Sensient Technologies Corp (SXT) 2011 Q1 法說會逐字稿

Good morning and welcome to the Sensient Technologies Corporation 2011 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 Stephen 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 2011's first-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 are Paul Manning, President of the Color Group and Jim McCarthy, President of the Flavors & Fragrances Group.

Earlier today, we released our first-quarter 2011 financial results. A copy of the release is now available on our website at www.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.

Thank you, Steve. Good morning. Sensient reported record revenues, earnings, and cash flows for the first quarter of 2011. Revenue increased 11.3% to an all-time quarterly record of $349.7 million. Earnings per share grew 10.4% to $0.53, and cash provided by operating activities rose to $28.4 million, an increase of 21.2%. Each of the Company's groups reported record revenues for the first quarter.

The Color Group continued its strong performance as it set new all-time quarterly highs for both revenue and operating income. Revenue for the quarter was $125.7 million, a 16.4% increase over last year. Operating income increased 23.4% to $22.3 million.

These results were driven by volume gain in food and beverage colors, cosmetic colors and inks. We continue to see strong demand for natural colors.

The Flavors & Fragrances Group reported first-quarter revenues reported first-quarter revenues of $206.7 million, a new high for the first quarter and an increase of 8.4% over the first quarter of 2010. Operating income rose by 6.5% to $29 million as volumes increased for both traditional flavors and Dehydrated Flavors.

The Asia Pacific and China groups reported revenues of $31.5 million for the quarter, which were driven by strong performances in China, Thailand, and Singapore.

Our balance sheet is strong and we -- and generated record cash flows in the first quarter. We repaid $11.1 million of debt in the first quarter and recently entered into two separate financing arrangements, a $75 million private placement and a $350 million revolving credit facility. Investor interest was very strong for both transactions, which demonstrates the confidence in the Company's future on the part of the financial community. The new financing also ensures that we will have liquidity to invest in our operations, grow the business and provide a healthy return to our shareholders.

Sensient had a record-breaking year in 2010. We have followed with record results in the first quarter of 2011 and we expect this exceptional performance to continue going forward.

Our strong financial position allows us to invest in our operations, increase our sales coverage, and develop new technologies to better serve our customers. We see opportunities for growth at all of our businesses, and as a result we have increased our earnings guidance.

For 2011, we now expect to report earnings between $2.28 and $2.34 per share. Our previous guidance had been in a range of $2.26 to $2.32 per share.

In conclusion, I have never been more optimistic about the Company's future. Dick Hobbs, our CFO, will now provide you with the details for the quarter.

Good morning. Revenues for the quarter ended March 31, 2011 was $349.7 million, an all-time high for Sensient, and an increase of 11.3% from $314.1 million from last year's period. All of our operating groups reported record first-quarter revenue in the quarter.

Operating income for the first quarter of 2011 was $43.6 million, up 12.8% from $38.7 million reported in the first quarter of 2010. This represents a first-quarter record for Sensient. Foreign currency translation increased consolidated annual revenue and operating income by approximately 1% and 2%, respectively, from the first quarter of 2011.

Diluted earnings per share were $0.53 for the quarter ended March 31, 2011. This was a first-quarter record for the Company and an increase of 10.4% from 2010.

Sensient's cash flow from operating activities was $28.4 million, a first-quarter record for the Company and an increase of 21.2% over last year's first-quarter cash flow of $23.4 million. Total debt was $343.9 million at March 31, 2011, down $77 million before currency impact in the last 12 months.

The debt to capital ratio improved to 24.9% from 26.2% at the end of 2010. Debt to EBITDA has decreased to 1.5 at March 31, 2011 from 2.1 a year ago. We expect the debt to capital ratio to reach 20% and debt to EBITDA to reach 1.2 in the next 12 months.

I will now take a brief look at the results for our operating groups. Sensient's Color Group reported all-time record revenue and operating income in the first quarter of 2011. Revenue of $125.7 million in the first quarter of 2011 was an increase of 16.4% from the $108 million in the comparable period of 2010.

Color Group operating income of $22.3 million was up 23.4% from $18.1 million reported in the first quarter of 2010. Foreign currency translation increased Color Group revenue and operating income in the quarter by approximately 1%. Operating margins increased by 100 basis points to 17.8% in the first quarter of 2011.

Revenue and operating income was up in all product lines with particularly strong results from sales of natural colors, cosmetic colors and inks.

The Flavors & Fragrances Group reported record first-quarter revenue of $206.7 million in 2011, an increase of 8.4% from $190.7 million in the first quarter of 2010. Operating income was $29 million for the three months ended March 31, 2011, an increase of 6.5% from the $27.2 million reported in the comparable 2010 period.

Foreign currency translation increased revenue and operating income by approximately 1% and 2%, respectively. Operating margins were 14% for the first quarter of 2011 compared to 14.3% for the prior year period.

Strong volumes led to higher revenues in both traditional and Dehydrated Flavors. Operating margins were effectively comparable to last year despite some one-time costs that were incurred during the quarter.

Revenue in the Corporate and Other segment, which includes the Company's operations in China and the Asia-Pacific region, was up 29.8% to $31.5 million in the first quarter of 2011 compared to $24.3 million from the prior year. As stated in local currency, revenue in the Corporate and Other segment was up approximately 24% for the quarter. This growth was fueled by record revenues and operating income from operations in China. The operations in Thailand and Singapore also performed well in the quarter.

As Mr. Manning stated, we have increased our guidance for 2011 diluted earnings per share to be between $2.28 and $2.34. The Company's previous guidance had been 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). Michael Sison of KeyBanc.

Nice start to the year.

Good morning, Mike. Thanks.

Good morning, Mike. Thank you.

Question for you. Dick, you mentioned that there were one-time [items] in flavors. I noticed that despite really good sales growth, your earnings growth was just I guess okay to some degree. Can you help us understand what those one-time items were?

Absolutely. When we look at the SG&A in the Flavor Group, there was an impact from the building of the infrastructure, the salespeople and the technical people. We continue to build that.

As a matter of fact if you look at the SG&A for the whole Company, there is continued emphasis on salespeople and technical support staff. And we do have an increase related to that.

In addition, we do have a cost in the Company as we gear up for some of the more stringent FDA rules. We have training and other costs relating to getting people up to speed to dealing with those more stringent rules so that we, the Company, is always in very good shape in that area.

When you look at all of the things that we are doing in the SG&A it's really building further the infrastructure of the Company. And it's the reason for the topline growth that we have been experiencing. We expect going forward that the SG&A will grow at a lower percent increase in the top line.

So you'll start to see that come more into line with prior periods.

Got it. So the first quarter maybe was a couple million, $2 million to or $3 million more than Flavors & Fragrances?

For the -- yes, I would say --. It would be fair to say with the Flavor Group that their margin of 14% without these one-time costs might have been closer to 15%.

Got it. And those one-time calls will lessen as the year progresses?

Yes, you will see less of an impact. We did have some costs with -- related to hiring and in some cases some severance as we continue to strengthen overall various costs of beefing up generally. Generally, the technical and sales areas.

And then so as we head into 2012, the earnings leverage for Flavors & Fragrances should be pretty [pointy] in assuming that the sales volume continues to improve?

Yes. With the benefits that we get from that infrastructure, we expect to see margins really throughout this year. We think that the Flavor Group group is positioned well certainly to surpass the 15.1% that we had in 2010, and we would expect to be pushed in more towards in the area of 16%. Certainly in the higher 15s.

Got it. And then in terms of raw materials, seems to be the buzz here in chemical land. Are you seeing any pressure, any issues going forward with maybe pricing or --?

Well Mike, we are definitely keeping up with it. Unlike most, as you say, people in chemical land, we have no real major raw material that dominates the Company in any way and we have very good coverage, some of it into 2012. But I'll just -- if, Dick, you want to add anything to that, go ahead.

Yes, to add to Mr. Manning's point, we certainly do have a diverse group of materials. Everything from sugar to corn syrups to sophisticated chemicals to onion. And we are positioned going forward with contracts in many cases where we're positioned. For example, into 2012, on a number of items, we have been able to get pricing.

And in general, we're not having an issue as you see in the market place a lot of companies. We feel we are in pretty good shape to cover the raw materials.

Great. And a quick question for Paul in the momentum and your color volumes continue to be pretty impressive. How much of that 15% is I guess wins and base demand? And how do you see that progressing as the year progresses?

Well, Mike, I would say that we have a very good combination of not only organic or base business growth, but we also have a fair expansion of the new product development growth as well. I think we -- with our better selves coverage, better technical support, we continue to penetrate more deeply with our existing customer base. And we are happy with that progress, but also in terms of penetrating in the new markets, introducing some newer products and technologies, I think we have seen a tremendous growth on the new product side as well.

So I see both areas as being very strong. I see the continuity continuing throughout the rest of the year.

So is this sort of above 10% type growth doable for the full year? Is that sort of the run rate you are still at?

I would tell you that double-digit growth is within our reach for the rest of the year.

Great. Thank you very much.

Edward Yang of Oppenheimer.

Good morning.

Good morning.

Good morning, Ed.

In your press release you mentioned strong volume gains on the Flavor side and it sounded like Paul was pretty positive on the Color side as well. Could you break out the organic growth for both segments in versus -- volume versus price?

Yes. When you look at the Flavor group -- and when you say for both segments, do you mean for both Flavor and Color?

Yes, correct. Separately, volume versus price.

Okay, when we look at the Flavor Group there it was more skewed towards the price. In the case of the Color Group there was significant volume growth. So when we look at the whole Company and we look at the impact on the quarter, the volume growth is about 20% or so of the total, total increase for the whole Company.

Okay. And on the Flavor side, what is driving the strong pricing? Is that mix, new products, or is it food inflation?

Give it to Jim.

Jim.

Yes, I would say that new products are starting to really -- we are starting to see a strong impact from our new products and from customers coming through. Our new wins were strong this quarter again and our pipeline continues to be strong.

Well, just staying with the team of Flavors margins which Mike started the path on. There were some items in the fourth quarter as well. I believe it was about $3 million of inventory writeoffs in the fourth quarter. So I would've thought that sequentially the first quarter margins might have been proved off of that.

is that just more Seasonality or what's driving the margins in the Flavors Group?

We had that in the -- we had that certainly in the Flavor Group and certainly we did have some improvement in the gross margin in Flavor. And Ed, when I said that 20%, it's a bigger number on revenue. I was looking at a profit number.

If you just looked at the total revenue, the volume is a much bigger number. Probably half of the total increase in the topline.

Okay. And on the flavor side, how happy are you? Are you making progress on the European side? I know that is a business where margins are somewhat lower than North America, but you've also been reinvesting in that business as well.

Yes, I think we are making progress. I think what you're seeing is we hope to be a much bigger company than we are today and we are building the infrastructure for that now. We are trying to increase the sales coverage. This is something that we've pretty much achieved in the US and we're still adding salesmen in Europe. We are still adding technical support people. We are even adding engineers.

So we have to build the infrastructure, and as we build that, you are going to see the effect on sales.

And less and maybe more of a qualitative question, but you know, food inflation is very much in the news nowadays. Is that a good thing for Sensient or is that a challenge? I know on one hand, one of your biggest product categories is dehydrated vegetables. So I would think you would benefit from that standpoint, but across the broader Company is that a positive or a negative (multiple speakers)?

Let me answer this way. Traditionally, and we expect that not to change, it has been a benefit.

Thank you very much.

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

Good morning, guys.

Good morning, Chris.

Good morning, Chris.

If I remember, a couple of years ago when we were last looking at significant inflation on the food side and also the front end of the recession, a lot of your customers scaled back new product development to save promotional dollars. As we are looking at the potential, at least for food inflation going forward, have you seen any sense that that is going to happen again? Or was that more of a recessionary response?

That actually was a response of the a lot of consolidation of R&D groups as a result of acquisitions. That was really not a traditional type of thing. I feel when inflation comes, it will be more along the usual lines. And although nobody wants to advertise this, I would essentially see this as a benefit for our business.

And you had talked about your strength and your balance sheet, could you give us a sense on where you might stand as far as acquisitions with some natural products or you had mentioned also some of the FDA rules that you are going to be facing. Any smaller competitors facing those as well and become candidates for takeout?

Well, first of all, we would only do an acquisition if we got something unique. Something in technology or into -- access to a market that we really don't have access to now. So I doubt that FDA rules would be driving this, but certainly unique technologies maybe even in the nonfood area like pharmaceuticals, cosmetics. Yes, we are interested in naturals and we have a very, very broad portfolio of naturals, far broader than the rest of the industry. And if there was something very unique there, we would be interested in that as well.

So I would never --. I certainly wouldn't say no to a unique opportunity. But we would not necessarily do a market share gain or acquire a company that had all the same things that we have. That would make, to us, no sense at all.

We have the ability to grow organically. We are going to add to our product portfolio and our technology, and where an acquisition can facilitate that, that is what we would do.

And where would you (multiple speakers)?

And I don't know if you have specific questions on the balance sheet for Dick.

Well, I would come back with where do you expect CapEx to be this year?

We are looking at a range of roughly $80 million to $85 million. We have a lot of projects relating to the growth. For example, growth in natural colors, growth opportunities in pharmaceutical. And so we do have a lot we are doing there, but also we're doing a lot to improve the efficiency of our factories and so we do expect to spend in that range. But we will continue with that spending to be well-positioned and continue to pay down our debt.

I appreciate your time.

Thank you.

Okay, thank you.

(Operator Instructions). Michael Sison of KeyBank.

Ken, when you think about volume growth this year, and I take a look at Paul's plan to grow double digits, Flavors & Fragrances is running at a good rate, mid-single digits, and Corporate and Other is maybe about 20 for the year. You know you'll be close to 9%, 10%, 8%, 11% growth in 11 and I take a look at the high end of your guidance of $2.34, that is about 8% growth on EPS, a little bit less, or just in line with your sales growth number.

I understand we've talked about the SG&A and investment and such. But going forward, if you grow sales a certain level, what should your earnings growth be above that level, given that all the investments that you've made this year will be, let's say, completed?

Have I ever disappointed you?

No. No, not since I have covered you.

Okay, I don't want to.

(laughter). So there should be stronger net income earning leverage down the road as these SG&A investments are, let's say, are done?

I would say there is a possibility, sure.

Got it. And then in terms of the investment you are making in SG&A and you know what type of longer term volume growth do you think those investments will help you sustain?

That's a good question. But right now as we increase coverage, as we go more and more direct even in Europe and other places, we are seeing some definite results. There is a strong correlation between sales coverage, technical support, that sort of thing and success.

So I would see a very good year this year. I would see a very good year next year unless something dramatic unpredicted were to happen. And I am talking about a calamity in world politics or world economy.

Right. Then in terms of your balance sheet, any thoughts of stock buyback or anything of that nature?

That's a good question, I'll give that to Dick.

Certainly, the Company has a lot of capability. We continue to pay down the debt and it gives us the flexibility to do a lot of things. We talked about capital and Mr. Manning talked about acquisitions that could be considered.

And certainly, depending on certainly what happens in the markets, there are times when the stock just is really unfairly priced and we have to look at something like that. But we have the flexibility to do a lot of things and we have no current plans to do the stock buybacks at this time. At least not right now.

And then last question, will you -- your returns on [as tax] turns on capital, assuming you hit your guidance there, is going to look probably the best we have seen in the last 10 years. By my calc, you will be getting close to 10% after tax.

Yes, we are looking at double digits coming up in the (multiple speakers)

Yes that's right. (multiple speakers). That's right. The thing is really, as I said in my comments, I've never been more optimistic about the business. So you are right. Yes, it is coming.

Yes, but my question was is there now a more, an internal goal to get to to a certain level of returns on capital?

We look at it closely and certainly we talk about the 10% a lot in meetings that we have and in planning with the Company. So yes, we are very much focused on that ratio.

Right. Okay. Great, thank you very much.

Thanks, Mike.

Thank you, Mike.

And there are no further questions. Are there any closing remarks?

Thank you again for your time this morning. If anyone has a follow-up questions after the call, please feel free to contact the Company. This concludes our call. Thank you.

Thank you. You may now disconnect.