Morningstar | IFF's productivity program should help the company achieve modest margin expansion.
International Flavors & Fragrances is the world's second-largest flavors and fragrances manufacturer with a 16% share of a $20 billion industry. Competitors are market leader Givaudan (25%), Firmenich (16%), and Symrise (12%). These Big Four flavor and fragrance companies command a roughly 70% market share. IFF's products impart a desired taste, smell, or feel based on customer specifications. Customers primarily operate in the food, beverage, and personal care industries.International Flavors & Fragrances operates via two reporting segments--flavors and fragrances--that contribute about equally to companywide sales. Flavors enjoys slightly higher margins and therefore generates a slightly larger share of profits versus fragrances. IFF has a global footprint that helps it land supply agreements with large, global consumer packaged goods companies. Half of sales are directed to customers with a global presence and half to customers with a regional presence. The company’s sales are split equally between emerging and developed economies.Proprietary formulations are a key driver of revenue growth. For example, rather than supplying basic flavor solutions, IFF's sweet spot is supplying innovative solutions that modulate the consumer experience. IFF can help save costs for its customers by providing "fine-tuning" flavor agents that allow for the use of cheaper ingredients or extend a product’s shelf life. Additionally, the company's offerings help customers remove undesirable content (fat, sugar, and sodium) from their products without sacrificing the consumer experience.We forecast modest margin expansion in the coming years as IFF's product mix improves and the company’s productivity program, announced in February 2017, drives material cost savings via reduced overhead. However, we are skeptical that the company will achieve management's long-term (2020) operating profit and earnings guidance, as issued in 2015. IFF expects to complete its acquisition of Frutarom by year-end 2018. We are skeptical that the deal will prove value-accretive, due to a lofty deal price and a seemingly aggressive synergy target.International Flavors & Fragrances is a creator and manufacturer of taste, scent and complementary adjacent products, including cosmetic active and natural health ingredients. The company's operating segments are Taste and Scent. The Taste segment develops a range of different flavors and taste offerings for its customers, most of which are tailor-made. The company's Taste business is comprised of various portfolios across flavor compounds, savory solutions, inclusions and nutrition and specialty ingredients. The Scent segment creates fragrance compounds and fragrance ingredients for the household and personal care products. The company also produces cosmetic active and functional ingredients for use in cosmetics.
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