Sensient Technologies Corp (SXT) 2008 Q2 法說會逐字稿

Good morning everyone and welcome to the Sensient Technologies Corporation 2008 second-quarter conference call. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to Mr. Steve Rolfs. Please go ahead, sir.

Good morning. I am Steve Rolfs, Vice President, Controller and Chief Accounting Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's 2008 second-quarter earnings conference call.

I'm joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman and Chief Executive Officer; Dick Hobbs, Sensient's Vice President and Chief Financial Officer; and Rob Edmonds, Sensient's President and Chief Operating Officer.

Earlier today we released our second quarter 2008 financial results. A copy of the release is now available on our website. Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Securities Litigation Reform Act of 1995.

Our statements may be affected by certain factors including risks and uncertainties, which are discussed in detail in the Company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today.

Now we will hear from Ken Manning.

Good morning. Today we reported all-time record revenue of more than $330 million and record second-quarter EPS of $0.53, an increase of 18%. This was our tenth consecutive quarter of increased revenue and earnings.

The excellent performance for the second quarter was broad based. The Color Group and the Flavor & Fragrance Group reported record revenues and double-digit increases in operating profit. Operating margins for both groups in the Company were also up.

The Color Group saw strong volume growth in cosmetic, pharmaceutical and technical color productlines. The Flavor & Fragrance Group also delivered growth in key productlines.

We continue to experience solid demand for our products, even in an environment of increasing cost. We have been able to implement price increases across all our productlines, and this has offset the impact of rising raw materials and energy costs.

As our financials show, our focus is on organic growth, with new product development and proprietary technologies delivering results. As an example, our next generation of self-dispersing pigments for inkjet inks and new cosmetic formulations contributed significantly to our second quarter. We are also set to launch a new range of natural colors to capitalize on growing opportunities for these products.

We are in the process of transferring technology within our Groups. This will further enhance our product offerings of specialty flavors and colors throughout the Company.

In Dehydrated Flavors proprietary seed stocks and high-tech processes, such as satellite imaging, have provided a competitive advantage. All these productlines are important drivers of our continued success. Overall, the number of new products developed was up more than 25% on a year-over-year basis.

In addition to new product development, we continue to extend our distribution system and customer support network in markets such as China, Brazil and Eastern Europe. Our global reach, innovative products and our technologies have allowed us to succeed in a challenging marketplace.

As I have mentioned many times before, I see no obstacles to continued growth. As a result, I am raising the EPS guidance for the year to a range of $1.80 to $1.84. Our previous guidance had been $1.77 to $1.80.

Also, as you know from yesterday's announcement, we have increased the quarterly dividend to $0.19 per share per quarter, raising our dividend payments to $0.76 per share annually. I expect our strong performance to continue and I want our shareholders to benefit directly.

I will now turn the conference call over to Dick Hobbs, our CFO, to give you details.

Good morning. I will now provide details of the results for the quarter and six months ended June 30, 2008. Second-quarter revenue increased 9.4% to a record $332.8 million. Each of our Groups reported revenue increases in the quarter.

Revenue for the first six months of 2008 was $640.2 million, an increase of 8.6% from the comparable period in 2007. The key drivers of this quarter's revenue increase include favorable foreign currency translation, improved pricing, and volume increases.

Foreign currency translation increased revenue in both the quarter and year-to-date period, by approximately 6%.

Sensient's operating income reached a record level for the second quarter of $44.9 million, an increase of 12.2% from the prior year. Operating income for the six months ended June 30, 2008 increased 13.9% to $84.5 million. Operating margins this quarter increased 40 basis points to 13.5%.

Diluted earnings per share reached $0.53 for the quarter ended June 30, 2008, an increase of 17.8% from $0.45 per share in 2007. For the six months ended June 30, 2008 diluted earnings per share rose 17.1% to $0.96 compared to $0.82 in last year's comparable period.

Sensient's effective tax rate for the second quarter was 30%, compared to 30.4% in the second quarter of 2007.

The Company reported cash flow from operating activities of $38.5 million for the six months ended June 30, 2008 in comparison to $48.8 million in the prior year. This year's lower first half cash flow reflects an increase in working capital, primarily accounts receivable, as a result of the quarter's strong sales and inventory due to strategic purchases of key raw materials. The Company continues to expect that cash from operating activities will exceed $100 million for the year.

The Company reduced its total debt by $18.5 million in the second quarter for a debt-to-total capital ratio of 36.5%, compared to 38% at March 31, 2008.

The Company's debt-to-EBITDA, which is under 2.5% at June 30, 2008 is at its lowest level since the first quarter of 2001. This is a clear indicator of our solid performance and the continued strengthening of our balance sheet.

By the end of this year the debt-to-total capital ratio should reach 34%, and Sensient's debt-to-EBITDA ratio is expected to be approximately 2.2%.

I would now like to take a brief look at the results of our operating groups. The Flavors & Fragrances Group reported a 7.8% increase in revenue in the quarter, to a record level of $214.4 million versus $198.8 million last year.

Group revenue for the six months ended June 30, 2008 was $409.6 million, an increase of 8%. Revenue in both periods benefited from favorable foreign currency translation and improved pricing.

Flavors & Fragrances Group operating income rose 11.9% to a record $33.9 million for the second quarter, compared to $30.3 million in the second quarter of 2007.

Operating income for the six-month period was $62.7 million compared to $55.8 million in the prior year's first half, an increase of 12.5%. In both periods operating income rose as a result of the higher sales and continued profitability improvements in the Group's European operations.

These profit gains were partially offset by increases in raw material and energy costs. Group operating margins improved 50 basis points to 15.8% for the quarter.

Sensient's Color Group reported revenue of $107.3 million for the second quarter compared to $95.8 million in 2007, an increase of 12%. Revenue for the six months ended June 30, 2008 increased 9.4% to $210.1 million.

The higher revenue in both periods was primarily due to favorable foreign currency translation, volume growth and price increases.

Color Group operating income for the second quarter was up 12.4% to $19.3 million. Operating income for the first six months increased 10.3% to $37.8 million from $34.3 million in the first half of 2007.

Operating income for both the quarter and six months ended June 30, 2008 increased as a result of the higher sales and improved pricing, partially offset by higher raw material costs.

Operating margins for the Color Group improved 10 basis points to 18% for the quarter.

Revenue in the Corporate and other segment increased 16.4% in the second quarter to $20.3 million as a result of strong sales in China, Thailand and New Zealand.

Sensient expects 2008 diluted earnings per share to be between $1.80 and $1.84. This is an increase from the previously provided range of $1.77 to $1.80.

I will now turn the call over to Rob Edmonds, President and Chief Operating Officer, for some concluding remarks on this quarter's performance.

I would like to conclude the call with some brief comments on our results. We are extending our superior performance with another strong quarter. Each of our groups reported higher revenue and profit, with the Flavors & Fragrances Group posting all-time record results.

Revenue in the Flavors & Fragrances Group rose on improved pricing and favorable foreign currency translation. The group experienced solid growth in several key markets, including Europe and Canada.

In the US sales of Savory and Dehydrated Flavors also contributed to the excellent results. Operating margins in the European business continued to increase, up 70 basis points this quarter, driven by improved pricing and higher volumes.

In Color our new product development had a very positive impact this quarter. In particular the Color Group saw strong quarterly sales growth within cosmetic, pharmaceutical and technical color productlines as a result of new products.

Sales of food and beverage colors were also up in the quarter, particularly in Europe. This has raised Color Group operating income to $19.3 million, up over 12% for the quarter.

The Asia Pacific region continues to perform well, particularly in the markets of China, Thailand and New Zealand. Combined sales in the region increased over 16% in the quarter.

In each of our businesses we have demonstrated the ability to raise price in order to offset the impact of higher raw materials and energy costs. We are positioned financially and strategically for future success. I'm very pleased with the groups' performances so far this year.

Thank you very much. We will now open the call for questions.

(OPERATOR INSTRUCTIONS). Mike Sison, KeyBanc.

Guys, nice quarter. Just curious, I am encouraged to see that raw materials aren't an issue relatively speaking for you. Why are you able to achieve pricing now? And just generally speaking, what is sort of the pressure, are raw materials going up a lot or are they moderating here?

First of all, unlike at a lot of companies, we're not highly dependent on a single raw material such as oil or resin. We have a broad, broad base of raw materials that we use. We can plan ahead. We have been stockpiling some raw materials when we get the opportunity. This is something that we don't typically do, but we're doing it now.

And we have been able to pass on increases, because if you take a flavor and a color, and I will let Dick comment on this a little bit further, the total cost of that color or flavor and the total cost of our customer's products is somewhat de minimis.

So it is a little bit easier to pass on a cost that represents maybe 1% or 2% of the finished product cost as opposed to maybe 10%, 15% or 25% of the finished product's cost. I will let Dick make some additional comments on that.

Certainly what we have found is that our customers understand increases when there is a need to have increases. Our positions in the market and the needs for our products certainly facilitates that. And as Mr. Manning noted, we have a very diverse base of materials that we utilize.

We have areas where we have strategically purchased some inventory. We have areas where we have strategically positioned ourselves with some energy.

We watch it regularly. We continuously look at our costs within each group in great detail. We sit down as a management and look at it and we have discussions with our group management within our groups. So we're watching it certainly weekly and pretty much close to daily. We're on top of it and we take action as needed.

Right. So going forward do you feel pretty comfortable that you have price increases in place to manage any changes in raw materials at this point?

We do. We feel very good about that.

Then when you take a look at your profitability in the quarter it continues to -- you have done a really nice job there improving it at 13.5%. Maybe, Ken, could you maybe just give us a better feel for longer term, what the potential is? It seems you have already exceeded what your long-term goals were.

As we go forward, first of all, we are transferring technology. We are licensing. Where an opportunity would arise to acquire a big piece of technology we would do that.

But all this means that we really are going up market in terms of the nature of our products. These typically yield a higher premium. You have heard a lot -- as an example, you had hurt a lot of talk on synthetic versus natural colors. Well, the synthetic color business is kind of in the low single digits. Maybe it is growing at about 2% to 3%, but it is also very low margin business.

The natural color business, which is a much higher margin business, is growing at 15% at least in our business.

As we go forward, particularly as we transfer technology, which will open up specialty products that might exist in a place like Germany. Germany has a lot of wonderful microemulsions. We are transferring those into the US market at St. Louis.

The English manufacture some very, very fine extractions -- our English company. And we are transferring those into Indianapolis.

This is improving the product mix dramatically, both in beverage and food, and in non-food areas.

So we see a proliferation of products. We see a proliferation with better -- margins. And then taking it a step further, we are extending our distribution. And by extending distribution, you just can't stick a salesman in say Warsaw or Gdansk or someplace in Finland, in Helsinki, and that is extending your distribution system. That just won't work.

You have to have a certain amount of application text. You have to have probably a small warehouse, possibly even a small blending facility, certainly some other people. And we're doing this and we will be extending our existing products -- not only our new products, but our existing products, to all the other new markets.

We see a lot of growth in the business. We're accessing markets in China. We're accessing markets in Eastern Europe. The Color Group has done, believe it or not, a very, very good job of accessing the Balkans for the higher margin colors, natural colors with rather advanced emulsions. And natural colors typically need an emulsion type technology to maintain their stability and shelf life.

I think the best is yet to come. It took us a long time to bring 21 acquisitions together. Maybe we were a little optimistic about melding cultures and fitting out technologies, but that is done. And it is working and it is going to continue to work. And I think the best is yet to come.

Just one more quick one. Rob, I don't know if you could give me a little more caller on Flavors & Fragrances. You have had nice growth in Color, obviously. The first two quarters you have been sort of flattish in volume. Yet the tone of the call suggest that there should be a little bit more growth.

Is there any pockets of weakness or inventory destocking that is causing your volumes to be somewhat flattish thus far?

No, no particular pockets at all. If we look at our pipeline in the flavors area it is -- to some extent it has shifted towards cost reduction for our customers, particularly in ingredients that include cheese and beef ingredients, which are based on obviously commodity feeds. Our products there, which enhance those flavors, not only reduce cost, but they also have some health benefits. So we are seeing a lot of activity there.

We are seeing quite a lot of activity in organic, in flavors, in things like organic fruit preparations for yogurts. And so the underlying demand for our products is still there, without any doubt.

So moving into the third and fourth quarter we should expect that volume growth number to be positive?

Yes, it will be positive, but I don't want to give you a pie in the sky estimate. I would never want to disappoint you. So we are going to continue to be conservative and cautious in our forecasts, because we're always going to make our forecast. The days of not making our forecasts are not in our future.

Could we exceed them? That's possible. But we're still going to give you a more conservative view.

Christopher Butler, Sidoti & Co.

I wanted to get back to raw materials here a little bit. What kind of increase were we looking at in the second quarter for materials and for your energy costs? And what are you looking for for the full year that you have baked into your raised guidance?

I'm going to give those to Dick in a second. But in the case -- a big use of energy for us is natural gas for drying. And we're pretty much covered for this year. We have it covered at a pretty good price. Dick, do you want to comment on the --?

What I would say, rather than -- because there are so many different pieces, as we said earlier, to the cost component. But when we look at energy and raw material in the quarter, what we are seeing as a comparison is that we had about $5.5 million increase in the quarter. And we have offset that significantly with the selling price.

So it is a manageable number. It has been a manageable number for us. And, yes, as we look at those costs we have a pretty good handle on what that year-to-year increase is in the next two quarters. And we have a very good handle on what the pricing is to offset it. So $5.5 million is what we saw as year-to-year increases on our business in Q2.

Looking at your SG&A expense, you just talked about the sales and the service necessary to operate in new markets and really go after some new geographies. You did a good job of keeping that relatively flat year-over-year. Can you give us an idea of what you have going on there?

Yes, absolutely. What we have done there is we've had a very concerted effort to manage those costs. What we have done as a Company is we have improved our talent.

With the success of the Company we're finding that we are able to get better and better talent coming into the Company. And as that talent has improved, we have been able to get a lot without necessarily having to add a whole bunch of positions.

We're constantly looking at that. And as a matter of fact we took a bit of cost out at the end of 2007, and we're getting some benefit from that right now. So we'll continue to look at those costs and we will continue to upgrade the talent.

Also, I think what Dick is saying is that functions that might have been at one point in time in the plant, or for that matter in headquarters -- headquarters now is 48 people -- are out in the field. And the productivity consequently of all our efforts is much higher.

If you measure this on sales per employee, that has gone up dramatically over the years, and we would expect that to continue to go up. But we don't deal in a lot of overhead. We don't have a lot of people in corporate headquarters, nor do we have people in other places in the field -- a lot of headquarters type of overhead. We're trying to put our people effort into salesman and sales support people and technical applications people.

Year-to-date our SG&A as a percentage of revenue was 17.6% versus 18.1% last year. We're going to continue to see the favorable year-to-year comparisons in that area.

In a similar vein, you had said I think 25% growth in new products. I just wanted to verify that number. And also, as far as the expenditures on research and development, can you give us an idea of where those stand (multiple speakers)?

The 25% was correct and [Gordy] or Dick, do you want to give the expenditure?

For the R&D?

Yes.

The R&D has historically been in the range of 2.5% or so.

Yes, I would say between 2% and 3% of revenue.

Yes. That is consistent. Different companies account for that different ways. There are no accounting rules necessarily that really tie down exactly how you do it.

We feel that we have a lot of people working on new products, but they are also working on ongoing products. So we feel we have very good coverage in that area.

We don't have central research and development, because we feel there is a lot of wasted effort there, that there are a lot of products that are scientifically very interesting, but nobody wants to buy them.

So we tend to have our product development people very close to the market. We literally have product development people all over the world. That is what we are going to continue to do.

(OPERATOR INSTRUCTIONS). Edward Yang, Oppenheimer.

Congratulations on a strong quarter. Lately there have been some press reports of consumers trading down, buying less branded products, maybe moving more into private label. Are you seeing this trend as well? And how big a portion is private label for you as a percentage of sales?

For starters, what is music to the ears of anybody in our business is when somebody reformulates, whether they are reformulating into a product that is less expensive or whatever. When people reformulate they need new flavors, colors, what have you. In fact, generally if they are formulating down into a lower cost product for them, they generally need more flavor.

So we are seeing some of that. It has been very good for us. Any sort of effort to reformulate is just a wonderful thing.

In terms of the amount of private label -- of course, private label in Europe is quite different than private label here. Private label in Europe can be actually a very premium product. But I don't see the private label percentage changing very much.

No, not particularly. I think that the other theme -- and you're right, there is, I guess, consumers moving more to private label. The other theme is the branded products therefore try and differentiate themselves a little more on the shelf.

And we're seeing obviously a continual move to this health and wellness theme. And also added ingredients for beneficial value, antioxidants and things like that. It isn't just a matter of reformulating for lower cost, but it is also for differentiation.

As a percentage of your sales, could you roughly size that up, private label?

Roughly it is in the 10% to 20% range, I would say.

But I don't see it changing much at all.

I know your markets are fairly defensive, but are you seeing any signs of your food and beverage customers slowing new product introductions or cutting back on marketing?

Not really. In fact, we saw that years ago when a lot of the biggies consolidated and were trying to figure out -- rightsize their product development efforts. And consequently during that period of time -- during the period of consolidation, when they were coming together and figuring out what they wanted to do, there were some slowing at that point, but we don't see it now.

At this time there are no further questions. I would now like to turn to call back over to the presenters for closing remarks.

Thank you very much for your time today. If there are any follow-up questions after the call, please feel free to call the Company. Thank you again.

This concludes today's conference call. You may now disconnect.