Sensient Technologies Corp (SXT) 2014 Q4 法說會逐字稿

Good morning, everyone and welcome to the Sensient Technologies Corporation 2014 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, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2014 fourth-quarter and full-year financial results. I'm joined this morning by Paul Manning, Sensient's President and Chief Executive Officer. Yesterday, we released our 2014 fourth-quarter and full-year financial results. A copy of the release is now available on our website at Sensient.com.

Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Securities Litigation Reform Act of 1995. Our statements may be affected by certain factors including risks and uncertainties which are discussed in detail in the Company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today. Now we'll hear from Paul Manning.

Thanks, Steve. Good morning. Sensient reported fourth quarter earnings -- adjusted earnings per share of $0.71, an 11% increase over the $0.64 reported in last year's fourth quarter. Operating profit increased by more than 8% in the quarter driven by growth in the Color Group and Asia-Pacific as well as lower corporate expenses. Consolidated operating margins improved to 14%, up 130 basis points from 12.7% reported in the fourth quarter of 2013. For the year, adjusted earnings per share were $3.02, an increase of 11% from $2.73 reported in 2013.

Consolidated operating profit increased by 8% and operating margins improved 120 basis points to 15.3%. Each of our operating groups improved their margins during 2014. Cash flows from operations increased by more than 70% in the fourth quarter to $62.1 million driven by solid earnings and significant reductions in working capital. Excluding the impact of currency, inventories decreased by $15 million in the fourth quarter. For the full-year, operating cash flows were $189 million a 23% increase over last year.

In addition, free cash flow more than doubled to $110 million. Shareholders directly benefited from this outstanding performance as the Company returned $185 million via share buybacks and dividend payments in 2014. The strong results our restructuring actions and lower capital expenditures also drove an improvement in return on invested capital which increased 50 basis points to 10.2%.

Sensient's Color Group is the global leader for food and beverage colors and we have the unique ability to provide both synthetic and natural color solutions to our customers. We are also a global leader for industrial inks and cosmetic ingredients and we have strong capabilities in pharmaceutical excipients and industrial colors. The Group performed very well in the fourth quarter despite challenging economic conditions. In local currency terms, fourth-quarter revenue grew by more than 4% and operating income increased 8.5%.

The industrial inks and US food color business units were the strongest performers driving the group's operating profit margin to 21.5% in the quarter. For the full-year, local currency growth was approximately 4% on the top line and more than 7% for operating income. Operating margins for the year improved 80 basis points to 22.6%.

Our Flavors & Fragrances Group has strong capabilities in sweet, beverage and savory flavors, natural ingredients and fragrances. We have aligned our commercial and technical activities around common product lines and we will continue to shift the group's products mix from simple ingredients to more complex flavors and flavor systems. We are also progressing with the restructuring program and other efforts to lower costs. Once completed, the combination of improving our product mix and reducing our cost structure will increase the Group's financial returns and enable them to deliver more consistent results.

We're making progress in the Flavors & Fragrances Group. Several of the groups business units delivered operating profit growth and higher margins during the year and the Group's operating margin improved 40 basis points to 14.1%. The Group's results were impacted by soft economic conditions in the fourth quarter. Operating income for the Group was off 10% in local currency as many of our customers reduced their production levels, delayed product launches and otherwise managed their inventories. The changes that we are making in the Flavors & Fragrances Group will make the business stronger and allow it to produce more consistent results. We are making progress but we still have work to do.

The Corporate and Others segment, which includes our operations in Asia-Pacific, reported improved results in both the fourth-quarter and full-year periods. Revenue for this segment grew by approximately 3% in local currency in the fourth quarter and the Group also reported higher operating income. Most of the businesses in the Asia-Pacific region reported double-digit profit growth in local currency.

Corporate expenses were lower in the fourth quarter. We have reduced the size of our staff and we have made several changes to executive compensation which lowered costs and strengthened the link between pay and performance. These savings reflect structural changes in our costs and they are sustainable. 2014 was a successful year for Sensient. The Color Group delivered another strong performance and we implemented unprecedented changes in the Flavors & Fragrances Group and expect improved results for this Group in 2015.

Looking to the future, recent movements in the currency markets including a strong dollar and the recent strengthening of the Swiss franc have had a significant impact on our outlook for 2015. For example, Color Group has production based in Switzerland and almost all this product is sold in euros or dollars. Stronger Swiss franc relative to the euro and dollar has reduced our local currency operating profit expectations for the Color Group by approximately $0.05 to $0.08 per share. In addition, the US dollar has strengthened against most other currencies. The combined impact of the Swiss franc change and the strong dollar will be $0.23 to $0.28 per share based on current exchange rates. In summary, our current earnings per share guidance for 2015, accounting for the currency impact and excluding restructuring costs, is a range of $3.02 to $3.12.

Early in 2014, Sensient announced a four-part plan to enhance shareholder value that include restructuring savings, governance improvements, a dividend increase and share repurchases. Let me give you an update on each of these items. The objective of our restructuring efforts is to lower costs and improve operating efficiencies by eliminating underperforming operations and consolidating manufacturing facilities. These actions are on schedule. We are executing our plan to ensure that we effectively transfer our production capabilities while minimizing the disruption to both the business and our customers. We still expect to incur pre-tax charges of approximately $120 million to $130 million and generate annual cost savings of approximately $30 million upon completion of the program. Most of these actions will be completed by the end of this year.

We made a number of changes to our governance and compensation policies in 2014. We adopted a majority voting standard for uncontested Board elections, appointed a lead Director and added two new independent Directors. We remain committed to ongoing Board refreshment. We also adopted several changes to our compensation policies in 2014 strengthening the link between pay and performance.

In the first quarter of 2014, the Board of Directors increased the Company's quarterly dividend by 9% to $0.25 or $1 per share on annualized basis. Sensient has increased its quarterly dividend by 40% over the last six years. Last March, the Company committed to repurchasing 2 million shares of its stock over the following 12 months and we completed that commitment in the second quarter. In July, the Board approved a new share repurchase authorization allowing the Company to purchase an additional 5 million shares. We purchased 500,000 shares in the fourth quarter bringing the total for the year to 2.5 million shares. We expect free cash flow to be strong in 2015 and we will continue to evaluate share repurchases on an opportunistic basis.

Our strategy is working. In 2014 we delivered operating profit growth, improved margins, strong cash flows and returned $185 million to stockholders. Sensient's stock generated a total shareholder return of 27% last year which was significantly higher than the 15% generated by the S&P 400 Specialty Chemicals Index. I'm very pleased with the Company's performance in 2014 and we remain committed to delivering sustainable long-term value to our shareholders. Steve Rolfs will now provide you with the details for the quarterly and annual results.

Thank you, Paul. Sensient reported revenue of $342.8 million for the quarter and operating income was $36.2 million. The reported results included $11.8 million of restructuring costs in 2014 and $5.7 million of restructuring costs in 2013. Excluding these costs, operating income increased 7.6% in the fourth quarter. In local currency, fourth quarter revenue and adjusted operating income increased 1.8% and 11.4%, respectively. Our adjusted operating margin increased 130 basis points to 14% in the quarter.

Diluted earnings per share, as reported, were $0.55 in the fourth quarter compared to $0.57 in the fourth quarter of 2013. Adjusted earnings per share increased 10.9% to $0.71 per share, as reported, and by 15.6% in local currency. For the full-year, revenue was effectively flat relative to 2013 as we reported approximately $1.45 billion in both years. We have continued our strategy of shifting to value added and technology driven products in each of our groups while actively rationalizing non-strategic and low-margin business. Removing this effect, revenue grew by 2.5% in local currency for the year.

Full-year operating income was $130.7 million in 2014 compared to $173.8 million in 2013. The 2014 results include $90.6 million of restructuring and other costs compared to $31.7 million of restructuring costs in 2013. Adjusted operating income increased 7.6% to $221.2 million in 2014 which is 8.7% growth in local currency. The Company's adjusted operating margin increased 120 basis points to 15.3%. Earnings per share were $1.67 in 2014 and $2.29 in 2013. Adjusted earnings per share increased 10.6% to $3.02 in 2014 which is an 11.7% increase in local currency. Sensient's cash from operating activities increased by more than 70% in the fourth quarter and 23.2% for the full-year.

We implemented initiatives in 2014 to reduce our working capital levels and achieved significant inventory reductions in the second half of the year. Our inventory days decreased by approximately eight days during 2014 and we expect to see a further reduction in 2015. Free cash flow increased by more than 100% and this strong performance allowed us to repurchase 2.5 million shares of company stock during 2014. As Paul stated, we will continue to evaluate opportunities to repurchase shares.

Capital expenditures were $79.4 million in 2014, down almost 25% from last year's level. Looking forward to next year, we expect capital expenditures to be in the range of $75 million to $85 million. We have been focused on improving both free cash flow and return on invested capital and delivered solid improvements in both areas last year. We expect to achieve further improvements in 2015.

Now I will briefly review the results of our operating groups. For the quarter, the Color Group's revenue and operating profit increased by 4.3% and 8.5% respectively, in local currency. The Group's fourth quarter operating margin improved 70 basis points to 21.5%. For the full-year, local currency revenue and operating profit increased by 3.7% and 7.3% respectively. The Group's operating margin improved 80 basis points to 22.6% in 2014.

The Flavors & Fragrances Group's revenue was flat in local currency in the quarter. Operating income decreased approximately 10% in local currency as the Group was affected by soft markets. For the year, the Group's revenue was off 2.7% in local currency due to the impact of strategic revenue actions. Operating income was flat in local currency for the year and the Group's operating margin improved 40 basis points to 14.1%. We are seeing encouraging signs of progress in the Flavors & Fragrances Group but efforts continue to reposition the business.

Revenue in the Corporate and Other segment, which includes the Company's operations in the Asia-Pacific region and certain flavor operations in Central and South America, was $36.2 million in the fourth quarter and $146.7 million for the year. In local currency, revenue increased 2.8% for the fourth quarter and 4.2% for the full-year. The adjusted operating expense in the Corporate and Other segment improved by approximately $10 million in 2014. This improvement was driven by improved profitability in the Asia-Pacific region and a reduction in corporate expenses. Thank you very much for your time this morning. We will now open the call for questions.

(Operator Instructions)

Mike Sison, KeyBanc

Good morning, Mike.

Hey, good morning, guys. Paul, when you think about 2015, can you maybe walk us through the type of growth you think Flavors & Fragrances should be able to generate new products and all that good stuff? And then help us try to bridge the gap between the cost savings that should be a nice boost to operating income growth and then unfortunately, maybe the negative from the foreign currency as we look to model out 2015?

Sure. Let me start a little because I think this may help the group understand the impact of the currency issues. As we looked at the year we finished at $3.02. So as we made our projections for 2015, before considering the impact of currency, we essentially came up with a range of $3.25 to $3.35 for EPS. After we factored in the translational impacts of dollar-peso, dollar-euro and dollar-Canadian dollar and took into account the Swiss franc to euro kind of transactional piece we effectively lowered the guidance by between $0.23 and $0.28.

That was the impact that those FX effects had which brings us to where we are today. The $3.02 to $3.12. Now, that's based on where we anticipate -- that's effectively where the FX is today. That may change. That may not change. But again, I think if you start with the idea $3.25 to $3.35 is the underlying performance of the business that gives you a pretty good sense of how we think we'll do.

So to the other part of your question, maybe more specific to the operating groups and Flavor in particular. As we look at this, and if I were to make some projections for the year, certainly we've talked about Flavors and our efforts with respect to culling and the like. So we're projecting flat revenue for Flavors in 2015 but I definitely see mid-single OP and quite frankly, I could see a path to high-single OP growth in the Flavor business for the year along with 100 to 200 basis-point improvements in each of gross margin and operating margin. I'm not very happy with the Flavor performance in Q4 but we're very much on track and I have a lot of confidence that we will perform in 2015.

As we go to the other businesses, I think Asia-Pacific will have another very strong year and I would project double-digit OP growth out of that group. Color, we have the very profound impact of the Swiss franc to euro change. Obviously, that came suddenly and without warning to the entire market and so the impact of that will be felt in the Color Group because that's where the manufacturing for many of our European products takes place.

With the impact of that currency move, we would anticipate low single-digit OP growth out of the Color Group and I would anticipate a 100 or more basis-point decline in operating margins. And again, nothing changed in the underlying performance of the business. This was purely a currency move which directly affected the Color Group. We don't see that impact, at least the Swiss component, in the Flavor Group at this point.

And then, when you think about some of your input cost, not a lot of it is petrol related. But oil was down and some of the derivatives will be coming down. Is that going to be a benefit to you as the year unfolds and maybe can you talk about your value pricing initiatives and such?

Yes, so I think with respect to oil, I want to say energy natural gas is about 8% to 9% of our cogs. We would anticipate some relief there as we move forward in the year. I think some of our raw materials are derived from petroleum sources so we may also see some benefit to that as we move forward in the year. But here again, no one raw material represents any more than say about 2% or 3% of our total costs so I wouldn't expect a real profound impact from the change in oil. But what I would say as we look at 2015 and the pricing actions we took, we certainly accounted for any inflation and raw materials with our pricing. And again, our goal and our expectation of the businesses is that we maintain our gross margin and not just simply cover the costs of those inputs. So I think we were quite successful with our pricing actions for 2015.

Great. You've done a nice job buying back your stock. Can you maybe talk about other uses? Are there any good acquisitions that potentially you can add to continue to improve the portfolio?

Yes, there's certainly gaps in the portfolio that an acquisition could fit very nicely with. So certainly, that would be a principal use of some of that free cash. But absent a suitable acquisition, which could be either suitable from a technical standpoint or suitable from a price standpoint. Absent that, we see buybacks as a very good use of free cash at this point.

And of course, as has been our practice over the years we certainly have an eye towards increasing our dividend consistent with that mid-30% payout that we've targeted. But I think the acquisition market, that there's a lot of different types of companies and typically our approach has been smaller technically driven candidates. And we watch this market very closely we evaluate a lot of opportunities. That will very much be a big factor in terms of driving our decisions around buybacks in 2015.

Great. Thanks, guys.

Thanks, Mike.

Mike Ritzenthaler, Piper Jaffrey

Good morning, Mike.

Good morning. Just a couple questions. It was really helpful to have you guys walk through some of the FX impacts. I'm just wondering about as we go through 2015, are there any rules of thumb to sort of gauge the reasonableness and maybe how guidance might move? I think our bias is to think about it in terms of the $3.25 to $3 35 and then tweaking it from there as currencies move. But, I don't know, as things fluctuate around in currencies, any rules of thumb there that could help us out?

Yes, I think at this point the best rule of thumb I can give you is just giving you our underlying performance in US dollars. We certainly would anticipate giving our shareholders and our analysts a very thorough review at the end of each quarter to tell you where exactly we came out with respect to our estimates. But I think at this point, currency is anybody's guess in a lot of ways. There are some mitigating actions we can, as a business take. That there is some selective pricing opportunities. Which certainly would apply to any situation where we have transactional impact from FX. So that is one lever. There are some other opportunities in terms of where we could source some of our raw materials although that one is a little bit more difficult to change at this phase.

But the other piece that oftentimes people would ask is, well can you just change your production, where you're producing this stuff? And I think that would be the most complicated thing to try to do. Because again, as we continue with this restructuring and for those of you who know the Company very well, these plants are very specialized plants and so the ability to make a product in multiple plants oftentimes not there. And between customer approvals and the process of transferring a product, that could take three to four months in some cases and you may be switching it back just as soon as you switched it in light of another currency change. So Mike, I think probably the best we can do is just continue to update you on these calls about where the FX is going. And again, I highlighted really the four that are the biggest impact to our business at this stage.

Okay, fair enough. A bit of a higher level question on the Flavors business as it transitions to more resistance or compounded flavors, are there any end product categories that you've been particularly happy with in terms of adoption rates and winning new business?

Yes. I would tell you that as we look at our Flavors business, just to frame this out for everybody, we think in terms of Beverage, Savory, Sweet. We have a Natural Ingredients business and then we have our Fragrance business. We talk about the strategy of evolving this product line, focusing on flavors that can utilize some of our existing building blocks and other enabling technologies.

And in terms of the hierarchy of those businesses that are being most successful with that, we are definitely seeing the strongest improvement in our Beverage businesses. Not only in terms of their ability to execute on this strategy and generate new wins with the types of customers we're targeting, but also generate the type of profit margins which we believe are achievable across the larger Flavor Group. And so at this phase, better than half of our Flavor Group businesses are at that margin, that 20% operating margin, that we've targeted as an organization. And that is an improvement, obviously, versus prior year and certainly from two years ago. So Beverage is quite far along.

I think that the Sweet Flavors businesses, Sweet has been a category we have historically focused in the dairy area of the world, yogurt and ice cream. And as most of you fellows know, these are industries that have been very hard hit over the last few years. In fact in 2014 the yogurt was a declining market from a volume standpoint. There may have been growth based on some of our customers taking pricing, but volume declined in each of the quarters of 2014. That obviously had a very strong impact on our business. So the name of the game with Sweet has been expanding our view of the market to include a broader definition. Things like bakery, things like confectionary customers and applications.

And then, our other groups, our Natural Ingredients, they had a very good year. We in our Savory business, again in terms of that hierarchy of who's farthest along and who's still making progress, I would tell you that Savory is probably in that more of a making progress stage. That business was most heavily oriented towards some of these building blocks that I've referenced before. Some of what we saw in Q4 was we had some cost issues in a number of these businesses that we've now subsequently addressed with our 2015 pricing and I think we'll see a very different picture of that. But we have a lot of opportunity to continue to improve there.

And then as far as our last group, our Fragrance Group, I think here again, not unlike some of our Savory businesses where there was a decline in many of our building blocks products, we have diversified that portfolio enough and have entered different markets and different focus areas that we're now seeing the progress that we need to in Fragrance to have a successful 2015. So hopefully, that gives you kind of a sense of how I would rank them within the Flavor group.

That definitely is helpful. Thank you very much.

Thanks, Mike.

Christopher Butler, Sidoti

Hi, Chris.

Good morning, everyone. As we look at the Flavors Group and your expectation for 2015, could you give us a sense on how much more culling there's going to be in this group? And it sounds like with your forecast that you expect that to be made up with new product successes?

That's right. I would tell you that from a culling standpoint very broadly, I would not anticipate as much culling in 2015 as we had seen in 2014. Some of our early culling was in our Beverage segments and our Savory segments. Much of that we completed in the year. As we look forward to 2015 there will be less than 2014 but there certainly still will be. There's more work to be done particularly in our Fragrance area of the business. But nonetheless, I see a lot of new wins in these Flavor areas, these higher margin more technically sophisticated products with largely an underserved part of the market. And I think that's a little bit of the key to the success we're seeing in a number of these businesses.

So I think between removing a low margin and replacing it with a high margin win, I think the net-net of that, I'm saying flat on revenue. Could there be some upside? Sure, there could be. But I don't want to lead you astray in terms of where I think we're really going to be. I would tell you then again, I would reaffirm, that I see a definite mid-single OP but a definite path towards even high single-digit OP out of the Flavor Group.

And after a challenging fourth quarter, about a month under your belt here in the first quarter, have you seen demand snap back? Was this just year-end inventory destocking that you ran into? And then with the launches, have those new product launches from customers, have those picked up again as well?

Yes, I think overall certainly, it's a very different picture in the first quarter than we saw in the fourth quarter. I think there is a fair amount of seasonality that we see in the fourth quarter. A lot of customers while their business may not be down they do very closely manage their stocks, their inventory in general. And so in a number of our businesses, we saw that immediately pick up those orders and that type of volume. So I would tell you that the Q4 results was very much an anomaly. I'm very unhappy with it but I'll tell you right now that's not going to happen again.

I'm sorry if I missed it, but how much of the savings from the restructuring in Flavors were you expecting in 2015?

In 2015 we've been saying about 20%. So roughly, call it $6 million of the $30 million is what we believe we're going to achieve this year. And if I can just give you an update a little bit on the restructuring? As I mentioned in the commentary we're running on track. No real big surprises. Much of the most challenging and quite frankly, riskiest portion of that is just obtaining the severance agreements with many of the local organizing agencies, or organizing unions and the like, and we have passed that threshold at this point. So the formula transfers are underway and in earnest. I think there are a few that I want to get a little bit further ahead, there are a few that are very well far ahead. And I think net-net, we're on track and again, no real surprises and I would confirm that the $6 million estimate for 2015.

I appreciate your time.

Thanks, Chris.

[Garrel Lohrain], [Telluside] Capital.

Good morning, Garrel.

Hello, how are you? Just wanted to make sure I understand as completely as possible the impact of the Swiss franc change from a competitive standpoint. Does that in any way or in what ways does it make it more challenging from a business competition standpoint?

Well, it certainly limits our ability to address the change of any sort of pricing and I think that's first and foremost the biggest impact. I think again, in terms of our ability to transfer production, that's real limited. I think for those two reasons it's going to affect from a profit standpoint. But again, I think our ability to provide a high-quality technically sophisticated product, which has been the hallmark of that business, that has not changed. Obviously, what we saw here is a one-time essentially loss in several cents of profit out of those products. So I think it's a bit of once you lap it you're in a better situation again. Because again, if you're not adjusting your prices it doesn't really change our competitive position in terms of gaining new business with customers. But obviously, it does have this one-time impact on your costs.

Okay. And it's not like some other competitor that's been trying to get the business? It's based on placed else that now all of a sudden has better leverage?

Well if they produce in Switzerland they would have the same predicament as us. But I guess if they produced somewhere else and they can make the logistics work, I suppose in theory that puts them in a little bit of a different cost position. Again, this is a business that's really built on the technical sophistication of the product itself and its ability to perform and really sophisticated manufacturing operations.

Okay, that's great. And then just a couple kind of specific questions on the Color business that was moved to discontinued operations, was that in this quarter? Or which quarter was that that actually got moved out and discontinued?

That was in the third quarter.

Third quarter. Okay. Total debt for the year, what was that at the end of the year?

Total debt at the end of the year was $466.9 million.

Okay, and then as far as the 2015 outlook, what kind of tax rate and share count are you guys assuming?

So in terms of the tax rate, our base rate is about 30% plus or minus and that's before any discrete items. It could be from 29% to 31% if you factor those things in. In terms of the share count, we finished the year at 48 million.

Great. Thanks so much.

Thanks, Garrel.

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

Okay, thank you very much for your time this morning. If anyone has any follow-up questions I would encourage you to call us at the Company. Thank you, again.