International Flavors & Fragrances, the U.S. maker of food ingredients, said Monday that it believed employees of Frutarom had bribed customers in Russia and Ukraine before IFF bought the Israeli company last year.
“IFF’s investigations are not yet complete, but preliminary results indicate that improper payments were made and that key members of Frutarom’s senior management at the time were aware of such payments. IFF has not uncovered any evidence suggesting that such payments had any connection to the United States,” the company said in a statement.
IFF didn’t identify any of the executives, but they are believed to include Frutarom’s former CEO Ori Yehudai and former Chief Financial Officer Alon Granot, who were allegedly aware of payments made to customs officials and local marketing managers in the two countries.
The disclosure came as the company reported disappointing second-quarter earnings and lowered its outlook. Its share price plunged 10% on the Tel Aviv Stock Exchange to 444 shekels ($127.43), making it the biggest loser of the day on the bourse.
IFF said net profit dropped 22% from a year ago to $1.30 a share in second-quarter 2019, missing the Zacks Consensus Estimate of $1.61.
It also cut its outlook for 2019 sales to as little as $5.15 billion from a previous estimate as high as $5.3 billion. IFF said adjusted earnings per share are expected in the band of $4.85-$5.05 a share, compared with the previous guidance of $4.90-$5.10.
IFF completed its acquisition of Frutarom last October, paying about $7.1 billion in cash and stock for the company. At the time, IFF promised “accelerated financial performance” of average sales growth of 5%-7% annually and 10% adjusted cash earnings growth over the 2019-21 period.
IFF said it became aware during the integration of Frutarom that two Frutarom businesses operating principally in Russia and Ukraine had made “improper payments” to representatives of a number of customers. IFF said it promptly opened an investigation with the assistance of outside legal and accounting firms.
“Based on the results of the investigations to date, IFF believes that such improper customer payments are no longer being made and 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 company said.
Frutarom said it had provided authorities in Russia, Ukraine and Israel with the evidence it had uncovered so far.
Bribes to foreign officials by Israeli companies have been illegal under Israeli law since 2008. Among major companies that have been investigated since then is Teva Pharmaceuticals, which paid a 75 million shekel penalty in January 2018 for brides to Russian, Ukrainian and Mexican officials.
Teva paid another $519 million to the United States in connection with the same charges.
The former Frutarom executives believed connected with the alleged bribes have reportedly retained lawyers in expectation of a criminal investigation or class actions.
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