Sensient Technologies Corp (SXT) 2009 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Sensient Technologies Corporation 2009 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 2009 second-quarter earnings conference call. I'm joined this morning by Mr. Kenneth P. Manning Sensient Chairman and Chief Executive Officer; Neil Cracknell, Sensient's President and Chief Operating Officer, and Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer.

Earlier today, we released our second-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.

Thank you, Steve. Good morning.

Today, Sensient reported earnings per share of $0.53, which is equal to the last year's level as reported. As stated in local currency, second-quarter EPS was $0.06 higher than the reported figure last year. On this basis, quarterly earnings were up 11% versus the prior year.

Sales, as stated in local currency, displayed good growth in a number of markets. Margins were also up in the quarter, even though our operations were affected by some nonrecurring items.

Sensient's Flavors & Fragrances group continued its strong performance in the second quarter. On a local-currency basis, we grew sales in most of our major markets, including the US, Canada and Latin America.

Operating profit for this group was up 8% from prior year as stated in local currency. Margins improved 140 basis points, because we have been able to offset higher raw material costs with increased pricing.

In the Color Group, food and beverage sales were up 3% on a local currency basis, but margins in this product line were impacted by higher raw material costs. Margins are beginning to improve because we are seeing relief on these raw material costs. We expect margins to continue to improve for color over the remainder of 2009.

Demand for the Color Group's non-food products was down in the quarter. In total, Color group's revenues were down from prior year by 2.8% on a local-currency basis.

Sensient's overall financial position remains strong. Cash flow was up 44% in the first six months of this year, and the Company's debt to total capital ratio is now below 35%. Our ability to reduce has lowered interest expense, and this trend should continue for the remainder of the year.

Despite today's difficult economic environment, Sensient's strong financial position allows us to continue to invest in the business in order to generate organic growth.

As I have outlined in previous quarters, one of Sensient's primary areas for investment has been in the development of new products we are investing in our facilities in order to enhance our ability to develop and produce new products. Some of the product categories receiving investment include natural colors, flavor extracts, pharmaceutical coatings, and high-value flavors for the dairy industry.

A second area of focus for the Company is to strengthen and extend the distribution system for our products. We are on track to hire 35 additional salespeople which will increase our sales force by about 15%. These new sales resources will strengthen our coverage in established markets, and allow us to increase our coverage in promising new markets. We are now in the process of establishing several new sales and product support locations in Scandinavia, Central Europe, and Eastern Europe. Our consistent strategy of reducing debt and investing in our business has produced favorable results this year, and it should generate additional growth as economic conditions improve.

We are maintaining our annual forecast of $1.90 to $1.95 per share, and I remain very optimistic about the Company's prospects. I expect to see earnings continue to grow in the second half of this year, and additional improvement next year.

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

Good morning. I will now provide details of the results for the quarter and six months ended June 30, 2009.

Revenue for the second quarter of 2009 was $304 million, down from last year's record revenue of $332.8 million. Revenue for the first six months of 2009 was $586.8 million, versus $640.2 million in the prior year's first half.

Unfavorable foreign currency exchange rates reduced revenue in the quarter and year-to-date period by approximately 8% and 9%, respectively. Excluding the impact of foreign exchange rates, revenue was even with the prior year for both the quarter and year-to-date period.

Sensient's operating income for the quarter ended June 30, 2009, as stated in local currency, was up 5.9%. For the first six months of 2009, operating income as stated in local currency was up 7.1%. Unfavorable foreign currency exchange rates reduced operating profit by 9% and 10% in the quarter and six months ended June 30, 2009 respectively.

As a result Sensient's reported operating income was down 3.6% in the quarter to $43.3 million. Operating income for the six months ended June 30, 2009 was $81.6 million compared to $84.5 million in the same period of 2008. Operating margins improved 70 basis points in both the quarter and year-to-date periods, so 14.2% and 13.9% respectively.

The Company's continued focus on debt reduction was a key factor in reducing our interest expense this quarter. Interest expense was down 33.4% to $5.7 million in the quarter ended June 30, 2009. As stated in local currency, Sensient's pretax earnings increased by approximately 14% in the second quarter. Quarterly pretax earnings as a percent of revenue increased to 12.4%, compared to 10.9% in 2008.

Diluted earnings per share, as reported, of $0.53 for the second quarter of 2009 were equal to the prior year's comparable quarter. For the six months June 30, 2009, diluted earnings per share as reported were $0.98, up from $0.96 in the prior-year first half.

As stated in local currency, second-quarter earnings would be $0.06 higher than the reported figure, and year-to-date earnings would be $0.14 higher than the reported figure. Earnings per share increased 11% in the quarter and 15% for the six months -- first six months of 2009, when stated in local currency.

As Mr. Manning previously mentioned, earnings in the quarter were also reduced by some nonrecurring expenses, including costs related to the move to a new production facility. In total, second-quarter nonrecurring expenses were about $0.02 per share.

The Company's cash from operating activities increased 44% to $55.4 million for the six months ended June 30, 2009 from $38.5 million in the comparable period of 2008. The increase was primarily due to improved working capital usage, especially Accounts Receivable and inventory. We expect cash flow to be strong for the remainder of the year.

Sensient's total debt at June 30, 2009 was $464.9 million a reduction of $15 million since the beginning of the year and $45 million over the last 12 months. The Company's debt to total capital ratio now stands at 34.7%, compared to 37% at December 31, 2008.

I would now like to take a brief look at the results of our operating groups. Revenues for the Flavors & Fragrances group, as stated in local currency, grew 1.1% and 2.6% for the quarter and six months ended June 30, 2009 respectively. Reported revenue in the second quarter of 2009 was $197.6 million, down 6.6% compared to the same quarter in 2008, as reported.

Group revenue for the six months ended 2009 as reported was $382.1 million, down 5.6% from $404.7 million reported in the prior year's comparable period. In both the quarter and six-month period, growth in North America and Latin America was partially offset by lower revenue in Europe.

Flavors & Fragrances group operating income rose 1.6% to a record level of $34.2 million in the second quarter of 2009, compared to $33.7 million in the prior year's second quarter. For the six months ended June 30, 2009, operating income increased 2.7% to $64.2 million from $62.5 million in the comparable period in 2008. As stated in local currency, operating income grew by 8.3% and 10% in the quarter and six-month period, respectively. In both periods, increased pricing has more than offset the impact of higher raw materials.

Operating margins increased 140 basis points in both the quarter and six months ended June 30, 2009 to 17.3% and 16.8%, respectively.

Sensient's Color Group reported revenues of $93.7 million in the second quarter of 2009, compared to $107.3 million in the second quarter of 2008. For the six months ended June 30, 2009, revenue was $180.8 million compared tot $210.1 million in the prior-year period. Stated in local currency revenue, was down 2.8% and 3.7% in the quarter and six months ended June 30, 2009 respectively. Higher sales of food and beverage colors were offset by lower sales of non-food colors in both periods.

Color Group operating income for the second quarter of 2009 was $15 million, compared to $19.3 million in the second quarter of 2008. For the first half of 2009, operating income was $28.7 million compared to $37.8 million in the same period of 2008. Stated in local currency, operating income was down 12.4% and 13.5%, respectively.

In the quarter and six months ended June 30, 2009, operating income was down due to lower volumes of non-food colors and higher raw material costs in food and beverage colors. The impact of raw material costs is expected to subside over the remainder of the year, which should lead to improved margins. Operating income in the second quarter was up 9.2% in comparison to the first quarter of this year.

In the Corporate and Other segment, which includes the Company's operations in the Asia-Pacific region, was $21.2 million in the second quarter of 2009, off 3.5% from the prior year when reported in local currency. Operating margins in the region grew by nearly 300 basis points in the quarter as compared to the prior year. As Mr. Manning stated earlier, 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.

Today's question-and-answer session will be conducted electronically. (Operator Instructions). Mike Sison.

Good morning guys. Nice quarter in a tough environment.

Could you give me a feel for the outlook for the second half of the year for local currency growth? Are you going to see maybe a pickup a little bit to hit your estimates or are you sort of thinking about the same level of growth that you saw in the second quarter to hit the outlook for the year?

Well, certainly where it's at right now gives us a little lift from what we had in our projections. We didn't expect to lap for currencies until the fourth quarter, so yes, I don't know that I'm going to say that it's going to give us a huge lift year to year because the euro last year was what? $1.48, or something like that, or $1.50?

Yes.

It was $1.41 when I looked at it yesterday. But certainly in our projections we are assuming a euro less than $1.41.

When we get to the fourth quarter, as we've been saying in these calls, we will lap the currency and so we should be pretty good then.

So net-net, to answer your question just in a couple of words, I think it gives us a lift where it is right now. And it helps us to get to run numbers little bit. But I think we feel we have plenty of other things that help us to get there as well.

What about sales growth, less currency?

This is Neil Cracknell here. I think we have some good growth coming through some of our product lines. We have been performing particularly well in the savory and dairy segment and we anticipate that continuing as we move through to Q3 and Q4, which is traditionally a strong time for savory sales.

Do you want to add anything to that?

Yes, Mike, let me just add a little bit of analytical to it. Yes, when we look at the first quarter, certainly in local currency we had up in the Flavor group, certainly a lot of parts of the business were up. When we look quarter to quarter from the first quarter to the second quarter, we were up pretty dramatically when you compare -- now I know there is some seasonality in the flavor, but just as a matter of comparison, volumes -- because I know a lot of people like to know about the volumes -- going from the first quarter to the second quarter are up between 4% and 5% and certainly we see that kind of trend going forward.

Okay then, in the Color Group, the non-food and beverage side seems to be the weak spot for another quarter in terms of growth year-over-year. Can you give us a little bit of color on, is that more inventory destocking? What's sort of the driver for the weakness there?

This is Neil again. Yes, that's correct. Yes, we saw some evidence of destocking in the nonfood segments, but as the quarter progressed, as Q2 progressed, we certainly saw a pickup in activity. We are hoping and we are confident that, in Q3, we will see that continue and we will see the volumes pick up in that segment.

Okay. Then the last question -- in the back half of the year, do you see the sort of that raw material pricing spread to be a positive for Sensient?

Yes let me just -- that's a very good question and let me just know that when I look at the net impact on the business, for the pricing that we've been able to get, and we've been able to exceed the pricing over and above what the raw material hit has been.

As we look at the raw material impact quarter to quarter, it significantly subsides by the time we get to the fourth quarter. As a matter of fact, when we look at the revenue's as they offset the raw materials and the energy, we are seeing a nice net pickup, certainly as we get to the fourth quarter. I would say the raw material impact, the negative impact of the raw materials will be roughly a little a bit less than half of what it was in the first quarter, so it will be down on a year-to-year comparison basis that much, and of course we have the pricing to offset it.

Okay, great. Thank you.

Christopher Butler, Sidoti & Company.

Good morning, guys. I just wanted to circle back on the Color Group a little bit. When we last spoke three months ago, you indicated that you were expecting to see relief from raw materials. Looking at the second quarter at the time, were you expecting a little bit better in the second quarter as far as the Color Group, or was this always expected to be more back-end loaded as to the year?

Certainly, the expectation is back-end, because if I compare the net numbers out just given the [mic], if I compare those from the whole company and look just at the Color Group, the difference between the pricing and the raw material costs year-to-year was a negative in the first quarter.

We've been able to make up, within certain segments, like for example a US color significantly in the second quarter. But by the time we get to the fourth quarter, the difference in that comparison, it goes from a negative to a positive, and the difference is something like $3 million. So if I took the net of pricing versus the raw materials in the first quarter and I compare it to the fourth quarter, it goes from a small negative or a negative to a large positive, and the difference is about $3 million.

Similarly, comparing to your first-quarter conference call, as far as currency goes, granted on a year-over-year basis currency is still a bit of a headwind, but we have a marked improvement from where we were three months ago yet your guidance doesn't reflect any more optimism as far as the year goes. Is there one aspect that may be holding you back from issuing better guidance? Is it the Color Group or is there something else going on?

We can't predict the euro and so we are really looking at our targets, looking at where the euro has been. Yes it has ticked up. That's a good thing and it could help us somewhat.

Yes, we are optimistic, but we want to be sensible and cautious.

Finally, looking at Europe in the first quarter, there were some modestly positive things said about Europe in pushing some of the -- your operating margin up in that geography. Yet this time, you seem to be indicating that there is a little bit of weakness. You know, what has taken place here over the last three months in Europe?

Well, one of the things we have done, as Mr. Manning has been talking about this, is this extended distribution system to take more volumes and a lot of actions have already been taken. So there are opportunities to get a lift in the top line and certainly in Flavors-Europe.

Yes, it is more, the extended distribution system is more of a longer-term benefit but we will see some of that towards the end of this year. So yes, we will see a positive from that.

We still feel confident, long-term, with there's a big boost that were going to get from that. Certainly the extent of distribution is part of it, and some of the things we've done -- the movement of technologies throughout the Company, that's a big boost and we have gotten technologies into places where they weren't before. A lot of that is done already, and all those things we see as continuing to be an opportunity in Flavors-Europe.

This is really kind of reflected as well in new product offerings. Our new product offerings right now are up from prior year about 30%. We had about 266 new products for the second quarter last year, and we had 345 this quarter. We will start seeing the benefits of these during the rest of the year. We are particularly focusing on things like natural colors, pharmaceutical coatings, higher-end dairy flavors. So we should have a very good second half. We are very optimistic about the business.

I appreciate your time. I will go back in the queue.

(Operator Instructions). Sam Yake, BGB Securities.

Can you talk about pricing, if you can touch on it? I have kind of a general question. Could you explain how, when you get pricing, how it works? Do you have typically contracts with your customers, or just exactly how would you increase (multiple speakers)?

Sam, it works in a variety of ways. Sometimes we have contracts. Sometimes, to use the cliché, it is spot. Generally a price increase will take it from six to nine months work its way through the system. So the price increases that we have initiated in the first half of the year will really show an advantage in the second half, as they catch up with the raw materials as they run through the supply chain.

But it depends on the customer and the business and the product, whether it's a contract in the Dehydrated Flavor business; there's a lot of contracts in the food and beverage color; there is less and so on. So it depends on the customer, it depends on the product. Clearly, for a unique product there would not be a long-term contract.

Right, so do you typically -- because I remember in previous conference calls you said you typically get price increases when you introduce new products, and that's why you like when companies reformulate and things like that.

We do, we do. That's correct. That's absolutely correct.

So when you take pricing on your current range of products, is that typically just to adjust for raw materials?

We do some adjustments for raw materials, and then we also, if we are dealing in all the other new product oftentimes do, we do get good pricing.

Okay. I have one other question. I was doing some research on the size of the color market, and when you talk about the food part of the color market, it is a little over $1 billion. How do you see the size of the whole color market in which you compete worldwide?

Oh, my goodness. Because we are competing in inkjet inks, we are competing in cosmetic colors, we are competing in pharmaceutical colors, I would think it is more in the area of about $5 billion. Gordy, we have our Director of Technologies here. Do you want to comment on that?

Certainly, the food and beverage color markets could easily take that to the $3.5 million. I think the real wild card here is the cosmetic color contribution. That could be substantially higher.

Yes, it's certainly -- we're talking not $2 billion but more like $5 billion or $6 billion or more.

Okay, and how much -- because you say in your filings you are the only company that offers the whole broad range of products?

That's correct, yes.

A follow-up question from Mike Sison, KeyBanc.

Yes, I just wanted to get a little bit better of a feel. You know, at the beginning of this year, I think there was an expectation or a hope that your organic sales growth, excluding currency, would grow sort of mid-single digits. You are a little bit under that now. Was the bulk of the let's say less growth coming in the inventory destocking primarily in colors?

That was certainly a factor. In the non-food and beverage colors, there was destocking in several areas, and as we look towards the remainder of the year, we are expecting some of that come back. As a matter of fact, we are already seeing some uptick in the inkjet/ink area, so certainly that was a factor.

As I mentioned, and I know it's not the same as year-to-year, but on a sequential basis, our volumes are up pretty significantly from the first quarter to the second quarter. That's really it's a fact of we've gotten the pricing. There have certainly been some cases where the pricing means that we are moving to the higher-end products. We are not going to sell something that's not going to get us the margin that we feel is appropriate, so some of that could have an impact on it. But in general, we feel very good about it going forward.

The cosmetics business, is the inventory destockings finished up there as well for color?

I don't know if we can say it's done, Mike, in the cosmetic area. As we look ahead, we look at the boost, we see the boost in other areas, but certainly we maintain our strong position.

If you talk about, Mike, the low end of the cosmetic business, like the ladies lipsticks that might be sold in a drugstore, for instance, that is pretty much destocked. The higher end though, that you might buy in a very fashionable department store or something of that sort, there's probably still a little bit there.

I got you. So the Color segment in total, I guess for the second half of the year we should expect local currency growth to still be a little bit negative, and maybe turn sort of flattish in the fourth quarter? Is that the way to think about that segment as we progress through the rest of the year?

When we look at the whole segment, and we look at the third quarter for example, you know, we do expect that the fourth quarter is going to be better than the third but we expect up in local currency in the third quarter.

Okay.

That's our expectation right now.

Okay. A lot of that is driven by sort of the new products that you alluded to and less destocking, I guess is the way to sum it up?

Yes, yes, that's a good way to sum it up.

In Flavors & Fragrances, you noted a good amount of new products that you've won and so on and so forth. Did the local currency growth there pick up as well little bit in the second half of the year?

We certainly are looking for that in the Flavor group. Again, when we look at our targets we see up in local currency in the third quarter and even better as we go forward to the fourth quarter.

Yes, Mike, this is Neil. If you look at our pipeline in the Flavors & Fragrances businesses, it is showing a very strong trend. We are expecting customer launches to pick up as we come into the second half of the year, and that should reflect through in our sales.

Okay, okay. Then lastly, Dick, interest expense came in a little bit better than I thought, down a lot from the first quarter. Is that sort of rate, that level run rate achievable for the second half of the year?

I think, if you look at the second quarter, you could take what you saw there and have some expectation that you would see that in the third and fourth quarter.

Okay, okay. One last one -- you know, it looks like you generated some cash and working capital in the quarter, a little bit. Would you expect to generate cash in the second half of the year?

Yes. As I said in my comments, we do expect strong cash flow for the remainder of the year. I don't want to predict a record but we are certainly positioned to have an annual record or close to it. Steve, I don't know what the record is from the past, but --

I think it is about 128.

128. I am not going to say we are going to surpass the record, but we are certainly going to have a chance to get to that neighborhood.

That's the cash flow from operations?

That's correct.

Okay, great, thank you.

(Operator Instructions). Christopher Butler, Sidoti & Co.

Thanks for taking my follow-up. It segues perfectly from the last question. You had mentioned that you're under 35% long-term debt to capital --

Yes.

With all the strong cash flow that you're expecting, what are your primary uses for the cash?

Well, we are going to continue to pay down debt. Dick can give you some projections on that.

Yes, right now in this economy, in this world, we feel that the Company has a lot of strength. And I won't talk about our relative position but we feel we don't know very many companies as strong as Sensient. We think that serves us well going forward, so we expect our debt by the end of the year, debt to cap, to be in the 32%-33% range. We expect debt to EBITDA to be pretty close to 2 by the end of the year. We expect certainly debt to cap by the end of 2010 to be nicely under 30%, and the debt to EBITDA to be nicely under 2.0.

But we will continue to invest in the business, and we will continue to look at the dividend.

At what point do you think that reducing debt becomes less attractive to you?

We are not there, but yes, when you get down around what Dick is talking about, under 30%, you want to really look at that again. But above 30%, I think it's a good thing to do, particularly in these times. I've heard some real horror stories of private placements at absolutely unbelievably high rates. So we are going to continue to be very liquid.

Because of our position, the all=in rate may be 5% or more, but because you have the fees of doing private placements, all of that built-in. But if you take the incremental rate, it is about 1%. I mean, that is how favorable we are viewed by the credit markets. So as long as we are paying down debt, we are going to continue to have a real bonus to the overall financial strength of the Company.

There are no further questions at this time. I will now turn the call back over to Sensient Technologies.

Okay, thank you again for your time. If there are any follow-ups after this call, please feel free to call the Company. Thank you.

This concludes today's conference call; you may now disconnect.