Sensient Technologies Corp (SXT) 2009 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Sensient Technologies Corporation 2009 third-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 third-quarter earnings conference call. I am joined this morning by Mr. Kenneth P. Manning, Sensient's 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 third-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, and good morning. Today, Sensient reported earnings per share of $0.47, which is down $0.03 from the $0.50 reported in the prior year. It is important to note the results as stated in local currency were $0.03 per share higher than the reported figure. This would result in earnings that were the same as the prior year.

Sensient's sales this quarter showed strength in a number of key areas, but certain markets continued to be impacted by soft consumer demand. The US market in particular was soft this quarter and was impacted by inventory destocking and a cautious approach to new product introductions on the part of customers. We are confident that we have maintained our strong competitive position, and our project pipeline continues to strengthen.

Sensient's financial position continues to be very strong. Cash flows were up sharply in the first nine months of the year, and total debt has been reduced by $39 million over the last 12 months. The Company's debt to total capital ratio is now below 33%.

Sensient's strong financial position allows us to continue to invest in our Company and its future. A key area of our focus is to continue to enhance our ability to develop new products. In many cases, this requires that we make investments in order to transfer technology and broaden product lines.

We have also made a great deal of progress in our efforts to strengthen and extend the distribution system for our products. We have added additional resources in markets such as Scandinavia, Central Europe and Eastern Europe. We're also in the process of adding additional salesmen in our established markets in order to improve coverage of the new and existing accounts. In total, we have filled over half of the 35 new sales positions that were planned for this year.

We are also building the Company's management team at this time, and several of the entrepreneurs that were originally involved when we acquired the businesses are reaching retirement. Whenever possible, we are replacing these individuals with talent from within the Company.

The fact that we are investing in the business at this time instead of cutting resources has positioned us to grow as economic conditions improve. We have followed a consistent strategy of paying down debt and investing in the business. This approach has allowed us to report stable results despite today's difficult market.

We saw many positives this quarter, but the overall market conditions may remain soft through the end of the year. As a result, we have lowered our guidance to reflect a continuation of current market conditions. For the year, we expect to report earnings of between $1.85 and $1.90 per share.

I am pleased with the progress we have made to strengthen the Company. We are well prepared to succeed in the current market, and I remain optimistic about the Company's prospects in the future.

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

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

Revenue for the third quarter of 2009 was $303.2 million compared to prior-year revenue of $318.6 million. Revenue for the first nine months of 2009 was $890 million versus $958.8 million in the prior year's comparable period.

Unfavorable foreign currency exchange rates reduced revenue in the quarter and year-to-date period by approximately 4% and 7%, respectively. Excluding the impact of foreign exchange rates, revenue was down about 1% from the prior year in the quarter and was flat with the prior year and the year-to-date period.

Sensient's operating income for the quarter ended September 30, 2009, as stated in local currency was up 0.5%. For the first nine months of 2009, operating income as stated in local currency was up 5%. Unfavorable foreign currency exchange rates reduced operating profit by approximately 5% and 9% in the quarter and nine months ended September 30, 2009, respectively. As a result, Sensient's reported operating income in the quarter was $39 million compared to $40.9 million in the prior year.

Operating margins improved 10 basis points for the quarter to 12.9% and improved 50 basis points for the year-to-date period to 13.6%. Sensient's pretax earnings were up this quarter. As a percent of revenue, pretax earnings increased 11% compared to 10.3% in 2008.

As stated in local currency, earnings per share in the quarter were equal to the prior year, and earnings per share for the first nine months of 2009 decreased -- increased 9%. Diluted earnings per share as reported were $0.47 for the third quarter of 2009 compared to $0.50 in the prior year's third quarter.

For the nine months ended September 30, 2009, diluted earnings per share as reported were $1.45 compared to $1.46 in the prior year's comparable period. The impact of foreign exchange rates reduced reported earnings per share by $0.03 and $0.14 for the quarter and nine months ended September 30, 2009, respectively.

The Company's cash from operating activities increased 49% to $98.6 million for the nine months ended September 30, 2009, from $66.3 million in the comparable period of 2008. The increase was primarily due to improved working capital usage, especially related to inventory. We expect cash flow to remain strong in the fourth quarter.

Sensient's total debt at September 30, 2009, was $444.5 million, a reduction of $35 million since the beginning of the year. Excluding the impact of foreign currency, total debt is down over $40 million since the beginning of the year. The Company's debt to total capital ratio now stands at 32.9% compared to 37% at September 30, 2008.

I would now like to take a brief look at the results of our operating groups. Revenue for the Flavors & Fragrances Group, as stated in local currency, was down about 1% for the quarter ended September 30, 2009. For the nine months ended September 30, 2009, revenue as stated in local currency was up 1.4%. Revenue in the third quarter of 2009, as reported, was $194.8 million compared to $204.6 million in the same quarter in 2008.

Group revenue for the nine months ended September 30, 2009, as reported, was $576.9 million compared to $609.3 million reported in the prior year's comparable period. In both the quarter and nine-month period, growth in Latin America was partially offset by lower revenue in the US.

Flavors & Fragrances Group's third-quarter operating income, as stated in local currency, was equal to the prior year. Operating income for the nine months ended September 30, 2009, as stated in local currency, increased 6.7% from the prior year's comparable period.

Operating profit for the third quarter of 2009, as reported, was $30.7 million compared to $31.8 million in the prior year. For the nine months ended September 30, 2009, operating income as reported increased 0.6% to $94.9 million from $94.3 million in the comparable period of 2008. Group results were affected by the slow pace of new product introductions on the part of customers and soft consumer demand, particularly in the US market. Operating margins increased 20 basis points in the quarter to 15.7%. For the nine months ended September 30, 2009, operating margins increased 90 basis points to 16.4%.

Revenue for the Color Group, as stated in local currency, was down 2.7% for the quarter ended September 30, 2009. Revenue in the third quarter of 2009, as reported, was $94.2 million compared to $102.7 million in the same quarter in 2008. Higher local currency sales of food and beverage colors in Latin America and Europe were offset by lower sales of nonfood colors and lower sales of food and beverage colors in the US.

Color Group operating income for the third quarter of 2009 was $14.6 million compared to $17.7 million in the third quarter of 2008. For the first nine months of 2009, operating income was $43.3 million compared to $55.5 million in the same period of 2008. Operating income in the quarter was impacted by lower volumes of nonfood colors, partially offset by improving margins in food and beverage colors.

Revenue in the corporate and other segment, which include the Company's operation in China and the Asia-Pacific region, was $23.3 million in the third quarter of 2009, an increase of 8.9% from the prior year when reported in local currency.

Operating margins in the region were also up in the quarter as compared to the prior year.

As Mr. Manning stated earlier, Sensient expects 2009 diluted earnings per share, as reported, to be between $1.85 and $1.90.

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

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

I just wanted to start with the inventory destocking and get a feel for where that stands now. I was under the impression that the third quarter, that was going to be far less, if not negligible, headwind. As we look into the fourth quarter, are we seeing a continuation through the end of the year at this point?

We are a little cautious, Chris. As we look at the reports from our competitors and from our traditional customer base, we are a little cautious about the next couple quarters as far as moving things out of the pipelines that Sensient has developed with these customers and gotten into the pipelines. Neil Cracknell, the President, wants to talk a little bit about the market and where he sees it right now.

If we start off in the food and beverage segment, we did see a slowdown and a softness in demand coming in the North American market in August. There was some back in September, but it wasn't sufficient to recover from that softness.

Overall, our customers are being very cautious. Product launches have slowed down, and customers are focusing their efforts elsewhere. So, yes, we want to keep our projections at a cautious level. And we think that the recovery will be somewhat slower coming than perhaps where we indicated in the previous quarter.

Help me understand the impact of new product launches here. If you have a customer that is not necessarily rolling out new products, wouldn't an old product still be used and theoretically a Sensient flavor or color be in that older product still?

That's true. There's two factors here, Chris. Obviously, there's the ongoing consumer softness. And I think there is some softness in the demand for the existing products. But there is always some attrition in products and new products being launched. And the launch of new products is important to our business in driving our top line.

And if you look over the course of the year, new product launches are down close to 50%. And certain segments, particularly the beverage segment, are impacted more significantly than that. So that certainly impacts the development of our sales.

And Gordy, could you talk a little bit about the new products coming into the customer pipelines?

Chris, just to give you an indication of the activity within the product development cycle, on a year-to-year basis we show an increase of over 34% in the number of new products that we developed throughout the Corporation. This tells us that that cycle is still very active. But as Neil commented, we have seen instances where products have been approved, order schedules have been laid out, only to have those rollout programs delayed into 2010.

Yes, and I think Gordy raises an important point there. The pipeline remains strong as ever. In fact, it is getting stronger. And so we are confident that those wins exist, and they will feed through into the sales line at some point. But until customers launch those products, we can't get the benefit.

And shifting gears just quickly on the Color Group, the expectation was that there would be better margins there as raw material costs come down. Could you give us a little bit of color on what was taking place in the third quarter there?

Absolutely. When we look at globally the food and beverage portion of the Color Group, and we are talking about in the area of $250 million or so of total revenues on an annual basis that end up in that category, and those margins are actually up quarter to quarter.

But what has occurred as we look at the whole Color Group is in the US, the volumes have been affected. And I think Neil wants to talk about that. But let me just note that in Latin America, we've had very, very strong volumes in the color business, as we did in flavor. Europe has been strong, and we did get hit in the US and Canadian markets on the volume. But with that, we have maintained the margin for food and beverage.

And when you look at the margin in the quarter, where we were impacted was on the non-food and beverage areas. And also, to some extent, as you drop the profit from the food and beverage, even though it is up as a percentage because the volume was down in that area, then it affects the total margin for the Color Group.

But do you want to talk about the natural colors and looking forward with the volumes and so on?

Yes. I think if we look at the food and beverage business in general, in Europe the conversion to naturals continues, and we saw growth in our food color business in Europe. And South America and Mexico exhibited growth, too. And Asia-Pacific had some strong sales with some significant growth.

So there's a lot of positive signs. The US was quite narrow -- the slowdown was quite narrow in certain segments of the market, but they're significant segments of the marketplace. So that impacts us. And the softness really is in the nonfood segment, which is -- was showing some signs of recovery, but it is being slower than we anticipated.

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

Edward Yang, Oppenheimer.

What were volumes and price by segment?

We look at -- certainly in the US and in general for the food and beverage products -- in flavor, of course, is all food and beverage except for the small fragrance portion, and then the color, food and beverage, the volumes were down a little bit overall. When we take it all and combine it all together, they were down a couple percent. And we did for the most part make up for that with pricing, where pricing was a little bit better than the raw materials. And so therefore, we have been able to maintain the margins. And as we have noted, our margins are actually up in the flavor group and as well in the food and beverage colors.

And then, Dick, just for the Color Group as a whole, then, what were -- were volumes up or down, and price up or down?

Looking at the group as a whole, as we mentioned, the volumes were down more than the rest of the food and beverage markets for flavor, certainly, and for color in Europe and Latin America. Volumes, I should note, as Neil mentioned, are also up in Latin America. But they were down in the US specifically on the food and beverage colors, and they were down also on the nonfood and beverage colors.

Was price up in the Colors Group?

Price was favorable in the US, certainly in the food and beverage areas.

Okay. Looking at just SG&A and cost of goods sold, both were up sequentially, while your revenues were down sequentially. That did surprise me quite a bit, because I would think that raw materials are still maybe declining for you. Was this a function of something in your raw materials bucket that went up more than you expected? And on the SG&A side, was that just a function of ramping up your salesforce hiring?

I'm going to just answer quantitatively, and then Steve is going to elaborate a little bit more on the SG&A. But actually, I'm showing that the percent of gross profit, so the inverse of the cost of goods sold, was actually up in the quarter, from 30.1% last year to 30.7% this year. And I think that was buoyed by the pricing.

And then in the case of the SG&A, in the quarter, yes, we were 17.8% of revenue versus last year's 17.3%. But in the prior year, or I should say in the year to date, it was a favorable 17.1% to 17.5%. And Steve can elaborate a little bit more and maybe talk a little bit about where we see the margins, first of all the gross profit margin in Q4, and as well where we see SG&A going.

On the -- just another point on the SG&A -- although it is up as a percent of revenue, if you look at the consolidated revenue as reported, which is down about 5%. SG&A in dollars was down about 2%. So part of what is going on there is it's just not as variable as the sales line. And that's, as Dick said earlier, falling down to the bottom line with a slightly lower margin.

And in terms of raw materials and cost of goods sold, which you also asked about, we have seen a big improvement from the first half of the year, when that was running significantly negatively. It was still a modest negative in the third quarter, but it was more than covered by price. And I think one of the reasons why it perhaps has not flushed out as fast as we thought it would is simply because of the volumes being a little softer than we had thought. And so some of the older raw material costs are taking a little longer to come through.

Okay. And just to clarify, I was actually talking about sequential trends, so second quarter to third quarter, and the dollar amounts as well, so SG&A, for example, $54 million in the third quarter, $51 million in the second quarter.

Okay. I was talking -- I'm sorry, I think we were all talking year over year. Sequentially, it is up a little bit. And that's really just a function of some of the expenses not being even throughout the year.

Last year, it was actually down sequentially in the third quarter versus the second quarter.

We had some things particularly unique to this year. And also, I think we had some things that went good last year.

I think there were a couple of onetime --

Favorable items, yes.

Okay, understood. On the color side, just on the cosmetic side, I kind of equate that market as something similar to fragrances, high-end fragrances. It looks like some of your competitors were more levered to high-end fragrances, or kind of talking about restocking, are you seeing any restocking in the makeup business in the color segment?

I think there is some signs of stocking, but it varies by market segment. I think certainly the more budget end of the market is doing better than the higher end of the marketplace. So there has been a shift in customers' buying patterns. So it is kind of a different answer depending on the segment you're looking at.

You're right. The high end is not doing as well as the low end. And in fact, the last statistic on ladies' lipstick for the low end was up 85%. But that's stuff that you would see in Wal-Mart and places like that. The high end, where we usually do very well, is a little bit slower.

Understood. Just finally, have you gone through your budget process for 2010, and could you share some of what you expect to see in (multiple speakers)?

We can do that for you, Ed.

Yes, Ed, absolutely. As mentioned earlier, we look at the top line and are cautious about it for the next couple quarters. And as Neil and Gordy have noted, we are very confident about our pipelines and what we have going in. And we just need to have our customers moving those items through the pipelines.

So as we look cautiously ahead to 2010, we are comfortable right now that as we do go through our budget process with a range of $1.98 to $2.05 for diluted earnings per share for 2010.

And what kind of a currency assumption do you have embedded in that, Dick?

What we are looking at, and I will start out with the fourth quarter, we have had a headwind throughout the year on currencies. We are impacted by -- I think there are four that we particularly focus in on that have a pretty significant impact on us. Certainly the euro, the Canadian dollar, but also with all the sales we have in Mexico, the Mexican peso is a big factor, and the British pound.

So looking, just starting with the fourth quarter, we have had a headwind on these currencies, as I mentioned. We see the British pound being somewhat flat to last year. We see the Mexican peso being somewhat flat to last year. We will get a lift, certainly, and we have seen that in October. We expect to get a lesser lift in November and less than that in December. So the lines will converge as we go to the end of this year. And so as we look at the currencies and what we are assuming for the budget, we would be roughly in the $1.40 or low $1.40s for the euro, roughly.

That is our current assumption, yes.

Peter [Cazone], KeyBanc Capital.

I think most of my questions have been mostly covered here. But I guess could you talk about -- I'm just trying to get a better feel as far as organic sales growth. Now, with the more cautious tone, I guess, could you kind of discuss what you are seeing on the demand side shaping up as far as customer inventory destocking maybe continuing into 2010?

As we look ahead, as we mentioned, we are a little bit cautious about the next couple quarters. We're of course pushing. We're pushing new products out into the marketplace. We're working the products that are in the pipeline. And we're hoping certainly to get some organic help as we look at the fourth quarter.

We have quite a few things in the Company that are coming onstream that are favorable -- the natural colors, and maybe Neil or Gordy wants to talk about that. We have an enteric coding in pharmaceutical, which is very positive. We try to not talk too much about customer names, so I won't mention the name, but we are back doing business with a major OEM for inkjet inks. And we see the sales picking up rather significantly there.

And so we have a lot of activities going on in the Company in a lot of different areas that could have some -- a rather significant impact. And it is really a matter of when some of those things kick in. And Neil and Gordy, I don't know if you want to elaborate on the natural colors.

We have not lost any market share. We're holding our own with our competitors. And I think it's pure and simple that some of the consumer markets are a little bit soft.

The natural colors, Ken, can we maybe cover -- is that okay if we talk about it?

Yes, I think it's interesting at the time, the conversion to natural colors is quite far advanced in Europe, but we are now seeing a lot of interest from customers in the US and Canada in switching over to natural colors. So I think that is going to drive our top line in the coming years.

And as Dick pointed to there, we have in our pipeline a number of activities in both the nonfood markets and particularly in the pharmaceutical and in the inkjet market. So I think there's a lot of positives out there. We need our customers to launch those products and take decisions. And so that is a factor we're not directly in control of, and so we're just being a little cautious until we see the orders turn up.

Great. Thank you. I just have one more regarding the new product launches from your customers. Could you kind of give me a sense of the lag of the benefit you guys realize as far as when your customers launch a product and when you actually receive a benefit from those new launches?

Typically, we would see a ramp-up as the pipeline is being filled. So before the product is launched, obviously, there's quite a lot of stocking that needs to goes into a pipeline. So we get a benefit quite early on. Usually after that initial benefit, it declines as it goes into the marketplace, and then it sees how it progresses in the marketplace. If it is a hit, we see the sales pick back up. Not every launch, of course, is such a huge success. So, yes, we get the benefit pretty early on of product launches with that pipeline filling.

Great. I will jump back in the queue.

(Operator Instructions). Sam Yake, BGB Securities.

I just had a question. Looking at your overall results, I remember when you said earlier in the year that your only real concern centered around currencies. And then I see where the currency kind of gave you a tailwind instead of a headwind. And I'm wondering if you could single out what is the biggest factor to cause the shortfall? And what kind of blindsided you most?

We talked about the markets. And I think pretty much consistently, everything that we've looked at within the businesses relates to the markets that we're in. We have not lost share, and the markets turned out to be much weaker, at least at this point in time, than we had anticipated they would be.

Certainly, given the fact that 80% of what we sell is going into food and beverage, very stable market, we know that people are going to be eating, and they're going to be consuming beverages. And we know that these markets are going to be -- continue to be stable and that we are going to do well in these markets.

But we did have a lot of people certainly looking at their balance sheets and looking at their inventory levels and certainly looking at their P&Ls and whether -- how much they would be willing to spend on R&D. So certainly, those factors, to some extent, you can't predict months in advance what is going to happen in some of these markets.

Right, but through the previous conference call, you were fairly optimistic, and the currency went in your favor. So I'm just wondering -- something doesn't add up, that it just -- something came out of left field.

Let me comment, Sam. When I look at your forecast, your forecast for the year was -- it looks like now it is probably up to $2.12. Our forecast was $1.90 to $1.95. So I don't know where you are coming from, but you're so far off our forecast that I don't know what your point is.

No, no, no, I'm not being argumentative. I'm just -- I looked at what your currency -- you've built in, I think, $1.30 to $1.32 on the euro. So when that went so far in your favor, that is probably, like, $0.07 to $0.10 in the second half in your favor. And your forecast, you --

Sam, we have a lot of people who want to get on the call. I will call you after the call, and we can have a conversation then.

Okay, that would be fine.

Thank you.

(Operator Instructions). We have now reached the allotted time for questions. I would now like to turn the call over to the presenters for closing remarks.

Thank you again for your time this morning. That will conclude our call. If there are any follow-up questions, please feel free to call the Company. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.