Why IFF’s Fragrances Segment’s Profit Fell in 3Q17
IFF’s Fragrances segment’s revenue in 3Q17
The Fragrances segment of International Flavors and Fragrances (IFF) contributes the most to IFF’s overall revenue. This segment accounted for 53.0% of the company’s revenues in 3Q17 compared to 52.8% in 3Q16. The Fragrances segment reported revenue of $463.1 million, an increase of 12.9% on a year-over-year basis. In 3Q16, the segment reported revenues of $410.1 million.
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The segment’s revenue growth was primarily driven by acquisition-related growth. The consumer fragrance business rose 11% helped by the acquisition of Fragrance Resources. Similarly, the fine fragrance business unit reported growth of 18% driven by new business wins and the contribution from Fragrance Resources. The fragrance ingredients business rose 8% due to higher volume growth in EMEA (Europe, Middle East and Africa) and Latin America. Further, the Lucas Meyer cosmetics business grew by double digits, which also helped boost the segment’s revenue.
Segment’s net profit and margins
The fragrances segment reported a net profit of $93.5 million in 3Q17, an increase of 10.0% on a year-over-year basis. In 3Q16, the segment reported a net profit of $85.0 million. However, the increase in input costs and acquisition costs resulted in margin reduction. In 3Q17, the segment’s profit margin stood at 20.2% compared to 20.7% in 3Q16, which implies a margin decline of 50 basis points from the previous year.
Fragrance Resources will continue to drive the segment’s revenue growth. However, the margins might be under pressure unless the input costs are reduced or passed on to the customers. Investors can indirectly hold IFF by investing in the Vanguard Materials ETF (VAW), which invests 1.0% of its portfolio in IFF. The other holdings of the fund include Sherwin-Williams (SHW), Celanese (CE), and Eastman Chemical (EMN), which have weights of 2.6%, 1.3%, and 1.2%, respectively, as of November 7, 2017.