Sensient Technologies Corp (SXT) 2012 Q4 法說會逐字稿

Good morning everyone and welcome to the Sensient Technologies Corporation fourth-quarter and year-end 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 2012 fourth-quarter and year-end financial results. I am joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman and Chief Executive Officer, Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer, and Paul Manning, Sensient's President and Chief Operating Officer. Yesterday, we released our 2012 fourth-quarter and year-end 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 delivered record results for 2012. This is the third consecutive year that we attained record levels for revenue, net income, and earnings per share. Earnings per share increased to $2.49 in 2012 compared to $2.41 in 2011. Revenue in 2012 was approximately $1.5 billion, compared to $1.4 billion, reported last year. In local currency, earnings per share increased by 6.2% and revenue increased by 4.6%. The Color Group had a stronger year delivering record revenue and operating income for 2012. Revenue reached $494.1 million, and operating income grew to $94.1 million. In local currency, revenue and operating income increased by 4.1% and 8%, respectively.

The Color Group's operating margins increased 70 basis points to 19% for 2012. Operating margins have increased by 170 basis points in the last two years as the Color Group has focused its sales efforts on higher margin products. In 2013, we expect the Color Group's operating income to grow by mid- to high-single digits in local currency. The Flavors & Fragrances Group also reported record revenue in 2012. Revenue was $875.3 million, an increase of 4.6% in local currency. Operating income was $123 million for the year. Operating income declined slightly for 2012 due to increases in raw material costs as well as customer destocking particularly in the second half of the year. We expect the Flavors & Fragrances Group to achieve mid- to high-single digits operating income growth in local currency next year.

Yesterday we announced a broad and strategic restructuring program. This program provides for the relocation of the global headquarters for the Flavor & Fragrance Group as well as the relocation of management and technical personnel for our US flavor businesses to Chicago. We believe that there are a number of strategic advantages to relocating this business, including giving us better access to our customers, improving our access to food industry talent, and allowing us to showcase our broad product portfolio in a state-of-the-art facility. Many of our largest customers have locations in the Chicago area and this move allows us to be closer to those customers. In addition, the proximity to a major international airport will make our new facility easily accessible for all our customers and suppliers. The central location and enhanced transportation options will also make it easier for our management team to visit customers and to access our businesses around the world. The new facility has been designed to emphasize the customer experience. It will include a large customer presentation area and state-of-the-art laboratories for each of our product lines. We are confident that this facility will allow us to showcase our innovative capabilities to customers and attract and retain talented technical personnel.

In addition, we are implementing a worldwide profit improvement plan throughout the Company. The result of this plan will be to reduce our global headcount and consolidate several facilities in North America and Europe. These changes will make our operations more efficient and substantially reduce our cost structure without impacting sales and technical coverage or our manufacturing capabilities. We are making these changes to position the Company for even greater profitability and we expect these programs to be completed within a year.

We will continue to invest in our business as we manage these restructuring efforts in 2013. We invested more than $100 million of capital into our operations in 2012 and we remain focused on upgrading our capabilities and developing new technologies. We also continue to evaluate acquisition opportunities. We will be selective in considering acquisition targets, focusing on opportunities that enable us to broaden our product portfolio and to commercialize new technologies.

Sensient remains committed to increasing shareholder value. In 2012, we raised quarterly dividends to $0.22 per share. This was the sixth increase of our quarterly dividend since 2006. We also used the Company's share repurchase program to purchase more than $23 million of Sensient shares last year. I am very confident about Sensient's future. The Company is strong and the 2013 profit improvement and restructuring activities will improve our cost structure and facilitate future growth. We expect to report earnings, excluding the impact of the restructuring charges, in the range of $2.64 to $2.72 per share in 2013. Dick Hobbs, our CFO, will now provide you with the details for the quarter.

Good morning. As Mr. Manning stated, Sensient reported another year of record revenue and earnings per share. Annual revenue for 2012 was $1.46 billion, an increase of 2% from 2011 revenue of $1.43 billion. Operating income was $191.2 million in 2012 and $190.8 million in 2011. Foreign currency translation decreased both consolidated annual revenue and operating income by approximately 3% in 2012. In local currency, revenue and operating income increased by 4.6% and 2.9%, respectively. Diluted earnings per share were $2.49, an all-time high for the Company and an increase of 3.3% from $2.41 reported in 2011. In local currency, earnings per share increased $0.15 or 6.2%.

Sensient's revenue $356.2 million for the quarter ended December 31, 2012 was the fourth-quarter record and an increase of 4.7% from $340.4 million reported in last year's fourth quarter. Operating income in the fourth quarter was $39.7 million and $43 million in 2012 and 2011, respectively. Foreign currency translation did not significantly impact revenue or operating income in the fourth quarter of 2012. Diluted earnings per share were $0.55 in the fourth quarter of 2012 compared to $0.57 in 2011.

Sensient's cash from operating activities was $139.4 million for 2012 and $142.9 million for 2011. Cash flow is strengthened throughout the year and we're up by 30% in the fourth quarter. The Company invested $103.8 million during 2012 to upgrade its production facilities and expand its technical capabilities. Sensient repurchased $23.2 million of company stock in 2012. Total debt as of December 31, 2012 was $354 million, compared to $335.4 million as of December 31, 2011. Sensient's balance sheet remains strong. The Company's debt to total capital ratio improved to 23.5% on December 31, 2012 from 24.2% at the end of last year. Debt to EBITDA was 1.5 at the end of 2012 and 1.4 one year ago.

As Mr. Manning mentioned, Sensient is implementing a broad and strategic restructuring program. The program results in the relocation of our Flavors & Fragrances Group headquarters to Chicago, the consolidation of several manufacturing facilities in North America and Europe, and the elimination of more than 200 positions worldwide. The restructuring program will result in one-time cash expenses between $20 million and $24 million, most of which will be recognized in the next 12 months. In addition, we will recognize non-cash asset write-downs of between $6 million and $8 million. Annual savings from the program are anticipated to be between $10 million and $12 million with approximately $6 million to $7 million being realized in 2013. The savings in 2013 will be weighted more to the latter half of the year.

I will now take a brief look at the results of our operating groups. Sensient's Color Group reported record revenue of $494.1 million for 2012 compared to $491.9 million in 2011. The Color Group's operating income was $94.1 million, also an all-time high and an increase of 4.3% from $90.2 million reported in 2011. Foreign currency translation decreased both revenue and operating income in the year by approximately 4%. In local currency, revenue and operating income increased 4.1% and 8%, respectively, in 2012. Operating margins increased 70 basis points to 19% in 2012. Strong performances from the North American Food and Beverage business and the Digital Inks business drove the increased results. Revenue for the Color Group is $114.3 million and $112.8 million for the fourth quarters of 2012 and 2011, respectively. Fourth quarter Color Group operating income was $19.1 million in 2012 and $20.3 million in the prior year. Foreign currency translation reduced both revenue and operating income by approximately 1% in the quarter.

The Flavors & Fragrances Group reported record revenue of $875.3 million in 2012, an increase of 2.1% from $857.5 million in 2011. Operating income was $123 million in 2012 and $129.4 million in 2011. Foreign currency translation decreased revenue and operating income in 2012 by approximately 3% and 1%, respectively. In local currency, revenue increased 4.6% in 2012. Operating income was impacted by increased raw material cost and customer destocking. Revenue for the Flavors & Fragrances Group was $216.9 million in the fourth quarter of 2012, an increase of 5.6% from $205.4 million reported in the same period last year. Operating income was $28.7 million in 2012 and $31.8 million in 2011. Foreign currency translation impacted revenue and operating income by less than 1% in the quarter.

Revenue in the Corporate and Other segment, which includes the Company's operations in China and the Asia-Pacific region and certain flavor operations in South -- Central and South America, was up 9.2% to $156.8 million in 2012 compared to $143.6 million in the prior year. For the fourth quarter of 2012, revenue was $40.4 million, an increase of 15.2% from revenue of $35.1 million in the fourth quarter of 2011.

As Mr. Manning stated, we expect both the Color and Flavors & Fragrances Groups to generate solid revenue growth in 2013 and benefit from our cost reduction programs. As a result, Sensient expects 2013 diluted earnings per share, excluding the impact of the restructuring charges, to be between $2.64 and $2.72.

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

(Operator Instructions)

Michael Sison, KeyBanc.

A little bit late in the game for that -- but just wanted to get a little bit of a feel, you continue to grow your sales in Flavors and Fragrances is really well and operating income fell a little bit in the fourth quarter. Any color to that? Was that just anomaly and the cost savings programs you're undergoing should give you the better leverage in '13?

Paul, why don't you take that?

I would say this, we had some raw material impact in the fourth quarter, in particular in the dehydrated group. The bigger issue here was Flavors and I think the changes that you are going to start to see, you'll start to see in 2013. We have got substantial upside in that business in terms of gross margin, operating margin, and I think as you mentioned, the revenue growth has been fairly good. We think as we continue to upsell this portfolio as we did with the Color Group, there are a lot of analogies there. We will recover from the pricing components, but I think the bigger issue here is focusing on the value end of this market is going to overall raise the profit levels to a very sustainable and consistently growing level.

Okay. And then, Paul, in terms of the timing, the cost savings that you are undergoing, the bulk of it will be in the second half and some of that in '14 or will you be able to get all of it in '13?

Well, we just announced it today. Some of that will begin to be executed today. However, there are pieces in terms of some of these consolidations that will take a bit longer. In which case, that would be several months of continuing operations until such time that we can consolidate into the new site. So we would carry some of those -- we're not going to ever move 200 individuals on February 8. And we are not going to consolidate all the facilities on the eighth, but I would tell you that we will substantially make progress and we would expect to generate the full-year savings starting January 1 of 2014, but we will see a fair amount of savings this year throughout the reductions that we have globally.

Okay. And then Ken, you mentioned acquisitions. It has been a while since you have undergone any major transactions. Are you looking for a third leg? Are there opportunities to maybe buy something that helps fill out the of the infrastructure on your cost, maybe optimize it from that standpoint little bit better? Or maybe just give us a feel for what could be really attractive to you guys?

Sure, well Mike, actually we have sprouted other legs, certainly in the Color Group. We feel the cosmetic business has great potential, particularly in a place like Brazil. We did that acquisition last year where we bought out our partner. We also feel that longer-term, pharmaceutical will be quite good and industrial inks is going dynamite in Europe. And we also have across the food and beverage business. But I would say what we are looking for is technology, technology that we can commercialize rapidly.

We are looking at a variety of pieces right now. I would guess in the next couple of months, you might hear of one or so. These would be areas that would be new for us in terms of product types, but they would be also new to us in terms of the technology capability it would give us. We have really a very good basic business. The business is looking good for 2013. We are going to add to the product portfolio and we're going to add to our technological capability and that is where the focus is. You will not probably see, and I will never say never, but you will probably not see a big, big acquisition. You will probably see smaller acquisitions focused on technology.

Great, thank you.

Christopher Butler, Sidoti & Company.

Looking at SG&A expenses, it was a little bit higher than where you had been running with this restructuring being announced. Is there anything else in that number, consulting costs or things of that nature that may not re-occur as we look to next year?

We did have some one-time things that did hit it in some of our administrative costs. So there was a component of it that would be considered that we would not expect to repeat going forward. Certainly, of the 60 basis points or so increase versus last year, a big chunk of that will be mitigated by the restructuring program. And certainly, the element that probably is the most important for the future, I think Paul was going to talk about this a little bit, is some of the people we've added and some of the things we've done in a variety of different locations around the world.

Paul, do you want to add anything to that?

Yes, let me say a couple of things, Chris, on that one. Flavors, we have been fairly flat. I think you're going to see that continue, perhaps there may even be a slight decline, but I think we're going to keep that fairly steady. In Colors, I think we are going to benefit obviously from this restructuring program to take down some of the SG&A costs. But I will say this, as we left 2011 and started into 2012, we really introduced a number of strategic initiatives to grow the Color Group.

Let me just mention a couple of them. We obviously talked about the Brazil cosmetics business. We purchased that joint venture. We've made a lot of investments in that. That is a very exciting market. That is one of the largest personal care and cosmetic markets in the world and we have really made some nice investments to help us not only within Brazil but within Latin America at large.

In addition, as you remember, we added the Food Colors site in Brazil where we've made substantial investments as well in terms of new technical and sales people. These are both very good businesses, very good growth rates, and I would anticipate we will continue to generate those results into 2013. And as we do grow that top line, the SG&A will obviously be less of an impact in both of those. But in a couple of other areas, pharmaceuticals, and specifically pharmaceutical excipients, coatings and colors, which we have really made some investments in, that is a slower burn. And I think that is a phenomenal business.

We have created a new business to expand our coverage into Europe and so those were investments that we made, again strategic investments for which we did not anticipate a substantial return in 2012, but we certainly do moving forward. And if I could just mention a couple of other those investments that we made. The industrial colors business, where we address everything from seed coatings to other non-food applications, very good market, very fragmented market. And so we have the ability to really make a good impact as we have in North America in the last couple of years. We created a business to focus our efforts in Europe, Middle East, and Asia-Pacific for that business.

So, there are investments and then of course you know very well the inks investment in Europe where we are doing exceptionally well. And then of course, our base business, the food colors business, where we've added a number of technical resources throughout the world to support ongoing innovation and R&D, where we have really had a lot of success already and we will continue to have success there.

With the optimism on the growth opportunities and margin expansion in the Color Group, why only mid to upper single-digits operating income growth in year two segments and the seemingly relatively cautious EPS guidance?

Paul, why don't you --

Well I would say this, Chris. We certainly -- there is always possibilities of great success. We want to -- we certainly don't want to disappoint anyone. We had what I would view as a fairly good year in the Color Group. We grew the gross margin 250 basis points, the operating margin we grew the top line, we grew the bottom line, we did a lot of what I have been describing as trimming of the low-margin business. And I think -- we think there is a very positive year coming forward but we simply don't want to disappoint.

Dick, think you want to add to that?

Thanks, Ken. Chris, looking at the earnings per share for the year, we are looking of course at a range of 6% to 9% increase as a potential if you look towards the higher end of the range there. And we feel comfortable with that, certainly when considering the fact that as we came out of 2012, we had roughly a 3% to 6% expectation based on the momentum of the costs and the situation in the business. With the restructuring, we immediately add another 3% to that. Now, is there something beyond that? Right now, I think as Paul said, and as Mr. Manning typically says, we do not want to disappoint.

Certainly, all the right things are happening. The move of the Flavor Group will be completed later this year. Hopefully by the time we even get into the fourth quarter. We think there is going to be a lot of excitement by our customers. There's going to be a lot more opportunities to move customers in and out of that area. So there are a lot of things, as Paul has mentioned, very positive going on in the Company. But, we do not want to disappoint. So we are comfortable with our forecast range in the roughly the 6% to 9% on the bottom line.

Yes, and Dick, if I could just add one more thing and Chris just to give you little bit more background. We obviously -- we are doing a lot in Flavors right now. It is clear we need to address Flavors. I know that there has been some concern about that segment, but I can tell you this, we are fixing Flavors and we're fixing it big time. I said last time, we are going to shake the organization up and we are going to start directing them towards a very strategic view of the market, focusing on value selling and taking advantage of these very strong core capabilities that we have in Flavors.

And so on this next call, we are talking about consolidating. We are talking about removing cost. We are talking about making it more efficient. Along with that, though, is a lot of these -- the changes in the commercial mindset of the Flavors Group. As I said earlier, there is a huge upside in this business. Not only on the top line, but also in gross profit, operating margin. This is a good business with all the potential of the Color Group if not more. And I think that we are going to see the benefits in the short-term, I don't think this is going to take a great deal of time. You will start to see the effects this year. But I want to make sure we don't disappoint you.

I appreciate your time. I will let others get in.

(Operator Instructions)

Edward Yang, Oppenheimer & Co.

Good morning. This is Luis Amadeo on for Ed. Just to clarify, the $10 million to $12 million you identified for the restructuring benefits, that is only for the headcount reductions and manufacturing consolidations? And if so, what are the benefits -- or additional benefits you could expect from the relocation of your headquarters and just having better access to your customers and that thing?

Well, Paul is probably the right guy to talk about the relocation of Flavor. He has been the key driver in much of that.

Yes, and so I would say this, number one, I think Chicago offers the opportunity to have far greater access to our customers versus a city like Indianapolis. Chicago is by any definition, one of if not the food capital of the world, so there is a huge talent base available in that marketplace. And as we begin to really transform the Flavors Group and build that into a much better business with much more consistent growth and sustainable growth, we are going to really need to continue to add to our business and have that talent available to us. And so that is going to go a long way towards helping us grow the top line.

Similarly, I think Chicago being accessible to all parts of the world makes it much more realistic for customers to come to your site, for us to showcase technologies, and I think that, that accessibility is very important. When customers come, you get projects. You get items in your pipeline that you can grow the business from. You can show your capabilities to a far greater degree. So, those are the benefits with respect to Indianapolis and now we expand talk about the rest of the restructuring.

I would tell you that number one, eliminating redundancies and improving efficiencies goes a long way towards simplifying the operation. And when we can do that, we can create critical mass in certain production areas, simplify the operations, improve supply chain, all of the things that you would expect. And so with these consolidations, I think you are going to see a much more rationalized and streamlined organization which is going to support our success moving forward.

Thank you. That is very helpful. And so, if you can, I don't know if you can answer this, but what operating margins are you expecting post restructuring? Is there a range that you are looking at or --

Paul do you want to take that one?

Yes, I'll take that one. Well, the Color Group we really crossed into the 19% threshold for the operating margin in 2012. I think with the restructuring, with the investments we've made, the very strong pipeline, the very good sales coverage, and all of the other things we have been doing over the last three years, very much investing in the business with an eye towards the future. You're going to see operating margins certainly crossing the 20% threshold. I would tell you that right now in January, it already exceeded 20% and I think you're going to start to see that on a very consistent basis. Certainly, the SG&A cost reduction is going to help as well.

And so, as I've said for the last 12 to 18 months or so, 20% is very achievable and consistently getting 20%. So this will not be a 20% this quarter and something substantially lower than next and something different the quarter after that. We are really driving towards consistency. Now within the Flavor Group, as I mentioned, we've got a lot of upside there, a lot of upside. We have a big gap to catch up with the Color Group, but again it is very achievable and I think the big emphasis there, we will take out some SG&A costs and that is good, but the big emphasis is the top line growth of the value and of our portfolio, that is going to be the biggest impact and you're going to see improvements in operating margin as we move forward.

So the 20% in Color, that is achievable in 2013 or just after the restructuring?

No, it's already been achieved and we are going to be -- I think you're going to see us operating consistently within this 19% to 20%, perhaps even in excess of 20% as we move forward.

Okay, thank you. And lastly, what is your current expectation for CapEx and the tax rate for this year?

Dick, why don't you take that.

Thanks, looking at the CapEx, I'll start with the CapEx, we spent just over $100 million in 2012. I would describe 2013 as more or less, barring any major significant opportunities beyond the ones we've already identified, I would see it peaking as far as CapEx and our initial expectation was around, in the neighborhood of $120 million for 2013. That is going to move up because of the restructuring. We will have capital expense relating to the -- very little relating to the restructuring, but a bigger component relating to moving the Flavor Group headquarters. So, we see --

To the building in Chicago.

To the building in Chicago, the headquarters in the US people, the US heads of the businesses and the technical and our R&D people are moving to this location. So we would see that number going up in the neighborhood of $140 million for 2013, but we would expect it to fall off from there and ultimately as I say, barring any major opportunities we would see it coming back down under $100 million probably in the next two to three years.

Regarding the tax rate, right now as we look ahead to 2013, we are roughly staying around 32%. We are hoping, certainly, that we might have some opportunities for some credits along the way, but we are also hoping that we might be able to shave a bit off that. So 32% is our official number that we are using, but we are working to shave that a bit if we can.

Okay, thank you very much. Have a good day.

Garo Norian, Palisade Capital Management.

I just wanted to see if I could understand a little bit better what kinds of stuff the restructuring you are expecting to do in Europe? I just had experiences with companies with the works councils and other things over there, typically it is longer and more expensive than maybe initial expectations?

Well, we certainly have a lot of experience with work councils. And we have pretty much laid this out. So, I'll pass this initially on to Paul.

Yes, I would say this. We've got a few sites in Europe that we will be consolidating. We do not anticipate that, that we will have issues with any particular works council. In fact, initial reads are all very positive in that regard. The cost that we have built into this program are all consistent with respect to severance and notice periods and all requirements within the European Union. We've certainly met those expectations. And we would not expect a substantial difference in terms of the costs that we have already estimated for those. In most cases, I think the sentiment that I could share with you is that, the individuals at these sites understand very well the decision and it makes very good sense. We have had very little -- very little surprise in that regard.

Great, and one other question I had was, you had mentioned about some of the raw material impacts in the Flavors and Fragrances side in the quarter. I was curious have you gotten through that period or is that going to linger through the first part of this year or how do you think about that?

Paul, you want to take that?

Yes, I would say we've got some in the dehydrated division, the onion and garlic side, that we have gotten a substantial amount of price in certain markets. However, we do anticipate a little bit of trickle into 2013. With respect to certain other products affected during the year 2012, we have addressed those substantially in terms of price in the Flavors Group. And that when you look at that Colors Group, we have -- as has been our practice over the last couple of years, we have certainly covered our raw material increases with pricing. Cover them in an effort to preserve gross margin and not just simply gross profit dollars, but the actual gross margin that we're earning on those products.

Great, thanks.

Christopher Butler, Sidoti & Company.

Thanks for taking the follow-up. It probably ties in with the last question a little bit, but if we are looking at what you are guiding to for 2012 at the end of the third quarter, you came in at the bottom end of that range. Is this a pricing scenario that didn't play out the way you thought that would have gotten you to the top end of that range?

Chris, let me give you a high-level view on that initially. The fourth quarter was really an anomaly. There were certain situations such as destocking. There was a lot of economic uncertainty, I guess that may have been driven by the cliff, and even Sandy created some problems. And we had a very, very unusual December. The thing was extremely unusual. It is not going to get repeated. The first quarter is going very, very well. We are optimistic about the -- 2013 and all I can tell you is the fourth quarter, particularly from the end of November and December, was a real anomaly. Dick, if you want to add anything to that?

Thanks, Ken. Yes, we did have a little bit of a gap on the pricing and as Mr. Manning has noted, Paul has noted, we are mitigating that and things look very good as we come into 2013 and we look at, for example, how things are going in January. We are very comfortable with how things are going in January as it relates to looking at our plan for the year.

Paul, do you want to add anything?

Yes, this would be an interesting data point for all those who are on the phone right now. But on a sequential basis, Q4 to Q1, Q4 2012, and now going into Q1 2013, the operating profit -- I'll give you one data point here. The operating profit of the Color Group, between January and December, is up more than 60%. So Q4 was an anomaly. We do not see that in 2013 and we are certainly not seeing that right now. We expect the results to continue to be positive.

I appreciate the clarity.

As there are no further questions, I will now turn the conference back to the Company for closing remarks.

Okay, that will conclude our call for today. Thank you to everyone who participated. If anyone has a follow-up question, please feel free to call the Company. Thank you.

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