Sensient Technologies Corp (SXT) 2009 Q4 法說會逐字稿

Good morning, everyone. Welcome to the Sensient Technologies Corporation 2009 fourth-quarter and year-end 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. It 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 conference call to discuss 2009 fourth-quarter and full-year financial results.

I'm 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 fourth-quarter and full-year 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.

Sensient earnings for the fourth quarter of 2009 reached $0.47 per share before charges for the settlement of environmental claims. For the year, Sensient's 2009 earnings before these charges reached $1.92, which represents the best results in the Company's history.

As we indicated in a prior news release, Sensient recorded expenses of $0.14 per share in the fourth quarter for the proposed settlement of environmental claims at a site in New Jersey. Sensient never owned or operated this site. We became subject to these claims because Sensient acquired a company more than 20 years ago that once owned the property. We chose to settle this matter so as to avoid costly litigation and potential of a greater liability in the future.

Including these environmental charges, Sensient reported earnings of $0.33 a share in the fourth quarter and $1.78 for 2009. Sensient's 2009 revenues in stated local currency was even with prior years'.

As we have discussed in previous calls, our sales have been impacted this year by soft demand caused by inventory destocking and a decrease in new product introductions by our customer.

In the fourth quarter of 2009, Sensient's revenues, as reported, were 6% higher than the prior year. Stated in the local currency, Sensient's revenues was up slightly and we saw strength in a number of markets. Both our Color and Flavor segments reported good local currency growth in Latin America and Europe. Quarterly sales in the Asia-Pacific region grew at a strong double-digit rate.

We also began to see improving sales trends in some areas that had been most impacted by the economy this year. As an example, several of the Color Group's nonfood product lines delivered topline growth in the fourth quarter.

Sensient has been able to strengthen its financial position over the course of 2009, and this trend continued in the fourth quarter. Cash flow grew to a record level of $138.3 million in 2009, and we reduced total debt by $52 million. The Company's debt to total capital ratio now stands at 32%, down from 37% at the beginning of last year.

Sensient has continued to invest in its businesses throughout 2009 in order to enhance our prospects for growth. We have added to our sales resources in several areas, and we have expanded our distribution system into promising new markets.

In 2009, we opened new locations to serve customers in Central Europe, Latin America and China. We have also added technologies and production capabilities to our existing facilities in order to increase our ability to offer new products. Our consistent strategy allowed us to report stable results in 2009 despite difficult economic conditions.

As we look ahead to 2010, we expect to report earnings of between $1.98 and $2.05 per share.

I am very pleased with the financial strength of the Company and the steps we have taken to improve our market coverage and product offerings. As a result, I remain very optimistic about the Company's prospects in 2010. We are well prepared to succeed in today's markets.

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

Good morning. I will now provide details of the results for the year and quarter ended December 31, 2009.

Annual revenue for 2009 was $1.2 billion, compared to record revenue of $1.3 billion reported in 2008. As stated in local currency, revenue was comparable to last year.

The Flavors & Fragrances Group and our operations in Asia reported increased local currency revenue, which was offset by lower revenue in the Color Group.

For the fourth quarter of 2009, reported revenue was up 6% to $311.5 million, in comparison to $293.8 million in last year's fourth quarter. As stated in local currency, consolidated revenue in the quarter was up 0.5% over the prior year.

In local currency, without the proposed settlement charges, Sensient's 2009 operating income was 3.6% above the prior year, and operating margins increased 30 basis points to 13.2%.

As Mr. Manning stated, Sensient recorded pretax charges of $11.3 million, or $0.14 per share, related to the proposed settlement of legal claims. As reported, 2009 operating income was $147 million, compared to $161.6 million in 2008.

In the fourth quarter, Sensient's operating income was $37.6 million before the charge, compared to $36.3 million in 2008. As reported, fourth-quarter operating income was $26.4 million. Diluted earnings per share before the charge were $1.92 for the 12 months ended December 31, 2009, versus $1.89 in 2008. Diluted earnings per share, as reported, were $1.78.

In the fourth quarter of 2009, diluted earnings per share before the charge were $0.47 compared to $0.43 in last year's quarter. Diluted earnings per share, as reported, were $0.33.

Sensient reported cash from operations of $138.3 million, an all-time record level for the Company. The Company reduced its total debt by $51.9 million in 2009, resulting in a debt to total capital ratio of 32%, down from 37% at the beginning of 2009. Without the impact of foreign currency translation, total debt has come down by $56 million over the last 12 months.

Debt-to-EBITDA is just over 2% and is expected to fall below 2% in the first half of 2010.

Sensient entered into an agreement in the fourth quarter to issue $110 million of debt through a private placement of notes in May 2010 at a rate of 4.91%. This new debt has an average life of six years.

Excluding the charges taken for the proposed settlement of legal claims, Sensient effective tax rate for the year was 30.5%, compared to 29.7% in 2008. On this basis, the effective tax rate for the fourth quarter was 28% compared to the prior-year rate of 28.9%. Our tax rate in both years included benefits from the settlement of prior-year tax matters and other adjustments. As reported, the actual tax rates for the year and fourth quarter were 29.7% and 22.1%, respectively, due to the tax effect of the proposed legal settlement.

I would now like to take a brief look at the results of our operating Groups. The Flavors & Fragrances Group reported revenues in 2009 of $772.9 million compared to $800.8 million in 2008. Stated in local currency, full-year 2009 revenue was up slightly from the prior year. Flavors & Fragrances Group operating income rose 0.8% to a record $124.5 million in 2009, compared to $123.5 million in 2008. In local currency, operating income was up 4.7% for the year. Operating margins in 2009 increased 70 basis points to 16.1%.

Revenue for the Flavors & Fragrances Group in the fourth quarter was $196 million, up 2.3% from the prior year's quarterly revenue of $191.5 million. Fourth-quarter Group operating income was $29.6 million, compared to $29.2 million in 2008, an increase of 1.4%. As stated in local currency, quarterly operating income was down 2%.

Group results reflect local currency revenue and profit growth in Latin America and Europe for both the quarter and the year. In the quarter, the Fragrance product line achieved significant local currency revenue and margin growth. These gains were partially offset by pricing adjustments in certain markets in advance of raw material savings that are expected in 2010.

Sensient's Color Group reported revenue in 2009 of $374.8 million, compared to $402.4 million in 2008. Stated in local currency, Group revenue in 2009 was down 1.3% in comparison to 2008. Color Group operating income in 2009 was $58.7 million, compared to $71.6 million in 2008. Foreign currency translation reduced Group revenue and profit by approximately 6% in 2009.

For the fourth quarter, the Color Group's reported revenue grew 11.4% to $99.8 million, compared to $89.6 million in 2008. Stated in local currency, quarterly revenue grew 5.8% in the quarter.

Color Group operating income in the fourth quarter was $15.4 million, compared to $16.1 million in the prior year. The impact of favorable foreign currency translation on the Color Group in the fourth quarter increased revenue and operating income by 5.7% and 5.2%, respectively.

In both the quarter and year, sales and margins for food and beverage colors were up significantly in Europe, as reported in local currency. These gains were offset by lower sales in the US. Sales of the Color Group's nonfood colors were lower for most of the year but certain product lines returned to growth in the fourth quarter.

Revenue for the Company's operations in the Asia Pacific region, as reported in local currency, increased 5.1% in 2009 on sales gains in China, Australia and the Philippines. Fourth-quarter revenue for these operations grew 27.5% to $25.2 million. Stated in local currency, fourth-quarter revenue in the region grew over 17%. Margins in the region grew in the fourth quarter and full year.

Sensient expects 2010 diluted earnings per share to be between $1.98 and $2.05. We expect earnings growth will be weighted towards the second half of the year and as a result of the timing of expected reductions in raw material costs.

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). Christopher Butler, Sidoti & Co.

Good morning, guys. I'm interested in the Color Group. It sounds like demand may have turned a corner. Dick mentioned that certain product lines had some improvement. I was hoping that you might be able to give us a little more detail on that.

Chris, I'm going to make a few comments and then I'm going to have Neil Cracknell, who (technical difficulty) closely with them, make a few.

We have had good improvement in the -- many of the nonfood areas of Color, and we see a lot of promising developments in the food and beverage area as well.

There was a lot of destocking last year that seems to be over. Product introductions seem to be coming along, so it is a good point. Yes, we are feeling very good about Color going into 2010. I will let our Chief Operating Officer, Neil Cracknell, add some comments to that.

Yes, Chris, I think we are seeing some signs of a return to a more normal pattern in some of our nonfood businesses. Particularly the inkjet in businesses are showing some robust trends. Our cosmetics business is also showing signs of a return to innovation. So, I think we are positioned well coming into 2010 to see the businesses (technical difficulty) a more normal pattern.

2010.

Sorry, 2010, sorry. (laughter)

In the guidance, it was mentioned that it may be a bit backend loaded due to raw material costs.

Yes.

As a chemical analyst I'm looking at higher costs for many of my companies. What are you seeing that you're expecting to be lower for later in the year?

Chris, it is Dick Hobbs. Looking at both the Color and the Flavor Group, we have a number of raw materials that have come down for us and we expect to come down further. If, for example, in the Color Group, you go back a year, we had some increases in costs that carried over into 2009. Those affected us pretty much through the three quarters and as well have spilled into, to some extent, into the end of the year. We see that becoming more favorable in the chemicals area for the specific materials that go into the synthetic colors.

Yes we also see some favorable in a natural part of it as well, but we are not really a petroleum-based company. We have an enormous range of raw materials. Thus far, looking into 2010 towards the end of the year, that's going to look pretty good.

In the Flavor Group, specifically to Mr. Manning's point about natural ingredients, we have a number of products that have come down, but also some major items will be coming through. They are contracted for and they will be coming through starting in the second quarter of next year. Those will have a significant impact. I alluded to that in my comments, that we saw that happening and that will be coming in and substantially in the second quarter we will be seeing that.

Just finally before I turn the questions over, on the environmental cost side, is there anything that's going to linger into the first quarter there, or is that done, and anything else that may pop up here over the next couple of years?

No, nothing significant. This has to go through a normal legal process where we get a -- it goes through the court for final approval and whatever is the EPA process has, but we don't anticipate anything. We are glad to be done with the thing and we don't anticipate anything in the future.

I appreciate your time.

Mike Sison, KeyBanc.

Congrats on a good end of the year.

Thanks, Mike.

In terms of your outlook for 2010 in terms of sort of recovery in volumes, how much of that improvement do you see from sort of wins or sort of momentum from some business that you've won heading into 2010?

Okay, actually, that's a very good question and we are pleased to answer it.

Our pipeline has improved significantly over the last quarter and into 2010. We see new product introductions coming on board that our customers had delayed. The whole destocking area really got -- some of our customers went down to really, really low inventories, and we would see those coming up. But I will let Neil talk a little bit about that as well, but we have a lot of things going for us.

Yes, Mike, I think, as Mr. Manning said, as we come into 2010, our pipeline is very robust. There have been some delayed launches which should impact early in 2010 in Q1 and Q2, so we are looking in a strong position.

I think, in addition, if you look at the public pronouncements of our customers, they are starting to talk about volume growth. That's certainly going to help moving forward.

I think the other important factor that we shouldn't lose sight of is the investment we've made in the last year in our capabilities. These will be coming on stream in 2010 and will help move the business forward. So I think we are well positioned.

Okay. Dick, did you guys give us -- I might have missed it -- the volume assumption for 2010 in terms of underpinning your outlook?

What we are seeing there, Mike, and it's certainly consistent with what Neil commented about regarding the markets, we are seeing mid-single digits as a pure number without any currency impact and we expect currency to not have a big -- be a big factor here. So, that's what we are -- is in our plans and we are feeling very good about that, that area, the (multiple speakers).

Right. Then think longer-term, Ken, one of the things -- you guys have done a nice job of getting your operating margins up every year for the last couple of years. So if you look out, you know, three to four years from now, the economy continues to recover, what do you think the margin potential for your business is now?

Well, I will let Dick kind of try to quantify it as much as possible, but clearly the move from synthetic colors and flavors into naturals is a -- those are higher-margin products. They are very, very difficult to replicate. By that, I mean the ease of entry into that business is not there. The investment to get into that business is great, not only in terms of producing the colors and flavors themselves, but preparing them for specific types of applications, the emulsion technology -- which I think we are the leaders in the industry. So I would see this improving as these product mixes improve dramatically. And the product mixes are going to improve because legislation all over the world is pushing people more and more towards natural flavors and colors. We feel this is going to be a bonanza for us. But I will let deep Dick see if he can put a number on it.

Mike, I had noted in my comments that, in the case of the Flavor Group, those margins went up 70 basis points to 16.1%, so we are nicely up into that 16% range. Certainly, as we look ahead to next year, we see ourselves operating there or above that range.

In the case of Color, we do have a number of things certainly. To further respond back to what Chris had asked, we also had some of our inventory coming down as we looked at our working capital and it's based on the cash flow. So certainly as that goes into 2010, the fact that we had less throughput through our factories to arrive at that inventory reduction, we are going to have an improvement in our costs. So the combination in Color as Mr. Manning noted, things like the natural colors, some of the pharmaceutical products that we have coming onstream, and even some of the inkjet color (inaudible) that are higher-margins, combined with those mitigations on those costs, we certainly feel it is appropriate to reach up into the 16% on Color. In both cases and with the success we've had in Asia Pacific, certainly that gets the Company up into that 13%-plus range. So we would endeavor to get into that for the Company, that 14% to 15% range, in the next three years or so. We feel that's a very reasonable goal.

Yes, that's very reasonable. Naturals are becoming prominent in places I least expected. We're going to be investing in our China facility for natural colors. Those are becoming very popular in China, and they are actually becoming popular in Central and Eastern Europe. Even though they are more expensive, they are more desirable. People are willing to pay the premium.

Great. Last question -- in terms of particularly in the Flavor side, are you seeing your customers look to maybe come out with sort of new, new projects? I think sort of the drive during the early parts of this downturn was to help them lower the cost. Are they coming out with more sort of newer-type products? Is the bidding right now on things that could be a little bit more exciting than you've seen, let's say, about a year, a year and a half ago?

I'm going to give this to Dr. Hering.

What we've seen is particularly our larger customers trending towards the healthier eating initiatives that have come to the forefront over the past, say, 6 to 12 months. Things like reduced sodium, reduced that, reduced calories, primarily through the reduction of sugar, have all led into our new product development. We have accommodated those requests by our customers with new initiatives that achieve reduced salt, reduced sugar and reduced fat formulations. Obviously, the customer is showing increasing demand for this, and we've responded accordingly.

Yes, I'm going to let Neil add to this, because the products we're talking about now are altogether new products, said Neil, do you want to -- ?

Just to build on what Gordy was saying, I think we are seeing a lot of discussions with customers, particularly the main brand producers who recognize the need to differentiate themselves from the private-label producers. So I think there is a lot of innovation going on to try and rebuild those brands, so that is certainly something that's going to benefit us moving forward. So I think there's a lot of activity there, yes.

Great, thank you very much.

Okay, thank you.

(Operator Instructions). Edward Yang, Oppenheimer.

This is [Luis] for Ed. The first question is on if you can talk more on the European flavors margins and how that is progressing and if you have expectations for that for next year?

Yes, Luis. We had a very good quarter with the European businesses in the Flavor Group, and certainly one that I would start out with -- it's not directly flavor but it is one of our European businesses, which is the Fragrance. So Fragrance --

It's in Flavors & Fragrance Group.

All right, it's in the Group and we had an outstanding performance by that Group with skewing more from the essential oils and aroma chemicals over to fragrances, which is where we are moving strategically with the business. So that had an outstanding performance in the quarter, and we see that going into -- further into next year.

As we look at the overall European operation, we did have a significant increase in the quarter, both as reported and in local currency, very strong from our operation in Belgium, in northern Europe. That plant ships throughout Europe.

We've been strong in getting new products, savory products. We have several factories in Europe that provide the full range of beverage. Going into 2010, Neil can add from a product standpoint, but based on the performance in the fourth quarter, we feel we are (multiple speakers).

Yes, not only Belgium but the UK looked --

The UK was --

-- looked very, very good. That's going to be okay but if you want to -- (multiple speakers).

Well, I can just expand on that a little bit. In the UK, we saw some strength in all segments of the market, even beverage, which has been, in most markets, struggling all year. So the UK really had quite a strong performance.

I think, in the rest of Europe, a particular highlight was the dairy and bakery segments where we saw a lot of activity and we've benefited from some new launches there. So I think there's some promising signs in Europe.

Yes, Spain, believe it or not, was particularly strong. Spain is doing very, very well in flavors.

One thing that I think is important, Luis, we've talked about this in other conference calls, but the Company has an extended distribution system that certainly Mr. Manning has had that as a key part of his strategy and the Group has been executing on that. This is expanding out into -- with more penetration into Scandinavia and into Eastern Europe, the Balkans, the Baltics and throughout the area surrounding where our plants are. We had some very good results from that business as well.

There is a demand in these smaller markets for premium flavor and color products. It's very encouraging.

Okay, thanks for the detail there. If I can ask one more question? I think you said that you weren't expecting much in terms of a currency movement. So I mean, your guidance -- are you baking in any type of strength in the US dollar or kind of --?

What I noted there, Luis, is that, when we look at the top line mid single digits percent growth, we are not including any currency in that.

When we look at the sensitivity, we feel the conversion point on currency versus the prior year, so 2009 versus 2010, we feel the conversion point is somewhere in the low $1.30s. So the euro can drop into that range and there's not a tremendous amount of sensitivity in either direction really as we get up on the upper end towards the $1.40 or above that. So we feel there is a pretty good range around $1.30 or so, where there shouldn't be any significant impact on our results for 2010.

It's a good question, and we've been studying it for several days, but Dick just gave a good answer.

Well, and the other thing is we do have EUR114 million of euro debt, so certainly depending on where it goes with the euro, if it has some small impact on our margins and earnings because the euro ends up coming down and the dollar strengthens, certainly we would see a really nice improvement in our debt. It could overnight bring our debt down to 400 or below.

Thank you.

There are no further questions at this time. I would now like to turn the floor over to management for closing remarks.

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

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.