Q3 2023 Sensient Technologies Corporation Earnings Call
Thank you good morning, welcome to <unk> earnings call for the third quarter of 2023, I'm, Steve Ross Senior Vice President and Chief Financial Officer of <unk> Technologies Corporation.
I am joined today by Paul Manning <unk>.
Chairman, President and Chief Executive Officer earlier today, we released our 2023 third quarter results a copy of the release and our Investor presentation is available on our website at <unk> com.
During our call today, we will reference certain non-GAAP financial measures, which removes the impact of currency movements and other items as noted in the company's filings. 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 how management reviews and evaluates the Companys operations and performance 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.
S. 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.
<unk> 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 <unk> previous SEC filings, including our 10.
And our forthcoming 10-Q for a description of additional factors that could potentially impact our financial results.
Please keep these factors in mind when you analyze our comments today.
Now, we'll hear from Paul Manning.
Steve Good morning, and good afternoon before turning to our results I'd like to provide an update on the market conditions during the third quarter ASP.
As predicted customer Destocking continued throughout the quarter.
It was most pronounced in the color group with gradual improvement in the flavors group.
We continue to see lower volumes across many of our market categories in the Americas with a moderate improvement in Europe .
We think these outcomes with respect to Destocking and lower volumes are consistent with the broad based volume declines in efforts to reduce inventory at most of our CPG customers.
Now turning to our results local currency revenue was down low single digits in the quarter, our local currency adjusted EBITDA was down about 7%.
Due to the continued impacts of Destocking globally and in particular in North America as well as declines in volumes in many consumer product categories.
In some areas of our business, we have seen improvements in customer order patterns and sequential improvements in volumes.
However in other areas of the business, we continue to be impacted by Destocking and lower volumes.
Right now, we believe volumes will sequentially improve in the fourth quarter and into the first quarter of next year.
As I said last time during our second quarter call. We continue to focus on the things that we can control we continue to win new business, while executing on customer service and on time delivery and avoiding attrition of our existing sales.
Our new sales wins continue to be a high level across all three groups and our sales pipelines across all of our businesses remain robust.
This speaks well to our ongoing strategy and our commercial focus activities.
And suggests a much improved picture in 2024 compared to 2023.
Yeah.
We also continue to manage cost inflation throughout our businesses and we continued to implement pricing wherever required.
While we have begun to see improvements in certain input costs. We do continue to experience overall elevated energy employee agricultural and commodity costs in certain geographic regions.
As always we continue to look for areas to optimize our cost structure and to improve our production capabilities.
Yes.
Destocking has unfolded differently in each group, depending on product and customer mix within each geographic region.
Within the flavors and extracts group Destocking began in late 2022.
And was more pronounced in the first half of this year.
Flavors group began to experience sequential improvements in customer order patterns in the third quarter.
We anticipate continued improvement in the fourth quarter with a much improved picture starting in 2024.
But the color group Destocking began in the second quarter of this year and became even more pronounced during the third quarter.
The impacts of Destocking on the color group are about a quarter behind flavors.
We're beginning to see some improved customer order patterns in the color group and anticipate the impact of destocking to be largely behind us by the early part of next year.
Destocking impacted the Asia Pacific Group, beginning in the second quarter of this year in contrast to flavors and colors Destocking in Asia Pacific is mainly with multinationals and in certain geographic certain geographies and as not as widespread but we do expect some impact in the fourth quarter.
Adding to the destock volume declines as a decline in CPG volumes in many food and personal care product categories, particularly in the Americas.
Overall, the combined volume declines, resulting from Destocking and overall market downturns have had an outsized negative impact on our sales and operating profit this year.
We are also facing difficult comparisons to our excellent volume driven performance 2022.
As we have discussed during our last couple of calls and similar to our customers. We continue to focus on our inventory position across all three groups.
Why are we while we are strategically investing in inventory for our natural ingredients business within the flavors and extracts group, we continue to be focus on decreasing our inventory across the remainder of our businesses.
As a result, we are seeing an improving trend in cash flow and we will continue to focus on improving cash flow throughout the remainder of this year and in 2024.
Now turning to the groups.
Revenue in flavors and extracts was down less than 1% in local currency in the third quarter. The group's revenue benefited from a strong sales win rate and pricing actions, which were offset by volume declines from customer destocking and lower demand in certain food and beverage categories.
We continue to see sequential improvement in the group's local currency revenue and operating profit in comparison to the prior year's periods.
And we anticipate the sequential improvement to continue in the fourth quarter, culminating with an improved 2024.
Our operating profit has suffered as a result of the volume declines that have continued throughout this year, especially in comparison to the outstanding volume in 2022.
Our focus over the years on our product portfolio sales execution and customer service are the foundation that will support growth over the long term for the flavors and extracts group.
Revenue in the color group was down 8% in local currency in the third quarter local currency operating profit was down approximately 23% in the quarter.
The group's revenue was impacted by a high single digit revenue headwind due to destocking and declines in overall market demand, which was partially offset by pricing and strong new wins.
This quarter's volume declined compared to the prior year substantial volume increase has had an outsized impact on the group's operating profit.
Revenue in both the food and pharmaceutical product line and personal care product line was down.
Primarily due to destocking and lower market demand, while we have begun to see improvements in certain geographies at customers across both product lines.
The headwinds due to Destocking will continue throughout the fourth quarter.
To work against these headwinds we continue to focus on new sales wins customer service and minimizing attrition on existing business.
Local currency revenue growth in the Asia Pacific Group was up approximately 4% in the third quarter year to date local currency revenue is up 6%.
Revenue benefited from new sales wins and pricing, partially offset by lower volumes, primarily due to lower market demand and destocking headwinds in certain regions.
Overall, the impact of Destocking within the Asia Pacific Group is less profound than what we experienced in the flavor and color groups.
The group has also successfully focused on sales execution customer service and broadening its product offerings within the region.
Which positions the group for future growth.
Despite the headwinds due to destocking and some decline in demand by long term growth expectations for each of the groups has not changed I continue to expect flavors and extracts group and color group to both deliver mid single digit local currency revenue growth with mid to high single digit local currency operating income growth.
And I continue to expect the Asia Pacific group to deliver mid to high single digit local currency revenue growth.
And operating profit growth of high single digit to double digit local currency growth.
For 2023, I now expect our local currency revenue to be up low single digits, and our local currency EPS to be down low double digits.
Our previous guidance called for revenue to be up mid single digits and for adjusted EPS to be down high single digits.
I continue to expect our 2023 local currency adjusted EBITDA to be down mid single digits.
Yeah.
As I mentioned during our last call. It 2023 has become a transition year as we moved from supply chain deflationary burdens to hopefully more normal environment in 2024.
We have begun to see pockets of sales improvements at certain of our product lines and geographies. We should see continued improvement within the fourth quarter and then the first part of 'twenty 'twenty four.
Continue to focus on right sizing our inventory positions. Despite the headwinds we remain focused on the areas, we can control, including new development activities with our customers, winning new business and retaining our existing business.
This focus has fueled the exceptional growth we've experienced over the last several years.
Strategy remains sound and we are well positioned for future growth.
Steve will now provide you with additional details on our third quarter results.
Thank you Paul since its revenue was $363 8 million in the quarter compared to $361 1 million in last year's third quarter operating income was $44 5 million compared to $47 $5 million in the comparable period last year foreign currency increased revenue by approximately.
3% and operating income by approximately 4% in the quarter interim.
Interest expense was $6 3 million in this year's third quarter compared to $3 7 million in last year's third quarter. The company's consolidated tax rate was 17, 5% in this year's third quarter compared to 17, 7% in last year's third quarter diluted earnings per share were <unk> 75 cents in this year's third.
Order compared to 85 cents in last year's third quarter foreign currency translation increased EPS by approximately <unk> <unk> in the third quarter.
As Paul mentioned, we are focused on our inventory position, while we are strategically investing in our inventory position and our natural ingredients business within the flavors and extracts group, we continue to be focused on reducing our inventory in a disciplined manner throughout a number of our other businesses. This focus will continue throughout.
The remainder of this year and into 2024.
Capital expenditures were $22 6 million in the third quarter of 2023, we continue to expect our capital expenditures to be around $85 million for the year.
Our net debt to credit adjusted EBITDA is 2.6 overall, our balance sheet remains well positioned to support our capital expenditures sensible M&A.
And our long standing dividend and any excess cash will be used to pay down debt.
Regarding our 2023 guidance as Paul mentioned, we now expect our 2023 local currency revenue to be up low single digits compared to our 2022 revenues.
And our 2023 local currency EPS to be down low double digits compared to our 2022 adjusted EPS of $3 29 says.
We continue to expect our local currency adjusted EBITDA to be down mid single digits in 2023.
Our previous guidance called for our 2023 local currency revenue to be up mid single digits, and our 2020 through local currency EPS to be down high single digits.
As we have discussed in 2023, our EPS continues to be impacted by higher interest expense 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 modestly favorable for the full year.
Thank you for participating in our call today, we will now open the call for questions.
Ladies and gentlemen at this time, we will begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone.
All your questions you May press star and two.
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Once again that is star and then one to ask a question, we'll pause momentarily to assemble the roster.
And our first question today comes from Ghansham Panjabi from Baird. Please go ahead with your question.
Hey, guys good morning.
Good morning, Paul I guess, you know first off maybe you could just disaggregate for us price versus volume across the.
Three operating segments, if you could and then in terms of colors specifically.
Just maybe give us a bit more insight across the various end market verticals that you have you know food.
Pharmaceuticals and personal care.
Okay.
So overall, if you look at Q3 pricing is kind of mid single digits.
Roughly the same in each group, maybe you know, 5% and flavor of 6% and colors, but all within that realm.
So overall prices six on the overall revenue were down too so that implies an 8% reduction in volume and so.
The the overall volume how much of that is destocking, how much of that is actual decline in market categories.
Those are the factors that will vary considerably depending on geography, depending on product line.
So for example, if you look across the portfolio.
Oh, yeah sure certain categories like Ah well most market categories in the U S continued to be down from a volume standpoint.
Even certain categories of pet food had declining volumes in Q3, so those would be some of the factors behind the volume as you look across the group to your question about price versus volume around each in as much as a if you look at flavors were about mid single digit in price, but down about one so there you see.
A little bit more than mid single reduction in volume again, principally those factors DC.
Destocking in the market declines.
Color, we got about maybe 6% price, but were down eight so you see a much more substantial volume reduction in color.
And let me just spend a second explaining that one as we kind of began this journey the destocking.
As we noted in the prepared comments late 2022 is really where flavors destocking began.
Colors did not really begin in earnest for another quarter. After that there are a number of reasons for that and not least of which the value of flavors tends to be higher than colors.
Flavors tends to have a shorter shelf life in general than many color products and so that's ultimately why the consumers.
In most cases elected to start Destocking on flavors first they had more of the shelf life constraint would be the you know the the.
The most critical factor.
So that's why colors as a much more profound destocking impact right now, but because it is much bigger in magnitude.
We don't expect it wraps to last as long as we saw it in flavors.
And then just to finish up your price volume question. So Asia Pacific There again price was mid single digits and they're up about mid single digits. So you can see volume.
Volume was just down slightly.
And there again to our point and there was kind of pockets of Destocking, but that's not really been a feature in Asia up I mean, it's been very very choppy, whereas in the Americas and Europe Destocking has been a systematic program reduction in inventory across customers.
Asia was pockets of customers the timing of which was with a little bit different driven principally by multinationals.
So then part two you cut question around color.
In terms of food and personal care.
The food part of the business was down maybe about six or 7% in the personal care was down a little bit more than that.
So we see a little bit more of the impact of the destock.
Destocking on the personal care side of things than we did on the food color side of things.
On the pharma side, there's actually a lot less destocking and in fact in some cases, there's volume growth, particularly.
Outside the U S. It's a little bit of a very well, it's a very different dynamic there.
Our our beliefs around that is that pharmaceutical excipient, which are sold to principally API providers are.
They're less concerned about inventory values, there, there's not nearly the shelf life constraints that you'd seen some of the food.
<unk> products and so perhaps that's driving some of their behavior.
Behavior in the market.
Okay terrific and then in terms of 'twenty 'twenty four I mean, you know obviously a lot going on but you seem a little bit more optimistic on new product wins and normally destocking will be hopefully on the probes.
What is your base case in terms of our assumption in terms of volumes for 2024 and any other variances that you could highlight in terms of on a year over year bridge basis, as we sort of finalize our estimates.
Estimates for 2024.
Yeah, I think 'twenty 'twenty four will be back on track.
As you know as you saw this year things can be patchy, what when the market is as volatile as it has been in 'twenty three are in a transition year.
Things can be a little bit.
Patchy in terms of one quarter from the next so but I think the overall picture in 'twenty 'twenty four will be quite good.
Thing else Destocking can't go on Forever, and Destocking has been a massive headwind in 2023 so I think that would be data point number one.
Which tells you that we would be back on track and 24 in a much more profound way than you are seeing right now.
I think the other thing you know our win rate remains at historically high levels, our win rates in flavors and colors.
I was very very impressed with our win rates last year, we had record win rates in each of the three groups and they continue to build on that success. So in the Annals of things that you can control just win that's working out pretty pretty well and unfortunately, it's being optically disc.
Disguised by a lot of this market reduction in inventory positions, which is not a whole heck of a lot we can do.
But I have every degree of confidence based on the ongoing win rate the.
The size of the pipelines that we have the trends that we're driving towards that when rates will continue to be rather robust.
'twenty 'twenty four it is a big big focus of this company.
Our top line, putting customers first and really spend your time on the things that your customers care about as opposed to goofy internal things that your customers don't care about so we're very very disciplined about that type of approach and I think that will continue will probably get a little bit more price in 'twenty 'twenty four.
While inflation has moderated this is not entirely out of the picture many commodities that reduce but labor is still up their other.
Input costs that are still elevated.
That may vary by geography, but I think we'll continue to do quite well there, but I think there's also as we've been looking at a lot of market research organization, there's expectation that.
Volume in the market should flatten out as I've been telling on.
On these conference calls for the last few years market volumes in the Americas had been negative for we're going on kind of two years now and Europe is now for the last couple of quarters.
As a small positive volume growth there in the market, which is a very nice thing to see.
But the expectations for most of the third party providers that we look at here is that volumes should at least be flat.
Coming out a lot of these consumer categories that in as much as Cpg's had begun in earnest programs around promotion activity.
Spending more marketing dollars to support and elevate their brands.
That should translate into.
I'm not asking for a lot just neutral would be great. So those would be sort of say four or five of the key inputs that tells me we're back on track in 'twenty four and that Ah.
We're sort of we've got a lot of good underlining inherent aspects of our business, but a lot of these external factors.
Fade away because like I said, they can't go on forever.
Okay. Thank you so much okay. Thanks ghansham. Thank you.
Our next question comes from Joanne Lim from B M. P. Parabolic. Please go ahead with your question.
Hello Hello.
Oh, Jones's Tessa Hi, I had two.
Two questions. So on your guidance I was just wondering why was there no downgrade on your EBITDA. Despite the downgrade on the top line.
And on a similar vein what is driving that E. P. S. Downgrade when you haven't changed your EBITDA guidance.
Yeah. John This is my first question.
So on the on the guidance I think it really comes down to a matter of degrees. So you're correct. We're not changing our EBITDA guidance. We had said that we would be down mid single digits. So we still believe that's the case so it's really.
It was you know things are largely unfolding the way we expected, it's just taking a little longer and in some cases, it's been a little bit more severe so.
With the incremental downgrade in revenue.
We're moving within that EBITDA range, and then of course, that's going to impact EPS as well and and the main reason why the EPS is.
Down more than the other metrics of course because of the interest expense, but it's really just a matter of degrees within the range and things are largely unfolding very similar to what we expected.
Yeah.
Okay. That's helpful. Thank you.
And then just a question on rent Diana Mitsui O I saw that and the California food safety. They hadn't been dynamically I was just wondering how will this impact Cynthia.
Well I would tell you this red three is not a real big.
Synthetic dye it it's one that's used a lot in for example, bakery applications, but there's many alternatives to that product.
So first things first it's not a lot of revenue.
And I would tell you that number too.
It's going to open up opportunities for natural colors, which is a good thing that is the that's been the driving our food colors group for 15 years.
We've done quite well there so actually I feel really good about that having a portfolio of naturals that can replace red three and those types of applications because we believe.
With California's actions that that would have a <unk>.
An impact obviously on the entire country and perhaps it could even change some behavior outside of the U S. But time will tell them about that one.
And I suppose the other aspect you know red three has had a rather challenged supply chain for many many years.
So I think that not being as big of a factor I think that's a good thing.
So in short I don't necessarily see a lot of bad I see a lot more good coming out of that then that and but you know that's the way we operate we always operated under the assumption that certain product can be replaced in the market.
And so our portfolio has been driven about how do you replace these synthetic dyes, which folks want and the natural version.
And that's been a lot of our work, so where we are more than ready and.
And willing for this transition.
Okay. That's helpful. Thank you.
Can they maybe squeeze in one last question on do you have a good one.
So what do you think how it will impact since you're in are you seeing any changes in terms of from your conversations with customers.
Not really you know I think at this point, it's used by such a small portion of the population.
It's really kind of hard to gauge at this point, how that will play out.
If that if this does in fact lead to folks consuming fewer calories.
That would clearly have an impact on the food industry in the United States for example.
I don't anticipate widespread use of this drug outside of the United States and maybe a couple of other countries.
And so you know does that mean that we would.
See a difference in composition of the types of products customers buy too soon to tell but the overall theme around reduction in calories sure that could be a real thing. The question is how quickly with this thing ever get rolled out when do the economics improve its quite expensive and most applications at this point so not enough.
Data points not enough people on the drug to really measure. This is a macro trend at this point.
So I couldn't really tell you much beyond that but I think that you know, we we will assume that things like this could be a threat to certain parts of our business and you know as that materializes over the next probably 510 plus years.
I think we can adapt to different types of segments.
Different types of product lines that could could continue to subsidize our business but.
Very very early in the game on that one.
Okay. Thank you.
King.
Thanks Joan.
Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May press Star and two.
Our next question comes from David Green from Bolt Haven. Please go ahead with your question.
Hello, David.
Okay.
Mr. Green is it possible your phone is on mute.
Yeah, sorry, thanks for that.
A couple of just a quick question around.
Comments on improving customer order patterns.
Youll, saying in SME.
Some early signs and call us would just be great. If you could give us.
Any more sort of detail on that.
I guess I'm sort of a broader question around what the shape of recovery looks like.
Do you see sort of volume rebounds happening quite quickly post the end of a destock or do you think it's going to be a slightly more measured.
Bounce back in volumes.
Before sort of getting back up to historic levels.
Okay. So so the first part about customer order patterns yet.
I don't want to give you that it depends because I think he's done a whole lot more pragmatic than that so here's a pragmatic version of this.
Customer order patterns are improving in flavors.
Going back to my comments about shelf life and there's only so much more you can possibly do but I think most of our customers in the flavor side of the business are at much more normalized level, yeah, there's little pockets here or there but in general.
Ah I see an improving picture in flavors, which I think will culminate to a pretty good start to the year in 2024.
And so I would not be surprised if we had volume growth beginning in the early part of 2024 there'll be a little bit of pricing.
But I think that one plays out pretty well now food colors, which again trailed flavors.
But it has been a probably a bigger impact in terms of the customer's activity.
There again, we'll feel another big Destocking.
In Q4, but I think that will largely swing a little bit faster than flavors.
Flavors it was kind of elongate it was kind of a 12.
12, plus months Destocking effort at a number of our customers I think the color one will be a little bit shorter than that and so I could see in the early part of 'twenty four as well volume returning to the color group.
Just simply based on that reduction in Destocking.
Now the other piece, though the big piece, that's going to really drive the volume as the new win rate that beyond any other factor.
Destocking goes away is going to be that the winning.
The winning outcome here so.
As revenue and volume recover right revenue gets fixed first and then operating profit lags that as you know because we have inventory we have fixed costs and these things are the timing of when operating profit recovers is not precisely aligned to revenue and so you'll see other revenue in volte.
Improved first and then you'll see operating profit improving and therefore EPS in the company improving so that's kind of how I would anticipate it you know the.
If the market volumes return from a negative picture to a more neutral or slightly positive like we're seeing in Europe .
It's a real good thing, but I can't predict when that will be I can hope them opened right now it's Q1.
But I think that the sense that we get from our customers is 2023 is a transition year, it's kind of a clear the decks folks and let's kind of start a new on January 1st and that feels very much like what we're seeing nevertheless these.
Destocking is not a perfect science, it's kind of an unprecedented thing we havent done this kind of thing in the food industry.
I don't know in my lifetime in the food industry I can't speak to before that but this is a pretty unprecedented thing.
And so customers may not hit that perfectly and we see signs of that we've been getting more urgent orders, hey, I need a bunch of stuff.
Cause navy they they got a little bit too aggressive on destocking in some cases.
That has been a little bit of a factor in some pockets.
But you know the other thing too is when your service levels are good.
Like ours are you start to get shorter lead times from your customers, which makes forecasting a little bit more problematic than these out months. So that's what clouds my crystal ball, because you know I have a crystal ball here at clouds, It just a little bit.
But I think what I'm also seeing is bigger in the month of orders not necessarily a thing we've seen for the last six to nine months in parts of the company. So.
That's kind of largely how I see it unfolding.
So not an exact science, but I think the net net here is I think we're going to have a much improved and the 'twenty 'twenty four that walby set will all be real happy with.
I seem to remember you, saying a bump that you saw the destock headwind broadly was about 10% is that still sort of consistent with.
Yeah.
Okay.
Yeah, it's it's about like that in color right now, but flavors in Q3 moderated to more like a mid single did.
Did it maybe mid to high.
In Asia, but that Asia Pacific kind of low singles. So yeah for the overall company was sort of like in the high single probably is the are the net net of that.
You know oftentimes it's hard to.
Laser cut the distinction between Destocking and the product categories declining.
So it's not that precise at the customer they deal and a lot of S. K use than where yours go in which S. K use and lining that all up.
By no means think about cutting that more of a hammer rather than a laser so as a rough estimate you're about right.
Yeah.
Okay.
And ladies and gentlemen at this time and showing no addition.
Oh God I missed the Green do you have additional question Yeah, I just had one final one there if that's okay.
The.
If we look across the the sort of sweet beverage I guess in Staples universe, there seems to be.
I saw that a little bit of a shift in your mood music in terms of I.
I think most companies are talking about increasing AD spend as we go through this year and going into next year and maybe that's a way of compensating for lower volumes.
Is that something you've been seeing in terms of new in terms of new tenders in your picture stuff to work.
Yeah, there's definitely been a pickup in ad spend.
For sure and in fact.
We're we're optimistic that that that will be continuing here in Q4 that that is certainly.
Through customer testimonials are happening, but we also see that at a broader market.
Because there's more interest in seeing volume growth at CPG customers and so I think they've been responding to that that are that need and promotion is one of their key steps we're doing that.
So yes.
<unk> Big part of what we're seeing now which is a real again, another nice positive parts of the business.
Great many thanks.
Okay. Thank you David.
And once again at this time in showing no additional questions I'd like to turn the floor back over to management for any closing remarks.
Okay that will conclude our call for today. Thank you very much everyone for participating thank you.
And with that ladies and gentlemen, we will conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.