International Flavors & Fragrances Inc. (IFF), which acquired Israeli food flavors and ingredients company Frutarom in May last year, stated yesterday in the report accompanying its quarterly financials that it had discovered instances of improper payments by Frutarom units.
"During the integration of Frutarom," IFF states, "IFF was made aware of allegations that two Frutarom businesses operating principally in Russia and Ukraine made improper payments to representatives of a number of customers."
IFF adds that it instituted an investigation of the allegations with the assistance of outside legal and accounting firms. Preliminary results of the investigation indicate that improper payments were made "and that key members of Frutarom’s senior management at the time were aware of such payments."
So far as is known, former Frutarom CEO Ori Yehudai and CFO Alon Granot and possibly other senior executives knew about the payments.
In response, Adv. Aaron Michaeli from Goldfarb Seligman law firm said, "Our clients do not know of any offenses against the law in Frutarom's deals. Over their years of operation, the company's management was always careful to do business according to ethical and business codes in accordance with the law and acceptable business practice.
IFF says that it has not uncovered any evidence suggesting that such payments had any connection to the US.
IFF also says that it believes that such improper customer payments are no longer being made and that the estimated affected sales represented less than 1% of IFF’s and Frutarom’s combined net sales for 2018. "IFF does not believe the impact from these matters is or will be material to IFF’s results of operations or financial condition," the report states.
The report adds, "IFF is committed to the highest standards of ethics and compliance and has strict compliance policies in place that are regularly reviewed and updated. Consistent with such policies, IFF has taken or will take appropriate remedial actions with respect to the matters described above. Although the investigations are continuing, based on the results to date and other compliance-related integration activities IFF is not currently aware of similar instances of misconduct."
IFF has cut its annual guidance, which led to an 8% drop in its share price.
IFF reported sales of $1.3 billion in the second quarter of 2019, up 40% on the $920 million recorded in the corresponding quarter of 2018, which of course is largely thanks to the consolidation of Frutarom.
IFF posted a net profit of $136 million, or $1.2 per share, for the quarter, which compares with a net profit of $99 million, or $1.25 per share, in the corresponding quarter. On a non-GAAP basis, earning sper share were $1.61, in line with analysts' estimates.
IFF's management now expects revenue to total $5.15-5.25 billion this year, and annual earnings of $6.15-6.35 per share, which compares with previous guidance of $5.2-5.3 billion revenue and earnings of $6.3-6.5 per share.
As mentioned, in the wake of the reduced guidance and the report of improper payments in Russia and Ukraine, IFF's share price tumbled in late trading New York. On the Tel Aviv Stock Exchange this morning, IFF's share price is currently down by more than 10%, cutting the company's market cap to some NIS 47 billion.
IFF also announced that it was raising its quarterly dividend by 3% to $0.75 per share.
Commenting on the company's results and its revised guidance, IFF chairman and CEO Andreas Fibig said, "Our integration efforts are well underway and we are making excellent progress. For those businesses where we have aligned our go-to-market approach, growth was strong, increasing high single-digits. We are also executing well against our cost synergy plan as our realized savings were $15 million for the first half of 2019. Based on our performance to date and our outlook for the remainder of the year, we have increased our expected 2019 savings to approximately $40 million -- above our previous $30 to $35 million estimate.
"For the full year, we remain confident in our ability to achieve an improvement in adjusted operating profit as productivity initiatives and integration-related synergies largely offset a modest revision in sales expectation. We also revised our adjusted EPS excluding amortization to be $6.15 to $6.35, driven by a change in the average effective tax rate on the amortization of intangible assets and a change in redeemable non-controlling interests.
"To reflect our confidence in our long-term strategy and strong cash flow generation, we are pleased to announce we are raising our quarterly dividend. This marks a decade of consecutive dividend increases and underscores our future growth prospects and strong financial position."
Published by Globes, Israel business news - en.globes.co.il - on August 6, 2019
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