Benzinga  Sep 22  Comment 
Insider buying can be an encouraging signal for potential investors. A number of insiders took advantage of share offerings. One company saw buying while shares were at all-times highs. Conventional wisdom says that insiders and 10-percent...
Yahoo  Sep 10  Comment 
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as International Flavors & Fragrances Inc (NYSE:IFF) a safer option. One reason being its ‘too bigRead More...
Benzinga  Aug 13  Comment 
Insider buying can be an encouraging signal for potential investors. One CEO and one beneficial owner were among the insider buyers featured this week. Some of the insider buying comes in the wake of earnings reports. Conventional...


International Flavors & Fragrances (NASDAQ: IFF) is the third largest manufacturer of flavor and fragrance chemicals by revenue and the only one of the top five manufacturers based in the U.S.[1] Its chemical compounds are sold to international food, household product, and cosmetics companies.

Revenues and net profits have grown steadily from 2005-2007, with annual revenue growth ranging from 5% to 8%, as IFF taps the emerging luxury and middle class markets of Latin America and Asia.[2] These regions of the world offer the most opportunities for expansion - for instance, the Brazilian cosmetics market is expected by Kline & Company to grow by double digits each year for the next five years and has already become the fourth largest cosmetics market worldwide.[3] IFF also sees opportunities to introduce new products in the midst of the natural and organic foods movement - consumers prefer healthy alternative foods made with natural flavorings to taste similar to the foods they used to consume.[4]

However, IFF faces challenges from rising costs and an economic slowdown in the U.S. In Q2 2008, raw materials prices have increased by an unprecedented 5%, compared to 2-3% increases in previous years.[5] Sales grew by only 3% in North America compared to growth of 7-12% overseas, as challenging macroeconomic conditions in 2007 caused a decline in discretionary spending on items like cosmetics and perfumes.[6] But because of the importance of continuous R&D efforts in the flavors and fragrances industry, IFF cannot reduce in-house costs by cutting a large number of jobs.

IFF's main competitors are based in Europe since 72% of IFF's revenue comes from overseas.[7] These companies have an even larger percentage of revenue from non-North American markets, and have also aggressively developed natural ingredient-based product lines.

Company Overview

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IFF produces over 33,000 proprietary chemical compounds used as flavors in packaged foods and beverages or as fragrances in cosmetics, toiletries, and household products.[10] These flavors and fragrances are usually custom-made to the specifications of IFF’s customers, and are produced and marketed worldwide. The company also sells some synthesized raw ingredients.

Business and Financial Metrics

In 2007, IFF generated $2.3 billion sales revenue and $247 million in net profits, an increase of 9% from 2006.[11] Although 2005 saw a 2% decline in sales due to a division spinoff and lower prices of synthesized ingredients sold,[11] revenue has since grown steadily by 5-8% from 2005-2007. Overseas revenue accounted for 72% of total revenue, due to successful introductions of new products in the developing Asian and Latin American markets and a weak North American economy.[12] 44% of its sales revenue came from the flavors division and 56% from its fragrances division.[13] This revenue breakdown has remained almost constant in the past three years.[14]

However, the flavors division posted a much stronger performance than the fragrance division in 2007. Flavors sales were up 12% from 2006 and increased in all world regions.[9] On the other hand, fragrance sales increased by 6%, of which 4% can be attributed to the weaker dollar in 2007 when performing currency conversions.[2] In addition, profit margins grew in the flavors division by 1.5% but fell in the fragrances division by 1.2%, as raw material prices increased while synthetic ingredients – which IFF sells – declined in price.[15]

IFF took steps to improve the profitability of the fragrances division by cutting production of low-margin products in 2008. Overall sales in Q2 2008 grew by 11% and gross profit grew by 7%, mainly fueled by strong growth in Latin America (21%) and Asia (15%).[5]

Business Segments

IFF produces over 33,000 different flavors and fragrances, and each compound contributes to no more than 1.5% of revenues.[16] Created by blending synthetic or natural ingredients, their formulas are not patented but are instead kept as trade secrets.

  • Flavors (44% of sales, 47% of operating profit): Flavor compounds contribute to the taste and consumer acceptance of packaged foods and beverages. Sales of flavors grew 12% in 2007 (9% after adjusting for exchange rate fluctuations), due to $20-35 million in new product introductions in each of the four geographical regions.[9]
  • Fragrances (56% of sales, 53% of operating profit): IFF’s fragrance compounds include functional fragrances (used in household products), fine and beauty care, and ingredients. Although IFF also introduced significant numbers of new functional fragrances and fine and beauty care fragrances, sales volumes declined in the weaker 2007 economy due to the discretionary nature of fragrances.[6] The sales volume of synthesized fragrance ingredients rose in 2007, but the increased volume was offset by lower prices and higher raw material costs.[6]

Key Trends and Forces

Weak dollar bolsters reported figures of sales overseas

IFF posted that 72% of its sales in 2007 came from outside North America.[7] Since it reports its revenue and profit in dollars, the weak dollar inflates its overseas sales. After adjusting for currency fluctuations, revenue growth in local currency in 2007 was 9% in flavors and 2% in fragrances, compared to 12% and 6% in dollar amounts.[9]

Economic slowdown in U.S. reduces consumer demand for fragrances

Soaring energy prices, job cuts, and a faltering real estate market helped to make consumer spending growth in 2007 (5.5%) the smallest increase since 2003. [17] In December 2007, mid and high-end department stores reported disappointing sales; for instance, Nordstrom posted a decline in sales of 4%.[18] The revenue that IFF generates from nonessential fine and beauty care products (20%) or from functional fragrances (24%) is particularly vulnerable to drops in discretionary spending.[7]

Rising commodities costs cut into profit margins

IFF uses approximately 10,000 raw materials from around the world for its products, and raw material costs account for about 70% of the costs of goods sold.[2] Raw material costs have risen by 2-3% each year from 2005-2007[15], but Q2 2008 saw an unprecedented 5% increase in raw material costs.[5]

Opportunity for growth in health food segment

About 57% of shoppers make an effort to eat healthier, and organic food and beverage sales grew 13% in 2007.[19] Some exotic foods have also been touted as “superfoods”—such as garbanzo beans, wild mushrooms, and goji berries—for their nutritious qualities.[19] However, these foods do not always appeal to pre-existing tastes, and a global survey reported that 80% of consumers wanted better-tasting health foods.[4] This market presents an opportunity for IFF to continue expanding its flavors business, but also requires continued innovation to design these flavors with the all-natural ingredients that customers demand.


  • Givaudan: Based in Switzerland, Givaudan is the world’s largest flavors and fragrances company, holding approximately 25% of world market share in sales volume.[20] Givaudan focuses on sustainability, both in its business model and in its raw materials sourcing.[21]
  • Firmenich: Also based in Switzerland, Firmenich holds 14% of global market share and operates with the same business divisions as IFF.[22] Unlike IFF, Firmenich owns approximately 1000 patents for the formulas of its products.
  • Symrise: This German flavors and fragrances company has taken advantage of growing interest in natural and healthful food flavorings with its “taste for life” product line.[23] It holds 10% of global market share.[24]

Givaudan, Firmenich, and Symrise are IFF’s main competitors in the flavors and fragrances industry. Along with IFF, which holds 17-19% of global market share, these four companies account for 66% of flavors and fragrances sales; all other flavors and fragrances manufacturers hold less than 6% market share each.[8] Geographically, IFF’s three competitors have an advantage over IFF in that they are based in Europe and a smaller percentage of their sales come from the weak North American market.

Although entry into the market is difficult due to high R&D costs, which comprise 8-9% of IFF’s annual revenue, the four main flavors and fragrances companies all produce similar products that cannot be readily differentiated.[2] IFF is on the core supplier list for most of its largest customers, giving it more opportunities to win new contracts.[7] However, IFF commands little customer loyalty since all suppliers on a core supplier list are given a chance to make a bid for a contract. Morningstar analysts also note that IFF’s position on core supplier lists is not guaranteed, since the company lost this privilege less than 10 years ago for poor customer service.

All figures below in millions USD.

' Revenue Net Profit Net Profit Margin R&D

Market Share

IFF is estimated to be the second largest flavors and fragrances company worldwide, holding 17-19% of global market share measured in sales revenue. IFF's inclusion on core supplier lists, companies that are offered a chance to bid for new products, give its market share some protection. However, IFF is not guaranteed a spot on the core supplier lists; nor is it guaranteed to win these contracts that would let it expand market share.

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  1. "Flavor & Fragrance Industry - Top 10," Leffingwell & Associates, 7 September 2008
  2. 2.0 2.1 2.2 2.3 IFF 2005 10-k, Item 7 pg. 21
  3. "Brazilian Cosmetics Market Booming," Inside Cosmoceuticals, 15 May 2008
  4. 4.0 4.1 "Scouting Out New Flavor Trends," Food Product Design, 27 May 2008
  5. 5.0 5.1 5.2 "IFF Q2 2008 Earnings Call Transcript," Seeking Alpha, 4 August 2008
  6. 6.0 6.1 6.2 IFF 2007 10-k, Item 7 pg. 20
  7. 7.0 7.1 7.2 7.3 7.4 IFF 2007 10-k, Item 7 pg. 18
  8. 8.0 8.1 IFF 2007 10-k, Item 6 pg. 16
  9. 9.0 9.1 9.2 9.3 IFF 2007 10-k, Item 7 pg. 19
  10. IFF 2007 10-k, Item 7 pg. 17
  11. 11.0 11.1 IFF 2007 10-k, Item 6 pg. 15
  12. IFF 2007 10-k, Item 7 pg. 20
  13. IFF 2007 10-k, Item 1 pg. 3
  14. IFF 2007 10-k, Item 6 pg. 15
  15. 15.0 15.1 IFF 2007 10-k, Item 7 pg. 22
  16. IFF 2007 10-k, Item 7 pg. 17
  17. "Consumer spending weak; jobless claims surge," USA Today, 31 January 2008
  18. "Americans Cut Back Sharply on Spending," The New York Times, 14 January 2008
  19. 19.0 19.1 "The Top 10 Functional Food Trends in America," Newswise Medical News, 18 April 2008
  20. Givaudan - Facts & Figures
  21. Givaudan - Our Company, History, and Management
  22. Firmenich Company Profile
  23. Symrise AG
  24. Symrise 2007 Annual Report, pg. 60
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