Q2 2020 Sensient Technologies Corp Earnings Call
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I would now like to turn the conference over to Mr., Steve Walsh. Please go ahead Sir.
Good morning, I'm, Steve Roberts, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation, I would like to welcome, albeit a some fields conference call to discuss 2022nd quarter financial result.
Hi, I'm joined this morning by Paul Manning, Sensient, Chairman, President and Chief Executive Officer.
This morning, we really started 2022nd quarter financial results a copy of the release and our Investor presentation is now available on our website <unk> Dot com.
[noise] during our call today, we will reference certain non-GAAP financial measures, which we believe provide investors with additional information to evaluate the company's performance and improve the comparability of results between reporting period.
These non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with gap.
A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is available on the Investor information section of our web site at Sensient Dot com.
And in our press release.
We encourage investors to review these reconciliations.
In connection with the comments, we make this morning.
I would also like to remind everyone that comments made this morning, putting responses to your questions may include forward looking statements.
Our actual results may differ materially, particularly in view of the uncertainty is created by the covert 19 pandemic.
Governmental attempts at remedial action and the timing of a return.
A more normal economic activity.
We urge you to read sense since filings, including our 10-K, our first quarter 10-Q and are forthcoming second quarter 10-Q.
<unk> description of additional factors that could potentially impact our financial results.
Please bear these factors in mind, when you analyze our comments today.
Now we'll hear from Palmer.
Thank you Steve Good morning, that's seen reported second quarter earnings this morning.
I'm very pleased that the results of our flavors and fragrances group as well, it's our food and beverage business in the color group.
Flavors and fragrances is up mid single digits in revenue and high single digits, an operating profit during the quarter continuing its revenue growth trend from the first quarter.
We also had favorable growth in our natural colors, and pharmaceutical businesses, which were up in the quarter.
The growth in these businesses offset by the adverse impact of Cobot 19, and the cross personal care market.
And throughout Latin America, Europe, and Asia Pacific.
Despite these cobot 19 headwinds.
Based on current trends, we expect to deliver on our EPS outlook for the year.
I'm also pleased on the progress we have made during the quarter on our divestitures.
We completed the sale of our inks business and signed a definitive agreement to sell our yogurt fruit prep business.
We anticipate closing the yogurt fruit prep sale in the third quarter.
We continue to make progress on that divestiture of our aroma chemicals and fragrance compound business.
Although we had been delayed by Cobot 19, we believe we can close this transaction by the end of the year.
All of our production facilities are open and had been throughout the pandemic. Our on time delivery remains high and we have successfully managed our raw materials.
Our staffing in attendance at our facilities remains outstanding and I'm very proud of the dedication of our employees.
We will continue to closely monitor each of our production facilities to remain ahead at prevailing GMP and sanitation practices.
As a result of cobot 19, we have incurred additional costs and we have experienced significant revenue headwinds in a number of businesses.
Overall, the impact of covert 19 has reduced our EPS by approximately 10 cents year to date.
The impact of covert 19 on our food and beverage businesses mixed.
However, the impact is significantly negative for our personal care business.
Now, let me turn to the groups the flavor group had another nice quarter adjusted local currency revenue for the group was up 5.7%.
The group continues to experience positive sales growth in the finished flavors and extract product lines as well as an improving picture in the flavor ingredient product lines.
The natural ingredients business also had a solid quarter.
The overall impact of Cobot 19 was negative to the group's revenue.
The group's revenue growth is based on strong new wins generated throughout 2019, and the first part of 2020 retaining existing business.
And overall decline in attrition, which was a lingering effect from our earlier restructuring activities.
None of these factors, we have generated mid single digit growth year to date and I anticipate the same growth rate for the remainder of the year.
This quarter the flavor group returned a quarterly profit growth with adjusted local currency operating profit up 8%.
The higher profit was a direct result of the higher volumes, new wins and the group's production cost initiatives.
Moving forward I anticipate continued profit growth.
Overall, the group's operating profit margin was up 30 basis points in the quarter and I would anticipate a 50 to 100 basis point improvement for the year.
In summary, I expect mid single digit revenue growth and mid to high single digit operating profit growth for the flavor group for the remainder of the year.
Within our color group revenue for food and beverage colors was up low single digits for the quarter.
Pharmaceutical had a nice quarter up double digits and natural colors continues to grow and that product line is up mid single digits for the year.
Similar to the flavor group colors continues to focus on retaining existing business and improving the group's overall sales win rate.
Unfortunately, the growth in food and beverage colors revenue was offset by a more than 20% decline in our personal care business revenue.
While we saw some improvement in our personal care business in Asia, and Latin America. The demand for makeup in Europe, and North America was down substantially in the quarter.
[laughter] given the uncertainty with cobot 19, and continued restrictions I would anticipate continuing challenges for this product line in the second half of the year.
In terms of operating profit the color group achieved mid single digit profit growth in food and beverage colors for the quarter.
And has generated double digit operating profit growth for the year.
However, a profit in personal care in the quarter was down by more than 35% due to the lower demand and make up and other personal care products and that was the main reason for the color groups overall decline in profit.
The color group remains focused on production takeout.
Actions. However, these actions need more time to realize their full potential and we do not expect that the actions will outpace the profit decline in personal care.
Short of a significant opening of the world economy, I would expect the profit declines in the personal care business to continue for the remainder of the year.
In summary, food and beverage colors revenue is up nearly mid single digits year to date and double digits for profit.
For the back half of the year I would expect mid single digit revenue growth and mid to high single digit profit growth for that product line.
Because of the impact the purpose of the because of the impact of personal care. We would expect the color group to be flat in revenue and profit for the year.
Our Asia Pacific Group had solid revenue growth in some regions, but this growth was offset by declines in other regions as government covert 19 restrictions that significantly impacted many sales channels.
The group delivered outstanding profit growth in the quarter and I anticipate the group to return to revenue growth once restrictions in certain areas begin to east.
Based upon current trends I expect Asia to deliver at low single digit sales growth and mid to high single digit profit growth for the year.
Overall for the company, we continue to focus on our supply chain, we have increased our inventory levels on certain key raw materials and as a result, we're providing outstanding on time delivery to our customers around the world.
While we do experienced supply chain disruptions, we have avoided any significant financial disruptions and we continue to reduce our overall inventory levels for the company.
I'm pleased with the progress we've made in the FERC sick first six months of this year.
The flavor group has had a great first half and I would anticipate this to continue in the second half.
Our food and beverage colors business is also performing well.
In Asia Pacific I'm confident that the strategy and investment we have in place will return this group to revenue growth.
Well I'm optimistic about our food businesses, our personal care business will continue to struggle.
Furthermore, the ultimate impact of Cobot 19 remains unknowable.
New product launches are significantly below prior year and there has been some customer SK you rationalization.
Nevertheless, our business is strong and well positioned to grow for the year.
Steve will now provide you with additional details on the second quarter results.
Thank you Paul and my comments this morning, I'll I will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2020, and 2019 remove the impact of the divestiture related costs and the operations divested or to be divested.
The second quarter 2019 results do not include any divestiture related costs, we believe that the removal of the gains and losses connected to the businesses that we are divesting provides a clearer picture of investors are the company's performance. This also reflects how management reviews, the company's operations and performance.
Included in this years second quarter reported results is the gain realized related to the reclassification of accumulated foreign currency translation.
As a result of the sale of the inks business as well as other divestiture related costs, which were primarily non cash.
These items, which are included in the divestiture and other related costs increased net earnings by 1 million or approximately two cents per share.
In addition, this years second quarter reported results include $28.2 million of revenue.
And an immaterial amount of operating income related to the results of the operations to be divested.
Last year's second quarter results include 36.4 million of revenue.
And an immaterial amount of operating income from the operations to be divested.
Excluding divestiture related costs and the results of operations to be divested.
Consolidated adjusted revenue was 294.9 million in the second quarter of 2020 compared to 302.8 million.
In the second quarter 2019.
Consolidated adjusted operating income was 40.3 million in the second quarter 2020, compared to 47 million in the second quarter of 2009 team.
Adjusted diluted earnings per share with 70 cents in this years second quarter compared to 81 cents in last year's second quarter.
We have reduced debt by approximately 60 million since the beginning of year at approximately 120 million over the last 12 month.
We have adequate liquidity to meet operating and financial needs through our cash flow and available credit lines.
Our debt to EBITDA is now just under 2.7 cash flow from operations was 107.6 million for the first six month of 2020.
An increase of 41%.
Capital expenditures were 21.4 million in the first six months of 2020 compared to 16.6 million.
In the first six months of 2009 team.
We expect our capital expenditures to be approximately 50 million for the year.
Our free cash flow increased approximately 45% during the first six months of 2020 to 86.2 million.
We expect continued strong cash flow growth for the remainder of the year.
Consistent with what we communicated communicated during our last call. We expect our adjusted consolidated operating income and earnings maybe flat to lower in 2020 because of the level of non cash performance based equity.
But maybe deducted in 2020 based on our results. We also expect at a higher tax rate in 2020 compared to our 2019 rate, which was lower as a result of a number of planning opportunities.
Based on current trends the company is increasing our GAAP earnings per share guidance to $2 intense those the to $2 in 35 cents. This guidance now includes 35 to 40 cents per share.
Of divestiture and other related costs and the results of the operations to be divested.
This guidance also includes approximately 10 cents of currency headwinds based on current exchange rates.
On an adjusted basis based on current trends, we're maintaining our original estimate for the year of a range of $2, a 60 cents to $2 in 80 cents.
Which excludes divestiture related costs, the impact of the divested or to be divested businesses and foreign currency impacts.
We're also maintaining our adjusted EBITDA guidance of low to mid single digit growth.
Please see our press release for a simple summary table of this EPS guidance.
Thank you for your time. This morning, we will now open the call for questions.
Thank you.
Now I'll begin the question and answer session to ask a question you May Press Star then one on your touch.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question stay will come from Heidi Vesterinen with existing please go ahead.
Hi, Good morning, So Paul I think you said in your opening comments that co bid was a net negative for flavors could you elaborate on what you meant if I heard that correctly because I thought you may have benefited from pantry loading a lot of your peers are talking about thoughts and then as it related.
Question, I guess to finish on players.
Your peers have talked about pressure in foodservice did you see that as well how big is your exposure to.
This area. That's my first two question. Thanks.
Okay, well good morning, Heidi well good afternoon actually so.
On the Kobe being a net negative for flavors, yes, I would say so theres certainly let's take the revenue portion.
While there were certain segments that were up for example, processed foods soups things of that nature there're a number of segments that were also down ice cream confectionery beverage.
In terms of from that's from a product line standpoint from a sales channel standpoint, yes, Indeed QSR.
In many of our regions was was a big headwind.
And in particular that played out not necessarily exclusively in flavors, we saw that in Asia Pacific and we saw that in colors as well.
Traditional retail outlet food stores and the like we did not have that type of headwind.
From a geographical standpoint.
The as co that has evolved at that that has sort of impacted countries at different time frames.
So right now we're in the second things in Latin America, certainly we had those geographic headwinds towards the end of Q2 and of course those continue into Q3.
Europe, we still had we had an improving situation and I would tell you that in the U.S., we had an improving situation.
But you take all those things together.
And that's what we would say from a revenue standpoint. It was a net negative now as that flows down to profit. There is that contribution but then of course, we also had the incremental costs associated with cleaning and pp in.
Everything from air freight to rest shipments all these other logistical and supply chain costs at certainly also where a headwind.
There was obviously a lot less travel, but the net of all those factors for the flavor group I would tell you.
Overall was negative but certainly there are pieces that it was favorable.
But there are plenty of pieces, where it was not favorable.
Thank you and then.
Separately, there that you out there and some peers that talks about it that smaller customers are challenged.
You'd have historically said that you work a lot with the so called PNC customer. So have you seen any any smaller customers being challenged there's a general view that large multinationals are winning so what's what's what's your view there.
My view is it's fairly mixed right in some locales multinationals have reduced shrunk SK use for sure. There are other multinational as their strongly aligned with certain channels like QSR that are not performed particularly well.
On the other hand, there are some smaller local.
Brands that are quite essential to the market that they're serving and so I would tell you that in both cases. The overall reduction in there is an overall reduction in terms of the number of product launches that is for sure for our business, whether that smaller cuts b and C types or big.
Hey types.
But in terms of activity I would have to tell you that overall in my opinion as I look at the whole company, we probably see more activity from a product development and what can we develop now and what are we going to develop coming out of this pandemic, we see more of that activity on the B and C level.
When we do on the a level I would tell you that here again in my opinion, we see a lot more activity.
Customers employees, returning we see more of that activity at some of these b and C than we do at at a number of the Ace.
Thank you.
Okay sure. Thanks.
The next question will come from Mark Connelly with Stephens. Please go ahead.
Thank you I wonder if we could follow up on that just a little bit in terms of what kind of product development have you started to see a shift in where your customers are putting a priority.
We should it come to conclusion that the gluten free is dead now that everybody's baking bread.
I'm curious, whether you've seen your customers shift more towards the food is medicine, you guys medicine side or or whether the it's just a greater portion of activity across the board.
Yeah. That's that's a great question 'cause your when I talk about pantry loading and it's a lot of that is processed food or food that tends to have a longer shelf life that does not lend itself to the sort of natural nutraceutical profile that we all heard about quite a bit coming in the cobot, which tends to have much shorter shelf lives.
I would tell you that most of the product activity or let me say this way.
Theres a lot more functional and nutraceutical attributes that customers are looking for.
So for example, our pharmaceutical business did quite well, we're selling a lot of functional ingredients, there, which can go into pharmaceutical over the counter applications and probably more.
More likely nutraceutical applications.
So we see a lot of activity there.
On the personal care side, you know we talk about makeup.
Certainly there is a big headwind there, but there is this other category out there somewhat akin to the nutraceutical market, which has described oftentimes as cosmetics euticals. These would be cosmetic problem products.
Bear some type of functional benefit.
To to either the scan or to the hair or some other attribute.
That people are trying to enhance so there is more of that activity in fact that some customers that as accelerate a well beyond any activity that we saw even before covert 19.
But yeah I tend to think that with so much of the development slowed and in some cases almost completely stopped at some customers.
You're right about this notion that products containing certain gluten free or other.
With some some would say is that before the pandemic, we certainly see a slowdown in that activity.
So yes coming into 2021 in 2022.
It'll be very interesting to see how the market response act quickly to the customer his resume.
That priority towards fresher healthier.
More natural products and.
And how much continued.
This they'll be on the more say historical or in some cases, even legacy products as some of our customers.
That one I couldn't tell yet, but I can tell you for a fact lot activity on the nutraceutical functional aspect of our products that would go into pharma food and even personal care.
That's helpful. Just just two more thanks first with with the administration basically saying phase two is no longer a priority or at least no longer a near term priority does that cause you to shift any of your Asia Pacific priorities into China is not a big market, but I'm curious where the trend is causing you more.
Competition over there now.
Well I would say that every country has a different approach being taken by governments and in fact as everybody is well aware even within a single country there may be multiple.
Local governments.
Coming up with their own programs and so.
Thats just plays out in different places in the different plays on different timelines and so our approach that has been we are an essential business. We are going to continue to operate.
If customers want to develop new products, we're very happy to do that our labs are open.
If customers want to continue to have their existing products.
We can do that too and on time delivery is absolutely outstanding and we can continue to fulfill those particular needs, but I think our business model and that of most of our folks in this space of ingredients. If we want to call. It that they tend to have a model you produce locally for your local customers and your local markets.
So for example, we produce in China for China.
I'm not aware of.
Many if any products that we export from China to the U.S. or to any other jurisdiction.
And so I think that model will continue to us and actually that's been quite helpful. Through this because we don't have to necessarily jumped through a lot of logistical hurdles in many cases when we're sourcing.
Manufacturing product support supply chain support locally to those local customers.
Okay and just one last question working capital was quite a bit better than we expected and better than what I'm seeing elsewhere is there anything.
We should be thinking about for the second half.
So we continue to that's been an initiative that we've been focused than they're focusing on for the last year and a half so we're really.
I'm trying to exercise very tight control over our inventories.
As well as our receivables and payables.
And over the last 12 months, we've done well on inventory I will say.
Actually in the quarter.
Consistent with Paul's comments, we we urge some of our businesses to stock up on certain raw materials. So we made some investments in inventory, but but we did.
We did well on receivables our receivables days have come down about a day.
And I think.
You are also just seeing a better mix of cash earnings out of the business. This year and that's helping contribute to the cash flow, but you know I would also say this.
We certainly have more work to do.
On.
Reducing our inventory levels throughout the company we've taken many many days out not only on the trailing 12 months, but even on the trailing six months.
And so we've got a lot of supply chain initiatives.
That that probably have a lot less to do with specifically serving customers, but they have a lot more to do is generating internal cash and improving efficiencies. There's a lot more of that to two under way. So I would anticipate we have inventory reductions well into the rest of the year and into next year.
And so that could be something to too.
To to anticipate for everybody.
Very nice to see in this environment. Thank you.
Once again as a reminder, if you'd like to ask a question. Please press star one.
The next question comes from Mitra Ramgopal Sidoti. Please go ahead.
Yes, good morning. Thanks.
And.
I just wanted to be sure harness rice I think Paul you mentioned I think coal has had maybe about a 10 cents impact on EPS for the half.
I wanted to double check if that's a net number just from the headwinds you've been seeing because I know you've also.
Benefit a little from it.
Sure so.
Mr of that that isn't that number so we really we looked at the sales impact.
Which Paul spoke to we looked at the onetime costs.
And then we've also fortunately had some offsetting savings in the area travel going in that all that together that was.
Since year to date.
I think there may have been a little bit of.
Positive impact in Q1, and a little bit of a greater negative impact in Q2, but year to date at the net of.
Okay. Thanks, that's great.
And that's just as you obviously, making.
Nice progress.
As it relates to the sales as just curious couple of questions on that for us.
Use of the proceeds.
If that's going to primarily for reducing debt and as you've been through this process given Cove ad.
I was wondering if this change anything as it relates to your longer term growth strategy. As you look at the remaining businesses and maybe area as you probably would like to be more active and.
So yeah. The proceeds from those divestitures will go towards reducing debt.
As you've seen we've taken out a whole bunch a debt over the last 12 months over the last six months.
Our debt to EBITDA is now just below 2.7, it's actually 2.68 jump back at you precisely number I'd like to watch very carefully.
So that's what we're going to continue to focus on for sure.
Hey, we always look at other uses of our cash as well.
But I think for the here and now that's how we're going to play that one.
With respect to this strategy of the business.
We have been underway with our diversification program in cosmetics for some time.
The words, how can we utilize some of our technologies more directly into the skin care market.
Hi into other personal care applications that just for example oral care.
Have a very good hair care and hair coloring business, but there's certainly more opportunities for us that segment well, though.
I think if anything covert 19 is accelerating our penetration is other segments.
Very good product line that in many cases is very suitable for those areas.
A lot of customers in that space throughout Americas Asia and in Europe. So we feel very good about that it is still a very good and growing market. It's a strong technology based market and so I think we can be quite successful there.
Beyond that though we're going to just keep Ryan and rope and in in colors and flavors. We've got a very strong focus what we want to do.
And you know we're we're I think we're starting to show the world that we can be set successful with this strategy.
And now I feel good about where thats going for the rest of the year and into 2021 for sure.
Okay, that's great.
A little of a follow up on that as.
Good.
Yes.
Wondering how you viewed environment as it relates to.
On a competitive fontan, maybe an update in terms of what you're seeing on raw material and being able to implement maybe some favorable pricing for you.
Well, let me take that first part first so you know raw materials. This is something that I think we got well ahead of their sole.
Situation earlier in this year and we.
Loaded up.
Thoughtfully on a number of our strategic raw materials that perhaps had more sensitivity then.
Save more mundane raw materials, so they had very strong effort there.
But along with that you can have raw materials, all day long, but if your employees aren't producing and you're not delivering these things and managing the supply chain around him.
Thats only kind of half the battle in so yeah, our folks have just been unbelievable, putting these AG not only from the supply chain, but from the production and the quality.
And the lab support across the board, it's been a real team effort and I think we've seen some very impressive results. There. So I I like our chances moving forward as well on the supply chain.
We're going to continue to watch it whether there is a another locked down or not a locked down we just kind of as I said, we just assume pretty much the worst in all cases and that tends to be good policy for us.
When you consider.
Because it's all about delivering and it's delivering on time to our customers.
And we're doing in fact, our delivery is better in June that it was before the pandemic. So our people are very engaged and they understand their mission and they're very motivated to complete it.
Now with respect to competition.
Hey.
We deal with different folks in different parts of the world and a lot of different product lines.
And so we're happy to know when they're not doing well because we'd like to take advantage of that fact and service the cost customers and so I guess, that's all I had to say about that these.
Okay, No that's great.
Stephen I just was curious in terms of maybe where it could be some leverage in the model and I was just I know us selling admin side the first half.
Second quarter pretty similar to what we saw into first quarter. I was just curious how should we think about the back half.
Given the ongoing divestitures.
Yes, so I think any increase that you saw in.
You know SGN, a in a quarter or general is going to be attributable to.
Primarily incentive accruals.
We're actually watching.
Yes, you in a very closely and getting some benefit.
From.
The reduced travel that we see right now.
With this type of volume growth, particularly in flavors, we should continue to see good operating leverage.
Weve.
I spent a number of years rationalizing our production footprint.
We have SGN a capable of supporting.
Significant growth.
Without having to make new investments. So so with with revenue growth, we should be able to generate good operating leverage.
Okay. Thanks, again for taking the questions.
Great. Thanks Mitra.
At this time there are no further questions I would now like to turn the conference back to the company for any closing remarks.
Okay. Thank you everyone for your time. This morning that will conclude our call goodbye and have a have a good there. Thank you.
Thank you conference has now concluded you may now disconnect your lines.
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