Sensient Technologies Corp (SXT) 2009 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Sensient Technologies Corporation 2009 first-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 2009 first-quarter earnings conference call.

I am joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman and Chief Executive Officer and Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer.

Earlier today, we released our first-quarter 2009 financial results. A copy of the release is now available on our website at, Sensient-Tech.com.

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.

Thanks, Steve. Good morning. Today, Sensient reported its 13th consecutive quarter of increased earnings. Despite difficult economic conditions, we have achieved a record level of earnings per share for the first quarter. Sensient's EPS reached $0.45, a 5% increase over the prior-year results of $0.43 per share.

Sensient's Flavors & Fragrances Group performed extremely well this quarter. On a local currency basis, the business saw solid growth across all major markets. Total sales in local currency increased by 4% over the prior year. Sales were particularly strong in North America.

Operating income for Flavors & Fragrances increased 12% from prior year, as stated in local currency. We were able to offset higher raw materials and energy costs with increased pricing. As a result, operating margins improved by 130 basis points.

In the Color Group, revenues were down 4.6% in local currency. Demand for some of the group's non-food products was impacted by customer actions to reduce inventories and delay new product launches. Sales of food and beverage were up slightly on a local currency basis but margins in this product line were reduced by increases in raw material costs. We are now forecasting a release in raw material costs and expect margins to improve over the remainder of 2009. In fact, we still expect Color to have a good year with up quarters going forward.

Our emphasis on cash flow and debt reduction contributed to our results this quarter. Cash from operations was up sharply, and over the last 12 months, we have reduced debt by $60 million. As previously announced, we paid off our public debt and we have financing for the next few years at attractive terms. As a result, we expect to see additional reduction in interest expense over the remainder of 2009.

Sensient has followed a consistent long-term strategy of investing in our business in order to enhance the prospects for organic growth. This conservative approach will allow us to continue to produce favorable results in the current environment and it should yield additional returns as economic conditions improve.

One of the primary areas for investment has been in the development of new products. An example of these investments is the construction of a new Canadian facility where we develop and produce high-value flavors for the dairy industry. We are also investing in our US facilities to broaden our product line as well as enhance our ability to produce unique flavor extracts. In the Color Group, we continue to expand and enhance our capability to produce innovative natural colors for food and beverage applications.

A second strategic initiative has been our effort to extend the distribution system for our products. In support of this strategy, we are adding additional sales resources in markets with long-term growth opportunities such as China, Brazil, and Eastern Europe. We are also adding sales and product support resources to serve key accounts and identifying promising new opportunities within both new and established markets. In total, we plan to increase the number of sales people in our Company by about 15%, which will add new sales people both in established and emerging markets.

Sensient's consistent strategy of investing in our businesses and maintaining a strong balance sheet has positioned the Company to achieve sustainable growth. Although current economic conditions are difficult, our markets and businesses remain strong. As a result, I continue to be optimistic about the Company's prospects and reaffirm our annual forecast of $1.90 to $1.95 per share.

I will now turn the conference call over to Dick Hobbs, our CFO, to give you the details from this quarter's results.

Good morning. I will now provide details of the results for the quarter ended March 31, 2009. Revenue for the first quarter of 2009 was $282.8 million compared to $307.4 million in the same period last year. Foreign currency translation had a negative impact of 9.4% on first-quarter revenues. As stated in local currency, Sensient's total revenues increased 1.4% in the first quarter of 2009.

Operating income for the quarter ended March 31, 2009 stated in local currency was up 8.5%. Unfavorable foreign currency translation reduced our operating income by 11.6%. As a result, Sensient's reported first-quarter operating income was down 3.2% to $38.4 million. Sensient's strong local currency operating profit growth is the result of improved pricing and lower selling and administrative expenses, partially offset by higher raw material and energy costs.

The Company's operating margin increased 70 basis points to 13.6% for the first quarter of 2009.

Interest expense for the first quarter was down 15.5% from the comparable period last year. Going forward, we expect to see additional savings in interest expense because of our ability to obtain financing at attractive terms through existing loan and revolving credit agreements.

Diluted earnings per share for the first quarter of 2009 as reported increased 4.7% to $0.45. Diluted earnings per share for the comparable period last year were $0.43.

Sensient's effective tax rate for the first quarter was 30.6% compared to 33.4% in the first quarter of 2008. The tax rate in both quarters included adjustments related to the resolution of prior-year matters.

The Company reported $17.5 million of cash from operating activities in the first quarter of 2009, a significant increase over the $9.7 million reported in the 2008 comparable period.

Total debt at the end of the quarter was $468.5 million, a decrease of $11.4 million since the beginning of the year. Over the last 12 months, total debt has decreased by $60 million. If the impact of foreign currency translation is removed, Sensient's total debt would have decreased by $28 million since March 31, 2008.

I will now take a brief look at the results of our operating groups. Flavors & Fragrances Group revenue in the quarter ended March 31, 2009 was $184.5 million, off 4.5% from the prior year's first-quarter revenue of $193.2 million. Stated in local currency, quarterly revenue grew 4.2%.

Group operating income was $30 million compared to $28.8 million in the first quarter of 2008, an increase of 4%. Group operating income as stated in local currency grew 12%. The impact of unfavorable foreign currency translation on the Flavors & Fragrances group in the first quarter reduced revenue and operating income by approximately 9% and 8%, respectively. Increases in selling prices throughout several of the group's product lines more than offset the impact of higher raw material and energy costs resulting in record first-quarter operating income for the group. Operating margins increased 130 basis points to 16.2%.

Sensient's Color Group reported first-quarter 2009 revenue of $87.1 million compared to $102.8 million in the comparable period in 2008. Stated in local currency, quarterly revenue was off 4.6%. Local currency revenue in food and beverage colors is up slightly over the prior year, but revenue is down in technical colors and cosmetic colors as a result of current economic conditions.

Color Group operating income was down 14.7% on a local currency basis for the first quarter of 2009 due to the lower sales level. Quarterly operating income was also reduced by a sharp increase in raw material costs. We expect to see improved margins in the Color Group over the remainder of 2009 as a result of increased selling prices and reduced raw material costs. The impact of unfavorable foreign currency translation on the Color Group in the first quarter reduced both revenue and operating income by approximately 11%. We expect the Color Group to be up for the remainder of the year.

Revenue in the Corporate and Other segment, which includes the Company's operations in the Asia-Pacific region, was $18.7 million in the first quarter of 2009 compared to $21 million in the prior year's comparable period. As state in local currency revenue in the Corporate and Other segment was flat compared to last year.

Operating income within the Corporate and Other segment improved as a result of reduced expenses in the quarter.

Sensient continues to expect 2009 diluted earnings per share as reported to be between $1.90 and $1.95.

Thank you very much for your time this morning. We will now open the call for questions.

(Operator Instructions). Mike Sison, Keybanc.

Nice job again. In terms of the color inventory destocking in the nonfood stuff, has that largely -- is that done or is there a couple more months to go?

We see that as pretty much affecting this quarter and we are seeing that there was some pipeline impact in the technical colors area. So we see that pretty much mitigating as we go into Q2.

Okay. And what was the actual impact on raw materials for that segment, negative?

That particular segment was affected by the, just the volume of business. As far as the food and beverage, the food and beverage had raw material impact that heightened towards the last quarter of the year and peaked at the end of 2008. And because of FIFO inventory, where we have to carry that cost over, the last cost into this quarter, we took a big hit on it this quarter in the Color Group. But if we look at the year, we certainly see the Color Group, as I noted in my comments, being up for the rest of the year.

And also we're going to get the pricing, Mike -- the pricing will go up and we're going to see a significant increase, for example, in the gross profit margin in food and beverage color, US.

And this is pricing that you have already announced and achieved?

This is pricing that -- yes, it's already been put in place.

Okay, so in the second quarter, it may be the way to describe it, is a little bit neutral, then third quarter you will be ahead of raw materials and ahead in the fourth?

That's exactly what we are expecting, yes.

And when you suggested color being up, is that operating income year over year being up or just operating margins being up?

We are looking at the income being up for the remainder of the year.

In the second, third and fourth quarter?

Yes.

And that's excluding local currency? Because local currency becomes a little bit more of a negative I would imagine in the second quarter.

As we look at the year, we are taking that as reported.

As reported. Okay. Great.

(multiple speakers) as reported.

Then last question on the Flavors & Fragrances side, nice performance there obviously being up in that difficult environment. Can you maybe give us a little bit of a breakdown of what was positive? Was it both the volume pricing and maybe some of the segments or new products that helped support some of that improvement?

Gordy can start off talking about some of the new products.

Yes, why don't we start out with the new products and then go into the others?

Mike, we saw growth in the three primary segments within the Flavor group, that being savory, beverage, and dairy. Our savory products group continued to provide reformulation solutions that allowed our diversified customer base to realize both pricing and margin advantages.

We also want to point out that we were able to achieve that both with major brand manufacturers as well as private label interests.

On the beverage side, we have introduced a new product line that is called True to Fruit. This allows [the still] and enhanced water beverage manufacturers to achieve full flavor impact without the higher raw material costs of a high concentration juice beverage.

On the dairy side, we saw increases in new product development and new product wins, both in Western Europe, the US, and Canada in large part due to improved process capability equipment that we put into all three plants.

What percentage are our products up -- (multiple speakers) products?

Well, compared to prior year, we've got a 28% increase in new products. These are all within either a month or two of commercialization or already having been commercialized in (multiple speakers) and corporate-wide.

For other callers, Dr. Hering, who is the Head of Technology in the Company, is the person talking. We didn't properly introduce him.

And Mike, on the other part of your question, flavor was strong across the board, certainly on a local currency basis. And on an as-reported basis, nearly every portion of the flavor group was up in operating profit. The volumes, we saw up volumes outside the US. The US was about even in volumes, but we got some pricing in the US. But the remainder of the group did nicely on volumes.

So pricing volume sounds like maybe 50-50 roughly?

Outside the US. Yes.

Okay, great. Thank you.

Christopher Butler, Sidoti & Co.

Just sort of jumping off that last question, was there any impact on the food side of the business from a volume perspective from customers destocking at all? Was that part of the story at all?

We took a look -- we didn't -- we certainly didn't see that in food and beverage. As a matter of fact, we spent a lot of time looking at our customers in food and beverage and how they are doing. And our customers seem to be doing well. And where they -- even some of the brand names, if they are flat on their brands, a lot of the brands are doing well in the private label. So we are seeing, generally, with the food and beverage customers, they are holding their own and they are getting pricing as well.

Yes, Chris, some of the customers are looking to have less expensive products, which require reformulation, and that is always a good thing for us. So we have seen some reformulation and that has been very good. The True to Fruit product line that Dr. Hering just talked about is sort of in that category and that has been very -- that was very successful this quarter.

And that sort of leads nicely into the next question. Sort of big picture, in a recession, how do your customers normally react as far as new products? You had just mentioned reformulation to less expensive products. Do you see the tendency not to put in the R&D spending that you would under different economic times? How can we -- what do you expect from your customers in this environment?

I will let Dr. Hering handle that for you.

Chris, what we are seeing is that our customers still require a cost-effective flavor solution for their new product interests. If the product has impact with their customer base, it will be rolled out. The other thing to note is that anytime we get a reformulation opportunity, we can generally provide solutions in a timely manner that leads to an improved position for the customer. So in that regard, perhaps the kind of new product rollout has shifted a little towards reformulation, but we are still seeing a lot of activity.

One other segment that I don't think has really slowed down that much at all is new beverage development. That area seems to be as dynamic as ever, particularly in the non-carbonateds.

We also see some improvement in premium ice cream. Most people want to reward themselves, so they are eating more premium ice cream, and this is not unusual in these times that customers do -- they are not buying big appliances or automobiles, unfortunately. So consequently, they do buy things like premium ice cream and treat themselves.

If a customer were to reformulate a product with -- come to you looking for cheaper materials, as a rule, are you able to get the same margin on those or as you move down the chain, do you (multiple speakers)?

Okay, don't confuse the raw materials that he uses in the 99% of the product with the 1% flavor that he uses to make it taste good. That, sometimes, can be actually more expensive and consequently the margins are even better. So what we are doing is helping him produce a product that other raw materials are less expensive, but it tastes just as good. So typically the margins not only hold, they go up.

Thank you for that clarification. I will go back in the queue.

Edward Yang, Oppenheimer.

Thank you. Good morning. In the colors group, what exactly is in technical color that is declining? Is that primary dies or something industrial related?

Well, we talk about technical in cosmetic and in technical, we include the inkjet inks. We include some other technical colors that we are selling in that group. And also we are selling into the colors into the paper industry.

Got it. And within colors, I was surprised to hear that you are going to look for operating income in colors to be up the rest of the year. And FX was an 11% headwind in colors this quarter. I would think actually second-quarter headwinds, given the FX comps last year, would be even greater than 11%. You also had stronger volumes in colors last quarter. What exactly is driving the year-over-year increase?

Yes, when we look at the year and we look at the FX, certainly, we're going to have headwinds in the second and third quarters. But in the fourth quarter, we won't. And as we look at the numbers for the group, and as we look at the numbers going into Q2, we are seeing that the raw material is measurable and the pricing is measurable, and so we are seeing our margins getting back in Q2 and Q3 back to the levels that we have had previously. And with that, we, based on our modeling, in as-reported basis, we are seeing up versus the prior year.

Yes, Ed, this was not a trend. this was more of a one-time event.

Okay, thank you for that clarification. And on flavors, you had a really outstanding performance. And I don't think I've ever seen the margin as high as you reported in the first quarter in flavors, at least in the past decade or so. And regionally, was that improvement more in North America or was it more in Europe? I know you've had different margins in those two regions.

Looking at the margins improvement, certainly, in North and Latin America, we saw our margins up. We saw our margins up in -- well, in Europe, as we look at the second quarter, we are expecting those margins will be over 10%. They are even with last year at around 7%, but that's what we've been talking about, getting those European flavor margins over double-digit. And as we look at our business model, we are seeing that in the second quarter of this year.

Okay, that's nice to hear. On the -- one of your Swiss-based competitors sounded a little bit more concerned on flavors in North America and Europe. And it sounds like you are doing quite well at least in North America. Are you taking share?

Right now, I know who you are talking about, but I guess we will just leave it as a Swiss-based competitor. To the best of my knowledge, we are not necessarily taking share from them, but we could be. Right now, Ed, we don't really kind of see that as a happening, but it could be. We will know a little bit more about that in the next couple of weeks. I don't know what their cost structure is. I don't know how close they are to their customer.

We are very close to our customers. We're constantly in their lap, so we are getting a lot of business from existing customers, although we do see an opportunity to expand the sales force, which we're going to do, and (technical difficulty) to institute more coverage. And we might actually then take some share. In fact, I think we probably will.

Okay. And my final question is just on the rate of new [briefs] in flavors. You typically don't open pricing on existing products, but with raw materials down, what does pricing look on new proposals? Is it going to be up, flat, or down year-over-year?

Well anytime we get a new product opportunity, you're right, that does introduce a pricing opportunity for us. We see prices holding or even rising slightly for the customer base.

This is not a -- as you know, Ed, this is not a commodity business. It's a specialty business. We typically get our opportunity to raise prices with products. We typically don't have an across-the-board price increase unless it's for a really kind of a down the ladder close to commodity type product. Typically, we get our price increases with new products.

(Operator Instructions). [Sam Yake], [CGB Security].

Yes, I was wondering in your full-year forecast of $1.90 to $1.95, since it's such an important element, the foreign exchange element, could you comment on what your forecast is, what's baked into that forecast on foreign exchange?

Well, we're pretty much looking at the $1.30 to $1.32, roughly, on the euro. That's kind of the range that we are using with our forecasting model. So I just looked at it a little bit ago. It was just a tad under $1.30. So it's right in that same range.

Okay. And then on the debt levels, you are bringing the debt down. Do you have a target that you would try and get to on the debt and then not really go below? Because I'm hoping that maybe as you pay down the debt a little bit, you may restart the stock buyback program.

Let me just tell you where we see the debt at the end of this year. By the end of this year, we expect our debt to be in the $420 million, $430 million range with a debt to total capital of 33% and a debt to EBITDA of 2.0. And by the end of 2010, our debt will be under 30% to total capitalization. It will probably be under $350 million, and our debt to EBITDA will be in the 1.6 or so range. We expect to see significant cash flow. As a matter of fact, this year, we expect our cash flow to be over $110 million. We expect to continue, going forward, to have significant cash flow, and we are seeing the debt pay-down as a very important thing, particularly in this environment. And I should note that we have our financing secured for our balance sheet through June of 2012, and that is just the revolver that renews at that point in time.

So the Company is in excellent condition in regards to its capital structure. And the other thing that we are going to see as we go through the remainder of the year is reductions in our interest cost versus the prior year. Kind of looking at what we had in the first quarter, where we are down $1.4 million, we expect, as we get into further quarters, it's going to be down even further. So we expect a lift also from the interest expense. So right now in the current condition, we feel it's critical to have a strong balance sheet and we're going to continue to pay down the debt.

Okay, thank you. I just had -- if I have some further general questions, can I follow up off-line?

Certainly, certainly. By all means, just give us a call.

Okay, will do. Thanks so much.

Christopher Butler, Sidoti & Co.

Hi, guys. Just a quick follow-up with the premium cash flow from operations that you generated in the quarter. Where do you stand on working capital? Can we expect something, a boost next quarter or is that, at this point, behind you?

Well, looking at the rest of the year, Chris, we are expecting that we're going to do a little bit better each quarter than the prior year. And I'd mentioned we expected the year might be around $110 million or so of cash flow, hopefully a little bit better than that.

And given the fact that last year, we did have some up top line related to currency and other things, that certainly increased our working capital, and so as you go through the remainder of the year, we expect a strong cash flow and appropriate working capital results. I think Steve had something to add.

Sure. Just to add to what Dick had said, receivables were a big factor, receivable collections in the quarter. And we continue to work hard at working capital at both receivable and inventory levels. So we hope to see improvement in both those areas.

And for those of you who are new on our call, Steve Rolfs is the Corporate Controller.

And I apologize if I missed it earlier, but did you give us an idea of where you expect CapEx to be this year?

Steve, go ahead.

I would say it would be between $50 million and $60 million.

Thank you again for your time.

Mike Sison, Keybanc.

In terms of the outlook for 2009, local currency growth embedded in your outlook is sort of up 1%, 2%, 3% this year?

Well when we look at the rest of the year, we're still looking at our traditional expectation of mid or a little bit over mid-single-digit growth in the top line. So that's what we're looking at on a local currency basis, maybe even a little bit better than that.

Okay. And then on a foreign currency negative, it's -- the impact for the full year is similar to that 10%, 11%, 12% negative?

Well, the second and third quarters will have the impact, not the fourth quarter.

Not the fourth quarter.

So we will get some lift in the fourth quarter.

And again, to go back to Ed Yang's question on the Color Group, we see a lift in the bottom line, certainly, with the raw material costs. And I know you are asking about the top line, but I think that is important to note. As we go through the remainder of the year, we will get easing in our raw material energy costs, which will help to maintain our guidance of the bottom line and we are very comfortable with our bottom line guidance.

Right. And in terms of the new product generation you guys alluded to earlier, how much of that momentum sort of supports the outlook for that mid-single digit, if you will, organic sales growth for the rest of the year?

Well, we certainly see our new product effort contributing to revenues throughout the year. Given the impact that that has on our pricing approach, we certainly feel that the new product effort is going to support the guidance perspective for the year.

Yes, these new products certainly stay for a while. Is your question what is the life of a new product?

No, I just -- if your growth for the second, third and fourth quarters is mid-single digits, there's sort of that new product growth which would be sort of embedded. You'd probably want a lot of that stuff support, like half of that, a third of that? Sort of ensure growth based on the growth that you have won already?

Well we certainly have incorporated a significant amount of revenue based on new product.

Yes, I think the question you are asking, will we sustain the growth from this product level, yes. Because typically the average product life is about 18 months and if these are reformulations to give a more attractive price to the consumer with the economy being what it is, they may stay around longer than 18 months. So this -- you will see a level of new product development, certainly around the 20%, maybe not as high as 28%, and that will add to sales growth as well, but you will see the products that we are developing right now be sustained for a period of time. Plus the market has changed dramatically, but it hasn't changed that much. So I would guess these products will be around for 18 months to two years.

Right. And then if you think about the organic sales growth improving to the degree that you think in the second, third and fourth quarter, I would think that the operating income less foreign-currency, you're operating income on the local currency basis would be stronger. So is your hesitancy of changing your guidance just the variability of foreign currency at this point? Because it would seem to me that if organic sales growth was better, the outlook probably looks better in terms of operating income growth as the year progresses?

Well, it's a good point and I would expect you to ask that question. I would prefer never to disappoint you. I would prefer to always deliver an up quarter. And so yes, I am being careful, but I'm also optimistic. So I think the numbers that Dick has given you are very, very achievable. Could there be an upside? Yes.

Great, thank you.

Violet Osterberg, Pacific Life.

Thank you for the call. I have a little bit different twist as being a debt holder. I was wondering if you could please comment about the Moody's recent action in conversations you may have had.

We asked Moody's and Standard & Poor's to cease rating the Company because the Company had public debt which was paid off and there was no longer a need. And we have other markets other than the public debt markets that reflect very positively on Sensient and on our capital structure. And we have done very well in those markets. And it's much better when dealing in those markets to not have this hanging over you, this rating agency situation. There is another rating agency for the private placements, called the NAIC. And we're going to work with that group because we feel that we are going to get better rates for the shareholders by dealing in those markets.

Yes, and I have a private approach.

Yes, you are in that private market and you know NAIC.

Right. So your intention then is to have conversations with the NAIC to --?

Yes, that's correct. That's what we will do. You can't really do that when you have a public rating, and you really have to ask to have those withdrawn. We were successful in having those withdrawn. And now over the next several months, should we decide we want to do a private placement, although I want to reinforce that we are well-covered with our line, but should we decide we want to do that, we would have the option open. And we would certainly, if one of our holders wanted to take us to meet with NAIC, we would like to do that.

Thank you.

Thank you. At this time there are no further questions. I will now hand the conference back to the Company for closing remarks.

Thank you very much for your time this morning. If anyone does have a follow-up question after the call, please feel free to call us here at the Company, and that will conclude the call. Thank you.

Thank you for participating in today's Sensient Technologies Corporation 2009 first-quarter conference call. You may now disconnect.