Sensient Technologies Corp (SXT) 2012 Q1 法說會逐字稿

Good morning, everyone. Welcome to the Sensient Technologies Corporation 2012 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 of Administration of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2012 first-quarter financial results. I'm joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman, President, and Chief Executive 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 2012 first-quarter financial results. A copy of the release is now available on our website at sensient.com. Therefore 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 delivered another strong performance in the first quarter of 2012, establishing new first-quarter highs for revenue, operating income, and earnings per share. Earnings per share were $0.58, an increase of 9.4% from the $0.53 reported in the last year's first quarter.

Revenue for the first quarter was $365.7 million, up 4.6%, as reported, and up 6.3% in local currency as compared to the first quarter of 2011. Operating income grew 6.6%, as reported, or 8.8% in local currency to $46.5 million. This is the 10th consecutive quarter that Sensient has met or exceeded earnings per share estimates.

The Color Group continued its outstanding performance, achieving new first-quarter record for revenue and an all-time quarterly record for operating income. Revenue increased 4.5% and operating income was up 14.2%, as reported in the quarter. The Color Group's operating margin was 19.4%, up 160 basis points from 17.8% in the first quarter of 2011.

We will continue to focus on strong growth opportunities in digital inks, pharmaceutical coatings, specialty industrial colors, cosmetic ingredients, and natural food colors. We expect to achieve mid to high single-digit growth, and we believe that the first-quarter operating margins are sustainable.

The Flavor & Fragrance Group also had a solid quarter, with revenue increasing 4.3% to a new first-quarter high. Operating income increased by approximately 2%, as reported in the first quarter, as strong performances in the North America were offset by the performance in Europe. We expect to achieve mid single-digit revenue growth from the Flavor & Fragrance Group as the year progresses.

The corporate and other segment reported a revenue increase of approximately 7% in the quarter, driven by strong performances from Thailand, Australia, and New Zealand. Our balance sheet is strong, and we are reinvesting in our business with strategic investments in infrastructure. These investments include expanding our facilities, increasing sales coverage, and improving our supply chain management.

Last year we expanded our main North America color facility in St. Louis and opened a new food and cosmetic color facility in Brazil. We also completed a number of other investment projects around the world. In 2012 we are making significant investments to our digital ink operation in Switzerland and to our flavor operation in the UK. We have expanded the size of our sales force and technical support personnel; we have added 75 salespeople across the country since 2009 -- sorry, across the Company -- and we continue to recruit sales and technical personnel throughout the world.

Sensient is also making strategic investments to improve its global supply chain management program. This program will secure our access to high quality raw materials. These investments will ensure that the Company is well positioned for future growth.

We are actively reviewing acquisition opportunities to add technologies and broaden our product portfolio. Sensient made 2 acquisitions in the fourth quarter of 2011, which allowed the Company to gain full control of operations in key strategic markets. This year we will consider additional opportunities that improve our commercial technologies, product offerings, or access to new markets.

We are also focused on returning value to shareholders. We saw substantial value in the Company's stock during the first quarter and repurchased approximately 400,000 shares. Our strategy is focused on profit improvement and margin improvement, and our record results over the past several years demonstrate that this strategy is working.

The Company expects to achieve mid to high single-digit revenue growth, with continued improvement in operating margins. We see many opportunities for growth, and I am very optimistic about the Company's future. As a result, I am raising our earnings guidance to a range between $2.50 a share and $2.59 a share for 2012. Our previous guidance had been between $2.48 and $2.58 per share.

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

Good morning. Revenue for the quarter ended March 31, 2012, was $365.7 million, a first-quarter record for Sensient, and an increase of 4.6% from $349.7 million in last year's period. Operating income for the first quarter of 2012 was $46.5 million, up 6.6% from $43.6 million reported in the first quarter of 2011. This also represents a first-quarter record for Sensient. In local currency, revenue and operating income were up 6.3% and 8.8% respectively in the first quarter of 2012.

Diluted earnings per share were $0.58 in the quarter ended March 31, 2012; this was an increase of 9.4% from 2011 and a record for the first quarter. Sensient's cash flow from operating activities was $9 million for the quarter ended March 31, 2012, and $28.4 million for the first quarter of 2011. The majority of the decrease was due to the impact on Accounts Receivable of strong sales in the second half of the first-quarter of 2012. The Company expects cash flows in the second quarter of 2012 to increase significantly from the first quarter as the receivables are collected in the normal course of business.

The Company purchased $15.4 million of its stock in the quarter. The Company's strong balance sheet allowed Sensient to take advantage of this investment opportunity. As previously mentioned, Sensient has several capital projects in progress to expand capabilities and improve efficiencies.

Capital expenditures in the first quarter of 2012 were $16.9 million compared to $10.1 million in the 2011 comparable quarter. As a result of these items, debt increased to $358.7 million at March 31, 2012, from $343.9 million one year ago. However, both the debt-to-capital ratio and debt to EBITDA remain constant, at 24.9% and 1.5%, respectively, as of March 31, 2012, compared to the prior year.

I will now take a brief look at the results of our operating groups. Sensient's Color Group reported a first-quarter record for revenue and an all-time quarterly record for operating income. Revenue of $131.3 million in the first quarter of 2012 was an increase of 4.5% from the $125.7 million in the comparable period of 2011.

Color Group operating income of $25.5 million was up 14.2% from $22.3 million reported in the first quarter of 2011. In local currency, group revenue and operating income were up 7% and 16.7% respectively in the quarter. Operating margins increased by 160 basis points to 19.4% in the first quarter of 2012. The group's results were driven by strong growth in the North American food color business and the inks business in both North America and Europe.

The Flavors & Fragrances Group reported record first-quarter revenue of $214.7 million in 2012, an increase of 4.3% from $206 million in the first quarter of 2011. Operating income was $29.1 million for the three months ended March 31, 2012, an increase of 1.6% from the $28.6 million reported in the comparable 2011 period.

In local currency, revenue and operating income were 6.1% and 3% respectively in the quarter. Operating margins were 13.5% for the first quarter of 2012 compared to 13.9% for the prior-year period.

Volume increases in North American flavors were the primary reason for the revenue increase. Price increases in the flavors business in North America offset higher raw material costs in dollar terms, but operating margins were slightly reduced. The European operations were impacted by some softness in the European flavors and fragrances markets.

Revenue in the Corporate & Other segment was up 7.5% to $37.2 million in the first quarter of 2012 compared to $34.6 million in the prior year. This segment includes the Company's operations in Asia Pacific and China, and now the Company's flavor operations and Central and South America. Growth in this segment was driven by Thailand, Australia, and New Zealand.

As Mr. Manning stated, we have modestly increased our guidance for 2012 diluted earnings per share to be between $2.50 and $2.59. The Company's previous guidance had been between $2.48 and $2.58 per share.

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

(Operator Instructions). Edward Yang, Oppenheimer.

Nice to see the share buyback. Could you describe your thought process there? The shares outstanding actually did not decline in the quarter. Was that just the timing issue, and we will see that flow through and the second quarter?

Yes, that is right. That is a timing issue, and Jeff Makal has specific details on the shares.

The shares -- there was about 400,000 shares were purchased in the quarter, as Mr. Manning mentioned. They were purchased probably the back half of February, early March. We expect to see some reduction in the outstanding shares, to be slightly below 50 million for the year.

Okay, and does purchase of the shares reflect any change in thinking relative to CapEx investments or acquisitions, etc. -- dividends?

No. We just saw it as an opportunity. We have an authorization for about 2.5 million more. We could be buying some more, but we still are going to pursue what looked like some interesting opportunities acquisition wise with our investments.

Okay, thank you. And the divergence in the results between North America and Europe in flavors, what is driving the weakness in Europe? Is that a market share issue? Is it just a macro issue? And is the product portfolio there demonstrably different than it is in your North American business?

Actually, I have Jim McCarthy on the call. So Jim, why don't you answer that question? Just make some comments about what some of the customers have been telling us, and I think that would satisfy Ed's question.

Sure. Thank you, Mr. Manning. Ed, overall the business is very good, although we are experiencing some softness in Europe in our fragrance sector. What we are hearing from European customers are that they are really monitoring their inventories very closely.

We are also seeing some delays with some new launches, and most of this that we are hearing is primarily due to concerns over the impact of the European debt crisis there. That said, our European customers are still projecting modest growth for the year.

But did your business grow in the first quarter in Europe?

In Europe?

Yes.

We were basically flat on a local currency basis in Europe.

Okay, and you mentioned fragrance. That is only about 10% to 11% of your flavors business. Is that --

Yes, but it is in Europe, principally. That is the reason (multiple speakers). He had tacked it on to his answer because it is in Europe.

I see, I see. And I had asked about this before, but on the nat gas situation -- those prices continue to decline. Are you seeing a benefit there, particularly in your dehydrated vegetables business?

Certainly that is baked in. We do hedge in the neighborhood of, looking at the whole Company, 70% or so, a little bit less than the dehydrated flavors business, because we have a number of spot purchases we typically make towards the end of the season.

But in general, we are pretty well positioned there at $5 or less per thousand cubic feet. We certainly will see some help there. We have been doing pretty well on those purchases, and I don't want to say it is significant, but certainly there will be a little bit of help there.

Christopher Butler, Sidoti & Co.

Staying with the Flavors & Fragrances, you had mentioned that raw materials were a bit of a difficulty. Could you give us some color on that -- what the increase you saw with the specific materials were?

Yes, we did have some raw material increases, but we were able to get pricing to offset that. The kinds of areas were blueberries, strawberries, sugar, milk. Those were some of the key areas for flavor. And what happens is, if you are able to get pricing that just offsets the cost, that will have a little bit of a reduction in the margin, because you are not bringing in that pricing at an amount that would include the margin.

So it had a little bit of an impact, but I would say that for the rest of the year, we certainly expect the Flavor Group margins will be in the area of where they were last year. And as long as we are talking about this, I would add the color margins for the remainder of the year we expect to continue to be above the prior-year margins.

And if we are looking at the effect of Europe with some of the new launches, the delays of the new launches, wouldn't that be something that would depress your margins here over the course of the year, just because that is where you get a lot of your price increases from?

Paul, why don't you talk --?

Are you just asking about flavor, or are you talking about the whole Company?

You are talking about Europe, right?

Well, yeah, we can open it up to the full Company if it's applicable.

Paul, why don't you just talk about where we are in product mix and things he said?

Certainly there is a nice benefit derived from new product mix, but we are also able to generate very nice improvement into our mix throughout the Color Group, really, by focusing on our higher end of the product portfolio.

So mix continues to improve. It is consistent with our value proposition -- really, what we are trying to sell to the market. We have been systematically divesting ourselves of opportunities that are perhaps not as strongly aligned with our value proposition. And so in short, new product is a piece of this, but there is also quite a bit that we are doing internally to offset mix where we may have some shortfalls in customer product releases.

And finally before I go back in the queue, it sounds as if the repurchases that you have baked into your guidance are basically at this point that which you have already done -- that going forward you'll be more periodic and also looking for acquisitions? So this should not be considered an ongoing thing, necessarily?

Well, I really don't even know how to answer that. I would say this -- it is something that we will continue to look at. Certainly, as situations develop, there may be more attractive opportunities, but we do consider the price very attractive right now.

Chris, in support of what Mr. Manning is saying and just as a backdrop, our balance sheet is so strong that we have a huge amount of capacity to do a lot of things as will be deemed best for the shareholders. That can include, certainly, capital expenditures, which we have a very strong program there; buybacks of stock; and, of course, acquisitions. So we are in the very good position of having plenty of capacity to do those things that we deem best for the shareholders.

But they are all attractive; all three categories that Dick mentioned are attractive. So stock buyback is an attractive opportunity.

I appreciate the clarification. Thanks for your time.

(Operator Instructions). Summit Roshan, KeyBanc.

Congrats on a nice start to the year here. We touched on this a little bit, actually quite a bit, on the strong margin improvement in the colors group. I know there has been a good focus on some of the new product introductions as well as the value of products such as natural colors and such. Just to touch on that, what start of margin profile do these newer products have relative to, say, some of the more traditional product lines? Are they somewhere in the 20% to 25% on an operating basis?

Paul, do you want to take that?

I would say, certainly, that some of the areas where we have expanded into over the years, whether it is inks for industrial applications, pharmaceutical coatings, natural colors, cosmetic ingredients; these are all areas that command a premium because they require a high level of technically advanced product with strong technical support and manufacturing capabilities, all really important elements of our value proposition.

So yes, in a sense, we do get -- we certainly do get better margins than traditional products, but I would not just limit that to food. I would say that that is a true statement for each of these businesses.

Sure, I appreciate that. I guess, Mr. Manning, looking into the outlook here for our guidance, you have done a pretty good job managing raw material here on a dollar basis. Sequentially as we go through the year, what are some of the assumptions underlying the increase in raw material prices? Is that going to be something that's stabilized here, or is that going to continue to grow, say, at a mid-single-digit rate?

I would say that we don't -- unless Paul are Jim has something in mind more significant, I would expect that it would be modest, and we don't anticipate any issues being able to get price to offset whatever those increases might be. Because we get them up and down; they go both directions, and we have been able to respond pretty effectively in either case.

Paul or Jim, do you want to add anything to it?

No. I would just expect that we would be able to compensate for any raw material increases, as we have historically.

Okay.

Great. And if I could squeeze one more in. In the outlook for mid-single digit growth in both Flavors & Fragrances and the Color Group, is that on a local currency basis, or is that adjusting for what we are seeing in the FX markets right now?

What we are looking at in local currency -- 6% to 7% growth in both businesses. Certainly, as I mentioned earlier, while we expect the Flavor Group to be able to maintain their margins from the prior year, certainly with the things that Paul was talking about for color, we expect those margins to be up versus the prior year as we go through 2012.

I appreciate your time. I will get back in queue.

(Operator Instructions). Summit Roshan, KeyBanc.

Just a quick question. On the two acquisitions that were made in 4Q, in terms of growth that we saw in 1Q, is that a significant impact?

No, it was not. It was, on the top line, not a big piece. I should point out, since you asked the question, when we look at the top line, really, for both color and flavor, that was about two thirds volume. So we view that, obviously, very positively.

The remainder for the most part was price. And the bottom line -- so that is just the top line. In the case of the bottom line, going back as it relates specifically to acquisitions, it was a de minimis impact.

It was a de minimis impact, and it was an effort to gain control of the Company, so we still could invest in it, but the sales were really de minimis. And we will be investing in that, and we are -- in one case we are in the Brazilian cosmetic market, which is, we feel, a very, very big growth opportunity.

Great, and if I can get one last one in. What was the logic in your thinking behind moving the Central America and South America back into corporate?

We did that as it relates to the Flavor Group. We felt that we need to pay more attention to it from the corporate office. In the case of color, they are very well-established in these markets. And so consequently, we felt with flavor we needed to beef that up some more and put it in the status of our extended distribution system. So we have done this in order to be closer to the things that needed to be done to grow those businesses robustly.

Christopher Butler, Sidoti & Co.

Just one more for you. Could you give us a little more color on the receivables? I know that periodically in the first quarter you have had single-digit cash flow from operations, but this jump in receivables -- we didn't have a huge spike in sales here. What is driving this?

Yes. If you look at the last 6 months, and you look at the growth in the top line in the fourth quarter of 2011 and then moving into 2012, happily, those increases -- so we are talking about the year-to-year increases -- continued to grow during that period, and the most significant amounts coming in in the way of revenue. So the increases in revenue very strong, and the most significant component is in the last part of this most recent quarter.

So you are going to have an increase in revenue, then, that is affecting the receivables that is greater than what the total increase is for the quarter. And so therefore it came in at the end of the quarter. We have the receivables, and as we look at our projections for the year and we look at the impacts of growth and the working capital for the year, we expect to see much stronger cash flow. Right now our forecasts are getting us in the area, roughly, of where we were last year on operating cash flow.

As there are no further questions at this time, I would now like to turn the conference back over to the Company for any closing remarks.

We would like to thank everyone who participated on the call this morning. With that, we will conclude the call. Thank you.

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