Q1 2022 Sensient Technologies Corp Earnings Call
Okay.
Good morning, and welcome to the <unk> Technologies Corporation.
2022 first quarter earnings conference call.
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Please note. This event is being recorded and at this time I'd like to turn the conference over to Mr. Steve Rolfs. Please go ahead Sir.
Good morning Welles.
Welcome to <unk> first quarter earnings call.
I'm, Steve Rolfs, Senior Vice President and Chief Financial Officer of <unk> Technologies Corporation.
I am joined this morning by Paul Manning.
Chairman, President and Chief Executive Officer.
Earlier. This morning, we released our 2022 first quarter financial results.
A copy of the release and our Investor presentation is available on our website at <unk> Dot com.
Yes.
During our call today, we will be explaining the differences between our GAAP results in our adjusted results we.
We did not make any adjustments to our GAAP results for 2022.
The adjusted results for 2021 removes the impact of the divestiture related costs the results of the operations divested.
And the impact of the cost and income related to our operational improvement plan.
We believe the removal of these items provides investors with additional information to evaluate the company's performance and improves the comparability of results between reporting periods.
This also reflects our management reviews and evaluates the company's operations and performance.
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 from those that maybe expressed or implied due to a wide range of factors, including those set forth in our SEC filings.
We urge you to read sentience previous S T SEC filings, including our 10-K and our forthcoming 10-Q for a 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 Paul Manning.
Thanks, Steve.
Good morning, and good afternoon, I'm pleased to report, 8% consolidated adjusted local currency revenue growth and 16% adjusted local currency EBIT Dag growth.
During the first quarter this year each of our groups continue their strong performance from 'twenty to 'twenty one.
Flavors and extracts group achieved 5% adjusted local currency revenue growth and 15% adjusted local currency profit growth.
Our color group had an outstanding quarter reporting, 12% adjusted local currency revenue growth and 18% adjusted local currency operating profit growth.
Asia Pacific Group achieved 14% adjusted local currency revenue growth and 31% adjusted local currency operating profit growth.
We had an outstanding first quarter and we are off to a great start to the year.
Our continued focus on sales execution customer service and product delivery are driving the growth in each of our groups.
Each group is generating a high level of new sales wins.
Continues to build on an already strong sales pipeline.
Our exceptional customer service broad product portfolio, and our robust technologies have positioned us as a reliable supplier for our customers and have also positioned us for future success.
As discussed during our last couple of calls we continue to experience an increase in input costs, including raw materials.
Transportation energy and labor along with logistical delays.
We are addressing the higher input costs with pricing and we are addressing the logistical delays with a higher inventory position.
While we expect the supply chain and inflationary challenges to persist throughout 2022, we will continue to provide robust customer service and on time product delivery and we will conduct additional pricing actions as required.
Turning to the Lockdowns in China, and the war in Ukraine. The current situations in each of these regions has not had a significant impact on our revenue in the first quarter and we do not expect these situations to impact our guidance.
Any impact on Saturday and as a result of the events in China, or Ukraine will most likely be on raw material availability shipping and logistics.
We continue to work through the supply chain issues and we believe we can manage each of these situations.
Now turning to our group results.
Flavor and extract group had another strong quarter, delivering 5% adjusted local currency revenue growth and 15% adjusted local currency operating profit growth.
The operating profit margin in the first quarter rose to 15, 1%.
The higher adjusted local currency revenue was primarily the result of favorable pricing and volume growth in flavors extracts and flavor ingredients as well as favorable pricing and natural ingredients.
Overall, the flavors and extracts achieved a mid single digit price increase in the first quarter.
During our last call I mentioned that the natural ingredients business would face a modest volume headwind in the first half of 2022 .
Primarily as a result of strong 2021 demand and a more limited supply of onion.
I anticipate this situation to begin to improve in the second quarter and into the back half of the year.
Excluding natural ingredients flavors and extract group experienced double digit sales growth across all of its product lines.
This is a direct result of the group's focus on more value added products and customer service.
Flavor and extract group's operating profit margin increased 140 basis points in the quarter.
The growth in the group's operating profit margin as a result of a focus on more value added product solutions.
Lower overall cost structure as a result of the group's past restructuring and the divestiture activities and recent pricing actions.
Flavor and extract group is off to a good start to the year I expect the group to deliver mid to high single digit revenue growth in 2022, and operating profit margin improvement of 50 to 100 basis points for the year.
The group is well positioned for the foreseeable future.
Over the long term I expect the flavor and extract group to deliver mid single digit revenue growth and operating profit margin improvement of 50 to 100 basis points annually.
The color group had an outstanding first quarter the group delivered 12% adjusted local currency revenue growth and 18% adjusted local currency operating profit growth.
Operating profit margin in the first quarter rose to 27%.
The group saw a double digit growth in both food and pharmaceutical colors and personal care.
A portion of the group's revenue increase was driven by a mid single digit pricing increase.
Food and pharmaceutical business as a high level of new wins as a result of the group's innovative natural color portfolio and its focus on customer service.
The food and pharmaceutical business is off to a great start in 2022 and I expect this to continue for the year.
The personal care business continues to rebound nicely from the impacts of COVID-19.
The business delivered double digit local currency revenue and double digit local currency operating profit growth in the first quarter.
The business continues to focus on customer service and building appropriate safety stock to support its rebound and growth.
Furthermore, the focus on product line diversification into skin <unk> body care and other categories is a key component of the business is growth in 2022 it will be for the foreseeable future.
Long term I expect the color group to deliver mid single digit revenue growth and an operating profit margin at or above 20%.
The group has had a great start to 2022 and is on track to deliver mid to high single digit revenue growth.
And an operating profit margin at or above 20% for the year.
Asia Pacific had another outstanding quarter, delivering 14% adjusted local currency revenue growth at 31% adjusted local currency operating profit growth.
Bring profit margin in the first quarter rose to 22, 5%.
The group experienced solid demand in almost all regions. In addition, the group implemented a low single digit price increase in the first quarter.
Since we have made in the group's technical leadership team are key factors to our growth and success.
The group continues to have a high sales win rate and is on track to deliver mid to high single digit revenue growth in 2022.
Over the long term I expect the group to deliver mid single digit revenue growth.
Without a great start to 2022, we are operating at or above the previous guidance, we outlined for the year as Steve will discuss we are raising our guidance.
I'm very excited about our new sales wins and I'm confident that our focus on customer service and new product development will provide us the foundation for continued growth in the years to come.
I remain very 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.
Since its first quarter GAAP diluted earnings per share was <unk> 88 cents.
As I mentioned in our opening remarks, we do not have any adjustments to our GAAP results for the first quarter of 2022.
Last year's first quarter GAAP results include a divestiture and operational improvement plan costs, which.
Which decreased last year's first quarter results by approximately seven cents per share.
In addition, our GAAP earnings per share in the first quarter of 2021 included approximately $25 6 million of revenue and approximately five cents per share of earnings related to the divested product lines.
Excluding these items in our 2021 results our consolidated adjusted revenue in the first quarter of 2022 grew by eight 4% in local currency to $355 5 million.
Our adjusted local currency EBITDA was up 16.3% for the quarter and our adjusted local currency EPS was up 16.9% for the quarter.
Foreign currency exchange rates decreased adjusted earnings per share by approximately two cents in the first quarter.
Our cash flow from operations was down in the first quarter, primarily due to strategic investments in our inventory position.
And higher incentive compensation payments as Paul mentioned, we continue to make strategic investments in our inventory to support our demand and to ensure we have appropriate safety stock positions as logistics and supply challenges continue.
Capital expenditures were $12 7 million for the first quarter.
We expect our capital expenditures to be near 90 million this year.
Our debt to adjusted EBITDA is 2.1.
Our balance sheet is well positioned to support our capital expenditure spend.
<unk> M&A.
And our long standing dividend.
Turning to our 2022 guidance, we are raising our reported GAAP EPS to now increase at a high teen growth rate compared to our 2021 reported GAAP EPS of $2 81 set.
Our previous guidance called for a mid teen growth rate.
At this time, we do not anticipate any material divestiture related costs or operational improvement plan cost in 2022.
We are also raising our revenue guidance to be up mid to high single digits in local currency compared to our 2021 adjusted revenue.
Our previous revenue guidance called for a mid single digit growth rate.
In local currency.
In addition, we are also raising our 2022 adjusted EBITDA and EPS guidance to both grow at a high single to double digit growth rate in local currency.
Our previous guidance called for adjusted EBITDA, and EPS to grow at a high single digit local currency growth rate.
Faith based on current exchange rates, we now expect currency to be a headwind of approximately 12 cents per share.
Thank you for your time. This morning, we will now open the call for questions.
Thank you we will now begin the question and answer session to ask a question you May press star and one on your Touchtone phone.
To withdraw your question. Please press Star then two our first question today will come from Ghansham Panjabi of R. W. Baird. Please go ahead.
Thank you good morning, everybody good morning Ghansham.
Good morning, Paul maybe we can start off with the you know the drivers of the increase in core sales growth for the year are you know how much of it is from incremental pricing versus what you thought initially because it seems like volume comparisons will be very difficult.
<unk> onwards, and maybe you could just update us on your view on a specific views on volume by segment as the year unfolds.
Sure. So if you look at the Q1 I'll go through each of the groups. So starting with Asia Pacific you saw were up 14% on revenue.
I'll kind of low single digit on pricing figure about 3%, which then implies a double digit increase in volume. So really strong volume growth there driven a lot by new wins targeted customers again are our sweet spot of these sort of B and C style customers applies very strongly there in Asia.
Okay.
Looking over at colors.
As you heard they were up 12% revenue their pricing was about a mid single digit.
Type increase figure of about 5% was pricing.
Which then suggests 7% was volume there again really really strong new wins across a broad variety of customers really good growth across a really each of the geographic regions and product lines.
So a good outcome there.
And then flavors, so I noticed there's a number of new investors on the call today too. So let me just take a little bit of a journey here. So as you know flavors consists of flavors extracts are flavor ingredients, which are <unk> and east extracts and then of course, our sentient natural ingredients, which is onion and garlic.
So if you take flavors extracts and flavor ingredients, that's about two thirds of the flavor group alright.
Alright that part of the business was up about 13.
It kind of almost mid single teen sorry, mid teen revenue growth with very nice operating leverage is there well into the double digit profit growth.
That two thirds, we got a kind of a mid single digit pricing increase very much what we expected about five.
Sent which then implies that part of the business got about seven or 8%.
Volume contribution so very very nice volume build there again, a lot of new wins targeted customers et cetera.
Now you look at that other part of the flavor of the one third of the flavor group with two thirds flavors ingredients and extracts the ones they're at the F&I business.
This is where volume was down and the volume was down because we sold quite a bit in 2021.
And it was a really effectively a product availability situation here in Q1. So this is the flag. This is the headwind I flagged in the earlier call. The Q4 call, suggesting that this would be a bit of a headwind for the first part of the year, but the crop comes in April it's alright, it's being pulled as we speak.
<unk> right now, but it's pulled from a lot of different regions. So it's pulled over the next several months so far so good and we feel very good about F&I for the year that one third of the flavor group, we feel very good that they'll achieve what they need to achieve from a volume standpoint, and from a revenue standpoint as well as pricing.
So you know overall as expected a little bit of a headwind. There again. This is really kind of a market driven thing that had been as you've heard and know very well droughts and other situations in the west coast in particular that have impacted the crops for this this last cycle.
Cycle moving forward, we expect that to be a much improved situation. So we feel good about things for the rest of the year.
Great. Thanks for that Paul maybe maybe picking up on that on the a b I don't think we've ever discussed on our conference call on our end, but maybe take us through you know how much that impacted you are specific to the first quarter.
And then just given the supply shortages.
You cited weather what does that imply for the cost basket specific DAU on these but also just broadly for sense, yet as the year unfolds as well.
Well I think you know we we.
At the at the highest level here, we're raising our guidance for the year, because we think we see very broad based growth across all of the groups really driven by new wins.
Wins is eclipsing pricing is a factor in this this revenue growth.
I think that's a very very important insight I think S. N I, it's it's a somewhat of a temporary headwind, but we feel very confident from the standpoint of driving volume.
The back half of the year and even starting towards the end of the second quarter, we feel really good about that so you know it's.
Overall for Q1, our revenue was up 8% if not for the the F&I impact we as a company, we would probably be up about 10 or 11%.
With about say overall say, 5% of that pricing and 6% volume. So I really want to continue to emphasize they're really good wins that we are generating the volume growth that we are seeing and it stands a lot from the technology side of things. It sends a lot from the customer service side the delivery side.
We don't operate in a in an organization that tolerate as excuses, so we drive to perfection.
Covid or no COVID-19 recession or no recession, we expect a high level of service out of all of our businesses every single day.
No excuse so I think that drives a lot of our success commercially here.
Okay perfect. Thanks, so much.
Fitting me sure thing.
Our next question today comes from Heidi <unk>.
From BNP Paribas. Please go ahead.
Good morning.
Heidi how are you.
Thank you so I think you're setting your prepared remarks that you're expecting percentage margin improved this year. What gives you that confidence it's a very confident statement in any place.
Their environments.
That's my first question. Thanks.
So yeah I think when you look at Oh, I'll kind of break down each of the regions, starting with Asia Asia, What's driving a lot of that margin improvement is the product mix. As you heard me say, we didn't necessarily drive a lot of that revenue with price.
The continued emphasis on flavors.
The continued emphasis on natural colors.
And with the types of customers that we like to emphasize I think is paying dividends. When you look at color very similar dynamic in terms of the types of products natural colors. There, but we're also seeing a nice and continued rebound out of the cosmetic market.
While makeup is still not quite where it was versus pre pandemic or in the pre pandemic measures.
Hair care body care. These markets still continue to grow very very nicely and so we expect a continued successful outcome from the personal care side and as you know that's a profitable business for us. So that's what gives me some confidence there and then of course on the flavors side why I think we can continue to improve the margin.
Yeah.
It is again a lot of fundamental good volume in the flavors and extracts side of that business precisely what we've been emphasizing for many many years now.
That restructuring thing, we went through that very painful process.
It is still paying dividends for us as we continue to better utilize our capital footprint. We continue to see a very nice uplift in that operating profit margin side, even though it seems like it was many years ago and sometimes I wish it was even longer ago in my own mind anyway.
It really has had a profoundly beneficial impact on the flavor group in terms of helping us to raise that margin.
So mix the outcome of that restructuring and cost savings work that we did and and of course in each case pricing is going to be a little bit of a factor.
But really pricing is in accordance with the inflation, we see so I think that would that that would be the third of the factors that I would point out. So you wrap all of those together.
And then you pair that with our good service levels.
And our strong wins across the board and that gives me a great deal of confidence for the year as I look at Q2.
Looking at sales for April right now they all look really good and each one of the groups and then as I look out here in May and June .
Sales look really good so I guess my confidence is born of what I'm actually seeing right now to actively in Q2.
So those would be some of the factors that come to mind for me.
Thanks for that.
Second question have you seen any signs of price elasticity in any market.
And if we want to see like trading down for example, how would that impact MTS.
Well, yeah, that's a great question and that's what's on everybody's mind right now I mean, certainly there's evidence.
And some markets are folks trading down.
Europe for example has tended to be a much larger private label market compared to say the U S market.
Ironically enough it would appear that private label sales and some segments product segments in the U S are actually down.
Despite this inflation so right now it's kind of hard to predict how that that pricing elasticity is going to play out here in Q2 and beyond.
But I would tell you that since the N as a company we deal in all types of customers than the biggest multinationals to some of the smallest startups, we're dealing across every one of the product categories from beverage to pet food.
Savory snacks.
Very very well represented we have a very.
Substantial sales force.
We insist on very active sales force covering these customers. So I feel really good about our coverage. So that you know when somebody wants to go from a very expensive drink to a not as expensive drink.
Well, they're not as expensive drinks still has color and it still has flavor in it.
So that's the nice thing about this business.
Since it is a very recession resistant business the nature of our products are products that people continue to buy whether there's a recession or not yes. They may trade down.
But ultimately we're still represented even in those products. They would trade down to we have a very good presence in private labels.
We're out Europe , and the U S and so I think we're fairly well insulated for whatever this market may throw our way.
Over the next even next year or two.
Thank you and then lastly, I was.
Wondering if you're seeing any regulatory tailwind, helping your business I think last time, we met we had talked about titanium dioxide as an example, because that's been a big growth driver for you.
Ah well regulatory in general I like to always see that as a tailwind consumers want what they view as better products and better products require more technology.
And so that's where we feel like we feel a real need in the market in many of these segments.
Specifically about titanium dioxide, yeah, I think theres a lot of activity as you know the European Union has come out very strongly against titanium dioxide that instead of food agencies have and so there is a very strong need to swap that out and the nice thing is we don't manufacture titanium dioxide, but we do manufacture.
The replacement for titanium dioxide, so it's a very exciting opportunity.
We've got a lot of work in a big pipeline associated with that so yes, it's very early for some customers given the recent regulatory change but for other customers they've been working on this for some time. So that's a very good example of the type of innovation work that we do it's very market driven it's very customer driven.
It's very much when you say R&D, it's kind of a little are really big D and titanium dioxide and replaces a good example of that type of dynamic. So yeah, I think that'll be a nice tailwind for us for Europe , and then as it migrates over the Atlantic for the U S. And then eventually into the Asia Pacific region as well.
Thank you.
Okay. Thanks I D.
Our next question will come from Metro from Gopal Upsell Daddy. Please go ahead.
Yes, hi, good morning, everyone and thanks for taking my questions.
Hi, Paul I was just curious on the first Sunday color makeup I know you mentioned it's not.
Back to where we were pre pandemic, but do expect to ever get back there given it seems like you know remote work because become sort of a permanent thing for a lot of companies now.
I do I think it well you still have to go look good on the camera Mitra.
So I think there's always going to be a need for that I think the the demographic has changed a lot more younger.
Females using makeup nails using makeup so there's a lot of dynamics that have been added to this market over the years. So I think makeup has been used for probably the last 2000 years of human history, I really don't anticipate it it kind of closing shop here on account of.
Covid I'm sure there is still some headwinds and as much as not everybody's out and about yet.
But it continued relief and in in some of the Lockdowns and things like that it's only helping situations and so we have very strong demand.
Much of that customer's recovering some cases recovering their inventory positions from.
During the pandemic, but yeah, I think theres a lot of good signs tell tale signs the pipeline has picked up.
But you know that's a market where I think many of our customers are very much emphasizing okay. We gotta go to customers with innovative products, we need to show them interesting things different things and so that is very much the nature of what we're seeing in our pipeline here. So I think youre going to see a little bit of a renaissance perhaps in some of the color makeup.
Well remember, there's two personal care it kind of moves in cycles.
I had a couple of years ago makeup was the biggest thing and now we're kind of in a lower cycle and skincare is the biggest thing right, but ultimately consumers make choices about where they're going to spend their money and that evolved and that shifts and so having a very diversified business well represented business is what ultimately will insulate us.
And as you know, we we had a larger subscription the makeup segment going into the pandemic.
But over the last couple of years, we've actually been quite successful diversifying into some of these other segments and I and I think that's gonna be a an important part of our success moving forward, but the short answer is absolutely makeup is coming back.
When precisely and to what degree that's a little bit harder to predict but I would tell you that the pipeline looks very good the customer activity is quite good and there's a tremendous interest on the customer and and really are building.
Building out some some great products moving forward.
Yeah no. Thanks, that's really good.
Color.
Switching over now on price increases you clearly have had some.
Success here in terms of.
Being able to implement increases across all our businesses I was just curious if I'm part of the negotiations more or less just trying to offset the higher input costs, you were seeing or maybe perhaps squeeze out even more than that.
Well you know, we're not looking to put our customers at a disadvantage we know they have to compete in the market.
But we also know that our products don't necessarily.
Change the economics for our customers substantially.
So our goal is obviously theres many input cost to address and to cover our goal is to certainly cover those and to maintain our gross margin in the process and so I think philosophically that's what we've done and I think we've been as successful as we needed to be in the process again, we're not.
Looking to we don't want to put our customers at a disadvantage and we certainly don't want to lose business. So you have to be very sensible and judicious.
<unk> is not as easy as as.
It may seem it can be quite complex it can be very time consuming.
And you got to work with your customers.
Okay. Thanks, and then I know you highlighted the flavor solutions business contributing this quarter.
Yeah. I was just curious are you almost a year into that acquisition. If it's kind of met your expectations or even exceeded it and also I think you've mentioned on prior calls you know maybe in 2022, probably aside from just focusing on acquisitions, maybe an update on.
Supply agreements and throws up maybe some exclusive T being.
A possibility.
So F. S. I is is I would tell you that it would be exceeding my expectations. It.
It was.
You know we bought last year is about $10 million in revenue.
But they had some very unique technologies and they had some very unique customer access that that we did not have so those were two compelling reasons that we saw when we acquired that business and so I would tell you it's exceeded it.
Very good cultural fit they've got very hard working very dedicated people in that business. So we're very happy to have him as part of our business and so I think that's all going very well.
I'm moving forward sure Theres always a possibility of M&A and there's certainly a fair amount of activity now.
But as you just referenced sometimes you don't need to buy a company. When you can set up the appropriate relationship whether it's a contractual obligation.
Our contractual arrangement to to purchase their material.
That could be a nice alternative to buying something if your goal is to secure your supply chain.
So there's a lot of different scenarios and again, we don't necessarily always have to buy something to get what we're trying to get maybe we license the technology.
Maybe we contract on the supply chain side and that gets you. What you want maybe it's not as sexy as M&A, but you know what it doesn't have some of the headaches associated with M&A too. So it's a it's a good outcome in a number of different scenarios.
Okay. Thanks, and then finally, one for Steve I'm always a tough one in terms of the tax rate.
A little higher than I was looking for this first quarter and just curious you know.
We should think about that.
End of the year.
Sure. So you're right. It was up about 100 basis points in the quarter and in most quarters. This year I expect it to be up.
A little bit over last year or so so for the full year.
Probably looking at.
Maybe 200 basis points above prior year would be my my guidance.
You know unfortunately, it'll be a little up and down each quarter, but by the time the year's done we're looking at about to about a 200 basis point increase.
Okay. That's great. Thanks, again for taking the questions.
Thanks Mitra.
Our next question will come from Lee first with high Tower Advisors. Please go ahead.
Thank you have a few questions first on personal care I'd.
I'd like to take it a little more.
High level color pun intended it sounds like skincare is coming back.
Or is it more of an issue than makeup and also lip color.
No from an anecdotal perspective masquerading as a problem with the last two categories. So could you just give us a high level sort of.
Further comment on I'm not sure.
So Lee the our personal care business.
We had skin care makeup air care body care is really kind of our four key segments.
To your point around skin in makeup skin has been a very strongly.
Strongly growing part of the market right now for a lot of different reasons.
Whether its whitening effects or anti aging or anti polluting.
Hum factors a lot of interest in skincare and and that has been robust throughout the pandemic as you're trying to make up as I mentioned before we're not quite fully recovered from COVID-19 .
Makeup is still a very good part of the market to your comment about mass. It's very interesting you say that right because I make up.
<unk> has actually done pretty well because you can't hide your I guess, you could put a mask over your whole face, but I don't think many people have done that so I makeup is still an important piece and we had a lot of interesting innovations that we launched during that time and emphasize that part of our portfolio.
So yeah, when you wear a mask, though it's kind of it's not so great. So that's why we're glad that people don't have to wear masks as often anymore, because I think that's only going to contribute.
But yeah.
Yeah, I think that would be the only other comments that I would make on that one.
Okay, and thank you and.
Alright.
Are you can you give us a little can you elaborate a little bit more on pricing I mean, obviously inflation is high so it opens up the dialogue, but is it is there more or less resistance than any particular categories or any particular customer groups.
Well nobody likes getting a price increase of course of purchasing person. They they're all trying to do their jobs and our salespeople are trying to do their job.
And so you know again it takes scale it take judgment and you got to work with your customers, whether their beverage or snack or or savory or whatever they may be selling.
And so different impacts different raw materials are obviously affecting.
Different markets are.
Yeah.
So maybe some are have stronger logistical costs because for example beverage products tend to be heavier so they're paying more for logistics. So they may have more of an impact there then.
And then say a a snack food, which.
Have some of the same constraints there, but then again, it's that food is a lot of grains and so they may have more raw material inflation that you're working through so I think that most of the raw material inflation logistics utilities et cetera.
That you read about in the Wall Street Journal those are essentially the things that we have to contend with I I don't think we have anything exotic or unusual or beyond the norm there and so again, it's a matter of working with your customers you got to keep it so that they can continue to be competitive, but you obviously have to address some of these input.
Costs that you are facing as a business.
Okay, and can you talk a little bit about the M&A environment in terms of rates and the dollar and just what you're seeing when you're looking around I know a lot of deals are opportunistic and not strictly driven by the.
Economy, but could you just talk about the M&A environment right now.
Well I think you can see the number of companies that have been bought and sold over the years and I think it's a fairly robust environment even during COVID-19 .
Those were happening.
How that will change in the coming year, well I guess I mean, I can guess just as much as anybody else can guess.
But I don't think I'll do that I would tell you, though that we're always looking at companies some of them we may approach.
Others, it's part of an auction process and so there's a lot of interesting technology to be had.
There's a lot of potential supply chain security to be gained through an acquisition, but as I mentioned to Mitra, sometimes you don't need to do an acquisition to get those things that you want.
From a from that situation and so we.
We will continue to evaluate.
We will continue to be very sensible.
I Wanna say conservative I, just wanted to say sensible, we need to earn a return we have a cost of capital.
We have expectations from investors and.
And we have needs that a company technology and otherwise so you put all those together and if you can have something for a REIT for a a price that makes sense for both sides. Then eight it can work so I don't necessarily.
See more or less now than I did even a year ago, where we're always looking we're always in the market.
Thank you so much sure thing.
Our next question today will come from David Green about Hey, Ben. Please go ahead.
Hi, Steven.
David Good morning, I was waiting for you here.
[laughter].
Right.
So wait wait till off okay.
Okay.
Couple of questions guys.
What's giving you the confidence.
So early in the yeah, I guess, especially given the macro backdrop is that just anything that's giving you a <unk>.
High level of visibility for specific reason.
The pipeline a lot stronger than America and historically, that's my first question.
Okay.
So probably three factors gives me confidence number one the actual numbers that I'm already seeing for April may June and they're good.
Number two I would look at our sales pipeline, what's in our pipeline is bigger than it was last year.
And make an evaluation on what would close in the next year.
And the third thing I look at is what's my trailing 12 months of new wins, we've been generating a lot of new wins and.
That that gives you a pretty good indication of what your next 12 months may look like Darden, our trailing 12 months on new wins has been very very robust.
And it continues to be robust in the month of April in the month of March. So that tells me and it gives a great deal of confidence those three factors.
That I feel good raising our guidance for 'twenty, two and I think it's a very achievable outcome for this company.
Okay.
Great.
The second question was just with regards to price increases.
What percentage of the portfolio has the smell been done across I guess, leading on from that is when when should we think about getting the full impact from those price increases.
Well you know in a lot of cases pricing is is ongoing.
I think youre seeing our revenue I quoted the price and volume impact for each one of the groups. So you can see that that's happening.
You can also see that we're generating operating leverage in each of our businesses with that revenue came profit growth.
Above and beyond the revenue growth. So that's a good factor but.
Pricing is a is a moving thing right now and so we are.
Working with all of our customers and you know what maybe it's just this one raw material or maybe it's just this one shipping line or maybe its just one.
Our country facing of this utility.
Inflation.
So I would tell you that it's just going to we're going to continue to monitor the situation and take action as we need to.
So theres no silver bullet, there's no easy answer to that one again.
Jay you kind of pick up the newspaper or maybe you pick up your phone and look at the newspaper and and there is information about something right and you talked to purchasing folks and the like.
Nothing going on every day.
So very dynamic situation, but I think we've managed to do it very skillfully our salespeople done a hell of a job are our general managers and other sales leaders have done a great job managing this process. So we've got a good program in place. So I'm I'm very confident that we will do what we need to do.
<unk> and work with our customers in a very judicious manner.
As the year continues.
Yeah.
Right.
Two more if I may.
I mean look at the cost base of your peers talk about well they all seem to be talking about more of a sort of high single digit powerful digit increasing in cost basis.
Cross the board.
And.
When when Youll sort of articulating the trends that youre seeing it feels like it's sort of you guys closer to a sort of mid single digit.
Do you think there is any specific reason why youre seeing less cost inflation than your peers.
And managing it better than I get off the components of it.
Well Youre right are our costs are more of like a mid single digit on the basis of our cost of goods sold right. So what you've seen us take kind of mid single digit pricing. That's mid single digits on the basis of revenue and that's again to cover mid single.
Oh digit on the basis of Cogs.
So you don't have to get more than mid single digit pricing to cover that and maintain your gross margin. Thank you.
We've talked about that before so I think you follow the math there.
So why are we different I don't know that I I don't know I'll, let you I'll, let you get what you want to from that one, but I'm not going to answer that one.
Okay. Okay.
Hum.
For more just the lofty promise I was just thinking about the margin.
For Q1, and sort of how to think about.
The cadence for the rest of the year.
Hello, Obviously, you should still benefit with makeup coming back. So we would expect margins I would have thought to improve enough division as we get throughout the year.
I was just thinking.
How about cadence might look for flavors and extracts in APAC.
Yeah. So.
Flavors, we expect a 50 to 100 basis point improvement in that O P margin for the year. So you heard.
What we did we were over 100 in Q1.
So you know those aren't necessarily linear and it doesn't necessarily always follow a neat.
I'd pattern.
I like to kind of stick with where that'll be for the year and I'll say it 50 to 100 basis points isn't achievable improvement in OSB market.
On the color side as I noted in my prepared comments.
We look to be north of 20% O P margin.
For the year.
Again.
How one individual quarter may play out I really don't want to predict that one.
Because there can be some some moving parts there.
But last year. We were just we were kind of 19 two on the op margin so that implies.
You know something better than that 50 to 100 basis point improvement there in color, probably more like 80 to get to that 20% op margin.
And then Asia Pacific.
You know, we expect a similar improvement 50 to 100 for the year and are there off obviously to have quite a good start there were about 20 last year Q1, they were 22 and a half ago, we feel good about that one as well.
Great. Thank you and I promise the last question.
On the balance sheet.
Doing a great job in terms of cash flow generation.
As you mentioned you were not down to a sort of a $2 one times net debt EBITDA level.
How would you sort of thinking about what the optimal balance sheet structure looks a lot of care and.
Now.
Aside from some M&A, which is obviously a priority and reinvesting into the business.
How are you thinking about potentially shareholder returns scope for buybacks.
Yeah, well I think the best way to give shareholders return us to grow EBIT dock and then once you have that cash to use you want to invest in the visits so step one on this train to knees capex.
$90 million is what we're planning this year I'd love to spend $90 million next year. Because then I got a lot of ROI projects that is the purest finest return I could ever offer to shareholders.
So that would be.
One point to we've got a long standing commitment to the dividend. So we will continue to do that.
And then you know I like the debt to EBITDA anywhere between two and three feels very manageable.
We could even go higher than that but I kind of like the two to three that feels pretty good.
So.
If I don't have a an interesting company to buy yeah, I can pay down a little bit more debt, but then again, maybe it's a better return to shareholders to purchase back our own stock. So.
That's kind of the way I'm seeing that right now so if we had an acquisition on the horizon, which we might we might not.
That would that would tell you that you know what we're not gonna do buybacks, but if you don't see an acquisition.
And then you could probably expect that there would be some buyback activity.
Perfect. Many facts, okay. Thank you David.
Ladies and gentlemen, showing no further questions in the queue. This will conclude our question and answer session and at this time I'd like to turn the conference back over to management for any closing remarks.
Okay. Thank you everyone that will conclude our call. Thank you for your attending today and.
We'll now end the call. Thank you.
Yeah.
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