Q1 2021 Sensient Technologies Corp Earnings Call
[music].
Good morning, and welcome to the <unk> Technologies Corporation 2021 first quarter earnings Conference call.
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Please note this event is being recorded.
I would now turn the conference over to Mr. Steve Rolfs. Please go ahead Sir.
Good morning, I'm, Steve Rolfs, Senior Vice President and Chief Financial Officer of <unk> Technologies Corporation, I would like to welcome all of you to sense against first quarter earnings call I'm joined this morning by Paul Manning.
Chairman, President and Chief Executive Officer.
This morning, we released our 2021 first quarter financial results a copy of the release and our Investor presentation is now available on our website at <unk> Dot com.
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 periods. These.
These non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with GAAP a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available 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, including responses to your questions may include forward looking statements.
Our actual results may differ materially, particularly in view of the uncertainties created by the COVID-19 pandemic governmental attempts that remedial action and the timing of a return of more normal economic activity. We urge you to read <unk> previous SEC filings and our forthcoming 10-Q for a description.
<unk> of additional factors that could potentially impact our financial results.
Bear these factors in mind, when you analyze our comments today.
Now, we'll hear from Paul Manning Thanks, Steve.
Morning, I am pleased to report, 4% consolidated adjusted local currency revenue growth.
Our flavors and extracts group reported 9% adjusted local currency revenue growth more than 20% adjusted local currency operating profit growth and 130 basis points adjusted operating profit margin improvement in the quarter.
Our Asia Pacific Group reported 5% adjusted local currency revenue growth.
Over 30% adjusted local currency operating profit growth.
Our balance sheet is strong and our debt to EBITDA is now at two four down from two nine a year ago.
In April we completed the sale of our fragrances business and we are currently assessing various acquisition opportunities.
Overall, I'm pleased with our first quarter results and our start to the year.
We continue to see an increase in new sample requests and strong activity in the sales pipeline both of which are good indicators of future product development opportunities and product launches.
Our sales attrition rates continued to be at the low levels, we achieved throughout 2020.
The impact of COVID-19 continues to vary depending on geographic region and product line.
Geographically, we are beginning to see positive trends in the U S and certain Asia Pacific countries.
However, Europe and Latin America continue to be impacted by government regulations slower vaccine rollouts in softer markets.
From a product line standpoint, we continued to see growth in a number of our sweet savory and natural ingredient product lines. However, we continue to see headwinds in personal care makeup and <unk>.
We expect much of the personal care headwind to subside later in the year.
During the first quarter, we experienced an increase in the number of supply chain challenges from shipping container shortages to Brexit disruptions Suez Canal backups and unusual weather in Texas.
These challenges we continued to provide robust customer service and we have mitigated raw material shortages and cost increases.
I'm very pleased to report that in early April we closed on the sale of our fragrance business.
This completes a third of our three divestitures identified in 2019 and positions the company to be strongly focused on our core product lines within food pharma and personal care.
We continue to look at sensible acquisition opportunities that support our strategic initiatives within these core product lines.
Turning to the group results the.
The flavor and extract group had another strong quarter with 9% adjusted local currency revenue growth and 21% adjusted local currency profit growth.
The group continues to benefit from a strong sales and customer service focus and a continued transition to more value added product solutions.
The group's operating profit and profit margin improvement is a direct result of the strong sales growth products product mix shifts and our ongoing fixed cost takeout initiatives.
Overall, the group's adjusted operating profit margin increased 130 basis points in the quarter compared to last year's first quarter.
We are well on track to achieve our 50 to 100 basis points operating profit margin improvement for the year and our mid single digit revenue growth goal for the year.
Within the flavors and extracts group the savory business had another very strong quarter.
Our savory business supplies companies with flavors flavor Enhancers and taste modulators that are found in a wide variety of products, including plant based proteins savory snack Saks sauces in prepared foods.
Our supply to foodservice CPG and other innovative food companies.
This business continues to grow as a result of its strong flavor technologies and exceptional customer service.
Our savory business is well positioned for growth and I'm optimistic about its future opportunities.
In the first quarter, we acquired a production facility for our natural ingredients business that will give us additional capacity to better service, our customers and to support the increased demand we see within this business.
We look forward to bringing this facility on line and anticipate it contributing to the group in the latter part of this year.
I continue to expect flavor and extract group to deliver mid single digit revenue growth and continued operating profit margin improvement over the long term.
Within the color group revenue for food and pharmaceutical colors was up low single digits for the quarter.
The group continues to see demand for natural colors, and functional extracts used in food and nutraceutical and pharmaceutical OTC applications.
The group's focus on sales execution and customer service as well as its strong technology platform and brand positions us to capitalize on the strong consumer demand for natural colors.
We believe our low single digit growth this quarter as a result of a slowdown in product launches that use natural colors. However, we expect a much improved second quarter and back half of the year due to the increasing rise in new sample requests and new customer project activity.
Also in the color group revenue in our personal care business continues to be down as a result of the negative impacts of COVID-19 on the makeup industry.
During our last call we communicated at the first half of 2021 would be challenging for this business.
As we enter the second quarter, we are already seeing signs of recovery.
The personal care business continues to make solid progress on our operational improvement plan, which is designed to consolidate some of our cosmetic manufacturing operations to better align our cost structure for the future.
The color group's adjusted operating profit was down approximately 13% in local currency in the first quarter the.
Net profit decrease is primarily a result of the ongoing lower volumes in personal care.
Many of our personal care customers experienced growth in the first quarter.
As our business lags their results, we are optimistic that our second quarter results and back half of this year should be much improved.
Turning to our food and pharmaceutical business, we were up in many of our markets. However, we experienced unfavorable product mix due to a soft market in Europe, and lower new product launches in the U S.
Looking ahead to the second quarter this year and beyond we expect profit to improve in the color group and both personal care and the food and pharmaceutical business.
Over the long term I continue to expect.
Mid single digit revenue growth from food and pharmaceutical and mid single digit revenue growth from our personal care business once the impacts of COVID-19 subsides.
Our Asia Pacific Group had another strong quarter with 5% adjusted local currency revenue growth and over 30% adjusted local currency profit growth.
The group had solid revenue growth in almost all regions driven by strong new sales wins, a strong focus on customer service and solid utilization of our technology platforms.
Over the last year the group has reduced its cost structure, which along with the volume growth is contributing to the group's operating profit and margin improvement.
Based upon current trends I expect the Asia Pacific Group to continue to deliver mid single digit sales growth throughout the year.
We've had a good start to 2021 and we are on track with our guidance, we outlined for the year.
Despite the ongoing impact of COVID-19, we continue to see an increase in customer sample requests, which is an excellent bellwether of new product innovation.
As always I'm very excited about our new sales wins.
I remain optimistic about the year and the future of our business.
Steve will now provide you with additional details on our first quarter results.
Thank you Paul.
My comments this morning, I will be explaining the differences between our GAAP results in our adjusted results. The adjusted results for 2021, and 2020 and remove the impact of the divestiture related costs, the operations divested or to be divested and the impact of the costs related to our operational improvement plan.
We believe that the removal of these items provides a more clear picture to investors of the company's performance.
Also reflect how management reviews, the companys operations and performance.
Our first quarter GAAP diluted earnings per share was <unk> 75.
Included in these results are $3 1 million or <unk> <unk> per share of costs related to the divestitures and the cost of the operational improvement plan.
In addition, our GAAP earnings per share. This quarter include approximately five cents of earnings related to the results of the operations targeted for divestiture, which represents approximately $25 6 million of revenue in the quarter.
Last year's first quarter GAAP results include $10 9 million from approximately 26 cents per share of costs related to the divestitures.
In addition, our GAAP earnings per share in the first quarter of 2020 includes <unk> <unk> of earnings per share from the operations to be divested and approximately $36 6 million of revenue.
Excluding these items consolidated adjusted revenue was $334 1 million, an increase of 4% in local currency compared to the first quarter of 2020. This revenue growth was primarily a result of the flavors and extra group, which was up eight 9% and adjusted local currency and the.
Asia Pacific Group, which was up four 7% and adjusted local currency.
The flavors and extracts group reported 21, 2% adjusted local currency operating income growth.
And the Asia Pacific Group reported a 31, 4% adjusted local currency operating income growth.
Adjusted local currency operating income in the color group was down 13, 3%, primarily as a result of the personal care performance.
Our adjusted local currency EBITDA was up approximately 2% for the quarter.
Our cash flow from operations was down in the first quarter, primarily due to higher cash incentive payments in the first quarter of 2021 compared to the first quarter of 2020.
We continue to focus on our working capital levels and expect continued improvement throughout the rest of the year. We are executing on our capital expenditure plan and have identified a number of attractive investment opportunity projects.
Which will bring us to the top end of our previously stated capital range of $55 million to $65 million for the year.
During the first quarter, we bought back approximately $12 million of company stock.
<unk> an acquisition, we expect to continue to pay down debt and buy back stock on an opportunistic basis.
Based on current trends and the current tax law, we are Reconfirming, our previously issued GAAP EPS adjusted EPS and adjusted local currency EBITDA guidance.
Our GAAP EPS guidance calls for mid to high single digit growth compared to our 2020 reported GAAP EPS of $2 59.
Our full year guidance for 2021 includes approximately 30 of divestiture related costs operational improvement plan costs and the impact of the businesses to be divested.
On an adjusted basis, our EPS guidance for the year calls for mid single digit local currency growth compared to our 2020 adjusted EPS of $2 79.
Furthermore, we continue to expect our adjusted local currency revenue to grow at a low to mid single digit rate in 2021, and our adjusted local currency EBITDA to grow at a mid single digit rate.
Given current proposals related to changes in the corporate tax law, we continue to believe that our adjusted local currency EBITDA metric provides a reliable measure for our underlying business growth.
Our reported results include the impact of currency and based on current exchange rates.
We expect our earnings to benefit by approximately 10.
Due to currency for the year.
Thank you for your time. This morning, we will now open the call for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Heidi <unk> with Exane BNP Paribas. Please go ahead.
Good morning.
Hello.
Hi, how are you.
So I wonder if he's there.
The thing you can share on the exit rate in Q1. So is it fair to say flavors and extracts might be slowing and color improving do you see that already so that's the first one and then the second question is more specific on color or could you talk more about the slowdown in food and pharma. Please.
The 1% growth that you saw and also the unfavorable product mix that you highlighted are both of these related to the slower launches in naturals that you talked about in your speech and what's the outlook.
And then lastly could you maybe update us on pricing and inflation trends for the year. Thank you.
Okay. So let me start with that first of all on the exit rate for Q1.
I would say the businesses are both on track to achieve our goals of mid single digit revenue growth for the year I feel very very confident about that.
Labor is obviously had an outstanding quarter.
So I see continued very good growth there.
I think colors, all get specific to the food and pharma here in a moment, but overall you heard me note that our personal care cosmetics, we are already starting to see that rebound.
I mentioned in the script that many of our customers are starting to report favorable results there tends to be a little bit of a lag between our customers results and our uptick in volume.
Theres, a rather vast supply chain there many of these products tend to have longer shelf life. So that's why you tend to see a little bit of a lag, but we're already seeing those positive signs even as I sit here in the third week of April we see a receipt of rebounding in personal care. So that's very exciting for Q2.
And beyond for color, we were not necessarily sure it was going to happen as quickly as it has.
So I think that's really good and so therefore I feel very good about mid single digits for the color group for.
For the balance of the year.
Ditto for Asia, and Asia has got a lot of unusual lockdowns and some unusual.
Events going on but we were able to eke out some some pretty solid growth there.
As I look at and look at the pipeline there I look at the sample activity.
Across all three groups I feel really really good here.
As we took stock of the 2020 launches.
You might find this one interesting that total number of launches say in the U S and Europe was not too far off what the total number of launches were in 2019.
The nature of those launches is a little bit different which is to say the launches were a little bit smaller in the market in 2020 versus 2019, but.
In terms of an aggregate number of product launches across the food industry in Europe, and the U S. It was fairly consistent.
But I think the big difference is the the slowdown in launches from perhaps some of the larger cpg's, who would've had a larger product launches more impactful in net in any non COVID-19 year.
So our win rate was quite good and our win rate continues to be quite good here in Q1, now the slowdown in food and pharma.
These are things that can happen in any 90 day period I would say.
Some of this has to do with.
Timing of launches.
Some launches you think theyre going to be Q1, and they wind up being Q2, or perhaps even later or perhaps even earlier.
I think that was a factor I think the overall the mix in terms of the types of products that were launched with a little bit different than what we've seen.
There is a slowdown in Europe, I think that is undeniable.
That has been for that business was kind of tricky to overcome.
But I would tell you that there's really nothing systemic that I see here I see very very good activity, we feel very good about Q2 and the rest of the year. We've had a very nice long run on natural colors growth.
And I think that's only going to continue we've invested and we continue to invest very strongly in that business and we believe we have a very very strong.
Portfolio, we have broad based access and that's yet another factor here for the food colors.
We generally are regarded in very near the top as a natural color company and so we enjoy very good access which is to say then that launch activities and things of that nature are very much reflective of big customers and small customers.
That's my comment about some of the big customers, having fewer launches we.
We see that impact a little bit more strongly in color versus say flavor, where we tend to focus on this segment of the market that we would traditionally describe as b or C type customers.
But no I feel very very good here I think this is a this is kind of just a.
And intermittent saying these things can happen, but I think the prospects continue to be quite good there now pharma.
Okay. I think people have noticed that there has been a slowdown in certain nutraceutical categories.
Nutraceutical is certainly an area that benefited substantially from COVID-19 in most markets I would argue last year at least as we saw it.
But there is naturally a slowdown as folks get vaccinated and as markets begin to open up more I don't think youre going to see the same level of nutraceutical OTC.
OTC related products that you did during a COVID-19 year. So I think that's a natural.
Out outcome of easing of certain COVID-19 restrictions in certain parts of the world. So that's a little bit of a of a slowdown there, but that's a smaller part of the portfolio. As you know so I don't think that's going to be a significant headwind for us.
Your last question pricing and inflation.
A lot of talk that certain businesses out there certain cpg's.
<unk> are already guiding towards raising their prices.
What we saw last year was not necessarily raising prices so much as an elimination of discounts. So instead of a two for one you get it while you pay for too if you want to.
We saw a lot of reduction in promotions, but I think what we're seeing this year is we're certainly seeing announcements about CPG is another brands raising their prices are projecting to raise their prices.
But so what we're seeing from our suppliers.
We're seeing inflation in transportation.
We're seeing inflation in some raw materials that are having some trouble.
In China being either produced or exported.
Yeah, I think some of this is that we can handle with surcharges and other factors like that.
But we don't see a massive wave of inflation at this point.
Could I anticipate that there could be some inflation next year for sure.
That's a.
That would not be at a significant surprise to me, but I think as a business as an organization food ingredients and personal care ingredients, we tend to be fairly successful.
In helping overcome that raw material inflation with pricing of our own. So I don't have any major concerns on inflation right now yes. There are individual items, yes, there are transportation.
Related cost increases.
But thus far we've been able to mitigate mitigate though is pretty pretty successfully.
Thank you.
Okay sure.
The next question is from Mark Connelly with Stephens. Please go ahead.
Thank you.
This this sort of a hard question to follow up on.
Your color performance was better than we expected overall and I'm trying to get a sense of whether that's because cosmetics was less bad or the younger pieces were significantly better than I had modeled can you just give a little sense of sort of what's going on sequentially or.
The evolving part of the cosmetics line.
Yes, if I were to answer your question very very literally yes, it was probably a little bit less worse in Q1.
Cosmetics that is.
But I think maybe what would help it even further is to give you a little bit more idea about what we're seeing right now and when.
When you think about our personal care business, we're dealing in makeup hair care skincare.
Skin continues to be a <unk>.
Good part of the market is that a good part of our portfolio, but a smaller part of our portfolio.
Hair was generally okay. It was not it was not as good as it you wouldn't we would've expected.
But all things considered.
There were some positive signs in that really where we got hit very very hard with makeup.
And so I think that yeah, there was some.
Definitely activity that was positive, particularly in Asia, we've started to see signs of life.
In some of those markets.
And so as we look at Q2, I think you know I've already.
As I look over at daily sales, they look pretty good right now and we I would tell you that based on what I see this month and the rest of the quarter I feel and really for the rest of the year I feel really good about cosmetics coming back in this makeup segment I think that's going to be.
Really the most significant factor.
For the second quarter into the back half of the year for that color group food and pharma you heard my comments there I think we're going to be very very good I think we're gonna be solid there, but the big thing is cosmetics coming back in.
And as I said I didn't think that would happen until about the second half, but I'm feeling pretty good that that's coming back really as we speak so that that's a real high positive.
No that's really helpful color. Thank you.
One of them one of them.
One of the things that we keep hearing from from food companies and <unk> in particular.
They may bring backs bring sort of new items to their menus more slowly and you talked about overall, new product wins and I know the kyocera isn't necessarily the be all and endo, but we keep hearing you talk about how the shifts they need to comfort food may evolve back to sort of normal more slowly so.
As you think about.
The kinds of product from you referenced to CPG separately.
Their behavior is a little different but as you think about the kinds of products that you're seeing.
Development right now does it suggest that we're seeing a different kind of new product coming back or are we just in the early stages.
Yeah. That's a very interesting question I think at a very broad based level.
The trends that we saw before COVID-19.
To some degree during COVID-19. So for example, natural colors I mean that that is a macro trend that I don't believe is going away and.
The level of natural colors in the U S market coloring foods in the European market I believe those levels continued to be very very high and their usage and products continues to be consistent with what we saw before during COVID-19.
Yeah.
One of the questions could very well be nutraceuticals does those really maintain a level of robustness in product launches that may be an area that I would if you're asking me to predict I could predict that that may fall off in some of our product categories based on what I see in the pipeline today.
But yeah I think one of the things that we've noted is is a lot of our customers. These b and C. Folks. They are very very aggressive they want to keep launching they want to keep taken share they want shelf space. They want online presence and so they continue to emphasize many of the things we built this business around naturals natural flavor.
And colors and extracts.
And so I think those trends amongst the <unk> continue to be very very strong.
I think one of the things that we've noted is definitely an acceleration in S. Ku rationalization from many parts of the market. So for example, foodservice into your question yeah. They certainly rationalize their menus many of them during the pandemic.
What they come back with.
I wouldn't be surprised if it was very similar to what you saw before COVID-19, So I don't necessarily see a big big shift in the types of products that customers are our customers are looking for and therefore the end customers are looking for.
Now are there big Bonanza launches or are there more incremental launches that that really kind of remains to be seen because our pipeline see both.
Big ticket launches on tap, but also again more incremental maybe you might call. It a line extension type of approach, but the nature of the product I don't really think theyre going to change considerably.
That's super helpful. If I could just squeeze one more in you talked about logistics.
This past quarter were hearing a lot more about difficulty in keeping plants fully staffed either because workers or ship.
Nick or corn seed or because hiring has gotten more difficult what's been your experience this quarter and is it getting better or worse.
Our tenants has been absolutely outstanding from the day somebody said COVID-19 to today.
So we have been very very.
Proactive we had talked about our mission a lot with our folks about the importance of Manning your position in coming to work in servicing the customers and it's very very important areas. We've talked about pharma, we've talked about protein for vaccinations that we produce we talked about flavors for all sorts of foods and so.
Our employees really understand the mission and they believe in it I think very very strongly so our attendance has been has been great I think that.
We've gotten a lot of our folks vaccinated around the company, we have been proactively testing our employees for many months now.
And so we.
I think we've created a very very safe working environment, which has really gone very very far.
And giving our folks competence to come into work.
So yeah. It is every part of the world as easy to get workers as it was before probably not.
But I would tell you that really it has not been a significant factor for us.
We're still hitting our on time delivery figures were still getting products out the door and that customer service element of our business continues to be very very fundamental.
So, but I wouldn't I wouldn't tell you that 100% of the World is is again as easy to get folks as it was before but that is not of all the things I've talked about that is not one that would be high on my problem list right now.
So a lot of good news there. Thank you Paul.
Okay. Thanks Mark.
Again, if you would like to ask a question. Please press Star then one.
The next question is from Mitra <unk>, Paul with Sidoti. Please go ahead.
Yes, hi, good morning, Thanks for taking the question.
Hey, Mitra.
Hey, Paul.
First just wanted to get a sense on in terms of the operational.
Net improvement I think that was scheduled to be finished mid year investing on track.
Well, if you're referencing the one in personal care.
Yes, yes, we are on track with that one and.
Yeah, that's going to be really really helpful. As that business comes back because that business is going to come back not only with revenue, but with lower fixed costs, which every account in the world loves to hear.
Okay, No that's great and then obviously the audit costs.
Sure.
We're implementing when.
It should be I don't know if you can give us a sense, maybe what inning are we along the way.
Overall, the soft cost reduction efforts.
Well I guess I would think of it than less as a baseball game or is baseball practice, we're always taken out costs. We're always practicing I think it's very much a part of how we operate in every month I'm reviewing that with our group presidents, where you've taken out SG&A, where you've taken out fixed.
Costs.
Where we've taken out raw material costs. So it has become more and more of a fixture in this organization over the years.
Really stemming from our experience with restructuring.
Yeah, we had some bumps as you remember years ago, but I think that made us pretty good at figuring out how to do these things in the future. So that's just think of that more as ongoing Mitra I think personal care is a more recent one.
But flavors and colors, you heard me referenced a little bit of that for Asia as well that's going to continue.
Okay. No. That's good and then Paul I know you talked about a lot of acquisition opportunity either.
I was wondering if you could give us a little more color in terms of the new Mexico, Chile.
Alex acquisition, how meaningful that is in.
Obviously, you also mentioned.
Expanded distribution with uniform both are in Mexico, just curious if there.
The increase.
Desire to expand your presence there.
Overall.
Maybe some of the acquisition.
Opportunities, we should be looking forward to.
Yeah, So new Mexico, Chile that was the facility we closed on very recently as you noted and that is going to give us incremental capacity in our F&I business, which continues to do very very well.
So not only will that give us capacity, but it will also give us greater proximity to certain growing areas, which we believe will it.
Prove our logistical costs.
For that particular business. So that's it that's it.
An acquisition really of a facility.
In the new Mexico.
Southern New Mexico M&A in general.
You know I think we talk a lot about sensible acquisitions, we talk a lot about being very wise with our shareholders.
Wealth here and we think that.
There's good opportunities.
I referenced in the in the commentary that there.
There may be some opportunities there you may hear about here soon.
So we've got we've divested ourselves of the part of the portfolio that we don't believe really works in our future and it would be better in the hands of somebody else, but those core businesses of food.
Pharma and personal care are fundamentally very very sound great dynamics in those markets technology, driven businesses and so we you could potentially see an acquisition in any one of those three areas.
Less so at this point, probably about geography, so I wouldn't tell you that there's anything to you.
Your question about Univar in New Mexico, Chile, that's not an overt attempt to expand our presence in Mexico.
<unk> per se, but I would tell you that we're really focused on technology and we're still really focused on incremental enhancements to the portfolio I don't really have any bet. The farm acquisitions in mind right. Now are these would be very very sensible sensibly priced.
Bolt on with with limited highly disruptive integration activities. These would be far less of that.
So yeah, there could be some opportunities you talked about in the future on that front for sure.
Okay.
Great and then.
Again, congratulations on the divestiture of non competing.
Yeah.
Or planning to.
Now I know you're always looking at the underlying business.
Just curious.
Yes.
As you look at where you are today.
In terms of divestitures, you feel pretty comfortable going forward you have the mix.
You're pretty comfortable with.
Yeah, I feel great about the portfolio now there may be some million dollar of paper Dod business somewhere that Steve wants to sell but other than that no.
Really good measure.
Right right.
Good day, I think the portfolio's in good shape. After all of these moves over the last couple of years.
Okay, great, Thanks, again, and nice quarter and thanks for taking the questions. Okay.
Okay. Thanks Mitra.
The next question is from Lee first with Hightower Advisors. Please go ahead.
Thank you good morning, I have kind of Big picture question can you talk about the.
External factors are thinner.
Kind of rolling through your outlook for the rest of the year like you said colors getting better now.
Some of the emerging markets are not recovering as quickly you know how does always puts and takes growth through the rest of your year in terms of your outlook.
Well I think we've taken into account many of these factors as we built out our projections as we built out our EPS guidance.
Certainly COVID-19 has the top anybody's list of factors to consider.
And I think if anything personal care is coming back faster than we thought but I would say in general no real surprises there yeah, maybe there are some questions about how much neutral nutraceutical maintains.
Post openings.
But I think those broader macro trends continue to be very very solid and are sampling and our pipeline.
So that's good I think what we're potentially seeing in some markets as kind of a shift in share among our customers.
I mentioned there are certain types of customers, we call them B and C customers.
Who had been fairly aggressive trying to take share.
In our foodservice or retail or in other outlets out there and so that remains to be seen how that one plays out but that could have some interesting implications in certain markets.
Were perhaps larger.
Participants what once had a very large share they could see some inroads being made there I think that could certainly be an external factor.
I talk about these logistic things, but you know that you always have issues at our business. I mean, that's why you have folks here to fix problems, because there's always things like that okay.
A bottleneck on the Suez Canal, yet that one was rather unusual event.
But things like that will happen and we can mitigate through those I don't really see like there's much systemic problem. There I think really what it is is when you turn off a supply chain, that's really really finely tuned and highly efficient.
When you turn it off suddenly and without warning in certain parts of the World and then you try to start it back up you know, it's kind of tough it's kind of like a lawnmower youre, leaving your garage all winter and then you try to turn it on the spring it doesn't necessarily start up immediately and so I think theres a little bit of.
A startup challenge from that standpoint, trying to kind of re optimize the supply chain.
But again, there we have mitigated that through holding more inventory, we've mitigated that by producing more forecasting more with our customers to really get through that one.
So yeah, I would say, it's COVID-19 some of the trends around nutraceutical and it's certainly the supply chain and logistics factors yeah.
Question came up about inflation.
For 2022.
I think thats, probably a foregone conclusion that there'll be some inflation, but I don't see that as being an impact in terms of our achieving our broader goals of mid single digit growth.
Thank you.
Okay Thankfully.
The next question is from David Green with Bold Haven. Please go ahead.
Hi, Stephen.
Paul.
Hello, David.
Okay.
A couple of questions.
Thank you very much I'm, just sort of the ongoing.
But you'll see them.
Within the shift from synthetic to natural sort of any general comments you could make there are there any thoughts of koos when news articles that are really taking off.
Second question is really are you seeing any changes in trend where your customers want more of an end to end solution.
Weather.
And in that regard.
What do you need to team up with another policy or how you how you address that specific dynamic.
On the balance sheet, just if you could give us any update there.
The sort of impact potentially to be free.
Whose disposal I'm more generally.
Any color you can give on on cash flow generation as well would be great.
Okay I'll.
Let me start off and then Steve will fill in some blanks and certainly take your your balance sheet item there the trend from synthetic to natural I mean, it's it's pretty broad based I mean, when we measure that.
It's really the vast majority of new product launches contain natural colors.
So that would suggest that and that's across all categories, So whether youre talking about.
Max or pet food or beverages, it's a it's the vast majority of new product launches contain natural colors.
Now are there are a lot of broad based conversions of existing synthetic colors to natural.
Not a huge number but those certainly can happen as well.
But I would say not a whole lot has changed there I mean, it was 80% of new product launches contain natural colors going into COVID-19 in the last report back when I got to sitting right in front of me says, it's like 79 right now so not a lot has changed there.
Question about teaming up.
Now are you getting more integrated selling or let me, let me I mean, I understand where youre trying to go with that one.
I guess I was just thinking about whether it's more of a from an end to end solution.
What are customers asking you to provide the color compiling the old style, but they may I'm not sure.
Whether that would be another Paul stopped which was something that you couldn't provide that they will also be useful.
Oh, Okay, well so yeah, we always look at backward integration and forward integration whatever you want to call it but I mean are.
Bread and butter, so to speak has always been.
We provide these food ingredients some of our customers right, you're providing a fully formulated product.
That doesn't mean, you necessarily sell them all of those elements of their fully formulated product.
And so we think a lot of in terms of just really the development needs of our customers.
We don't necessarily engage strongly in a lot of their production needs.
We don't to my knowledge, we may have a handful of products that go directly to consumers.
The vast majority of our business is probably 98% of it is b to b and as far as I'm concerned we will continue with that approach unless something seismic.
It happens.
But no we like the position that we're in right now as an ingredient supplier and we think that's where we create the most value for sure.
Now do you want to take the balance sheet, one Steve sure so on the.
First off on the divestiture so the sum of all the proceeds that we'll realize on the fragrance divestiture will be in the low $40 million range. Some of that came in right at the end of the quarter most of it will come in.
And in Q2.
There will be some charges related to the divestiture.
Now that that is close but those are largely non cash so there won't be a lot of cash charges for the remainder of the year.
On cash flow in general we were down slightly in the first quarter, primarily because of the incentive payments, but outside of that cash flow held up very well.
And we expect to have strong cash flow for the year, you know last year, we realized a lot of cash from inventory over $40 million and we still have opportunity in areas of inventory, but there's other areas, where we need to build up inventory a little bit, particularly on our natural ingredients business, where we've been very successful.
Commercially.
So I would expect more of the cash flow this year to come from you know higher quality high quality earnings growth.
As opposed to working capital, but we still have some opportunities in working capital.
Oh, great Ken could you just remind me.
As we look at the portfolio today what percentage.
What percentage of revenues do you think is from from natural.
So when are you know where there is the clearest distinction is in our food color business and there were probably about 55% natural.
Across the rest of the business.
You have varying degrees of natural reality, and it's not a bright line not quite as black and white, but I can tell you that.
You know in the food area most.
Most new product development.
Seeking natural solutions and in the cosmetic and personal care area.
There's a lot of interest in naturals as well, there's still a lot of synthetic products used certainly in personal care, but there's a lot of interest in Nashville, there as well.
Great many thanks.
Okay. Thanks, David.
There are no further questions at this time I would like to turn the conference back to the company for any closing remarks.
Okay I'd like to thank everybody for their time this morning, and that will conclude our call. Thank you.
The conference has now concluded thank you for participating in today's conversation you may now disconnect.
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