uploads/2018/02/Part-4-Fragrance-Post-4Q17-1.png

Why IFF’s Fragrances Segment’s Margin Contracted in 4Q17

By

Updated

IFF’s Fragrances segment’s revenue

International Flavors and Fragrances’ (IFF) Fragrances segment contributes the most to its overall revenue. This segment accounted for 53.0% of the company’s revenue in 4Q17 compared to 50.5% in 4Q16.

The Fragrances segment reported revenue of $452.7 million, a rise of 17.6% on a YoY (year-over-year) basis, in the quarter. In 4Q16, the segment reported revenue of $384.9 million.

The segment’s revenue growth was primarily driven by the organic growth seen across all three of its businesses aided by the acquisition revenue of fragrance resources. The consumer fragrance business rose 12%. Similarly, the fine fragrance business unit reported growth of 27% supported by double-digit growth across regions. Finally, the fragrance ingredients business grew 14% due to higher volume growth in Latin America, North America, and Greater Asia.

Article continues below advertisement

Segment’s net profit and margins

The Fragrances segment reported a net profit of $75.3 million in 4Q17, a rise of 4.1% on a YoY basis. In 4Q16, the segment reported a net profit of $72.4 million. However, an increase in input costs, higher incentives, and amortization costs resulted in margin reduction. In 4Q17, the segment’s profit margin stood at 16.6% compared to 18.8% in 4Q16, implying a margin contraction of 220 basis points from the previous year.

Outlook

The Fragrances segment’s revenue growth will likely be driven by organic growth. However, its margins could come under pressure due to an increase in input costs and supply constraints.

Investors can indirectly hold IFF by investing in the Vanguard Materials ETF (VAW), which invests 1.2% 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 3.6%, 1.5%, and 1.5%, respectively, as of February 15, 2018.

Advertisement

More From Market Realist