As a company, flavour and ingredients producer Frutarom is possibly the most acquisitive in the food and beverage industry. In pursuit of $2 billion in sales by 2020, the Israeli firm has already announced eight acquisitions this year and spent $255 million on its M&A activity during 2016.
The investment is paying off; in the time that CEO Ori Yehudai has worked for Frutarom, it has gone from a $3 million enterprise to a $1.3 billion multinational with customers – and subsidiaries – all over the world. FoodBev sat down with Yehudai to discuss the company’s journey so far, and its plans to add $150 million in revenue every year for the next three years.
You’ve spoken previously about Frutarom’s ‘aggressive’ approach to growth. How much more effective is it for you to capture growth through acquisitions rather than investing in your operations?
That’s a fair question. On the one hand Frutarom’s strategy has been over the last 20 years – and is now, and will be for the coming few years – a combination of profitable internal growth plus acquisitions. We believe that’s the best strategy for Frutarom that has proved itself very well. We differentiate Frutarom from both larger and smaller competitors by putting Frutarom at a fascinating junction between natural taste and health. We are able to achieve internal growth, which is double the growth of the market we are operating in. Add to that the acquisition strategy and the stronger pipeline for future acquisitions, we were able to grow around 20% CAGR over the last 20 years and I see no reason why we we’ll not be able to continue to grow in that way with a target of $2 billion by 2020. We believe this target is more than achievable, and maybe can be achieved sooner than 2020.
But you’re still investing in your production sites to complement the acquisitions?
If you look back into the Frutarom journey that I’ve followed over the last 31 years – since Frutarom was a $3 million company, $10 million in 1990, $80 million in 2000 and $450 million in 2010 – our run-rate today I assume is around $1.3bn, so Frutarom came from a position where we didn’t really have presence in most of the geography and countries where we are operating now. So through these acquisitions we got not only technology and know-how but the most important thing is human resources. The people that were added to the Frutarom family, we acquired customers and we have today close to 4,000 different customers in 170 countries that are the basis for our growth.
We should not underestimate our projects that are being implemented, to which we’ve committed – and will commit in the future to additional ones – to integrate production sites to become more efficient in our operations because we don’t necessarily need [them]. For example our largest savoury production site in Stuttgart following the acquisition of Wiberg, the largest acquisition we did, which took place about a year and a half ago. We closed down Stuttgart at the end of last year and this helped us to achieve the savings that we committed to so we became more efficient in our operations. When we did acquisitions in the US in the New Jersey area, we did another one in Cincinnati – which is where our US headquarters are – we moved production from New Jersey to Cincinnati and became more efficient and more effective to our customers. We kept the R&D centre in New Jersey, as well as Cincinnati, as well as the west coast, because we wanted to be close to our customers – typically the mid-size and the local customers. So that’s why we need to have more production sites and R&D centres than our other competitors because of the differentiation in our customer base. Altogether because we did so many acquisitions we had room to continue improving our efficiency as well.
So, $1.15bn in sales last year. Plans for at least $2bn by 2020. How confident are you that Frutarom can meet the target?
Very confident and I will tell you why. In order to do that, the mathematics are saying we need to grow internally by 4 or 5%. In the last two years we grew much faster, especially in the first quarter. We have to acquire revenue around $140 million–$150 million a year. In the last two years we acquired on average $240 million, so we feel very confident we can achieve this target and maybe even before 2020.
What sort of acquisitions pipeline do you have?
We have around 800 small to mid-sized flavour companies in the world. We have an additional 400 companies identified as producers of some sort of natural ingredient, enhanced taste, colours, antioxidant and so on – meaning 1,200 potential acquisitions. Out of them we have around 200 on our shortlist, with whom we have, and me personally in most cases, personal relationships. Out of them we have at least 20 deals in the pipeline with whom we are discussing either final price or due diligence or legal contracts or something. Not all of them will happen, but a large part of them will happen and that will give us the confidence that we can continue to implement our acquisition strategy successfully.
As far as our balance sheet is concerned, we have a very strong balance street and during all the years since I joined Frutarom, the only time we raised money was in 2005 – $75 million – so we grew from $3 million to $1.3 billion with only $75 million raised. We have done that because we generate quite a strong cash flow from operations. This cash flow from operations plus strong support from the banks is allowing us to continue acquisitions. Our net debt to EBITDA today is less than two times EBITDA so there’s no problem to leverage our strong EBITDA to do even more acquisitions than those required to achieve the $2 billion target.
You must be close to finalising some of those 20 deals then?
I believe that we will be able to do a few deals during the second half of the year.
Are there any markets you’ve got your eye on where you don’t have a presence, but you’d like to?
We’ve done a major shift in our geography in the last five years away from high dependency in West Europe. Europe has, over that time, more than doubled itself but the proportion of Europe [as a contribution to overall sales] went down from 51% to 37%, while emerging markets went up from 27% to 42%. North America jumped from 7% to 15%, but we are far from where we want to be in terms of the geography. One example where we [built our] flavour and tasting ingredients from zero is Latin America. In 2010 we had zero business, but we did acquisitions in Brazil, Peru, Chile, Guatemala, another two in Brazil, and another one in Mexico, and today over 10% of our turnover is in Latin America. We see that as a nice pipeline for growth in Latin America.
In Asia our market share is much smaller than where we want to be and we did the first acquisition in India two years ago – very successfully – and then we did one in China a year ago – very successful – and a small one in Vietnam this year. We have an interesting pipeline in additional markets in Southeast Asia. We built a state-of-the-art facility in Shanghai to be able to produce totally sweet flavours plus savoury. We didn’t have the capability to do that before. An area [where] we are definitely under-represented is the Southeast Asian market. In the US we doubled the share of North America but still we are under-represented in North America for the US market. We are very eager to do acquisitions in the US and to increase our share there. We have a lot to do.
You’ve always been up-front about your M&A spend. How important is it for you to be transparent with investors, given how actively you’re pursuing new targets?
It’s very important. As a public company we had a big shift in our shareholder base from typically one major shareholder, ICC [the US chemical company whose chairman, Dr John Farber, is chairman of the board at Frutarom]. But most of the other shareholders were, five years ago, Israeli institutions. Today the vast majority are foreign, the largest institutions in the world. We built trust in the relationships – the trust and recognition I believe. From many very strong, important global institutions, the transparency and trust is extremely important for me personally and for us. That’s why, as a company that is doing acquisitions, it’s very important for us to illustrate what is the internal growth excluding acquisitions, including currency, what are the acquisition contributions and so on so investors can really analyse Frutarom’s development in meeting our ambitious targets. We have always been able to achieve that.
Ori Yehudai was talking in conversation with FoodBev’s Alex Clere.
© FoodBev Media Ltd 2019