International Flavors & Fragrances (NYSE: IFF ) was formed through a merger in 1958, and it immediately became a major player in the manufacturing of -- you guessed it -- flavors and fragrances. In 2000, it acquired Bush Boake Allen to become the largest flavor and fragrance enterprise in the world. Since then, the company's stock has performed nicely. But a challenging fiscal 2006, as highlighted by its recent third quarter, suggested that it had quite a way to go if it ever wanted to get back to its glory days. A look through its fourth-quarter results does little to alter that sentiment.
IFF earned $0.16 per share in the period, but excluding the effects of one-time variables, the company's net profit was $0.32 per share -- well off last year's mark and this year's analyst consensus of $0.43. Some of these one-time charges are associated with North American and European job cuts, which is in part indicative of the company's continuing efforts to streamline operations in a competitive environment.
Three of its four product categories were in negative territory for the quarter, with Fine Fragrances showing the only sign of life at 12% year-over-year growth. The company is, however, seeing continued strength in Latin America and the Asia-Pacific region, with China, Vietnam, Mexico, and Brazil leading the way. Nonetheless, overall net sales, adjusted to reflect the elimination of its European fruit-preparations business, declined by 1% versus the year-ago period.
In addition to lagging sales, IFF continues to suffer margin erosion. Gross margins declined to 40.5% from an adjusted 42.8% a year ago (again, to reflect the elimination of its European fruit preparations business), in large part because of increased raw-materials costs. Management indicated in the conference call that pricing increases have not been able to fully offset these costs.
It is evident from these figures that IFF is in a challenging environment. To counter in 2006, management is planning an improved product mix to win over new business in North America. It's also considering price increases and a reduction of operating costs through restructuring efforts as it works toward a goal of 12% earnings growth.
But until International Flavors & Fragrances can prove it has a functioning plan in place to offer sustainable top-line growth, it's my opinion that this stock is best savored on an investor's watch list rather than in one's portfolio.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
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