International Flavors (IFF) Down 2.9% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for International Flavors (IFF). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is International Flavors due for a breakout? 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 Q2 Earnings Top Estimates, Down Y/Y

International Flavors reported adjusted earnings of $1.36 per share in second-quarter 2020, surpassing the Zacks Consensus Estimate of $1.33. The bottom-line figure, however, declined 15.5% from the year-ago quarter.

Including one-time items, earnings per share in the quarter came in at 74 cents per share compared with the $1.20 per share recorded in the year-ago quarter.

In the reported quarter, International Flavors’ net sales were $1.20 billion, reflecting a year-over-year fall of 7%. The top-line figure also missed the Zacks Consensus Estimate of $1.21 billion. In the second quarter, currency neutral sales decreased 4% on pressure in the Fine Fragrance and Food Service categories across emerging markets due to the coronavirus pandemic.

Given the pandemic-induced crisis, the company is witnessing significant demand for packaged food, beverage and hygiene and disinfection, which represents approximately 85% of its total 2019 revenues.

Operational Highlights

In the June-end quarter, International Flavors’ cost of goods sold was down 3% year over year to $717 million. Adjusted gross profit declined 12% year over year to $482 million. Adjusted gross margin came in at 40.2% compared with the 42.3% witnessed in the year-ago quarter.

Research and development expenses declined 5% year over year to $81 million. Adjusted selling and administrative expenses slid 3% year on year to $194 million during the second quarter. Adjusted operating profit declined 26% year over year to $158 million. Adjusted operating margin came in at 13.2% compared with the year-earlier quarter’s 16.6%.

Segmental Performances

The company has reported financial results in two segments, Taste and Scent, incorporating nearly all of the Frutarom business into the Taste segment.

Revenues in the Taste segment slipped 7.8%, year over year, to $748 million during the April-June period. On a constant-currency basis, revenues declined 5% year over year. Food Service witnessed pressure, declining 36% year over year on a currency neutral basis. Operating profit fell 18.3% year on year to $107 million.

Revenues generated in the Scent segment came in at $450 million, down 6.3% year over year. On a constant-currency basis, revenues were down 4% year over year. Fine Fragrance plunged 40% year on year on a currency neutral basis, thanks to the temporary disruptions of consumer access to retail markets due to the pandemic. Operating profit decreased 25.5% year over year to $70 million.

Financial Position

International Flavors had cash and cash equivalents of $508 million as of Jun 30, 2020, down from the $624 million as of Dec 31, 2019. Long-term debt rose to $4,182 million as of Jun 30, 2020, from $3,997 million as of Dec 31, 2019.

International Flavors generated $208 million of cash from operating activities during the first half of the current year compared with $185 million recorded in the first half of 2019. Capital invested in purchasing property, plant and equipment totaled $80 million in the first half of 2020.

Dividend paid summed $160 million in the first half of the ongoing year. On Aug 10, the company’s board authorized and hiked the quarterly dividend by 3% to 77 cents per share. This marks the 11th consecutive year of increase in quarterly dividend payment. The dividend is payable on Oct 5 to shareholders of record as of Sep 24, 2020.

Guidance

International Flavors has not provided any guidance for the current year on account of the uncertain impact of the coronavirus pandemic.

The company will continue to effectively manage its balance sheet by taking necessary actions to generate strong cash flow and maintain ample liquidity.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, International Flavors has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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. Notably, International Flavors has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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