Q4 2022 Sensient Technologies Corp Earnings Call
I am joined today by Paul Manning, <unk>, Chairman, President and Chief Executive Officer.
Earlier today, we released our 2022 fourth quarter and full year financial results a copy of the release and our Investor presentation is available on our website at <unk> com.
During our call today, we will be explaining the differences between our GAAP results in our adjusted results. The adjusted results for 2020 to remove income related to an earn out payment received in connection with the divestiture of our yogurt fruit preparations business. The adjusted results for 2021.
Remove the impact of the divestiture related costs. The results of the operations divested in the costs 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 era.
Porting periods.
This also reflects how management reviews and evaluate 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 the 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 today.
I would also like to remind everyone that comments made during this call including responses to your questions may include forward looking statements. Our actual results may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings, we urge you to read.
Since in previous SEC filings and our forthcoming 10-K 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 earlier today, we reported our fourth quarter and full year 2022 results.
I'm very pleased to report for the full year of 2022 that we delivered 10% adjusted local currency revenue growth and 13% adjusted local currency EBITDA growth.
Each of our groups had outstanding adjusted local currency revenue and adjusted local currency operating profit growth in 2022.
We exceeded the guidance we communicated at the start of 2022 for adjusted local currency revenue adjusted local currency EBITDA and adjusted local currency EPS.
Our strong operating and financial performance in 2022 follows a very strong results, we had in 2021 and 'twenty 'twenty.
Our performance is a direct result of our focus on sales execution and customer service as well as our broad product portfolio.
We have proven to be a reliable supplier to our customers and we continue to achieve new sales wins at customers across each of our groups.
Our portfolio of natural flavors and colors and a wide variety of product technologies continued to position us for future growth.
Input costs grew throughout 2022, including the fourth quarter.
Overall, we continue to see higher costs in a number of categories, particularly in the agricultural and natural raw materials, which impacted our margins in the fourth quarter.
We elected to wait to implement additional pricing until the first quarter of this year.
We anticipate these costs to remain at elevated levels at least for the first half of 2023 and we plan to continue with disciplined pricing actions as needed.
Because of the dramatic inflationary environment over the last two years and the timing of our pricing actions margin comparisons and other year to year comparisons will at times be distorted.
As a result, we believe it is best to judge our performance over the full year.
During the fourth quarter of 2022 we announced the acquisition of index a natural color next track company based in Turkey.
This acquisition is now included in the color group's results and strengthens our existing natural color portfolio and improves our vertical integration for several key raw materials.
We consider this to be a bolt on acquisition consistent with our natural colors strategy.
<unk> represents approximately 1% of the color group's fourth quarter revenue.
We continue to look at other reasonable acquisition opportunities that support our strategic initiatives within our core product lines.
Now turning to the groups.
Color group had an outstanding 2022 reporting 15% adjusted local currency revenue growth and 15% adjusted local currency operating profit growth.
The food and pharmaceutical and personal care product lines. Each delivered excellent results in 2022 with strong adjusted local currency revenue and operating profit growth.
Overall, the group's annual revenue growth was driven by a high single digit volume growth and high single digit pricing.
Within the color group food and pharmaceutical colors achieved 17% adjusted local currency revenue growth.
We delivered a high level of new sales wins in 2022 stemming from the company's strong customer service levels and innovative natural color portfolio.
The acquisition of endemic strengthens our natural colors supply chain and supports our new natural color wins.
I anticipate our food and pharmaceutical product line will have another good year in 2023.
The personal care product line also had an excellent 2022, achieving 10% adjusted local currency revenue growth.
The product line has rebounded nicely from the impacts of Covid.
Personal care is focus on product line diversification customer service and innovative technologies are fueling our current growth.
Yeah.
The color group also had a strong finish to 2022 reporting fourth quarter adjusted local currency revenue growth of 12%.
And adjusted local currency operating income growth of 8%.
The group's revenue increase was driven by a high single digit price increase and low single digit volume growth.
Food and pharmaceutical colors continued its strong performance in the fourth quarter, achieving 15% adjusted local currency revenue growth.
Oh care slowed to a mid single digit growth rate in the fourth quarter, primarily due to customer destocking.
Hello Group is well positioned for growth in 2020, three and beyond I expect the group will deliver mid single digit local currency revenue growth.
And mid to high single digit local currency operating profit growth in 2023.
We believe food and pharmaceutical colors will have solid growth throughout 2023.
We believe personal care will improve throughout 2023 as customer Destocking declines.
The flavors and extracts group had another solid year in 2022 reporting 6% adjusted local currency revenue growth and 10% adjusted local currency operating profit growth.
We also achieved an 80 basis point improvement to our operating profit margin for the year.
For the year flavors extracts and flavor ingredients reported double digit adjusted local currency revenue and operating profit growth.
These product lines benefited from high single digit pricing and mid single digit volume growth in 2020 two.
Revenue revenue in the natural ingredients product line was down in 2022, primarily due to lower volumes related to customer destocking and lower production volumes from the 2022 crop, which we have previously discussed.
In the fourth quarter of 2022 the flavors and extracts group delivered 3% adjusted local currency revenue growth.
Adjusted local currency operating profit was down 4% due to higher input costs and volume declines primarily due to customer destocking in the natural ingredients product lines.
The flavor group has implemented pricing actions that will begin to offset these increases, but we anticipate customer destocking to continue in the first quarter.
Despite these first quarter headwinds in the flavors and extracts group, we expect sequential improvement throughout 2023.
For the year I expect the flavors and extracts group to deliver mid single digit revenue growth and mid to high single digit operating profit growth in 2023.
The Asia Pacific Group delivered an impressive 14% adjusted local currency revenue growth and 23% adjusted local currency operating profit growth in 2022.
The group benefited from strong revenue growth in almost all regions.
Overall during 2020 to the Asia Pacific Group achieved mid single digit pricing and high single digit volume growth.
In the fourth quarter of 2022 the Asia Pacific Group reported 6% adjusted local currency revenue growth and 4% adjusted local currency operating profit growth.
The group continues to benefit from solid revenue growth in almost all regions revenue growth benefited from a mid single digit price increase and modest volume growth in the fourth quarter.
As input costs continue to increase the group has implemented pricing increases that will benefit the business during an during the start of the first quarter.
For the year I expect the Asia Pacific Group to deliver mid to high single digit revenue growth and mid to high single digit operating profit growth in 2023.
I'm very pleased with our performance in 2022 and over the last few years, our focus on sales execution customer service and innovative technologies are fueling the growth in each of our groups.
Our product portfolio is strong and we remain focused on our key customer markets of food pharmaceutical and personal care.
We continue to evaluate sensible acquisition opportunities we.
We spent approximately $80 million in capital expenditures in 2022, we.
We had very good internal investment opportunities that should drive future growth.
And as a result, I expect our capital expenditures between to be between 85 and $95 million in 2023.
Our inventory levels have Pete and I would expect a reduction in our inventory throughout 2023.
Absent an acquisition our capital allocation plan will be focused on paying down debt.
I'm very happy with our financial performance in 'twenty 'twenty. Two we finished at the top end of our guidance for adjusted local currency revenue adjusted local currency EBITDA and adjusted local currency EPS for 2022.
I am optimistic about 2023 in the future of our business Steve will now provide you with additional details on the fourth quarter results.
Thank you Paul since his fourth quarter GAAP diluted earnings per share was 69 cents.
And these results are four cents per share of income related to an earn out payment received in connection with the divestiture of our yogurt fruit preparations business.
Last year's fourth quarter GAAP results include a divestiture and operational improvement plan costs, which decreased last year's fourth quarter results by approximately seven cents per share.
Our GAAP earnings per share in the fourth quarter of 2021 include an immaterial amount of revenue and operating expenses related to the results of the divested operations.
Excluding these items our consolidated adjusted revenue in the fourth quarter of 2022 grew by five 9% in local currency to $348 7 million.
Our adjusted local currency EBITDA was up just under 1% for the quarter and our adjusted local currency EPS was down six 8% for the quarter, primarily the result of higher interest expense.
Foreign currency exchange rates decreased adjusted earnings per share by approximately four cents in the fourth quarter.
As we have stated throughout this year, we made strategic investments in our inventory position, which is the main reason for our lower cash flow from operations. This year, we have invested in our inventory position to support the high demand we are experiencing and to ensure we have appropriate safety stock positions.
Supply chain and energy challenges continue we believe our inventory levels have peaked and as Paul mentioned I would expect a reduction in our inventory levels throughout 2023.
Capital expenditures were $79 million for 2022, and our net debt to credit adjusted EBITDA is now 2.4 as of December 31 2022.
Our balance sheet remains well positioned to support our capital expenditures.
M&A and our long standing dividend and any excess cash will be used to pay down debt.
Regarding our 2023 guidance, we expect our 2023 local currency revenue to be up mid single digits compared to our 2022 revenue and we expect our local currency adjusted EBITDA to grow at a mid to high single digits.
Right in 2023.
We expect our 2023 local currency yes.
To be flat to up low single digits compared to our 2022 adjusted EPS of $3.29.
In 2023, our EPS will be impacted by higher interest expense and a higher tax rate.
Based on current interest rates, we expect our interest expense to increase by approximately $11 million or approximately <unk> 20 per share in 2023 compared to 2022 full year interest expense of $14 5 million.
Also we expect our 2023 tax rate to be around 25% for the full year.
On a quarter to quarter basis, our tax rate will fluctuate and therefore, we continue to believe our local currency adjusted EBITDA growth is an important measure of our performance.
Based on current exchange rates, we expect currency to be a headwind for the beginning of the year.
And modestly favorable for the full year.
Thank you for participating in our call today, we will now open the call for questions.
Thank you we will now begin the question and answer session.
You ask a question you May press Star then one on your Touchstone stuff.
To ensure your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Yeah.
And our first question will be from Ghansham Panjabi from Baird. Please go ahead.
Yes, Hey, guys. Good morning, Congrats on all the progress.
Good morning Ghansham.
Good morning, So first off you know on the Destocking paradigm that you called out you know obviously not unique to you, but rather the whole supply chain, but can you just give us more color on how exactly that dynamic played out towards the fourth quarter and then also what customers and specifically sharing with you as it relates to our channel inventory and the likelihood that it basically faced by the first quarter.
Okay I didn't get the second part of your question there got them.
Yeah, I was just asking about channel you know what customers are sharing with you in terms of inventory levels in the channels and you know your confidence I guess as it relates to maybe that stops in terms of destocking in the first quarter.
Okay got it.
Yeah. So I would say certainly destocking you you could see that throughout our product lines.
Mostly in Europe , and the U S. A less of that type of dynamic underway in Asia Pacific.
But the Destocking. We're seeing is is not unlike what you read in the newspapers.
Consumers and consumers are effectively responding.
Two price increases by buying a little bit less but then you have the added factor of many of our customers taking down inventory levels.
Because theres no longer such a strong need to compensate for supply chain disruptions.
So what we saw in Q4 it it hit hardest in the F&I business and I would say second to that would be personal care.
I think again wallet, we face that in every one of our businesses the new wins, we generated in flavors and extracts in food colors and pharma. We're so much larger than the destocking impact that we're able to come out on dry ground, there and from a revenue standpoint, and then of course from a profit.
[noise] standpoint in color and Asia.
In some cases, the destocking by our customers has been rather dramatic in other words, we've heard.
Testimonies from some customers to the extent that we're gonna take down our inventory 20, or 30% and we're gonna do it very dramatically and so much of what we see is or our belief my belief is that that's there was a big impact in Q4 bigger than at any other point during 2022.
As we look at our business, our customers and our product lines. I believe Q1 is the peak of the Destocking. So you're going to see that continue again in F&I are you.
You're going to see that impact again in cosmetics or personal care.
But so there'll be a little bit of a drag on the flavor and extract group in Q1, but I think that's going to largely subside come Q2.
If you look at color and you look at Asia I think we we've we will effectively whether through those destocking actions by our customers.
In Q1, but I think that will also.
Improve sequentially as we get into Q2, and Q3 and you know I can speak to very specific instances, where customers have already declared hey, we're not gonna black by this in Q1, and we see their orders for Q2.
So you know again I I think we have enough wins trailing in from 'twenty to 'twenty two.
We have enough wins that were already generating in 'twenty three.
We've been very effective with our pricing once again here in Q1.
So all of those things come together that I think we're gonna will be off for another good year, but we'll we'll start off with a little bit of slow down again in F&I and that's going to have an impact in flavors and extracts.
On the top and bottom line.
But I think we'll largely overcome those factors in color and Asia, even in Q1, and then of course continuing through the year.
Okay, and I guess on that maybe you can just touch on your specific inventory levels as well just given what we just said in terms of what customers are doing and then also is that starting to impact your cost basket as well just given the previous inflation et cetera.
Yeah, So inventory was up right around $150 million in 2020 to about a third of that was just inflation related so the cost side of that but.
But these are very specific directed actions to ensure that we were well positioned.
We've been able to win business on account of having product and being able to deliver it consistently and reliably.
So in my estimation is a very good investment now.
Now we have a much higher proportion of raw materials than we ordinarily have historically right. So if you.
You look back at the company, we had a much higher percentage of finished good inventory versus raw materials, but this time around.
We were very very specific about the types of inventory wanted to invest in and again it was largely a much.
Disproportionately raw material based.
So the positive about that is you know I think we can manage.
The absorption of the balance sheet activity as a as the market settles in as maybe we had destocking in certain areas I don't think there's going to be an economic impact financial impact of sensing as we start taking down our inventory.
But I would say this is more of a dimmer switch for us than an actual honor off switch. So we will manage that down there's still a lot of opportunity in the market, where there's bad service and there's bad availability of raw materials. So this idea that.
Companies can just kind of dropped their inventory back to normal levels I'm not quite there yet.
You know we've had some crop yield issues over the years, that's an eye and quite frankly, I'm a little bit tired of talking about that and I know you folks are tired of hearing about that and so to remediate that once and for all in forever ideally.
We have made a big investment in our inventory and S. N I and so I think having inventory in that business is a really good thing. It's a good investment we had very limited risk of obsolescence.
And I think that's going to play out in our favor so.
I feel good about our ability to bring inventory down, but I would not expect for you to be hearing about 20% reductions 25% reductions.
It'll be more of a slow steady progress consistent with maintaining good supply to our customers.
Perfect. Thank you so much.
Okay. Thanks Gautam.
And the next question is from Heidi <unk> from B M. P. Parable. Please go ahead.
Good morning, everyone.
Oh, Hi, good morning, Hi, I've got three questions I'll go one by one first question I wondering what you're assuming for pricing.
Pricing and inflation this year and are you assuming in your guidance.
Okay. So.
I think it's interesting I think there is yes, there is still inflation and yes, there are more than likely could be a need to take additional pricing.
Think versus 2022.
You could probably expect that the pricing in 'twenty, two 'twenty three will be a bit more surgical bit more directed at certain raw materials.
I think factors like sea freight and energy.
We see some stabilizing in those costs and in some cases again on something like sea freight or air freight those costs have actually come down.
We do have some commodities that are moving in the right direction from our standpoint from a price or a cost inflation, but there are there are still pockets of inflation.
That continue I wouldn't say unabated, but they are continuing and we need to be very cognizant of the need to to price that accordingly throughout the year, but I do think inflation seems to have stabilized overall in the business for at least the collection of raw materials in.
Energy inputs that we use and so.
Pricing.
Less impactful than it was in or sorry, less necessary than it was in 2022 would probably be the the short answer I would have for that one.
So is the mid single digit top line guidance, both volume and price.
Yeah that the mid single digit revenue guidance.
Includes volume and price.
Okay. Thank you and then maybe if we move to natural ingredients. So I think last year, you had talked about supply challenges.
Yeah.
What do you use over time I know that there's a short term destocking issue, but what are you seeing in terms of supply of raw material.
So you know S N I, you're right I mean, it was we sort of discussed that threat 'twenty to 'twenty two.
I think as we look ahead to 2023.
Well know more definitively as the year progresses as to what the crop bears them, but I think we've taken some steps as I referenced to the earlier question.
To make sure that that we are well supplied as we go throughout 2023 and into 2024.
So nothing dramatic to report at this point.
Again, I did note that the destocking phenomenon.
And each of our businesses and each of our product lines, where we're servicing different types of customers and so certain businesses may have higher exposure.
To certain types of customers and I think it's safe to say that F&I. The composition of its customers is a bit different from the rest of flavors and extracts and so that's just to some degree while we felt that destocking impact more profoundly with them than we did with the the balance of that portfolio.
But I think that as the year goes on in 2023.
What we will do fine there.
And you know as you look back at 2022, Yeah. We did have these issues in F&I, but flavors was still able to deliver you know our mid single digit revenue and our double digit profit growth. So we we've done a very nice job of managing despite some of those points of friction in the portfolio and so and I think we do.
Did that in 'twenty, 'twenty, one and 'twenty 'twenty as well so I think we've done we've got a good program in place, but again I'd I'd like I think we can still make some improvements there. So that the this business. This product line can be more additive to the overall flavors and extracts group.
Thank you and then a final one is on our innovation can you talk about innovation rate among your customer if he has anything changed given the challenging environment and Additionally, what are some innovation.
Innovation that you're excited about.
Thank you.
Okay. So first on the innovation, so I'll I'll describe that in terms of the launches that we see.
So our profile of Europe , and the U S and according to our data and our our our experience there are observations.
In Europe in the first half of 2022 launches were down double did like 14, 15%.
In the second half that moderated to like about flat like a minus 1% reduction in launches.
So that's that's a nice improvement and I think that bodes really well for 2023.
Similarly in the U S for the whole year launches were down about 5% to 6%.
Which is an improvement from 2021 when they were down like more like about 10%.
But just like Europe .
In Q4 launch activity in the U S is actually up slightly.
So those really I think are important factors to consider so when you think about our guidance why do I feel confident about our revenue and our profit and the leverage we will get there.
To some degree this launch inflection point is I'd call it.
Bodes really really well for US now the nature of the launches has changed a little bit.
If you are here again, I'll I'll profile, one of our regions give you a little sense of things. So if you look at Europe .
All of the launches that we measured last year in the food and beverage world.
40% of those launches were line extensions.
That a third about 30% where actual new product.
And then maybe about 25%, which was really just kind of a a modification of packaging so not necessarily a new launch and in the way we would traditionally think about it.
So how that would compare to years past, it's certainly much higher weighting towards new packaging.
A little bit more towards line extensions.
Nevertheless, the launches of lunch at some level and those are super positive and impactful for sensing now.
Now with respect to products that we've been launching and that we're very excited about.
You know we've got several in our natural colored portfolio that are really quite exciting and the idea there being how do we continue to improve the performance and the economics of natural colors to make it more enticing for customers to taken interest in converting products that are launching products with those.
So that will be an ongoing program that I think will be very happy with you heard me talk about the food color really strong results a lot of that is coming from our innovations there.
We have a number of innovations in our personal care business as I always like to say this is a business where technology matters and performance matters even more.
So we have a number of different launches with respect to natural color and natural ingredients base makeup products.
So these are very very exciting and I think we're going to see a lot of growth long term in that segment.
We have a number of new launches within the flavors and extracts part of our portfolio not only extracts new and in sort of novel extracts that we have sourced and are able to manufacture internally. These provide a more complex enhanced taste profiles and a lot of product applications. So those are.
Exciting.
And then of course in our bio nutrients business not one that we talk about that much we have a number of interesting launches in our plant nutrition.
Part of our portfolio to potentially enhance crop growth rates and yields are in a way that could be super compelling too to any number of growers around the world. So.
That's just sort of a high level of a few of the more recent launches, but yeah. We we track very closely what percentage of our revenue is being driven by new launches and so that's an important factor I think in our future growth and certainly for the growth we expect in 2023.
Thank you.
Okay sure.
And the next question is from Mitra, where Aimco Paul from Sidoti. Please go ahead.
Yes, good morning, and thanks for taking the questions just a couple from me.
Hey, Paul I guess in terms of the guidance for 2023, and the volume growth you're expecting how should we think about it as it relates to just continue to expand your services to the existing customers versus maybe out.
New customer wins.
So yeah I'll I'll start with this you know the guidance the mid single digit guidance would be to Steve's earlier answer inclusive of price and volume.
I'd like to think that that mid single digit growth expectation is a number that you folks can take to the bank.
Could there be some upside sure there could be some upside if you look at 'twenty 'twenty. Two there was a lot of questions. There was questions about destocking in price give backs and.
And so I think we were able to successfully navigate through that year and that culminated in a 10% growth.
The company and you heard some of the volume.
Metrics that I read off so we had really really nice volume growth in many of our businesses and product lines.
So.
The guidance I think maybe it's a bit conservative, but again I wanted you to have a very reliable set of top line expectations that you can.
Ah think about throughout the year and again, maybe there could be some upside on either volume while volume <unk> price.
To the question about are these really the revenue is it going to come from essentially a expanding an existing company customers or new customers.
I think in as much as we focus a lot of our attention on these local and regional customers. The B and CS is I may call them, we do that a lot in flavors and extracts. So I think that's gonna be a continued part of the flavors and extracts success.
He is going to be coming from a lot of new customers.
But what what's also interesting is you know in our in our color group, where we have very strong access to a wide range of customers.
We still generate a lot of new customer related revenue in that group. So I don't have a percentage breakdown for you.
You could certainly look by region and by product line and conclude that it's more efficient and it may be commercially more successful by simply selling more to existing customers.
But in other cases.
You may have some customers, who are maybe have more modest growth and more modest launch expectations in which case, you're turning more to a new customer.
Revenue generating model. So it's a mixed bag and I and again I don't have a percentage for you, but it's certainly within our thinking across each of our businesses would be probably the best answer I could give you there.
No that's very helpful. Thanks.
And then switching gears and it'll obviously interest expense is going to be a significant headwind in terms of EPS for this year just curious if it's causing you to maybe revisit your capital allocation priorities.
You'd be looking to be more aggressive in terms of debt reduction.
Phil.
Focusing on M&A and dividends share repurchases, maybe we can get a sense how are you.
Are you thinking about that.
Yeah, I'm not sure I would say you know our leverage is still at a very reasonable rate. So 2.4 debt to EBITDA. We are plenty of flexibility to do what we need to do we have a lot of good investment opportunities in the business. So we are going to continue to step up our capital expenditures and we're going to continue to look at.
Small bolt on acquisition. So I think from that point of view, there's not really any change, but anything we do have remaining after those priorities, we will want to pay down debt I think that that's accurate.
Okay, and then just following up on Atlanta, Capex I know if you look at 'twenty two versus maybe a couple of years ago, obviously significant increases and you mentioned step ups. Just curious in terms of any major investments you feel you need to do at this point and.
Should we expect the elevated capex to continue for the foreseeable future.
So I would say we've got a lot of ROI projects that we've invested in over the last couple of years, we got a lot projected for 2023.
And so I really like our chances in a lot of those there they're very much related to the core product lines that we have so.
As you think kind of longer term to the question about well is this 80 to 90 or 95 is that here to stay.
I would say the baseline would.
It would be what is our existing depreciation and amortization that runs right around I want to say, it's about 50 a mill.
So you know how much we are above I can't imagine that's being below that well what would render us substantially higher than that would really be how many are wide projects can we meaningfully complete in the course of the year.
So you know you look at our business the size of our business.
The number of locations.
You do have some structural limitations to how much capital you can reasonably expect to implement in the course of the year as these things can be potentially disruptive when you're shutting down parts of a plant to add something or it takes something out.
So yeah. Historically 89 is somewhat elevated but I think we're gonna be very very happy as we move forward with with the types of.
You know our ability to maintain and even accelerate some of our growth in a lot of our businesses, it's going to come on the heels of these capex implementation. So.
You know I think this year 85 to 95, I think there's a lot of really good stuff in there.
And I think as I or even as I think ahead to 2024, there's still a lot of really good projects. So that's the super positive thing here.
Here for the company those are the highest earning.
The opportunities as I see it when it comes to capital allocation.
So we we will will continue they were guiding in this realm in 2023 I would expect us to probably be close to this in 'twenty 'twenty four.
But as we get to 2025, we will see we Wanna, probably harvest some of the investments we've been making.
And but again use that 50 is kind of your minimal.
Hey, we got to maintain these places to type metric.
Okay, No that's great and then finally I just maybe circle back on the personal care business a little.
In terms of.
What youre seeing around your expectations that was sleep things have sort of settled down in terms of remote.
And back to office.
I don't know if you still expect a photo bonks back or that sort of played out for you.
Well I think personal care had a nice rebound in 'twenty, three or sorry in 2020 two as we discussed in the call.
We had as I also mentioned a little bit of a slowdown in Q4 and Q1, principally I think destocking was part of the culprit there.
But as we get into 'twenty three yeah, I mean I think.
These are great markets make up.
Hair care skin care, there very resilience.
Certainly.
One of the Super positives coming into 'twenty three is the reopening of China, I mean, China is a nice market for us for personal care.
And that's only going to help matters for us.
Europe and North America, we've got some kind of Q1 destocking continuing.
But I think our prospects for the business for the year are good probably not as strong as say food colors in pharma or flavors and extracts for that matter. So.
But it's an ongoing it's a great business, a very technically driven business our program around diversifying into these segments continues and we've made some super nice progress there very happy about that.
But there's a lot of N P. D activity, there and I think a lot of opportunities for us to continue to.
Generate some good growth out of out of personal care.
Yeah haven't folks out and about not wearing masks anymore that that's super helpful as well.
Okay. That's great. Thanks, again for taking all the questions.
Okay Mitra thanks.
Again here if he would like to ask a question. Please press Star then one.
The next question is from David Greene from Bold here. Please go ahead.
Hi, Paul I see alright.
Hey, David.
A couple of questions following up on <unk>.
Some of the previous ones.
In terms of price and taking price this year.
I appreciate it it's very early on in the year.
Have you had any sort of color or do you have any schools on the risk.
Back from customers, especially.
Given the high.
Levels of inventory that they might have.
Consumer demand backdrop.
Yeah, well I would tell you that I'm, probably one of the least favorite conversations a salesperson has is going into a customer with a price increase.
So.
But I don't think there's anything new on that front, maybe there a little bit more unhappy now than they were a year ago about price increases, but listen nobody likes a price increase.
And that's never easy and so you have to be very very thoughtful about the timing of that and the magnitude of that.
And you have to be sensitive to the customers ability to.
Build that into his economic model and still make money. So you got to you got to find win wins here are in the market and so.
I I like to think that inflation as I mentioned earlier has largely stabilized and some of the key markets and on the key inputs like energy.
For example.
But you know as we get into 2023 I don't think there's something like magic button that July 1st inflation stops and everything is back to normal I think this will be a process.
Hmm.
Whereby there is some deflation in some of these key raw materials and other inputs, but when and how big is anybody's guess.
In fact, that's what everybody is doing is guessing about this so my guess would be inflation should kind of stabilize on average will stop pockets up we may I think we're going to continue to have pockets downward.
And we work very very closely with our customers to two you know we need to cover our costs, but they need to sell stuff. They stopped selling stuff then you're covering your cost wasn't much. Good. So you do need to find a win win.
But we were very effective in 2022 largely across the board I have no reason to believe we will not be effective in 2023.
At least in covering our costs.
Yeah.
What wasn't a I'm not you can give any granularity on those given it so.
Amazing.
Goalposts of amendment.
I mean cost inflation for this year.
Are you running at minus 10%.
I'm just sort of thinking forward to this year you touched on a few things in terms of.
Some specific commodity prices have come down.
It seems like coming down one one thing you called out historically has been energy costs in Europe , which have also come down as well.
So I guess more broadly speaking what would be an expectation pool.
So cost inflation was 23 or is it just too much of it got to this point.
Ah well my short answer is I don't know.
But whatever it is I think we'll be able to cover that with pricing.
You know again, if you want me to guess, it's I don't think it's going to be as bad as 'twenty 'twenty. Two is my guess, which I guess is no different from anybody elses guess right just sort of.
Hard to I guess, you find out if youre right as the year goes on but you know maybe stepping back here for a second I think the thing for everybody to keep in mind is it.
Inflation as it drives our costs up and necessitates pricing actions on our part.
Our products typically do not constitute a significant input cost to our customers.
So our customers may have substantially high cost but.
Ordinarily, it's not coming in a substantial way from food colors, and flavors and things like that which is a very.
The wonderful thing about our businesses is that.
We can pass along pricing.
You can still help our customer to be successful owing to good products that we can sell them.
But generally we're not I I would say that we're not bringing customers to their knees on account of our inflation I think it's going to be coming in in other forums to our customers. So.
That's kind of the big picture here, which is to then say tactically speaking I think we can get the pricing that we need to get to cover our costs and retaining the business.
Okay now that's great.
It doesn't even have lightened by months because <unk> got a quick question on F&I, which you didn't want to talk about that anyway.
I see.
I have spoken about.
So in my opinion, it will take a 5% drag drag on SME.
'twenty two.
And on that basis, we'd expect a rebound to come through this year.
Just wanted to maybe try and get a feel for.
How much of that might unwind this year, and what kind of hell with it could generate.
Yeah, So, yes, and I was a drag in 'twenty to 'twenty two.
Yes, and I will rebound in 2023.
For some of the reasons that I've already discussed.
So.
Yeah, I think it's fundamentally a terrific terrific business and it's a tremendous benefit to have that business in flavors and extracts as it does broaden our portfolio with many of these related customers. So.
Yeah, I I would tell you that the rebound is not gonna be in Q1.
But I would tell you that the rebound will take place in 2023.
And and I think that's only going to add to the success of the flavors and extracts group.
Okay.
One final quick question.
Just touching on the.
Question earlier on product launches.
And obviously you talked about a higher mix of line extension sources new products in 2022.
I'm just.
Just wondering.
On the 2023 against that sort of mix changes more towards <unk>.
Is there a big difference in terms of revenue or profit contribution.
When you are dealing with a new product for us is a lot of extension.
Well so first the first part of your question I would anticipate just as I think about and look at our pipeline that there would be more kind of new to the world style products. This year as opposed to a line extension.
I wouldn't necessarily say, there's a significant difference in the profit stemming from a line extension versus a new launch that difference tends to be the magnitude.
So the magnitude of a Lou launch may be significantly greater than a line extension, but our new launches a heck of a lot riskier than a line extension.
You know think of a line extension of like a sequel like jaws for not much of a risk right jaws, one two and three we're pretty good at it kind of lends itself.
Self to a pretty good idea to extend that line.
But a new product on the other hand, you're you're launching a whole different category of movie potentially there to go along with this cinematic thriller.
Before I got here so.
Bigger impact potentially but it can be a lot more risky. So the thing that launches in six months later it goes away that doesn't feel real good.
Versus say a line extension, which you could have for several years and it's the very nature of that risk profile that.
That is why you see fewer launches when tightening starts a recessionary environment start. So what gives me optimism about twenty-three was that comment I made earlier about how there's been an inflection point and new launches.
And regardless of their type that's a super positive that demonstrates to me our customers eagerness to to really engage very thoroughly in the market and potentially even take some risks.
Alright, thanks, so much.
Yeah.
Ladies and gentlemen, there are no further questions at this time I will turn the conference back to the company for any closing remarks.
Okay. Thank you since we are starting the new year and you know in our prepared comments.
Made some.
Kind of to help with modeling for 2023, and just to reiterate that I indicated we did expect interest expense to be up about $11 million over the level in 2022.
Indicated our tax rate would be slightly higher.
Wrapping up 25% tax rate.
One other comment on our corporate expense, our unallocated corporate expense. That's a line item that has increased significantly.
Significantly the last couple of years, because we've had to reset our performance based compensation I would say that that is now normalized and I would expect.
A more normal inflationary increase of about 3% and our corporate expense. So I would I would look at that at about the level of $57 million for 2023.
And then the last comment I made was you know after after a year of FX headwinds, we do expect one more quarter, where FX will be a headwind.
But then in the second half of 2023, you know based on where rates are today that should be a moderate tailwind for us so with those comments, we'll conclude our call. Thank you everyone for joining us this morning.
The conference has concluded you may now disconnect your lines.
Yeah.
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