Sensient Technologies Corp (SXT) 2010 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Sensient Technologies Corporation 2010 fourth-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, of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2010 fourth-quarter and year-end financial results.

I'm joined this morning by Mr. Kenneth 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 are Paul Manning, President of the Color Group; and Jim McCarthy, President of the Flavors & Fragrances Group.

Earlier today we released our 2010 fourth-quarter and year-end financial results. A copy of the release is available on our website. 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'll hear from Ken Manning.

Thank you, Steve. I am pleased to report that 2010 was the best year in the Company's history. Sensient achieved new records for revenue, earnings per share and cash flow. Revenue surpassed $1.3 billion, an increase of 10.6% over 2009 revenue. Reported earnings per share increased to $2.17, an increase of 21.9% over 2009. Cash flow from operations grew to $155.7 million, an increase of 12.6% over the $138.3 million reported in 2009.

Consolidated revenue for the fourth quarter reached $339.3 million, a record for the fourth quarter and an increase of 8.9% over last year's fourth quarter. Diluted earnings per share grew to a record level of $0.52 per share, an increase of 10.6% over the prior year's results. This excludes the impact of an environmental liability settlement recorded in 2009.

Cash flows from operating activities were also a record for the quarter, reaching $45.2 million compared to $39.8 million in the prior year's fourth quarter. All of the groups established new revenue records in 2010, and the Color Group in particular produced exceptional results. Color Group revenue and operating income grew by 19.4% and 31.9%, respectively, over last year.

The growth was driven by higher volumes and selling prices in food and beverage colors and higher volumes in non-food colors. Flavor & Fragrance group revenue increased by 4.7% over 2009 as a result of higher volumes across most product lines. Our Asia Pacific and China operations reported a revenue increase of 28% over 2009, driven by strong results in Thailand and China.

We continued to strengthen our balance sheet in 2010. Total debt was reduced by more than $78 million to $349.8 million at the end of the year. The Company's total debt to total capital is 26.2%, down from 32% at the end of 2009. We will continue to use our strong cash flow to reduce debt and reward shareholders.

We recently announced a quarterly dividend increase to $0.21 per share, allowing shareholders to benefit from our strong performance. Our dividend has increased by 40% over the last five years. We will also maintain our strategy of reinvesting in our operations and building the infrastructure to grow the Corporation and expand into new markets. The Company made capital investments to support strategic growth areas, such as natural colors and pharmaceutical coatings in 2010, and we continue to modernize and improve our existing facilities.

The Company is also focused on hiring more sales and technical personnel to increase and improve our sales coverage, product support and product development capabilities. The Company continues to build a strong foundation for future growth, and we expect to report earnings between $2.26 a share and $2.32 a share in 2011. Sensient had a record-breaking year and all our groups achieved significant growth. Our commitment to our strategy has positioned the Company for future success.

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

Good morning. Annual revenue for 2010 was $1.33 billion, an all-time record for Sensient and an increase of 10.6% from 2009 revenue of $1.2 billion. All of our operating groups reported record revenue in 2010.

Operating income in 2010 was $174.6 million compared to $147 million in 2009. The fourth quarter of 2009 included a charge of $11.3 million related to the settlement of environmental claims. The Company recognized additional insurance proceeds of approximately $1.5 million on these claims in the third quarter of 2010.

Excluding the impact of these items, operating income was up 9.4% for the year. Foreign currency translation increased consolidated annual revenue and operating income by approximately 1% in 2010. Diluted earnings per share were $2.17, an all-time high for the Company and an increase of 21.9% from 2009. Excluding the impact of environmental settlement, diluted earnings per share were up 12% for the year.

For the fourth quarter of 2010, Sensient's revenue increased 8.9% to a record $339.3 million from $311.5 million in last year's fourth quarter. Operating income in the fourth quarter was $41 million and $26.4 million in 2010 and 2009, respectively. Excluding the impact of the environmental settlement, operating income was up 8.9% in 2010.

Foreign currency translation impacted quarterly revenue and operating income by less than 1%. Diluted earnings in the fourth quarter of 2010 were up 10.6% to a record $0.52 compared to $0.47 per share in 2009, excluding the charges for the environmental settlement.

Sensient's cash from operating activities was $155.7 million, an all-time record for the Company and an increase of 12.6% over last year. Total debt was reduced by $78.2 million in 2010, and the debt-to-capital ratio improved to 26.2% from 32% at the end of 2009. Debt to EBITDA has decreased to 1.6 at the end of 2010 from 2.1 a year ago. Over the next two years, we expect debt to fall to less than 20% of total capital and to reach a debt-to-EBITDA level of about 1.

I will now take a brief look at the results of our operating groups. Sensient's Color Group reported record revenue of $447.5 million for 2010, an increase of 19.4% from $374.8 million in 2009. Color Group operating income of $77.4 million was up 31.9% from $58.7 million reported in 2009. Foreign currency translation had no impact on the Color Group revenue in the year and reduced operating profit by less than 1%. Operating margins increased 160 basis points to 17.3% in 2010.

For the quarter ended December 31, 2010, revenue for the Color Group was $113.3 million, an increase of 13.5% from $99.8 million reported in the comparable quarter last year. Color Group operating income for the quarter was $18.4 million, an increase of 19.5% from $15.4 million reported in 2009. Foreign currency translation reduced revenue by approximately 1% and operating income by approximately 2% in the quarter.

All the groups' business units realized double-digit revenue growth as a result of volume gains in all markets and higher selling prices in certain product lines. Sales of natural colors and cosmetic colors were particularly strong.

The Flavors & Fragrances Group reported record revenue of $809.1 million in 2010, an increase of 4.7% from $772.9 million in 2009. Operating income was $122 million in 2010 and $124.5 million in 2009.

Foreign currency translation had no impact on revenue in 2010 and increased operating income by approximately 1%.

Revenue for the Flavors & Fragrances Group in the fourth quarter of 2010 was $206.1 million, an increase of 5.2% from $196 million in last year's fourth quarter. Operating income was $29.4 million in 2010 and $29.6 million in 2009. Foreign currency translation reduced revenue by approximately 2% in the quarter and had no impact on operating income.

Operating income was negatively impacted by lower selling prices and higher raw material costs and dehydrated flavors during the first part of 2010. Costs improved in this product line as the year progressed.

Revenue in the corporate and other segment, which includes the Company's operations in the Asia-Pacific region, was up 28% to $113.2 million in 2010, compared to $88.4 million in the prior year. For the fourth quarter of 2010, revenue was $30.8 million, an increase of 22% from revenue of $25.2 million in the fourth quarter of 2009. And state and local currency revenue in the corporate & other segment was up 20.9% for the full year and 15.9% compared to last year's fourth quarter. Thailand and China reported strong growth in the quarter.

As Mr. Manning stated, Sensient expects 2011 diluted earnings per share as reported to be between $2.26 and $2.32.

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

(Operator instructions) Mike Sison, KeyBanc.

Happy new year to you.

Happy New Year, Mike.

Congrats on a great 2010.

In terms of 2011, what type of growth underpins the EPS guidance in terms of sales?

What we would expect, Mike, is, in the Flavor Group expect to be at least in the mid-single digit range. It could have some pressure above that level, but we would expect at least the mid-single digits. And in the Color Group we expect high-single digits, possibly going into double digits for the top-line growth.

Okay. And when you think about the Color Group, that has been very strong over the last several quarters here. How much [legs] do you have in the natural phenomenon in terms of customers really wanting to switch into those areas? And is that going to be a good portion of that growth in 2011?

Yes. Paul, why don't you answer that.

I would tell you that natural colors will continue to be a key growth area for the entire Color Group internationally, and not only in the form of new products introduced in those markets, but also conversions from the traditional synthetic colors.

Okay, great. And in terms of your balance sheet, it's pretty strong here, Dick. Any sort of uses of cash in the works, stock buyback, or is it really going to be focused on CapEx and maybe some acquisitions down the road?

Well, as it turns out, right now with a strong balance sheet that's converging with a very strong business overall. And the strategy of the Company is to continue to invest in the businesses. So we don't have any -- we haven't announced any specific plans for buying back stock or any material acquisition moves on the part of the Company. We certainly would look, if an acquisition prospect were to come along that would meet our criteria and we felt would add to our technology and top-line growth.

But generally, it's not an area where we would expect that there would be a lot of investment, unless such an opportunity would come to pass. And as far as stock buyback, we do see that as a financial exercise and something that we could do any time. And we certainly have the capacity to do it, but we feel right now the important thing is to continue to invest in the businesses and into the plants and the people.

Just to add something to what Dick said, we would be interested in acquisition opportunities in our high-growth areas. And when he spoke about acquisitions, yes, we are probably not going to do many acquisitions in flavor. But areas like natural colors, cosmetic, pharmaceutical on the Color side, we'd be very interested because they are extremely high-growth areas. And we really have a critical mass in those areas.

So that could be a possible use of funds and would accelerate growth.

Great. And if I may, just one last one. When you think about longer-term, your growth rate has really stepped up to a level that we haven't seen for quite some time. Any update on where you think you can get your profitability to, given that your volume growth continues to be pretty impressive?

Well, yes. I think the profit -- perhaps we're a little bit conservative in some of our forecasts, but the profit growth will continue at a very exciting rate. One of the things that's happened -- and you've heard this story, Mike, 1000 times -- but this Company was created from 21 acquisitions. We have brought all the cultures together. We have built the infrastructure. We are really positioned to move up the chain to the $1.5 billion, eventually $2 billion level. And that's because we have built the infrastructure.

Last year, we hired 34 salesmen and the Company is really coming together. We are really hitting in the markets that we started -- in the case of China, we started from nothing. So, yes, the best is yet to come.

Great, thank you.

Christopher Butler, Sidoti & Company.

Could you give us an outlook on what you're seeing on the raw materials side and thoughts on your ability to recoup that with prices?

First of all, I know this is something that hits the newspapers. And with many companies, raw materials are not a problem. So let me preface Dick's and some other people's remarks on this. Raw material is not a problem with this business. So I'll let you take it from there, Dick.

Yes. Thanks, Chris. Thanks again. Looking at the overall Company, we have a rather diverse group of materials that are used throughout the various businesses, and we are really not subject to any significant item, with the exception of onion and garlic. I would like to just note, with the onion and garlic, that we are covered throughout 2011 both in terms of our contracts that will lock in our costs as well as with pricing that has been set for those products.

Another area is sugar, which is just a little bit over 1% of cost of sales. In the case of sugar, we are locked in with our costs there through the first quarter of 2012.

In other areas, a big item is carmine. In the case of carmine, we have been able to raise our prices to offset cost increases there and actually made a little bit extra from that. So overall, we feel we are very well covered.

Certainly in a group like the Color Group, where natural materials are very important as we see shifts to natural colors, they have a strategic approach to that, to their procurement, and are well ahead of the game on expectations there.

So overall, we actually are in very good shape as far as our handling of the materials, and we have been able to more than offset any raw material cost increases with selling prices.

You had touched on it a little bit -- 2010 was -- dehydrated products were a big talking point each quarter. Could you give us an idea of what we're going to look at in 2011 from that business?

Yes. The dehydrated products business did affect the overall Flavor & Fragrance margins in the first half of the year by 150 basis points. We were 150 basis points in the first half of the year below the prior year. By the time we got to the second half of the year, that was offset about 50 basis points impact, so we had improved in the second half of the year versus the first half of the year by 100 basis points.

I should add that in the second half of the year, in, specifically, the fourth quarter we did take some inventory write-offs in the Flavor group. And had we not taken those write-offs, which were about $3 million, that margin for the second half of the year would have been actually over the prior year. And in the fourth quarter, our margin would have been up by over 100 basis points, to the point where we likely would have been over the prior-year margin.

So we feel very comfortable with where we are at going into 2011 with our margins, and particularly the product line you mentioned. We feel we are in a very strong position going into next year.

Could you give us a little bit more detail on the inventory write-offs?

Absolutely. I mentioned about $3 million on Flavor in the fourth quarter, and about half of that was because we had in beefing up our controls. And we do that on a regular basis, and we strengthened the controller staff at one of our operations in the UK. And with that, internally, we determined that we needed to reduce the valuation, the inventory valuation, and took appropriate actions to do that.

In addition to that, throughout the quarter in the Flavor group we did have items that were approaching obsolescence; there were some lower-margin items. And we felt it would be prudent to write those off.

Shifting gears over to the Asia corporate and other category, the plus 20% growth in -- well, 28% growth in 2010 -- is that the target that you think you can get going forward? Or is that more of a rebound number and we should [slow a bit]?

Well, it's definitely not a rebound number, Chris. It's a highly exciting market for us. We manufacture in the region now. It used to be just a trading company kind of selling all the products of the Company. We do still sell a lot of products that are made elsewhere in the world -- the UK, the United States. But we are manufacturing now, and we expect robust growth there going forward. That's going to be a good market for us, particularly China, Thailand and the two areas that we mentioned.

So we started from nothing, and now that thing is really coming together very nicely. So the future of that is very good. That's going to be a high-growth area, definitely double digits.

And how should we think of the operating line there? You have solid growth, but with the capacity expansions I would have to assume there's increasing overhead costs that are coming into play as we move forward.

Well, the area where we've put the most investment is in China. Specifically, we've build factories in Qingdao, and now this brand-new factory in Guangzhou. And with that and strengthening the staff over the last several years, we are getting very, very good growth of our operations in China, that we feel the growth is sufficient to offset the cost of the new plan.

I appreciate your time.

(Operator instructions) Edward Yang, Oppenheimer.

I'd like to better understand the guidance a bit, because it sounds like you were fairly confident on the revenue outlook, looking for flavors up mid-single digits, colors high-single to low-double digits. But at the same time, your EPS guidance is basically mid-single digits.

So where is the slippage in terms of the top line and bottom line, kind of?

It's a good question, Ed. The last thing in the world we want to do, and we haven't done it, certainly not in recent years, would be due to disappoint. So probably the best way I can answer your question is maybe we are a little conservative.

Okay. And related to the Flavors business and the margins again, what were European Flavors margins? Have you seen any improvement there? And in terms of the write-off that you saw on the inventory side related to your enhanced controls, was that in North America or in Europe?

Well, let me just ask about -- answer the question about the Flavor margins in Europe. In the Color Group, the margins were quite good in Europe. They deal in a lot of the same markets. In the Flavor area, they were off. There were off for a variety of reasons, really based upon specific products, and moving ahead we have other products. But in terms of the inventory, I would think --

Yes; certainly, that was affected by the inventory write-off. And we have invested in the extended distribution system into Europe, so we have some additional costs of that extended distribution system. So we are still confident we will reach our targets. It's out a little bit further as far as bringing up the European Flavor margin overall, but we have -- our Color business is doing very well in Europe. And as we get the top line from our additional salespeople, that will pull the margins up with it.

And we will be investing in Europe in the Flavor area for the manufacture of some specific product types that we feel will better penetrate the market.

Okay. And in terms of CapEx outlook for 2011 and 2012, what are your expectations there?

What we expect, because we are investing in the businesses -- and as I mentioned earlier on the question about the balance sheet, the investment into the organic businesses is the most important use of the cash. And so we would expect, in at least the next two years, maybe two to three years, that our CapEx will be in the $75 million to $80 million range.

Okay, thank you very much.

Brad Evans, Heartland.

What is your assumption for tax rate within your guidance for the year?

Well, the academic rate is about 33%, but we do expect maybe we could do 100 basis points better than that and maybe come in and 32% or so. So our guidance is based on the 32% to 33% range.

And it sounds like you, from what you can see today, based upon the favorable price raw material relationship, that you would hope to see some improvement in margins across both the Flavors & Fragrances and the Colors segment in 2011 versus 2010?

We do. We are forecasting that across the board. For both groups and for the overall Company, we are expecting that our margins will be up.

Any major changes in terms of the corporate line item in terms of expenses there?

Certainly, that's an area that we feel -- we brought in very good talent. We certainly have handled, throughout the Company, succession appropriately. And so we don't see any significant changes one way or the other as we go into 2011.

So it looks like perhaps free cash flow should be around $50 million, plus or minus. Is that a good target?

For the year?

Yes, sir.

We're expecting that our overall cash flow, which was $155.7 million, would come up a few percentage points at the operating level. So if you get the free cash flow and if we do spend, say, $75 million or so on capital expenditures, we certainly could target -- because then we have the dividend -- we certainly could target a range like that of $40 million to $50 million; I don't think that's out of the question.

I'd be remiss if I didn't say, go Pack. But great quarter, you guys, and excellent progress on the balance sheet. Thank you.

(Operator instructions). At this time there are no further questions. Presenters, do you have any closing remarks?

Well, thank you again for your time this morning. If anyone has a follow-up question after the call, feel free to call the Company. And that will conclude our call for today. Thank you.

This concludes today's earnings call. You may now disconnect.