International Flavors & Fragrances Inc. (NYSE:IFF)
February 21, 2013 8:00 am ET
Kevin C. Berryman - Chief Financial Officer, Executive Vice President and Member Temporary Office of the Chief Executive Officer
Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division
Lauren R. Lieberman - Barclays Capital, Research Division
Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division
Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division
Well, if everyone could find their seats. Good morning, and welcome to the third day of CAGNY and we are -- I'm Jonathan Feeney, our conference coach here. And we're very glad to have with us representatives from the management team of International Flavors & Fragrances this morning. We have with us Kevin Berryman, Executive Vice President and Chief Financial Officer; and Shelley Young, Director of Investor Relations up on the dais there.
Kevin took over in 2009 after a 25-year successful career at Nestle, where he ended as a group controller worldwide. International Flavors & Fragrances is really the innovation and intelligence behind many, many food products and fragrance products around the world. Their core strategy, it has 3 parts: Leveraging their geographic reach, which is significant, I mean right up there with just about any of the larger companies that we've heard from this week; strengthen their innovation; and maximize their existing portfolio. And here to tell us more about that is Kevin Berryman. Kevin?
Kevin C. Berryman
Thank you, Jonathan, for that introduction, and good morning, everyone. It's great to be here.
For those of you that are here to see Heinz, don't worry, you are not in the wrong room. You are actually in the right room. As you know, they had a little bit of news that has precluded them from being able to present here, and we at IFF are very excited to be able to present in their absence. This marks our first time at CAGNY, and we are very happy to be here and pleased to have the opportunity to tell you a little bit more about what we do and what we're all about.
As some of you actually already know, IFF partners with many of the leading companies who are presenting here at CAGNY. We help drive consumer preference for their brands by creating enhanced consumer experiences. We have the same goal as our customers, to support their market share growth and to help them attract more consumers to their brands.
With me today is Shelley Young, our Head of Investor Relations. And I encourage each of you to reach out either to her or to myself after the day if you would like to follow up and learn more about our company.
Our goal is to spend some time presenting our company, our story and hopefully provide you better insight into our strategy, our performance and our progress against the same. At the conclusion of my talk, certainly we'll open it up to any questions that you might have.
So turning to the most exciting portion of the presentation, I certainly would like you to take a moment and read our cautionary statement. I would like to remind everyone in the room and those listening in via webcast that we will make forward-looking statements and that we will be presenting both GAAP and non-GAAP financial measures. I would encourage you for a full reconciliation to GAAP and non-GAAP measures, please visit our Investor Relations website section of our website.
Well, they say a picture or picture is worth a thousand words, and here you see a few key natural materials that we use, the faces of our flavors and perfumers who create our products as well as a few of the millions of consumers who enjoy our scented and flavored products in their daily lives. Simply put, we create unique scent and taste experiences people love.
We partner with the world's leading consumer packaged goods companies, and based on our consumer insights and innovative technologies, we create winning solutions that attract consumers to our customers' brands. We are key partners to our customers' success, and, in fact, it is very likely today that you have already used a product or 2 that has either been flavored or fragranced by IFF.
It is our ability to customize scents and to cater to specific consumer preferences that often lead to the success of a product. While smell doesn't change from one country to another, the emotions of a certain scent does evoke change in feeling and consumer insights of our company are critically important in this endeavor. Scents associated with babies in the United States, for example, might be more powdery in nature, but in Latin America they could be more citric in nature.
Subtle variations to global brand platforms are absolutely necessary to adjust for local market consumer differences. On the flavor side, local spices and cuisines within a country often vary by region and culture and require food and beverage companies to adjust and vary their ingredients, recipes and cooking processes to satisfy local consumer tastes and preferences. Developing extenders and replacers for materials and flavors, effectively enhancing the flavor profile, is actually very big business.
Touching on one of our fundamental strengths as a company, I wanted to highlight our strong geographic reach, our diversified product portfolio and our outstanding customer base. It is this diversity that provides us with greater stability during challenging times. Since it is our first time presenting at CAGNY, I thought that I would provide some background to our industry and our company.
Today, the global market for Flavors and Fragrances is approximately $18 billion to $20 billion in size and the top 4 companies in the industry represents just under 70% of total sales of the market. We have an estimated #2 market share position. The industry grows at 2% to 3% per year, and IFF has continuously been able to outgrow the market based on our innovation and ability to provide consumers with preferred products.
Our overall business is both stable and diverse due to several factors. In this business, both strong customer relationships and the ability to satisfy customers with quality and innovative products is obviously critically important.
We are able to deliver important innovations, and we believe we have been a pioneer in many areas and continue to look for ways to bring new innovations to the market. There's also a regulatory dimension to this industry. And due to our scale and scope, we are able to work with customers creating and shipping product into every market around the world. Our size, our scope and breadth of geographic and product diversity is important, leading to our critical mass that allows us to work with customers large and small, providing them with products that consumers want and trust. As our largest customers continue to grow globally, they will increasingly look for global partners to help them in the fast-growing regions of the world.
So to give you a feeling for our size and scope, in 2012, we had approximately $2.8 billion in revenue and delivered $488 million in adjusted operating profit. Actually, IFF has been in business for over 100 years. We've been trading on the New York Stock Exchange since 1964, and we have approximately a $6 billion market capitalization.
Touching on the key components of our scope and breadth, we are a global company with operations in 32 countries that serve customers in over 100 countries. We have 29 manufacturing facilities and 17 creative and application centers in the 4 regions of the world in which we operate. We work with 4,000 multinational and regional customers. We employ over 5,700 people around the globe, and IFF has 36,000 unique products that support our customers' brands.
Again, some of which you have probably already used once or twice today. In fact, we are a behind-the-scenes name for thousands and thousands of products and provide customers with the flavor and scent tools they need to capture market share. We operate in 2 segments: Flavors and Fragrance, as our name would suggest. Flavors account for about 49% of our sales and Fragrance represents the remaining 51%.
As a truly international company, 75% of our sales are actually outside of the United States and North America. Importantly, we are leveraging the growth of the emerging markets, including countries in Asia, Latin America, Africa, the Middle East and Eastern Europe to fuel our growth. Today, many customers are eager to expand into those regions into the world's developed and emerging markets, and they look to us for insight and experience in driving their brands in those locales. Importantly, in 2012, 47% of our sales were based in the fast-growing emerging markets.
Diving a bit deeper into our company, I'd like to provide you with more insight into our Flavors and Fragrances products and so you can get a feel for the breadth of the end-use markets we support. I will touch on a few of them. Starting with Fragrances, we are a global leader in the creation of fragrances included in luxury perfumes and some of the best-known consumer brands.
IFF has created some of the most well-known fragrances in the world including Beautiful by Estée Lauder, Happy by Clinique, and most recently this year's successful launch of La Vie est Belle by Lancome. Within our Fine & Beauty Care category, we create new fragrance experiences for the consumer and increase brand loyalty for our customers. We work with customers in our Functional Fragrance category, which includes Fabric Care, Home Care and Personal Wash, to strengthen their brands by satisfying consumers with indelible products that are both useful and unique.
Turning to ingredients. We manufacture innovative, high quality and cost-effective Fragrance Ingredients and also produce naturals from our in-house facility in Grasse, France, where we have perfected the transformation of processing natural ingredients into fragrances, such as jasmine and black currant bud into pure absolutes that retain the unique fragrance of their origin.
Turning to Flavors. Flavors are the key building blocks that in part taste and process food and beverage products and they play a significant role in determining consumer preference of our customers brands. Although we are a global business, certainly, our Flavors business tends to be more regional in nature with different formulas that reflect local tastes and ingredients preferences.
Our Flavors business includes 4 end-use categories, including Savory, Beverages, Sweet, and Dairy. We create our flavors in our regional creative centers and technical centers that allow us to satisfy local taste preferences, while helping to ensure regulatory compliance and production standards.
So turning to our global supply chain, we have 29 manufacturing facilities around the world, split almost evenly between Flavors and Fragrances. We have a high concentration of facilities, as you can see in the map, in the emerging markets. Our large global footprint makes us particularly attractive to global clients who are looking to expand their brands into these new markets. Recent investments include our Flavors and Fragrance liquid plant in Singapore, which we just recently opened in 2012, and we're about ready to open a new Flavors facility in Guangzhou, China, this year, in 2013. We actually tend to locate our new plants near our existing facility to ensure smooth transitions by leveraging our seasoned and experienced talent base.
The benefit of having a global network of manufacturing facilities enables us to realize economies in procurement and manufacturing based on our integrated network. Due to the strength of our manufacturing footprint, we are able to drive efficiencies along with unprecedented innovation, which is resulting in top line growth and enhanced margins.
So let's turn a little bit to our investment thesis. We believe we actually are a very well-positioned company competing in a very attractive category and industry, which at the end of the day, translates into IFF being attractive investment opportunity. Our industry has stable growth as people all over the world use our products on a daily basis. We actually believe the industry is quite rational, and we've been able to achieve strong margins based on our innovative product solutions, our ongoing manufacturing efficiencies, and our efforts to reorient our portfolio to ensure that it will deliver long-term profitable growth.
With 47% of our sales coming from the fast-growing emerging markets, which is among the highest of any of our competitors, we are very well-positioned to leverage the growth in these high-growth areas.
This is important because again, as our customers expand into these markets, they have the ability to leverage our long standing presence and our extensive market knowledge to drive their brands. The emerging markets have been growing at 2 to 3 times the rate of the developed markets, and this is primarily due to the expanding middle class and their increased levels of disposable income which is allowing them to increase their purchase of consumer packaged goods.
Our diversity in terms of our regional footprint, product portfolio, and global and regional customers, provides us great stability. We can absorb softness in one or more parts of the world while seizing opportunities in others. Also, we can continue to grow our business year after year, partnering with those customers that are on the rise while continuing to work and address issues with those that are facing incremental challenges.
We invest 8% of our sales in research and development dollars to fuel our innovation pipeline. Innovation is the essential block of our DNA and enables us to further partner with thousands of the world's most influential companies. In terms of our cost profile, our backward integration provides us with a stable, supply sustainable, cost-effective raw materials, and all of these attributes enable us to produce solid operating results and deliver profitable growth.
So now that I've provided some facts, a few ideas about who we are and where we operate, perhaps I can review a little bit about how we go to market. At IFF, in order for us to win with our customers and to be successful financially, we believe there are 5 core capabilities that drive our success. First, we develop a deep understanding of consumers' preferences and values to our consumer insights programs.
We have approximately 100 dedicated professionals constantly working to understand consumer trends all around the globe. Our consumer and marketing teams work to interpret trends, monitor product launches, analyze quantitative market data and conduct over 400,000 consumer interviews on an annual basis. Based on this information, interestingly, we have developed statistical programs that actually evaluate potential launches. We are able to share this analysis with our customers to support and drive our partnership with them.
Second, in using our consumer insights as the basis for what we do, we guide our research and development efforts to focus on the future consumer need states that offer the best possible return. Again, we spend approximately 8% of sales in research and development dollars and their initiatives to develop and implement technologies that drive consumer preference for our customers' products. This investment by IFF has paid off, as we have been granted over 235 patents during the past 10 years and have developed many unique molecules and delivery systems for our customers. All of which have translated into consumer-preferred products for them.
So third, we have 17 creative centers spread around the world where we create unique scents and tastes to help support individual customer products. Our global creative teams consist of approximately 170 perfumers and flavorers located around the world, and they are key talents that work in close collaboration with our customers' product development teams to create the scents and/or tastes that they are seeking.
While these 3 core capabilities are obviously critically important for us to do the business that we need to do, we must do this in a manner actually that is important and translates into appropriate returns for our shareholders, and that is critically important. Our focus on executional excellence ensures that we integrate our consumer insight, our technology and creative expertise in a manner that drives the necessary productivity and efficiency which will improve our margins and cash flow dynamics going forward. Importantly, this discipline in driving efficiencies is and will be a significant factor in our ability to simultaneously improve margins and our cash flows over time, while continuing to invest in critical growth initiatives.
Finally, we must do this all within the context of really understanding our customers. Thereby ensuring the customer intimacy that is so critically important for us to be able to partner with them. Understanding our customers' brands and their goals by supplying them with superior products accurately and on time is key to becoming their most reputable partner. If we do this well, it will drive repeat business, providing additional strong growth opportunities given that relationship.
So by focusing in on these core competencies and doing so in an excellent and disciplined manner, we believe that we can continue to be successful serving our customers with superior consumer-preferred products and delivering strong financial results.
So after discussing a little bit how we go to market, let me talk a little bit about our strategies. Jonathan alluded to them very briefly, but they're very, very important and they're simple and focused. We have a clearly articulated growth strategy, make no mistake about it. And we are focused on driving the business forward using these 3 strategic pillars that Jonathan mentioned. Firstly, we want to accelerate our growth in attractive markets by leveraging our geographic footprint, increasing our understanding of local customers and consumers and providing technical expertise to leverage our strong geographic presence around the world and especially in the faster growing emerging markets. Secondly, we want to strengthen our innovation platform to drive profitable growth by focusing on consumer trends, commercializing new ideas and products and working with, for example, biotechnology firms to create new and sustainable products.
Thirdly, we look to maximize our product portfolio to improve our returns to our shareholders. We do this by focusing on margin-enhancing opportunities and by constantly and consistently and incessantly analyzing and monitoring categories and looking for opportunities to increase the return profile of our portfolio in order to ensure our long-term profitable growth objectives are met.
So I'll talk a little bit about our geographic reach pillar. IFF has a presence in many of the emerging markets for well over 50 years. We are well-indexed in the emerging markets and continue to invest in manufacturing capacity and creative applications and sales offices in these markets to better serve our global and local customers in these regions. As a result, we have benefited from the growth that is coming from providing consumer products to the global population that can now afford to buy consumer packaged goods. It's interesting to note that 5 of our top 10 markets are actually emerging-market countries. So clearly, we have a strength that many of our customers actually do not.
To align our infrastructure to support our projected capacity requirements, in September of last year, we opened a new manufacturing facility, a liquid Flavors and Fragrance facility in Singapore and again, we expect to open a new Flavors facility in Guangzhou, China, later this year in 2013.
In June, we opened -- last year, we opened a new facility in Delhi, India, to house creative, technical savory and sensory and sales professionals for the company's flavors business unit.
These investments underscore our long-term belief in the region, as well as the strength of our business and our local IFF teams. We also recently announced the $50 million investment in a new facility and expansion to an existing facility, actually, in Gebze, Turkey, which will serve the growing markets of Southeast and Central Europe, the Middle East and Africa. We expect the first phase of this expansion will be completed in the first half of 2013.
Through these investments, we have been able to optimize our manufacturing footprint, collaborate with our customers on a global basis and grow with our customers in the fastest-growing regions of the world.
So to illustrate our strength in the emerging markets, I thought I would highlight the trends in our shifting sales mix as it relates to our percent of sales in the developed markets versus the percent of sales in the emerging markets over the past 3 years. This is certainly consistent with the strategic pillar of leveraging our geographic reach. As you can note, our percentage of sales has been changing, and it's been growing in terms of the emerging markets representing a greater share of the total pie, from 44% in 2010, to 46% in 2011, and finally, to the 47% that I already mentioned in the presentation, in 2012.
Importantly, during Q4 2012, our Flavors business and our Fragrance Compounds business, which is represented by Fine and Beauty Care products as well as our Functional products, and that's our Fragrance business excluding our Fragrance Ingredients business, each one of those businesses represented more than 50% of their sales in the emerging markets.
At this rate, we believe we are well on track to have a greater than 50% index in the emerging markets by the year 2015, which was a key objective of one of the strategic pillar. A strategic pillar, our second one, is about strengthening our innovation platform. You heard me say that innovation is the lifeblood of our success of our company, and it will continue to be the most critical for our future success. It is a key growth driver and an imperative for this company. Throughout our history, IFF patented technologies and captive molecules have been game changers for us, our customers, and for the industry. We have aligned our innovation programs around key R&D platforms, all of which are addressing specific consumer need states or expected future consumer preferences. By aligning our resources against these platforms, each program is assured the proper support and focus it needs so that it can be further developed and eventually, be accepted for commercial application. We have a very robust pipeline of new R&D products, and we are working to make each of them commercially viable, either through our internal R&D efforts or working with partners who specialize in areas where they have unique capabilities.
In fact, we just issued a press release earlier this month regarding our partnership with an outside firm called Evolva Holdings. The press release announced the pre-production and scale-up of a natural, sustainable vanillin through a biosynthetic route.
If you do not now, vanillin is a key flavor ingredient used in many, if not the majority, of flavor food products, and so a dependable, and cost-effective source of this key material will be very welcomed by our customers.
Our scientific advisory board announced in early 2012 has now been -- excuse me, has now been fully active for one year. The board is comprised of 5 scientific talents who are well-respected in their fields. They provide regular reviews of our efforts and initiatives and actually help guide our development efforts. Their insights have proven to be invaluable as they have been active and engaged and have provided tremendous value to our efforts.
So as I mentioned, all of our initiatives start with an understanding of consumer needs. It's why we're here at CAGNY. We are all about understanding consumers and driving our customers' business consistent with their same ideals and needs. It is important that we work with our customers to develop their products early in their development phases and help address these needs.
This graph sets out our R&D innovation platforms, which are based on our knowledge of consumer need states and/or future needs that will be further developed. I'll focus only on a few. Initiatives like salt and fat modulation, reduction; natural, new molecules and delivery systems all effectively translate into healthy margin-enhancing sales initiatives, growth that should lead to greater market share and ultimately, greater margins over time.
So it's no surprise that consumers around the world are more focused than ever on their health and well-being, and they recognize how modulating their salt, sugar and fat intake can have a positive impact on their health. Our customers look to IFF to make their offerings healthier, while maintaining the same great taste consumers expect. Through our active R&D programs, we have developed a large selection of options that make it possible to reduce sodium levels by up to 50% in the finished product, while maintaining the necessary taste profile and importantly, consumer preference of the customers' brands.
Since 2010, for example, we have increased the number of products in our sweetness modulation portfolio by over 57% and in our salt and umami capabilities modulation portfolio, we have increased those capabilities by over 215%. We also have a robust fragrance innovation platform, which includes our Fragrance Ingredients, our Natural Fragrances and Delivery system. Fragrance Ingredients, if you do not know, are the building blocks that we use in our compound plants to create unique fragrances for our customers. We sell our ingredients both to customers, to competitors and to ourselves. Over the past year, we have actually experienced some top line pressure in our ingredients business due to competition from competitors in India and China on those parts of our portfolio which are less value-added.
While we are looking for ways to adjust our participation strategy in this business to better align our costs with our revenues, we will continue to make investments in new ingredients that will help us to further diversify and differentiate our product portfolio versus our competition. The development and commercialization of new molecules can have significant impact on the growth and profitability of our Fragrance business. Our research indicates that consumers have a preference, for example, for natural fragrances.
In 2000, IFF actually bought LMR, Laboratoire Monique Rémy, who is one of the most prestigious companies and a leader in the production of naturals because of their innovation and the quality of their natural portfolio. As a result of that acquisition, we actually today are a leader in naturals in the industry, giving our perfumers access to creativity and providing them unique identity for our customers' brands. Finally, IFF was the first to market with encapsulation, providing market share gains for the brands we partner with. This was groundbreaking, providing long-lasting freshness and was a key driver of growth in Fabric Care.
We are expanding our proprietary encapsulation technology into other categories as we speak, such as shampoos and personal wash. For those of you that do not know what encapsulation is, it's basically taking molecules of fragrance and incorporating them into a little capsules. Those capsules get embedded into clothing, hair, or whatever, and they break over time and they release a freshness over an extended period of time to create that long-lasting, fresh scent that consumers are looking for. We've also made great strides in malodor control, which is a major segment of our portfolio and our POLYIFF technology continues to provide innovation solutions to some of life's most common products. For those of you that don't know POLYIFF, POLYIFF is a technology that allows us to fragrance, actually, plastic. So you can have offerings that provide for an additional consumer experience.
Our third strategic pillar is importantly focuses on improving our portfolio. And we continue to look for ways to improve returns with vigorous economic value analysis by evaluating resource allocations by category, thereby appropriately aligning resources behind our advantage portfolio and improving the performance of our less-advantaged businesses.
Last year, we implemented the realignment of our Fragrance business to make it more efficient and streamlined for quicker decision-making and allowing us to continue to deliver preferred customer fragrances.
We also exited approximately $28 million of low margin flavor sales. In addition to still being able to deliver a strong growth profile, we felt this was important to help rearrange the portfolio, and it certainly allowed us to gain incremental gross margin and to help drive better resource allocation going forward.
By focusing our resources on those areas that are most profitable to IFF and improving the performance of less advantaged businesses, we believe we will increase the productivity and profitability of our portfolio and allow us to better align our resources longer term. Of course, while our strategy is clear, we must also deliver the necessary returns to our shareholders. Our strategy is meant to deliver against our long-term financial targets. You see them here at 4% to 6% local currency sales growth; 7% to 9% in terms of operating profit growth; and greater than 10% earnings per share growth.
You can see that we have actually been able to outperform those strategic financial objectives since the incorporation of our strategy over the course of 2010. Over the last 3 years, where we have been implementing our strategy, we have grown 7% local currency sales, we've grown our profitability by 10%, and our EPS levels by 14%, respectively.
So looking at our total local currency sales growth a little bit more detail and for both 2012 and the last 2- and 3-year periods to reflect the longer-term trends, we have achieved our top line growth target, as mentioned 4% to 6% for the consolidated company for the last 1, 2 and 3 years. Importantly, we were able to achieve growth in line with our target because of the stability of our portfolio and business and where our diversification of our categories, our strategies, our customers and regions supported our performance during the time of economic uncertainty. Total company growth was supported by solid growth from both of the businesses, despite that impact of discontinued sales in 2012 that we've already discussed.
On a 3-year average basis, which combines our strong performance in '10 with more muted performances in '11 and '12, but still within our growth objective, our 3-year compound annual growth rate is 8% for both Flavors and Fragrance compounds. Again, Fragrance Ingredients has been pressured over the last couple of years, but still on a 3-year basis, our total Fragrance business has been able to achieve 6% local currency sales growth.
So turning to our gross margins. Over the last 2 years, as you may know, we have been challenged by unprecedented input cost increases which have been steadily increasing since the last quarter of 2010. In fact, our input costs have grown over 14% over that 2-year period and they remain at near historical levels. This dynamic has put tremendous pressure on our gross margins, and we have been consequently working with our customers to recover these costs through pricing. These proactive pricing measures and other innovations have helped offset this incredible pressure that the company has been able to see over the last 2 years.
Importantly, our gross margins have improved as a result of those measures. It has been helped by an increased level of new win, improved mix of business due to portfolio mix and manufacturing leverage and various other initiatives as well, including the acceleration of the exit of low-margin business, cost savings initiatives and growth leverage. You can see that as a result of these margin-enhancing initiatives, our margins are actually back to the pre-input cost accelerated environment level of 41%.
As a matter fact, in Q4 specifically, our gross margins were actually up 430 basis points versus a year ago. So we've continued to see very good traction on these initiatives.
So the strong operational performance has allowed the company to achieve 14% compounded annual growth rate in our earnings per share over the last 3 years, and this reflects our disciplined strategy execution against our strategy. It's resulted in margin improvement, cost discipline and a greater focus on improved portfolio of business.
Importantly, at the end of 2012, our return on invested capital actually approximated 18.7%, an industry leading number, I might add.
Given our economic profits focus going forward, we expect to further enhance our leading return profile in the industry through a combination of growth, as well as prudent investment decisions. It is our expectation that we'll continue to generate a sustained operating profit performance like we have done since 2009, where adjusted operating profit margin has expanded by 160 basis points. In addition, we will continue to drive core improvement in our working capital efficiency levels. Being disciplined in the collection process, maximizing payment processes and continuing to drive efficiencies in our inventory. Interestingly, our working capital as a percent of sales has decreased over the same 3-year period, even in an environment where inventory costs substantially increased because of the very strong levels of input cost increases.
And finally, our investment priorities will focus on high return initiatives, once they are supported by robust levels of profit and cash flow dynamics, driven by profitable and margin-enhancing growth initiatives. All this will lead to fundamental improvements in our levels of economic profit going forward.
Some final comments about our profitability and cash flow. Our strong annual performance has resulted in adjusted EBITDA margins, obviously growing over time, and you can see that our cash flow has further expanded. And actually, in 2012, our cash flows almost doubled versus the 2011 period.
So talking a little bit about uses of cash before we wrap up. Clearly, the health of our business has and will continue to be able to generate very strong levels of cash. Our strategy on the use of cash centers around the principle of us wanting to being able to maintain a high level of financial flexibility. Our capital allocation strategy will in fact be governed by, actually, the international aspects of our operation.
Clearly, our most important use of cash will continue to be the investment to growth support our growth initiatives, specifically capital expenditures. Prior to 2010, our investment spend was typically more in the 3% to 3.5% of sales range, which was really driven by increasing some investments to support incremental creative capacities throughout the world.
Now we're looking to invest behind the manufacturing facilities that I've already alluded to, and we expect our CapEx as a percent of sales to approach 5% of sales over the next few years. Second, the company is also committed to a disciplined return of capital. Our history has shown a willingness to return capital to our shareholders, and we have actually increased our dividend 9 out of the last 10 years.
We've increased our quarterly dividend 36%, or 11% on average over the last 3 years.
And finally, we recently announced the $250 million share buyback program which we have begun to initiate on in the year 2013.
Finally, we believe that M&A can play a role in the growth of our business. We think it can augment our organic growth strategy, and we are looking to routinely evaluate M&A opportunities. We look at those opportunities that will augment our strategy, providing access to technology, to improvements in our footprint, to access to specific areas within customers, regions, or just to fill or complement our existing infrastructure. Of course, any opportunities in this area will be dealt with and evaluated under the strict guidelines of our approach to economic profit.
So finally, our strong cash flow performance has really allowed this company to be able to delever quite a bit over the last several years. We had made some promises to the rating agencies back in 2007 at our latest accelerated -- when our most recent accelerated buyback was performed. We now have reached those objective, and you can see that our leverage is clearly at low levels at this particular point in time, which again offers us tremendous amount of financial flexibility as we think about uses of cash going forward.
So in summary, we're a diversified company with a stable and growing portfolio. This is well-demonstrated from a perspective that 47% of our sales are in the fast-growing emerging markets. From a business diversity perspective, where 51% of our company is in Fragrances, 49% from Flavors. And finally, from a customer base, where we have over 4,000 customers, many of them the multinational customers that you are going to be hearing about over the course of your stay here at CAGNY. But that doesn't exclude our large and important relationships with many key regional companies as well. So by leveraging our geographic reach, leveraging or in driving our innovation into our portfolio and improving our portfolio by making better business decisions based on the fundamentals of economic profit, we believe we can improve our business and offer our shareholders stronger returns longer term.
We have invested and continue to invest in additional capacity and create centers in the emerging markets of Asia, and we will look for other opportunities to add capacity in those markets where changing demographics result in abilities for us to accelerate our margins and our growth opportunities in partnership with our customers.
With that, I thank you for your time, and I'd be more than happy to take any questions that anyone might have.
Kevin C. Berryman
Lauren R. Lieberman - Barclays Capital, Research Division
I was curious, R&D spending. So your R&D now at 8% of sales, and if you compare that to some of your larger competitors that spend more as a percentage of sales and at a much higher sales base, the dollars invested are going to be a lot lower for you. So going forward, how do you think about R&D? I mean, what's the right percentage of sales? Is 8% the right range? Is there an inefficiency perhaps out there that your competitors are spending almost too much with less return given how strong your sales have been?
Kevin C. Berryman
Well, it's tough to comment on competitors, so I'll stay away from that one ultimately, but I can tell you what we're doing. We spent 8.3% of sales in R&D dollars in 2012. And in our strategy review process, in 2010, which we talked about at our Investor Day in early 2011, we really went through a deep dive to evaluate all of our programs that were in place. We stopped some. We augmented others, and we are really going through a vigorous quarterly review with all members of the operating committee, which is the 8 senior executives in the team. We are measuring our progress against the key milestones relative to driving our R&D agenda. We evaluate these opportunities in a very disciplined manner by trying to understand what we believe is the future consumer needs state and how that translates into an amount of profit pool that is potentially available. We have to measure that versus where we sit, in terms of our competitive advantage versus our competition, how long it's going to take to get there, what specific unique ideas that we have to be able to solve that technology issue. And consequently, that rigorous process, I think, is going to allow us to be more productive than we have been historically relative to our investments spend in R&D. So having said all of that, does that mean that R&D spend goes down for us? I would say given the importance of innovation, if there is one line item on the P&L that I would look to see where there's probably less growth leverage or perhaps negative growth leverage, than other parts of the P&L, it's going to be an R&D. Because as we invest, these are things that are happening not only 18 months from now, but 3 years from now, 5 years from now and sometimes even longer than that. And we're not going to sacrifice our future if we believe that there's fundamental abilities to drive innovation. That doesn't mean we walk away from our long-term financial growth targets. We think we can do both. We've got a question back here.
The LMR acquisition and the requirement for labels to sort of have Natural on it now, how far do you think that trend goes within your industry and what are the consequences?
Kevin C. Berryman
I think that Naturals is a trend that's here, and it's here to stay, and it's important. Especially, I would say in the Fragrance and Fine Fragrance and these types of things, you start to see a greater diversity of fragrance profiles and products. You see a little bit more unusual fragrances that are coming out. I think it's clearly a trend and it's something that is -- provides us, specifically IFF, with a competitive advantage when we're going in and looking at developing new types of fine fragrances for our customers. I also think, though, that you also have to measure that within the context of what we call the cost-in-use of a product and sometimes, natural products tend to be more expensive than less. And so consequently, you have to work with and partner with your customers to ensure that you have that right balance in terms of delivery of the fragrance profile as well as certainly being able to put the product in a position to be able to appropriate margins both for our customers as well as for us. But it is on trend, and it's something that we put in front of our customers all the time as a competitive advantage.
I've got 2 questions for you. One is to build on this Naturals theme again. I mean, it's kind of a trend. As you say, the real trend that's evolving is both natural and unprocessed becomes a bigger and bigger thing. How are you changing yourself, organizationally, operationally, assuming R&D spend? But also, if you think real long term, how do you continue to insert yourself in the product cycle, given the trend of, again, very natural, very unprocessed? That's kind of one long-term question. The other one is around encapsulation in particular. That was a huge success. It's been a success. It continues to be a little bit. What do you see as the big opportunities going forward? Is it POLYIFF? Are there other things in the pipeline that can be as big as that?
Kevin C. Berryman
Well, we don't talk a lot about some of the innovation stuff for all of the obvious reasons. But let me talk first about the naturals points that you were making. Clearly, it's an important trend. Health, natural, well-being, all of these types of things that you're going to hear about from all the customers, all of our customers that are presenting here. It's the way of the world, and so consequently it's important. And the label restrictions in various parts of the world is important for us to be on top of. And, actually, it's one of the things that we think we do very well is the management of the regulatory process. If you think about dealing with a global partner and they want a global launch, that global launch doesn't necessarily work with one set of ingredients because you can have specific ingredients that are accepted in Japan -- probably that's the bad example, not approved in Japan but are approved in other parts of the world. So it is very much part of something that we are spending time on every day, figuring out where the regulatory landscape is, how we can adjust our portfolio of ingredients such that we can satisfy our customers' needs. A good example is the vanillin one that I just talked about. Vanilla, the flavor of vanilla is a big flavor profile, not only in things that taste like vanilla but other things as well. And so we're creating a biosynthetic route, hopefully, that's going to allow us to offer to our customers and maybe our competitors, if we so choose to do so, a natural, synthetic, cost-effective way to provide the vanilla flavoring, vanillin. And if we can do that, that is a big win for IFF. So it's those kinds of things, and that will be a natural product that we continue to work on those types of things to help drive the portfolio going forward. In terms of your question on encapsulation, I think, was an excellent one. Encapsulation was probably introduced in 2006, by us, originally. And it's been really a fundamental driver to our Fabric business, which has been really, really very strong over an extended period of time. The encapsulation of today, though, is night and day different than the encapsulation of 2006. The mixture and the materials associated with how you put fragrances together, how it interacts with the capsules, how it interacts with the customer's actual formulation and processing within their factories, really has advanced tremendously. And we still believe we are the leading edge as it relates to it. So it continues to be a driver to our business. And if you look at our Fabric business and if you see good growth numbers, it is generally because we're getting even incremental traction to encapsulation. Now, we're looking to do that and extend it to other categories beyond Fabric. I mentioned hair and other toiletry-related items, and those are technological advancements that we are making that we think that we're ahead of the curve on. In terms of kind of just general Fragrance, I won't talk about anything else, but there are other things that we're working on, natural ingredients. Other things that we think are going to provide us a robust pipeline of R&D for Fragrance, specifically.
Can you talk about the M&A environment? I realize you can't talk about anything specific, but are sellers more willing to talk now and if so why?
Kevin C. Berryman
I'm sorry, I didn't understand the question. I'm sorry.
I'm interested in -- you said that you want to make more acquisitions, and can you talk about the environment, if sellers are more willing to talk to you now and if so, why?
Kevin C. Berryman
Probably the comment is less about more acquisitions than making an acquisition because we haven't made one in a long time. But we -- I would tell you that at any particular point in time we're in active evaluation of a variety of opportunities. Because of the fairly stable part of the industry, which is at the top, which is the top 4, which represent about 70% of the industry, and most of the opportunities are going to be smaller and what I would call bolt-on acquisitions, which leverage basically organic growth strategy. Those, oftentimes are private in nature, but there are some larger companies as well that could fit that bill. At this particular point in time, I'm not going to comment on specifics, but we do think there are opportunities out there. We all know that acquisitions are binary in nature. Either a seller and buyer agree on a price or they don't. So ultimately, that will determine success. And we will be disciplined in terms of our execution against acquisitions, consistent with the principles of adding value via the concept of economic value add or economic profit. So we have noticed, I would say, more activity, perhaps maybe it was kick-started at the end of 2012 when people started to worry about tax changes and whatnot. It seems things are -- there's more discussions going on right now would be my comment.
Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division
Could you talk a bit about how or what has contributed to the big 4 companies and the ingredient category taking share? How sustainable or how do you think about that from a longer-term source of share gains for those big 4 companies? And then specifically, to your business, you've seen your rate of volume in sales growth accelerate relative to those other big 3 companies within that group over the last quarter or 2 or 3. So maybe talk a bit about what has differentiated and contributed that to your business?
Kevin C. Berryman
I think it's very clear that if you look at the industry in total and the top 4 that Mark was referring to, which represent about 70%, if you think about the customers, our customers, and the ones that you're going to be hearing from over the course of these few days, their increasingly looking for strategic partners to help them drive their business. They're not interested in dealing, typically, with 10 suppliers. They want the ability to deal with a partner that provides the insight, that technology, the regulatory support to help drive their business on a global basis. And the reality is the smaller players in the industry really are going to have difficulty being able to address all of those needs. If you think about Unilever, you think about Nestlé, or you think about Procter & Gamble, or you think about Coke, or you think about Pepsi, they are all organized very differently. And we deal with key stakeholders across the globe in each one of those customers. We can be dealing with a local salesperson, a marketing person, a procurement person, an R&D person, so and so forth, and depending upon those decision rights within that particular company, you have to have that customer intimacy that I talked about. The larger companies have it; the smaller don't. And so I think in general, the 70%, or the 4 that make up the 70% get larger; the 30% gets smaller. I think, that's very clearly the dynamic that's been occurring. As it relates to our momentum that we've been seeing over the last few quarters, look, I think at the end of the day you always have to think about over the long term what our growth parameters are, and I think that innovation really fundamentally is going to be the reason why a company is able to win in this industry. I believe, certainly, in certain parts of our businesses that we have R&D offerings, innovation and technology that are being taken up by our customers and are being realized as being an advantaged offering for them. I can tell you, I can assure you, that when we come with something that has a technological advancement and go to a customer who potentially wants to be able to reduce the amount of salt in their product, they are willing to pay a premium if it, in fact, they believe it creates a consumer preference for their products. And so, I think, certainly in the last few quarters, our traction against a few couple large initiatives is certainly helping build some momentum in the business, in the portfolio, Mark.
Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division
I think, we've got time for one more, if you like.
Kevin C. Berryman
Sure. Any other questions?
Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division
Okay. That's it. You answered everything. I want to thank the management team of IFF. Once again, thank you for a great presentation. First time at CAGNY. It only gets better from here.
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