I wanted to continue to comment on the IFF Frutarom deal following the overwhelming support and agreement from nearly everyone in the industry about this Folly, and so from time to time I will make comments where I see the need and obviously I see the need today.
Recently Andreas Fibig, Chairman & CEO of IFF, was on Bloomberg to continue on his quest to explain the Frutarom acquisition. He starts out with the comment that Investors don’t understand Frutarom, especially investors in the USA, and so it has been necessary to educate them. Of course IFF is a US based company, and a Top 10 player, as is Frutarom (Israel), so any investors or analysts who make it their business to understand and invest in the F&F space should know plenty about Frutarom, since they have been in the news now, for many years. Explaining the drop in IFF share price on this investor ignorance seems very convenient, but you could also take the more plausible view that the Investors know more about Frutarom than Mr. Fibig gives them credit for, which is why they headed for the doors.
By the way if you haven’t seen the interview you can click on the attached link to Bloomberg: https://bloom.bg/2MEQi6w
Fibig also made a number of other comments which I wanted to address:
“Frutarom has a higher growth profile than IFF on both the top and bottom line” – Given that Frutarom has made 42 acquisitions in the past 6 years it is not surprising that this is the case and it would be interesting to know what the real growth is after taking out the acquisition effect. Acquisitions can cover up a lot of things and IFF investors should know what the underlying organic growth contribution is of each of these acquisitions which is what is important in the long run. With so many acquisitions they need a new metric – maybe like McDonalds “same store” sales to remove the impact of new stores on the growth numbers?
“Frutarom has a lot of business with small to medium customers – 30,000 customers versus only 3,000 at IFF so this gives us a lot more opportunities” – I have never worked at IFF but have been in the industry since 1990 and all of this time IFF was always cutting the tail and focusing on the big opportunities and customers, which is why so many smaller F&F companies flourished as well as flavor distributors. I don’t believe IFF has the ability to assimilate that many customers and many of them went to the companies that make up Frutarom, as they couldn’t get any service from IFF. For IFF its revenue per customers averages out at close to $1.1 million while for Frutarom it averages out at $45 Thousand. There is a big disconnect here!
“Frutarom portfolio is not just in F&F but also in food protection, active comestics, natural colors and health ingredients” This is no doubt true but this means that IFF has finally decided to become an ingredients company like Kerry or McCormick. This is a major change and to me means that IFF are struggling in the F&F area and it will become increasingly difficult to compare them to Givaudan, Firmenich or Symrise as they diversify into lower margin product lines.
“Fibig made the comment that naturals is a trend we have seen for a couple of years and we believe it is here to stay” – Not much to say here but its been more like 2 decades that this has been happening so this is not something new that Frutarom discovered for themselves.
“90% of briefs at IFF are for natural solutions” – I really doubt this – IFF is a global company as is Frutarom and they have business all over the world and really only Western Europe is fully committed to new natural product introductions and then the USA and North Asia follow, but the ROW doesn’t have this luxury.
“Frutarom allows IFF to enter the natural colors markets – we see USA as a big opportunity as many food & beverages still contain synthetic colors and there is a trend to change from synthetic to natural and this is another platform for us to explore” – I believe IFF was into colors well in the past but this is a very small part of Frutarom so using this as a key positive seems a bit desperate. There are plenty of large competitors in this space such as Sensient, DDW or Chr. Hansens, who would have a chuckle at this.
On another front it was announced on Rueters: Refer link https://reut.rs/2nQih54 that Frutarom shareholders had approved the $7.1 billion deal with IFF. What a surprise! One would think that may have been the fastest agreement in Frutarom history but only 94.6% of shareholders approved the deal so obviously someone felt that this was a bad deal but seriously who are they kidding.
I was extremely surprised however that these same shareholders rejected a $20 million one time bonus for the CEO, Ori Yehudai. I was speechless at this!
Comments
6 responses to “IFF / Frutarom Update”
agree with almost all points, however both Giv and especially Symrise have already been Ingredient companies for a long time. As you know, Symrise growth hasn't been attributed to fragrance for quite some time but to "Scent & Care" (care = cosmetics).
Thanks Bart and yes you are correct. This will form another blog subject that deal with the Leaderboard for the 10 F&F companies and that this is now becoming more and more obsolete, which is a pity.
There was very little integration of the acquisitions which means you may have the same number of systems to integrate into IFF as number of companies. From experience, more than one system is not pleasant.
For the most part, the good sales and technical people have most likely left with their customers after the initial rollup by Frutarom and most of the smaller customers have had the experience of being chopped after an acquisition when the new major company tries to justify their customer base, so are looking for alternatives now.
IFF as well as other major companies are now suffering from the emphasis on large companies and the core lists they implemented. Given the fact that introductions, successful products, and sales of existing products are down their revenues are starting to take a hit, so the drive for smaller accounts and diversity of products. $7+B is a number that will chock them.
If you are going to widen your product offering, Givaudan's approach with Naturex, is a better and cheaper fit with a better technical platform to grow from.
Since Fibig is essentially a pharma guy he has no history on what has transpired with naturals in F&F. Natural Aroma Chemicals got their big boost back in the early 1980's, not a new phenomena.
Lastly what has IFF gained in technology and capacity? Results there will be a glut of manufacturing sites or equipment for sale to anyone interested in expanding or starting a new company.
Thanks for your thoughts Bruce. I can hear the doors slamming as customers head for the exits to protect their flavor supply. I would believe that nearly all manufacturing sites will be closed as well and new Flavor companies will be created. Maybe similar to when IFF acquired BBA which to all accounts was a disaster for a long time.
Thanks for sharing.
As an investor, I demand transparency, understanding how the synergies are evolving (on a quarterly basis) and with a breakdown of gross, operating and net margin.
The SEC (IFF) standards are different from ISA (Frutarom). IFF should go beyond what is expected in financial reporting to gain or re-gain investor’s confidence.
Noteworthy is Andreas Fibig mentioning:
1) Project Briefs requesting natural products and here I have two comments:
1a) What is the IFF's definition of “natural products“ and how does it link to “intellectual property? As an investor, I want to know, if the talk is about commodities or valued added products.
I value very much a clear strategic thinking and a related explanation on the subject.
1b) I would love IFF disclosing key metrics on project-briefs. I assume they already have for internal use.
2) Sugar
I understand the need of the industry to sell sugar substitutes – sweeteners at a higher price and margin than sugar.
I ask myself what is more “natural” “sugar” or a “sugar substitute – sweeteners”. Asking for a clinical study on each project brief comparing the effect of sugar substitution is basically insane. Therefore,
“do you do “as it relates to sugar
3) Carbonation
Was AF referring to intellectual property worth a separate conversation?
The “wellness economy” demands the F&F industry to re-invent itself. There are many paths to do it: brands, sales channels, ecosystems, safety, etc. I am curious on how the strategy of each company reflects the going changes.
I think IFF is buying global market share. Nothing else. But at that price? Their investors will get its ROI in how many years? 35 or 40 ? Just by checking Frutarom profits. IFF looks to anxious ( or its CEO).