Sensient Technologies Corp (SXT) 2010 Q3 法說會逐字稿

Good morning everyone, and welcome to the Sensient Technologies Corporation 2010 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'm Steve Rolfs, Vice President, Administration, Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2010 third-quarter financial results.

I am joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman and Chief Executive Officer; Doug Pepper, Sensient's President and Chief Operating Officer; and Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer. Also with us today is Paul Manning, President, Color Group; and Jim McCarthy, President, Flavors and Fragrances Group.

Earlier today we released our third quarter 2010 financial results. A copy of the release is available on our website at Sensient.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.

I am pleased to report that this was the best third quarter in the company's history. EPS as reported increased 25.5% to $0.59, including a $0.02 benefit from an insurance recovery related to a 2009 environmental settlement.

Excluding the insurance recovery, third-quarter earnings per share increased 21% to reach a record level of $0.57.

The company's revenue reached an all-time record level of $340.9 million, up 12.4% from the prior year's third quarter.

Quarterly operating income grew 22.6% to $47.8 million, a record for a third quarter.

Operating margin increased to 14%, from 12.9% for the third quarter of 2009.

Sensient's color group delivered another strong performance this quarter. Group revenue grew 20.3% to $113.3 million, an all-time record for a quarter.

Operating income increased 37.5%, from $14.6 million in 2009 to $20 million this quarter.

Every product line reported double-digit sales growth on strong volume gains, and the increase for the food and beverage product line was driven by focus and growth in natural color.

The flavors and fragrance group revenue increased 6.4% to $207.2 million, a record for a third quarter.

Solid volume growth in both the traditional flavor product lines and dehydrated flavors contributed to the higher revenue.

Operating income increased 4.8% to $32.2 million, also a record for a third quarter.

Our Asia Pacific and China operations reported all-time records for revenue and operating income. The results were particularly strong in Thailand, China and Japan.

We generated record cash flows from operations in both the third quarter and year-to-date periods.

The total debt decreased by $29 million during the quarter and $84 million during the last 12 months.

Debt to total capital is 27%, down from almost 33% at this time last year.

Our strong financial position has allowed us to continue to reduce debt and reinvest in our operations.

Our strategic initiatives have driven our record performance this quarter. We're investing in promising opportunities such as natural colors and pharmaceutical coatings. We're also strengthening our sales coverage and expanding into new geographic markets.

We're optimistic about the future and continue to see opportunities for growth in all of our operating units. As a result, I have increased this year's earnings guidance.

We now expect to report earnings between $2.13 and $2.15 per share for 2010.

Our previous guidance had been in a range of between $2.05 and $2.10 a share.

The company is having an exceptional year. We have reported record results for each of the first three quarters. I am pleased with our performance and expect strong results going forward as we continue to execute on our strategic initiatives and build our business.

Dick Hobbs, our CFO, will now provide you with the details of the quarter.

Good morning. Sensient reported all-time record revenue of $340.9 million for the quarter ended December 30, 2010, an increase of 12.4% from $303.2 million in the same quarter last year.

Revenue for the first nine months of 2010 was $988.9 million, an increase of 11.1% from $890 million reported in the same period of 2009.

Stated in local currency, consolidated revenue grew 14% in the quarter, with particularly strong growth from the color group and the company's operations in the Asia-Pacific region.

Sensient's operating income for the third quarter 2010 was $47.8 million, an increase of 22.5% from $39 million reported in the same period of 2009.

For the nine months ended September 30, 2010, operating income increased 10.7% to $133.6 million from $120.6 million in the same period of 2009.

Excluding the benefit of the insurance recovery mentioned by Mr. Manning, the increase in operating profit was 18.8% and 9.5%, respectively, for the quarter and nine-month period.

Foreign currency translation decreased revenue and operating profit by approximately 2% and 1%, respectively, in the quarter and had no impact on earnings per share.

For the first nine months of 2010, foreign currency translation increased revenue and operating income by approximately 1% and 2%, respectively.

Interest expense for the third quarter was down 4.7% from last year's third quarter, primarily driven by lower debt this year.

Diluted earnings per share, as reported, increased 25.5% to $0.59.

Excluding the insurance recovery, diluted earnings per share were $0.57, a record level for the third quarter.

For the nine months ended September 30, 2010, diluted earnings per share, as reported, were $1.65, compared to $1.45 in the prior-year period, an increase of 13.8%.

The company reported record cash flow from operating activities of $110.5 million for the first nine months of 2010, an increase of 12.1% from the $98.6 million reported in last year's comparable period.

Total debt at September 30, 2010 was $360.3 million, a decrease of $28.9 million in the quarter.

Over the last 12 months total debt has decreased by $84.2 million, resulting in a debt to total capital ratio of 27.2% at September 30, 2010, compared to 32.9% one year earlier.

Debt to EBITDA is now at 1.6 compared to 2.2 one year ago.

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

Sensient's color group reported record quarterly revenue of $113.3 million, an increase of 20.3% from $94.2 million in the comparable quarter in 2009.

Revenue for the first nine months of 2010 was $334.2 million, an increase of 21.5% from $275 million reported in the prior-year period.

Foreign currency translation decreased color group revenue in the third quarter by approximately 2% and increased year to date revenue by less than 1%.

Color group operating income of $20 million in the third quarter of 2010 was up 37.5% from $14.6 million in the same period in 2009.

For the nine months ended September 30, 2010, operating income increased 36.3% to $59 million from $43.3 million in the prior-year period.

Foreign currency translation decreased operating income in the quarter by approximately 3% and had no impact on operating income for the nine-month period.

Third-quarter operating margin increased 220 basis points to 17.7%.

Revenue for both food and beverage colors and non-food colors was up more than 20% in the quarter.

All product lines within these categories reported strong growth.

Flavors and fragrances group revenue in the quarter ended September 30, 2010 was $207.2 million, up 6.4% from the prior year's quarterly revenue of $194.8 million.

For the nine-month period, revenue was $603 million, compared to $576.9 million last year, an increase of 4.5%.

Foreign currency translation for the flavors and fragrances group decreased quarterly revenue by 2% and increased year-to-date revenue by less than 1%.

Operating income for the flavors and fragrances group of $32.2 million is up 4.8% from last year's quarterly income of $30.7 million.

Flavors and fragrances group operating income for the nine-months ended September 30, 2010 was $92.6 million, compared to $94.9 million in 2009.

Foreign currency translation had no impact on operating income in the quarter and increased operating income by approximately 2% in the first nine months of 2010.

During the quarter the group reported double-digit revenue growth in North America and solid growth in Europe.

Group operating margin of 15.5% was comparable to last year.

Revenue in the corporate and other segments, which includes the company's operations in the Asia-Pacific region, was up 33% to $31 million in the third quarter 2010, compared to $23.3 million in the prior year's third quarter.

For the first nine months of 2010, revenue was $82.3 million, an increase of 30.3% from revenue of $63.2 million the first nine months of 2009.

As stated in local currency, revenue in the corporate and other segment was up 27.4% from last year for the quarter, and up 22.9% in the first nine months.

Japan, Thailand and China reported strong growth in the quarter.

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 $2.13 and $2.15.

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

(Operator Instructions) Peter [Kazone], KeyBanc Capital.

Hey guys. Great quarter.

In terms of colors, you've seen 20% growth in food and beverage now for two consecutive quarters. Is this reflective more of overall expansion in the natural -- demand for natural colors? Or -- and how much of this growth is sustainable going forward here?

Paul, why don't you take that?

I would say that the overall market is growing for natural colors. Some of that in Europe is driven by legislation. In the US it is driven by interest in branded companies principally.

I would tell you that we are growing in [access] in both markets, and I would tell you that our growth moving forward is sustainable.

Great. Thank you. And then on the last conference call here you noted expectations of a benefit from lower raws and flavors. We saw a segment operation -- operating margins declined 70 basis points sequentially. Can you maybe provide some more color as far as the sequential dynamics here and maybe your expectations heading into the fourth quarter?

Now, Peter, you're looking at the margin for Q3 compared sequentially, and we've been talking about the margins compared to the prior-year, because certainly we have seasonality, we have certain products that we're selling at certain points in time, so the sequential isn't necessarily what we focus on in these calls or when we're running the business, because last year was 15.5%. This year is 17.7%.

If you look back in the first quarter and the second quarter, you see significant increases over the prior year, and that is the key here. And so therefore we're not concerned at all, nor do we necessarily feel that the comparison sequentially to Q2 is anything that really makes any difference.

And this was in flavors? I thought you -- flavors was here at 15 (multiple speakers)

Oh, your question is on flavors?

Yes. I'm sorry. On the flavors business. You saw -- even on a year-to-year basis you saw some pressure.

I was just trying to --

Okay. Good. Yes, good. Let me go through that then.

In the case of flavor, we did note in the first two quarters that we had a decrement based on a difference between cost and pricing in the dehydrated flavors piece of the business. That was about $3 million per quarter.

And as we said as we were going through the quarters, we had an impact on the margin. In the first quarter it was about 200 basis points versus the prior year. In the second quarter it was about 100 basis points versus the prior year for the overall flavor group. And now in the third quarter it is pretty much even.

And we expect it to be a little bit better in the fourth quarter, and that is because we now have a linkage with the selling prices and the costs. Our costs are now down, and we're seeing a year-to-year profit growth in that piece of the flavor group. So therefore we see the 15.5% -- to go back to your original point, and now I understand where you're going with it -- is that on a comparison to the prior year, this is actually very good news, because we've built up during the course of the year as that cost has now improved dramatically.

And you'll see that trend continue with the flavor group, where we'll be at least at or perhaps above the prior year in our margins.

Okay. And then just one more. Can you discuss what you're seeing as far as customer activity on the new product front, and maybe your optimism heading into 2011?

Yes, absolutely. Let me just, Peter, respond to that based on when we look at the total revenue increase in the quarter, and I will just focus on the color group and the flavor group right now, rather than Asia Pacific.

If I take the flavor group and the color group, of the roughly -- I think it was $34 million or so increase in revenues for the two, $20.3 million is new wins, where we've been able to get into customers for one of their new products or for one of their new applications with either totally new products or with existing products but a new win with our various customers.

That has doubled from last year. Last year it was just under $10 million for the flavor group and the color group, and this year it is over $20 million.

So I think that Paul and Jim might elaborate as follows far as their pipeline.

Paul, do you want to start with color?

Yes. I would tell you that we have continued upside in all of our key strategic areas, natural colors, pharma, inks being those key areas. And our pipeline is looking very strong across many different geographies and across not only some of our existing product portfolio for opportunities that would require new product development in each one of those segments.

Jim, do you want to add anything?

Sure. From a flavor group's perspective, our pipeline continues to be strong. New launches and product development projects are increasing, and our customers are -- especially major customers. And with the added sales and technical resources that we put on this past year, we're well-positioned to take advantage of these -- this increased activity.

Christopher Butler, Sidoti & Company.

Circling back to a couple of questions that have been previously asked -- for the dehydrated products you had said that I think it's about $5 million to $6 million from the first half that you took the hit on. Do you expect to regain that full amount in the fourth quarter?

When we look at the fourth quarter, Chris, versus last year on the bottom line for that particular business we'll be at a very healthy increase, and compared to the first half of the year, we'll make up a sizable part of that, perhaps at least half of it. But certainly we'll be over -- we'll be significantly over the number for 2009.

And if I remember from the last quarter, shortages were something that product -- the material shortages were something that were hindering you a little bit. Is that something that continues? And could you speak to your expectations looking out a little bit at raw material, any kind of ag inflation, that sort of thing?

Well, certainly there are some items where that actually is an opportunity. We haven't had an issue with any raw materials going into our vast number of products.

There is one item that we end up selling as a finished product where we see some shortage in Asia on garlic, but that would certainly be an opportunity as far as garlic pricing, as far as what we're able to put in as a selling price for the garlic we sell. Maybe that is what you were thinking back to, the garlic.

And as far as looking forward a little bit with crop prices almost across the board coming up, is that something that is going to impact you much?

Well, there would be certainly -- you're right -- some impact there, and in our communication with both Paul Manning and Jim McCarthy, they're very comfortable that they've looked at where they would have some impact, some basic items, some basic commodity items. They're comfortable that they're going to be able to offset with pricing.

Swinging back to the growth on the colors side, it was mentioned that you had very strong growth this year, but we are looking in comparison to a difficult 2009. With all of the opportunities that you have, what do you expect for organic growth looking say out until 2011? Where is your organic growth here now?

Chris, as we look at Q4 and we look at 2011, and specifically for the color group, we feel that when we look at the base business, we look at some of the new product opportunities, we'll sustain at least in the mid-single digit increase. We certainly will endeavor and work to strengthen and get even a little bit above that mid-single digit, but certainly that's -- we're comfortable at least that's (multiple speakers) [normal].

Yes. And Chris, if you look at some of our prior releases, we're really optimistic about natural colors and pharmaceutical colors, and we are investing heavily right now in those two areas.

We've increased the sales coverage in that group dramatically, so we're very, very optimistic about the future (inaudible)

I appreciate your time.

(Operator Instructions) Edward Yang, Oppenheimer.

This is actually [Luis] for you. How much was the insurance recovery pretax? And is that in corporate?

That was about $1.4 million or $1.5 million -- yes, about $1.5 million. And where that is, if you look at the press release, Luis, it is in the operating income. It's a favorable there, coming out of selling and administrative expenses.

So for example, if we take the selling and administrative expenses last year, they were 17.8%. This year, 17.2%. If we had not had that insurance recovery, it would have been 17.6%.

So we still -- on selling and administrative expenses, we're -- perform better than the prior year.

Now looking down further on the press release, if you see the corporate and other category, that would be in that corporate and other category. So if you add back that benefit, the corporate and other number would be a debit of roughly $5.8 million, $5.9 million, so we still had a good result there in that corporate and other category when you add that back.

I have a question on dehydrated also. Have you seen -- are you seeing the benefit from lower natural gas prices, or is that something that you hedge?

Yes, we do hedge it. Certainly when we look at the spot prices, they are very favorable. And as we look ahead to certainly the next year, 2011, we're very well hedged out there looking forward, and so therefore I think certainly in the remainder of this year, say, roughly $6.00, $6.00 and change. As we look at next year, maybe even a little bit better than that, maybe at $5.00 and change based on our hedging (technical difficulty)

Okay, great. And lastly, could you quantify how much was the volume growth in -- per segment?

Yes. When we look at the -- starting with the flavor and fragrance segment, the increase in revenue is roughly $12 million. But the volume increase, the volume component, which is the majority of it, was even more than that increase in the revenue, and it was brought back by the foreign exchange. So in that particular group, we would have seen something of an increase that would have been more by $4.6 million (multiple speakers)

So flat pricing and mostly volume?

Mostly -- yes, pretty much all volume for the flavor and fragrance group.

The color group got a little bit of pricing, but again, for their increase, which was roughly $9 million, that was dramatically -- I'm sorry. Their increase of $19 million. Their increase of $19 million, 90% of that was volume.

So -- how much you said?

90% of the $19 million increase was volume.

So you would have a small segment that was price as well. So from our point of view, it was a very good combination. We're getting price and we're getting volume.

Okay, great. Thank you very much.

(Operator Instructions) Christopher Butler, Sidoti & Company.

Just a couple of quick follow-ups. Where do you expect CapEx to be by the end of this year?

Looking at the current year on CapEx, we expect it to approach $60 million in total. And looking forward to 2011, we're going to see numbers that are going to be broaching $70 million, and again, 2011/2012 we could even be seeing numbers that could touch on $80 million.

Given the cash flow in the company, we feel very good about those levels. We've announced investments in natural colors.

(inaudible)

But I would say this, Christopher, really getting into some very good process technology, good ROIs, we're building the business, we're growing the sales force, and we want to have really good products to supply them.

So as you saw from some of the releases, we're spending $16 million plus in St. Louis for natural colors. That's in anticipation of where we really believe strongly that the national natural color business will be. We're spending several million dollars on pharmaceutical coatings. We're transferring technology in beverage flavors. We have some very, very advanced extraction technology that will allow us to provide some unique natural flavors for beverages and other products.

We are going to build the business. These are great investments. There's no goodwill with them. And they are really going to turn a dollar for us.

The company is really on its way. This is a very good quarter, but it's just the beginning.

I would now like to turn the call back over to management for any 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 after this call. Thank you. Goodbye.

This concludes today's conference. You may now disconnect.