sized companies and the remaining 35% are global consumer products companies. The company opines to have a more massive future growth potential for taste and scent and continues to build on its multi-decade understanding in the emerging markets.

Looking at the past performance, IFF delivered a CAGR of ~14.2% in revenues over the period of FY15 to FY19, while net profit recorded a CAGR of ~2.1% over the same time span. The company is gaining from favorable markets for flavors and fragrances, backed by higher demand for a range of consumer products and growth in emerging markets. Additionally, focus in achieving business efficacy via its cost and productivity initiatives, acquisition synergies, new business wins are likely to positively aid IFF performance in the days ahead.

On 11 January 2021, the company informed the market regarding its long-term outlook, which includes three-year financial targets. IFF also provided its long-term cost and revenue synergy associated to the company’s ongoing assimilation plan with DuPont’s Nutrition & Biosciences business (N&B). Notably, IFF expects to complete the acquisition on 1 February 2020. Post the completion of the integration, the new IFF is likely to be a worldwide leader in high-value ingredients and solutions for food and beverage, health & wellness and home and personal care markets. The company expects to meet the ever-rising customers’ demand for natural and healthier products, given the expanded global reach and enhanced capabilities.

The integration process will lead IFF to achieve run-rate revenue synergies of ~$400 million by the 2023 end, which are likely to contribute a minimum of $145 million of EBITDA net of reinvestments. Further, the company expects to accomplish run-rate cost synergies of at least $300 million in the same time span.  IFF anticipates run rate cost synergies of ~$120 million by 2021 end, out of which ~$45 million will be realized on an annual basis. The company also expects an organic currency neutral sales increase of 4% to 5% every year through 2023. Further, it expects adjusted EBITDA margin and free cash flow of approximately 26% and $2 billion, respectively, by 2023 end. The company targets net debt to EBITDA of less than 3.0x in two to three years, post the completion of the integration.

Future Cost Synergies (Source: Company Reports)

3QFY20 Key Financial Highlights: During the quarter, the company reported adjusted earnings of $1.40 per share, down 8.5% on pcp. EPS (including one-time items stood at 75 cents per share down from $1.13 per share reported in 3QFY19. The company’s net sales during the quarter came in at $1.27 billion, flat over the prior corresponding period. During the end of September quarter, revenues from currency neutral went up marginally 1%, indicating year-over-year increase in Scent division. Adjusted gross profit in 3QFY20 came in at $524 million, down 1.1% on pcp, whereas, adjusted operating margin came in at 15.2% against 15.8% reported in3QFY19.

3QFY20 Key Highlights (Source: Company Reports)

Segment-wise Performance: During the quarter, revenues from Taste segment stood at $765 million down 2.2% on pcp. Food Service remained under pressure, owing to COVID-19 crisis. Revenues from Scent segment in 3QFY20 increased by 3.7% from the prior corresponding period and came in at $503 million. Revenues on a constant-currency basis increased 4% on pcp, owing to an increase in Consumer Fragrance. Segmental operating profit came in at $101 million, up 14.8% on pcp.

Segmental Performance (Source: Company Reports)

 Balance Sheet & Liquidity Position: The company exited the period with a cash balance of $483 million. Long-term debt at the end of 3QFY20 stood at $3,891 million, down from $3,997 million as of December 31, 2019. Cash generated from operating activities during the nine-month period came in at $415 million, up from $383 million noted in the previous-year period. The company paid a dividend of $240 million in the first nine months of FY20.

Cash Flow Highlights (Source: Company Reports)

Key Metrics: Gross margin for 3QFY20 stood at 41.4%, higher than the industry median of 33.3%. EBITDA margin for 3QFY20 stood at 21.9%, higher than the industry median of 17.1%. Operating margin and net margin came in at 11.9% and 6.8%, higher than the respective industry median of 10.9% and 6%. The company’s debt-to-equity multiple in 3QFY20 stood at 0.71x, lower than the industry median of 0.83x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 60.22% of the total shareholding. Winder Investment Pte. Ltd. and The Vanguard Group, Inc. holds the maximum interests in the company at 22.56% and 10.64%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: The company has not provided an outlook for FY20, given the extent and timing of coronavirus induced uncertainties. Furthermore, IFF is encountering a 400-basis-point sales headwind owing to additional sales week in 4QFY20. The company is also seeing a slowdown in demand for Food Service due to the coronavirus pandemic. These declines can mainly be attributed to restrictions imposed on travel and shelter-in-place along with closure of retail outlets.  Moreover, higher expenses are expected to weigh on IFF’s performance, in the near-term. IFF’s leveraged balance sheet also poses risks with long-term debt at $3,891 million and cash balance at $483 million as of September 30, 2020. This indicates that the company needs to be more focused on cash flow generation.

What to Expect: Although the coronavirus led lockdown has created a hustle, the easing of the closure has instilled optimism for further market improvements, which creates future opportunities for IFF’s business. The company remains on track to drive overall profit, by increased focus to improve efficiency via cost control measures and production initiatives, margin improvement, and acquisition-related synergies.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of IFF closed at $121.52 with a market capitalization of ~$12.99 billion. The stock is currently trading above the average of its 52-week low and high levels. On the technical analysis front, the stock has a support level of ~$117.90 and a resistance level of ~$132.70. Considering, the stock has corrected by 6% over the six months, there are investment risks that need to be evaluated from a market volatility perspective and uncertainty arising due to the current market sentiments. However, based on our valuation i.e., price to cash flow multiple based illustrative relative valuation method, an upside potential of lower double-digit (in % terms) is indicated from the current low trading levels. For the purpose, we have taken peers like we have taken the peer group - Edgewell Personal Care Co (NYSE: EPC), Colgate-Palmolive Co (NYSE: CL), and Clorox Co (NYSE: CLX). Considering the decent long-term outlook, robust product adoption, acquisition synergies, along with cost control measures, we recommend a “Buy” rating on the stock at the closing price of $121.52, down by 3.45% on 13 January 2021. 

IFF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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