Sensient Technologies Corp (SXT) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Sensient Technologies Corporation's 2010 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'm 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 2010 first-quarter financial results. I am joined this morning by Mr. Kenneth 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 first-quarter 2010 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 turn it to Kenneth Manning.

Thanks, Steve. Good morning. For the first quarter of this year, Sensient reported record revenue and earnings. EPS grew to $0.48 per share, an increase of 6.7% over the prior year. The Company's revenue of $314 million was up 11%, compared to prior year.

We saw encouraging signs of growth this quarter as many of our markets began to return to more normal order patterns. We also saw benefits from our investments, both in capital and people, which have strengthened our operations.

Sensient's Color Group reported excellent first-quarter results. Revenue was up 24% in comparison to prior year. Profit was up 32% and margins also improved. These results are driven by solid sales gains across all of the Color product lines.

Sales of Natural Food and Beverage Colors, in particular, were very strong this quarter. Naturals are a strategic focus of the Company and continue to represent a significant opportunity. Sales of Natural Food and Beverage Colors increased over 25% this quarter and we expect to see strong growth in this product line going forward.

Revenues in the Flavor & Fragrance Group were up 3.3% this quarter. Both revenue and operating profit as reported were higher in the Traditional Flavor product line, but this growth was offset by lower revenue and profits in the Dehydrated Flavor product lines. Dehydrated flavors were impacted by pricing adjustments taken in advance of raw material cost improvements.

Lower raw material costs will begin to benefit us in the second quarter. The full benefit of lower raw material costs will be realized in the second half of the year when we will see stronger profits.

Sensient's excellent results this quarter are partly due to improving conditions within our market. But they also reflect actions we have taken to strengthen our operations.

Because we continued to invest in our business over the last two years, we have dramatically improved the sales coverage in many of our markets. We have also greatly enhanced our ability to develop new, differentiated products. We expect to see additional improvement in our business as a result of other initiatives coming onstream.

As a result, I have increased this year's earnings guidance. We now expect to report earnings of between $2.00 and $2.06 per share in 2010. Our previous guidance had been $1.98 to $2.05.

I remain very optimistic about the Company's prospects. I expect to see earnings continue to grow over the rest of this year and additional improvements next year.

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

Good morning. I will now provide details of the results for the quarter ended March 31, 2010.

Sensient reported record first-quarter revenue of $314.1 million in 2010 compared to $282.8 million in the same period last year. Foreign currency translation had a positive impact of 5.3% on first-quarter revenues as state and local currency, Sensient's total revenue in the first quarter of 2010, was up 5.8% from the same quarter in 2009. The Color Group and the Company's operations in the Asia Pacific region saw double-digit revenue increases as reported and also at state and local currency.

Operating income for the quarter ended March 31, 2010, was $38.7 million. Operating income as reported reflects favorable foreign currency translation which added 5.8% this quarter's operating income.

Interest expense for the first quarter was down 34% from last year's comparable period. In the second quarter of this year, Sensient will issue $110 million of new fixed-rate notes in order to refinance some of its existing debt. The new notes take care of Sensient's financing needs for the foreseeable future and they lock in a portion of our debt at a fixed rate of 4.91%.

For the remainder of 2010, we expect interest expense to be flat with prior-year levels.

Diluted earnings per share increased 6.7% to $0.48, a record level for the first quarter. Diluted earnings per share for the comparable period last year were $0.45. Sensient's effective tax rate for the first quarter was 30.7% compared to 30.6% in the first quarter of 2009. The tax rate in both quarters included adjustments related to the resolution of prior-year matters.

The Company reported $23.4 million of cash from operating activities in the first quarter of 2010, an increase of 34% from the $17.5 million reported in last year's comparable period.

Total debt at the end of the quarter was $415.2 million, a decrease of $12.8 million since the beginning of the year. Over the last 12 months, total debt has decreased by $53 million, resulting in a debt to total capital ratio of 31.5%. Debt to EBITDA is now at 2 and is expected to fall below 2 by the end of this year's second quarter.

I will now take a brief look at the results of our operating groups.

Sensient's Color Group reported record quarterly revenue of $108 million, an increase of 24% from $87.1 million in the comparable period in 2009. Color Group operating income of $18.1 million in the first quarter of 2010 was up 32% from $13.7 million in the same period in 2009. Revenue and operating income benefited from increased volumes of food and beverage colors.

Non-food product lines -- including Pharmaceutical, Cosmetics, and Technical Colors -- also showed solid growth this quarter. The impact of favorable foreign currency translation on the Color Group in the first quarter increased revenue and operating income by approximately 5% and 6%, respectively.

Flavors & Fragrances Group revenue in the quarter ended March 31, 2010, was up $190.7 million, up 3.3% from the prior year's first-quarter revenue of $184.5 million. Group operating income was $27.2 million compared to last year's record first-quarter profit of $30 million. The impact of favorable foreign currency translation on the Flavors & Fragrances Group in the first quarter increased revenue and operating income by approximately 5% and 4%, respectively.

During the quarter, volumes were higher and the group saw local currency revenue growth in its European operations. This growth was more than offset by lower sales in North America. As we indicated during our fourth-quarter conference call, market pricing and dehydrated flavors were adjusted down, in advance of reduction in raw material costs.

These new lower raw material costs will begin to provide a benefit late in the second quarter. As a result, we will see improvement in margins in the second quarter and more significant improvement in the third and fourth quarters.

Revenue in the Corporate and Other segment, which includes the Company's operations in the Asia Pacific region, was $24.3 million in the first quarter of 2010 compared to $18.7 million in the prior-year's comparable period. As state and local currency, revenue in the Corporate and Other segment was up 19% from last year. We saw revenue growth across the region with particularly strong results in China.

As Mr. Manning stated, Sensient has increased its guidance for the remainder of 2010. As a result, Sensient expects 2010 diluted earnings per share as reported to be between $2.00 and $2.06.

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

(Operator Instructions). Mike Sison of KeyBanc.

Hello. Good start to the quarter. What was the impact from the dehydrated flavors pricing raw material sort of hit in the first quarter?

Looking at the first-quarter the overall hit was about in the mid $3 million range.

And that $3 million comes back as the year progresses?

We are expecting to get close to half of it back in the second quarter and our expectation is, by the time we get to the third quarter, we will get it all back.

So that was just sort of a timing issue in terms of -- and are contracts in that business sort of index-based or raw material-based?

Yes. It was understood at the end of 2009 that with the reductions in the cost of the crop, which is exactly correct, it is academic that those costs will decrease dramatically. The customer base and just based on how that contracting went to reduce the selling price accordingly, with the understanding that all of the margins would ultimately come back into line with starting that new production, which will start probably in late May, roughly sometime in late May.

Okay. Then and if I add back the $3 million to first-quarter results, it did sound like the rest of your Flavors businesses had up volumes?

Yes. As a matter of fact, looking at volume -- and I think that's an important point to get out here -- the Company, as a whole, had volume up by 7%. So we had a dramatic increase in the volume. Now that was more in the Color and the Asia Pacific, but as far as the traditional Flavors, and even the dehydrated have some volume increase, the traditional Flavors, coming off a very strong year last year, was about even on volume.

But going into Q2, we are seeing very strong orders. And that is looking very good, very robust orders coming in for the traditional Flavors in the second quarter.

Okay. So the impact on pricing will still be negative in the second and the third, but your profitability would be up in Flavors due to better volumes across the board as well as lower raw materials?

That's correct.

Earnings growth will be positive in the second and the third for flavors?

Yes. We are very comfortable with our guidance and we feel that this is all going to play out as we are discussing it right now.

Great. Thank you.

Thanks, Mike.

Christopher Butler of Sidoti & Company.

Good morning, guys. You had mentioned that your volumes were up 7% and Color Group was a part of that. Could you touch on nonfood products and how the volumes were for those in the quarter?

Certainly. For example, in the area of inkjet inks, that growth is very robust. That is a significant growth.

And also looking at our operations in Europe, the inks operations in Europe was particularly strong, particularly the business in Switzerland. Very strong, very good profits from that business in Switzerland.

In addition to that, cosmetics -- the cosmetics business had a local currency increase of 6%. The as reported was up 13% on the Cosmetics. So very strong there. Pharmaceutical was up. So, yes, pretty much across the board, the nonfood and beverage Colors look real good.

So it is safe to say we are seeing a pretty good rebound after a difficult 2009?

I think that is a very good way to put it. Color is doing very nicely and the margins look good. The volumes are spectacular throughout the Color Group.

And could you give us some insight into your customers and the development of new products from their standpoint?

Chris, this is Gordy Hering. We sought growth within our Natural Color program with both multinationals and regional producers, particularly private-label interest. So we feel our Natural Color program has really got the traction we have been looking for. In terms of the systems that we are seeing that growth in, it's primarily dairy and beverage.

The --. All right and so is this something -- I'm sorry, is this something --? Do you think this could help the numbers come the second half of the year or are we -- (multiple speakers) it's still early in the process --?

Absolutely. Absolutely.

This is Neil here. To build on that, the new product pipeline looks strong and yet we have launches lined up for Q2 and we are confident how that is going to move forward.

Thank you. I'll go back in the queue.

Thanks, Chris.

(Operator instructions). Edward Yang of Oppenheimer.

Good morning. Touching more on the Natural Color opportunity. What do you think the ultimate revenue opportunity is there? And what is the level of penetration?

Well, I think the sky is the limit. And I think first of all, in Europe, the regulatory authorities are pushing [for] Natural Colors, and we see this even coming into the United States where you have a French manufacturer or some foreign manufacturer. Because they are doing Natural Colors in Europe, they are starting to do Natural Colors in the United States, even though they are not required.

So yes, I would say the sky is the limit. And I think we have good people on the Color Group. The strategic focus of the Color Group is Naturals, and I think that will continue.

So I don't want to give you a number. But the numbers that are kind of rolling through my head right now are quite large.

And it is my understanding that you have both Synthetic and Natural Color customers, but because Natural Colors are less potent, you just need to use a multiple to volume to switch over from a synthetic to a natural color?

Yes. As with everything of that sort, you've got to make it work for the customer. So typically, the amount of natural custom color will probably succeed the synthetic color. But I would just point out one thing.

Synthetic colors in the United States are certified by the FDA. Right now, Natural colors are not certified by the FDA. They are generally regarded as safe.

So I think there will be a business for synthetic colors for an awful long time. But I also feel that natural color is [becoming all over the world].

Thank you for that.

And just one other thing. On that magnitude, it can be 4 to 1, it can even be better than that. So for a given unit of volume of synthetic colors, the natural replacement would be roughly 4 or more times the amount of product.

So as you can tell -- and the margins are also very favorable. As you can tell it would be a very, very nice increase to the Company's base, and we are very well-positioned with the capital. Our capital planning and our -- the work that we're doing in that regard is to facilitate expected growth.

And we are going to have the scientist just give you one last word.

Ed, we have done a pretty dramatic upgrade in our European Natural Color processing facility in Italy. We recently upgraded that to improve not only the range of raw materials we can extract, but the quality of the extractions as well. We are looking to add capacity into our North American Natural Color program as well. So we are anticipating significant growth within that product line.

And then that Italian CapEx that was the [anthocyanine]? Is that all done?

That's correct.

That's correct. But we will be investing very aggressively in Natural [Colors] all over the world.

Okay. Thanks for that. And on Flavors, the European business, have you been continuing to make market progression there? There has been a gap between European Flavors margin and North American Flavors margin?

Yes, the European business, which had a very nice growth in the quarter, we had -- the local currency revenue was up 2%, but the profit was up 17%. And so with that, we did have an increase in the margins.

I don't have the exact number in front of me. But it was, I believe, in excess of 100 basis points in this quarter versus a year ago.

That's great. On -- and finally, on this dehydrated pricing issue, are there any other products where you could potentially see pricing adjustments outside of dehydrated color -- flavors related to raw materials coming down?

Not generally. I think the dehy was a special case that continues to be a little bit of price pressure. But we are holding pricing ahead of the raw materials and [any actual] decreases. So no it is not an issue.

Great. Thank you very much.

Thanks, Ed.

(Operator Instructions). You have a follow-up from Christopher Butler of Sidoti & Company.

Hello. Thanks for taking my follow-up. Could you give us an update on where we stand as far as foreign currency and what you think for the second quarter and updating some of the numbers that you had given us on the last conference call for the full year?

Yes. When we look at the current cities, we are going into kind of a conversion quarter where we don't, based on where the currencies are right now, last -- I looked at the euro yesterday afternoon. It is still $1.35 or so. I didn't look at it this morning.

At that level, we would see in the second quarter probably very little impact from the euro. We might certainly see some of the other currencies might give us a tiny lift.

And then as we look at the remainder of the year, there could be -- if they stay where they are -- maybe just a small adverse effect. But we don't see it as an issue and it's -- with our plans for the year, we don't see it weighing in as a problem at all.

And with the strengthening that you have done on the balance sheet side, any change to your use of cash as you look forward here?

I think on the balance sheet, our priorities are going to remain paying down debt. And as Mr. Manning indicated, we are going to be investing in Natural Colors. So we will be using some of that for capital expenditures as well.

And that would be CapEx as opposed to acquisitions primarily?

Primarily, yes. That's our focus right now, is organic growth and investing in the business.

We expect by the end of this year that our debt to capital will be about 28% and debt to EBITDA about 1.8. We will come below 2 in the debt to EBITDA in the next quarter. And we see those numbers continuing to get stronger and stronger as far as the ratio of debt to equity and EBITDA.

Thank you for taking my questions.

We are the best investment in town.

Alright, well, thank you for taking my questions, guys.

Mike Sison of KeyBanc.

Just a quick follow-up. Do you expect the growth in Color to stay in the double digits range for the rest of the year?

Yes. Yes. Absolutely.

Okay and then in the Flavor side, sort of for the remainder of the year, something in the low single digits?

Looking at the Flavor, you know, looking ahead to the current quarter as Neil mentioned or as we've discussed here, it is very robust in the second quarter. So, certainly, we would feel that in the traditional Flavors we could get into the mid to higher single digits for the growth.

And that is just offset by the pricing and the dehydrated Flavor side?

Yes, that's right. And that's really where we had the pricing effect was in the dehydrated. And as we mentioned earlier, the costs will offset that. So we feel that the growth should continue throughout the year.

If I did the math, it seems to me that if you pick up the rest of the operating leverage from the pricing and you get a post pretty good 7, 8% total, wouldn't your earnings growth be a little bit more pointed or stronger or --? It just seems like --.

Well, we never want to disappoint you. So maybe we will just let that rest there.

As I mentioned there could be a little hit on the currency. We built that in. And we have, as I said in my script, that the -- we have that new issuance of debt coming out in May. And so our interest will be even with last year.

And of course, we look at our tax rate, which is academically 33%. And we endeavor to get that down and we endeavor to get it down to 31 or 32, where we can with tax planning. So certainly, given our assumptions, we are very comfortable with our forecast. And remember that in the dehydrated Flavors, the cost improvement comes. But that pricing is -- it is where it is.

So we feel when you put all that together, yes -- as Mr. Manning noted, we want to be careful not to disappoint. And so I guess I'll just leave it at that.

We don't want to disappoint, but I have never felt better about the business than I feel right now.

Ken, when you talk to customers, are they feeling better? Are they -- you looking to maybe introduce more new products? Is there -- so is their sentiment's improving as well?

Well, that's an interesting question. The new product introduction of our customers has not been robust. However, our new product introductions have been up 20%.

But we are seeing a return to more normal purchasing patterns. I think there was a certain amount of destocking that can't go on. I think inventories of our customers are very, very low right now.

So, as I look to the future, I feel very good. I think, yes, they may be -- our customers may be pouring more into older products but will get the business.

Great. Thank you very much.

Susan McGarry of Granahan.

Hello. Mike just asked my questions.

Okay, Susan.

Since there are no further questions, I would like to turn the call back to management for closing remarks.

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

Thank you. This does conclude today's conference call. You may now disconnect.