Q2 2024 Sensient Technologies Corp Earnings Call
Good morning and welcome to the Sensient Technologies Corporation 2024 second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw your question, please press star then 2.
Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornel. Please go ahead, sir.
Good morning. Welcome to the Sentient Earnings Call for the second quarter of 2024. I'm Tobin Tornel, Vice President and Chief Financial Officer of Sentient Technologies Corporation.
Paul Manning: I am joined today by Paul Manning, Sentient's Chairman, President, and Chief Executive Officer.
Paul Manning: Earlier today, we released our 2024 second quarter results.
Paul Manning: A copy of the earnings release and the slides we'll be using during today's call are available on the investor relations section of our website at sentient.com.
Paul Manning: For those of you that joined us by webcast today, you will note that this quarter we are introducing a slide deck with our presentation.
Paul Manning: If you joined our conference call by telephone and would like to follow along, you can find a copy of the prepared slides on our website.
Paul Manning: During our call today, we will reference certain non-GAAP financial measures, which remove the impact of currency movements, costs of the company's portfolio optimization plan, and other items as noted in the company's filings.
Paul Manning: 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.
Paul Manning: This also reflects how management reviews and evaluates the company's operations and performance.
Paul Manning: non-GAAP financial results should not be considered in isolation from, or a substitute for, financial information calculated in accordance with GAAP.
Paul Manning: A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release.
Paul Manning: We encourage investors to review these reconciliations in connection with the comments we make today.
Paul Manning: I'd also like to remind everyone that comments made during this call, including responses to your questions, may include forward-looking statements.
Paul Manning: 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.
Paul Manning: We urge you to read Sensient's previous SEC filing, including our 10-K and our forthcoming 10-Q, for a description of additional factors that could potentially impact our financial results.
Paul Manning: Please keep these factors in mind when you analyze our comments today. Now we'll hear from Paul Manning. Thanks Tobin.
Paul Manning: Good morning and good afternoon. During our call today, we will be introducing a new slide deck that we will reference throughout today's discussion.
Speaker Change: The slide deck is available on our website. We hope that you find the deck a helpful addition to our presentation.
Speaker Change: Starting on slide five.
Speaker Change: Sensient's local currency revenue increased by more than 8% in the second quarter. This revenue increase was mostly volume driven with price contributing about 1%.
Speaker Change: As expected, the positive customer order trends from the first quarter continue to build into the second quarter.
Speaker Change: Each of our groups contributed to the volume growth and improved operating profit.
Speaker Change: The volume improvement is due to our strong new sales wins across each of our groups, our focus on our sales execution, and more stable market dynamics post destocking.
Speaker Change: Our sales pipelines remain robust in each of our regions.
Speaker Change: Each group is focused on expanding new sales win rates and working with our customers to support their development needs and new product launches.
Speaker Change: Our consolidated local currency adjusted EBITDA was up 2% for the second quarter of 2024 and is up 2% through June 30th.
Speaker Change: As mentioned during our last few calls, with the resumption of volume and growth, we expect operating profit improvement to accelerate in the back half of the year.
Speaker Change: We are also focused on maintaining and improving our cost structure.
Speaker Change: Now turning to slide 6.
Speaker Change: Flavors and Extracts Group had another solid quarter delivering 11% local currency revenue growth and more than 7% local currency operating profit growth.
Speaker Change: For the first six months of 2024, the Flavors Group local currency revenue is up 9% and local currency operating profit is up approximately 7%.
Speaker Change: The group continues to benefit from its strong new sales win rate, its innovative product offerings, and its focus on sales execution and customer service.
Speaker Change: Similar to the first quarter, the group benefited from particularly strong volume growth in its natural ingredients product line.
Speaker Change: The Natural Ingredients product line continues to be impacted by elevated costs in certain agricultural ingredients and raw materials.
Speaker Change: These elevated costs have impacted our operating leverage for the flavors group in the first half of the year.
Speaker Change: But as these costs moderate, we expect improved operating leverage.
Speaker Change: I'm now raising our guidance for the flavors and extracts group and expect the group to deliver mid to high single-digit local currency revenue growth for the year.
Speaker Change: I previously expected the group to deliver at least mid-single-digit local currency revenue growth in 2024.
Speaker Change: Turning to slide 7.
Speaker Change: The Color Group delivered 5% local currency revenue growth and 9% local currency operating profit growth in the second quarter.
Speaker Change: As expected, customer order patterns improved during the quarter, and we expect continued improvement in the back half of the year.
Speaker Change: We solve volume growth in all product lines.
Speaker Change: The group is benefiting from its strong new sales wins, innovative products, and exceptional customer service.
Speaker Change: I expect this volume growth will continue to improve throughout 2024.
Speaker Change: The Color Group's operating income improved during the quarter, and I expect this trend to accelerate as the year progresses.
Speaker Change: I'm now raising our guidance for the color group and expect the group to deliver mid to high single digit local currency revenue growth in 2024.
Speaker Change: I previously expected the group to deliver mid-single-digit local currency revenue growth in 2024.
Speaker Change: Turning to slide 8.
Speaker Change: The Asia-Pacific Group reported 11% local currency revenue growth and 9% local currency operating profit growth in the second quarter. The group continues to experience solid growth in most regions and an increase in new sales wins.
Speaker Change: Customer order patterns continue to normalize and the group is well positioned for growth.
Speaker Change: I'm now raising our guidance for the age-specific group, and I expect it to deliver high single-digit local currency revenue growth in 2024. I previously expected the group to deliver mid-single-digit revenue growth in 2024.
Speaker Change: Turning to slide 9.
Speaker Change: The Portfolio Optimization Plan that we initiated in the fourth quarter of 2023 is progressing as expected.
Speaker Change: Once fully implemented by the end of 2025, we expect to generate annual cost savings of $8 to $10 million.
Speaker Change: We are carefully managing this process to ensure we meet our customers' needs and to minimize the disruptions of the business.
Speaker Change: On the capital allocation front, we continue to focus on strategically managing our inventory positions.
Speaker Change: We have reduced our inventory balance by approximately $45 million in the first half of the year. And we will work to continually improve our inventory position.
Speaker Change: Will we use any excess cash to reduce our debt in an effort to alleviate the higher interest rate headwind?
Speaker Change: We expect improved financial results in 2024, including growth in sales volume, local currency revenue, and local currency adjusted EBITDA.
Speaker Change: Based on the volume growth for the first six months of 2024, we are raising our guidance for 2024 and now expect to deliver, on a consolidated basis, mid-to-high single-digit local currency revenue growth and mid-to-high single-digit local currency-adjusted EBITDA growth.
Speaker Change: We previously expected mid-single-digit local currency growth in both revenue and adjusted EBITDA.
Speaker Change: We are also raising our Local Currency Adjusted EPS. We now expect our Local Currency Adjusted EPS to grow at a mid-single-digit rate in 2024.
Speaker Change: Our previous guidance called for a low to mid-single digit growth rate in 2024.
Speaker Change: The growth we are experiencing is a direct result of our strategy and the markets we have chosen to operate in. We will continue to invest in our innovative product offerings as we focus on sales execution and growing our business.
Speaker Change: I'm excited about the growth opportunities within each of the groups and I remain optimistic about 2024 and the future of our business.
Speaker Change: Turning to slide 10.
Speaker Change: Before turning the call over to Tobin, I'd like to highlight some of our more innovative product offerings.
Speaker Change: Currently, the market faces a number of regulatory challenges in many parts of the world. One example we have discussed in our previous call is the changing regulatory environment around Titanium Dioxide and REDD3.
Speaker Change: Titanium dioxide is a widely available, cost-effective ingredient that works well in many applications.
Speaker Change: And it's been used by our customers for decades.
Speaker Change: It is extremely challenging to swap out of a product.
Speaker Change: It requires customized applications to achieve the same degree of effectiveness.
Speaker Change: Red 3 is a synthetic color dye commonly used in candy and beverages.
Speaker Change: It too has been used for many food applications for decades.
Speaker Change: Both are facing bans in the U.S. market.
Speaker Change: Due to our proactive innovation efforts, we are well positioned to offer a range of high-performing alternatives for both to our customers.
Speaker Change: Innovation will continue to be a strong emphasis across our company, and we will continue to build our product portfolio in advance of any future regulatory changes.
Speaker Change: Tobin will now provide you with additional details on the second quarter results.
Tobin Tornel: Thank you, Paul. In my comments this morning, I'll be explaining the differences between our GAAP results and our non-GAAP or adjusted results.
Tobin Tornel: The adjusted results for 2024 remove the cost of the Portfolio Optimization Plan.
Tobin Tornel: We believe that the removal of these costs produces a clearer picture of the company's performance for investors.
Tobin Tornel: This also reflects how management reviews the company's operations and performance.
Tobin Tornel: Now turning to slide 12.
Tobin Tornel: Sensient's revenue was $403.5 million in the second quarter of 2024, compared to $374.3 million in last year's second quarter.
Tobin Tornel: Operating income was $49.7 million in the second quarter of 2024 compared to $51.6 million of income in the comparable period last year.
Tobin Tornel: Operating income in the second quarter of 2024 includes $1.8 million of portfolio optimization plan costs, which is approximately $0.04 per share.
Tobin Tornel: In 2023, we incurred $28 million of portfolio optimization planning costs. So far this year, we have incurred approximately $4.6 million of additional.
Tobin Tornel: CORS.
Tobin Tornel: Excluding the cost of the Portfolio Optimization Plan, adjusted operating income was $51.4 million in the second quarter of 2024 compared to $51.6 million in the prior year period.
Tobin Tornel: A significant impact for this year's operating income was an increase in performance-based compensation compared to the low value recorded in 2023.
Tobin Tornel: The company's consolidated adjusted tax rate was 25.8% in the second quarter of 2024, compared to 24.8% in the comparable period of 2023.
Tobin Tornel: Local currency adjusted EBITDA was up 2.3% in the second quarter of 2024, and up 2.2% for the first six months of 2024.
Tobin Tornel: Foreign Currency Translation reduced EPS by approximately 2 cents in the second quarter of 2024.
Tobin Tornel: Now turning to slide 13.
Tobin Tornel: Cash flow from operations was $59 million for the first six months of 2024, up 14% compared to last year's comparable period.
Tobin Tornel: Capital expenditures were $23 million for the first six months of 2024. We expect our capital expenditures to be between $65 and $70 million for the year. Our net debt to credit-adjusted EBITDA is $2.6.
Tobin Tornel: With the continued high interest rate environment, we are focused on reducing our debt levels and our interest expense.
Tobin Tornel: Overall, our balance sheet remains well-positioned for future investments.
Tobin Tornel: Turn in slide 14.
Tobin Tornel: Regarding our 2024 guidance, we are raising our guidance and now expect our 2024 local currency revenue and local currency adjusted EBITDA to be up mid to high single digits.
Tobin Tornel: This is an increase from our previous guidance, which had called for a mid-single-digit growth rate in 2024 for both local currency revenue and local currency-adjusted EBITDA growth.
Tobin Tornel: We continue to expect our interest expense to increase this year compared to our 2023 full-year interest expense.
Tobin Tornel: And we expect our 2024 full-year adjusted tax rate to be around 25%.
Tobin Tornel: We are also raising our guidance for local currency-adjusted EPS to grow at a mid-single-digit rate in 2024.
Tobin Tornel: Our previous guidance called for a low to mid-single-digit growth rate in 2024.
Tobin Tornel: As Paul mentioned, we are experiencing solid volume growth in certain businesses and expect this to broaden and strengthen in the second half of the year. The volume growth will precede our operating profit growth and we expect improved operating leverage in the second half of the year.
Tobin Tornel: Considering our GAAP earnings per share in 2024, we now expect approximately 18 cents of portfolio optimization plan costs.
Tobin Tornel: We previously expected approximately $0.15 of cost.
Tobin Tornel: We still expect our overall cost for the Portfolio Optimization Plan to be approximately $40 million.
Tobin Tornel: We now expect our GAAP EPS to be between $2.77 and $2.87.
Tobin Tornel: compared to our 2023 GAP EPS of $2.21.
Tobin Tornel: We previously expected our GAP EPS to be approximately $2.80 to $2.90.
Speaker Change: Thank you for participating in the call today. We will now open the call for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question will come from Ghansham Panjabi with Baird. You may now go ahead.
Speaker Change: Hi, good morning everyone. This is Matt Krueger for Sync for Gansham.
Speaker Change: Hey, sorry, sorry, it's just Matt.
Speaker Change: So hey Matt
Speaker Change: Paul and Jovan, I just wanted to touch on some of the new business wins across the portfolio. Can you provide some added detail on where you're winning business along with?
Speaker Change: You know, a characterization of the customer promotional activity or innovation activity that might play into some of these business wins.
Speaker Change: And just for some added detail, you know, if volumes grew in the high single-digit range on an overall basis, you know, what did the new business wins contribute, you know, volumetrically during the quarter versus, you know, just a normal rebound from prior destocking or normal business growth?
Speaker Change: Okay.
Speaker Change: I'm just noting your questions here. Okay, so the first one on new winds.
Speaker Change: The new wins are very much broad-based, so at the macro level, very strong win rates in each of the groups, flavors, colors, and Asia Pacific.
Speaker Change: Bye.
Speaker Change: Breaking that down by product segments, we had a particularly strong growth in natural colors, not only organically, but from the standpoint of new winds.
Speaker Change: The vast majority of products being launched throughout the world contain natural colors and we have a very, very broad base.
Speaker Change: commercial enterprise there that enables us to capture lots of those. So we had really really good new winds and natural colors.
Speaker Change: We had very good new wins in personal care, a lot of good trends coming out of COVID.
Speaker Change: You recall, as we went into COVID, there was a lot of...
Speaker Change: reduction in the makeup category, but there's been a real resurgence in makeup in the last few years so that we are above the levels that we experienced going into COVID. So we had very good wins in personal care, a lot of that derived from natural ingredients that we've utilized there.
Speaker Change: but a lot of high-performing
Speaker Change: products.
Speaker Change: particularly in the makeup category, but as well in hair and skin, but principally in makeup were a lot of the new wins there.
Speaker Change: We had very good new wins in the natural ingredients business, as you've heard me note in the prepared comments.
Speaker Change: A lot of that is being driven by the availability. We invested very heavily in having a larger crop so that we could have product available and I think that's paying dividends for us.
Speaker Change: And then, of course, traditional flavors, we continue to generate very good wins in a number of categories, most notably, for the first half of the year, we'll be in beverage and sweet areas, bakery.
Speaker Change: and Beveridge in a number of the subcategories of Beveridge. So the wins are very, very broad-based, and they're across a whole range of different customers too, from startups to locals and regionals, where of course, as you know, we spend a lot of our commercial time.
Speaker Change: But we also were able to generate very good wins at large multinationals and branded customers as well. So, I feel very, very good about the win rate, and again, as we discuss internally and we talk externally.
Speaker Change: No matter what's going on in the world, are there a lot of new launches or not, is the economy down or not, you've got to continue to win new projects. You can always win new projects. There's always things being launched.
Speaker Change: There's always disruptions in the market, and there's always new customers coming online. So, it's a matter of really focusing the organization on that metric around winning new business, existing customers, and new customers.
Speaker Change: So I feel very very good there. With respect to your second question on promotions and kind of overall business activity
Speaker Change: You know, you see promotions in brands, you see it at the retailer level, you see it in a lot of different places.
Speaker Change: And so certainly that may be driving a portion of the volume. I will note for you that we went through about a two, two and a half year period where in the U.S.
Speaker Change: The market volume was effectively down.
Speaker Change: over at 8 to 10 quarters. Europe , it was close to that, maybe up about a percentage point. And so what we experienced in Q2 and Q1 was actually a flat...
Speaker Change: market from a volume standpoint in both Europe and North America where we have very fairly good data to support that. So the promotions are in fact correcting some of the underlining volume in the market.
Speaker Change: and that's a positive. I think as I said once before, the market doesn't necessarily have to be growing. If it could just not be down, that would be a very nice boost to the business.
Speaker Change: Now, your third question about how much of the volume...
Speaker Change: Since the volume was quite significant, particularly in flavors, how much of that was driven by new wins? In flavors, I would say the vast majority of it. I don't have that specific calculation for you. We can get that for you. But directionally...
Speaker Change: in flavors. The majority of those new wins drove the volume. In color, we had probably a little bit more of a combination of the new wins, plus some correction and underlining growth in the markets.
Speaker Change: We had very good growth rates, very good growth coming out of a number of our customers, again, at this local and regional type level.
Speaker Change: So...
Speaker Change: Yeah, we'd have to get back to you about a specific figure, but if you say that in color about 4% was volume, if I had to guess, so I'll guess, I would say probably half to three quarters is generated from new winds.
Speaker Change: The other was a continuation of growth from wins we achieved in the previous year, just the underlying growth of that customer. In flavor,
Speaker Change: That's probably more like color, a mix of new winds and organic growth. A lot of the markets in Asia still have pretty good organic growth. People talk quite a bit about China.
Speaker Change: and how the, you know, somehow the end is near. Well, we don't quite see that and we continue to have pretty good results in the food and personal care business in China, but also we see good volume growth in other parts of the region as well.
Speaker Change: That's that's that's terrific color. Thank you. Thank you, Paul. And then if I could sneak one more in about, you know, the cost side of things so
Speaker Change: talked about how
Speaker Change: higher agriculture and the agricultural and other costs are weighing on the operating leverage across the flavors and extract segment, you know, given the investments that have been made there.
Speaker Change: What should we expect from this segment as the year progresses from kind of an operating leverage perspective and a margin perspective? When do the higher agricultural costs kind of roll off and when can we get to a more normalized level there?
Speaker Change: Yeah, well I think the crop that we're selling right now is, if it's not the most expensive in the history of the business, it's pretty close to it. And so...
Speaker Change: Since we're selling at increased volume at that peak cost position that that's clearly driving a lot of that impact you see here in Q1 and Q2.
Speaker Change: So, as new crops come in...
Speaker Change: In the back half of this year, we're optimistic that we can get some relief there, and so what that would spell is that in Q3, you'd have probably not too dissimilar from Q1 and Q2, you're not going to see that perfectly mathematically derived operating leverage that you'd expect to see from good revenue growth.
Speaker Change: But I think as we turn the corner into Q4, then certainly into next year.
Speaker Change: You'll see that more resounding operating leverage from this very good volume growth, very good new wins. And so, you know, Q3 will be...
Speaker Change: We would project fairly similar, maybe we're a little bit more even between revenue and profit, but I think as we get into Q4 and beyond, you'll see more of that more of that traditional leverage that we would generate in the business.
Speaker Change: Great, great, that's super helpful. That's it for me, thank you very much. Okay, thanks, Matt.
Speaker Change: Our next question will come from Nicola Tang with PNB Parabas Exsene. You may now go ahead.
Speaker Change: Thanks, everyone. Hi. Hi, Nicola. Hi. Sticking to, I guess, the same topic on the natural ingredient side, it looks like for the division, savor and extracts overall, the growth was really driven by natural ingredients.
Nicola Tang: I think last quarter you said that this was a little bit exceptional, but it seems to have continued again this quarter. So can you help us understand the dynamics and your expectations for the rest of the year around growth in natural ingredients? And then I suppose on the other side of that, you know, it looks like the kind of flavours and extracts business was...
Speaker Change: still pretty slow in terms of organic growth. I know last quarter I think I asked something similar and you said you know one quarter doesn't kind of give you an indication of exactly what's going on in the market but could you help us to understand why you're still underperforming?
Speaker Change: sort of larger flavor and fragrance peers on the flavor side. Thanks.
Speaker Change: this one anyway.
Speaker Change: Sure, so you're absolutely right. Last quarter I said S&I had a very very large sales growth and you're right I said that would happen again here in Q2 so that's essentially what we saw is outside growth in S&I.
Speaker Change: for the quarter. As we get into the back half, when we start kind of lapping those highs, you'll see the
Speaker Change: Revenue contribution from S&I be less than it has been here in the first half. So I think there will be a little bit of math associated with that one.
Speaker Change: With respect to flavors,
Speaker Change: You know, a lot of this is always timing of launches and seasonality of launches.
Speaker Change: You know, as I look back, 2019, 2020, 2021, 2022, and into 2023,
Speaker Change: You can see that Sensient has actually exceeded the market and just about any competitor that I can name here from that five to six year time frame.
Speaker Change: Yeah, you're right, certain pockets of Q1 or Q2, flavors was, we were in sort of more of a low single digit on traditional flavors.
Speaker Change: But I have no reason to be concerned with that. The winds continue to be good, and we would expect to see, as we get into the remainder of this year, a more balanced contribution between S&I and traditional flavors, as we're describing that one.
Speaker Change: Alright, thanks. And then a second one, just a more general question on operating leverage. Again, I think you've been quite clear that it's more a kind of back, half-weighted story in terms of the lag. But I was just wondering why we didn't actually see any improvement sequentially in terms of margins in Q2 versus Q1, just bearing in mind that volumes have improved, you have some of the cost, or you have the portfolio profitability plan coming through as well.
Speaker Change: Yeah, so I guess the simple answer would be inventory.
Speaker Change: The more, let me give you a little bit more perspective on that.
Speaker Change: So, as you look at flavors in the first half, you're seeing, yeah, good revenue and operating profit that is not growing at that rate or in excess of that rate, what we would call
Speaker Change: as you're describing, we would describe as operating leverage.
Speaker Change: And again, that goes back to the agricultural costs that we are selling through. And so that begins to naturally moderate with new crops as the year progresses, as we sell off that more expensive inventory.
Speaker Change: So, the operating leverage doesn't speak to any sort of problem in terms of customer access or wins or anything more than we have a very, very high agricultural
Speaker Change: input cost situation right now and it's just a matter of selling through these and moving on to the next year's crop and so
Speaker Change: If we didn't have any inventory, I guess we'd already be there, but as we sell through that inventory, and as I noted to Matt before, you'll start to see more of that clean leverage. If you go over to the color group,
Speaker Change: where we did have the same set of input costs as we did in flavors.
Speaker Change: I noted on the last call that color would be kind of flat in Q1 but in Q2 you begin to see that leverage and we did five and nine.
Speaker Change: and then we also hinted at this in the prepared script.
Speaker Change: as we get into the back half.
Speaker Change: You'll see that leverage become even better, and I'd like to think substantially better.
Speaker Change: So I think you'll see that play out very, very nicely in color, and then, you know, Asia continues to drive very, very good top line as well and very good profit.
Speaker Change: So we'll continue to see good things out of them. But yeah, I think the leverage is really a function of the input cost and the inventory position.
Speaker Change: It's just really the math associated with it is why you're seeing the sequential improvement. But because of the S&I crop year and when we cut over to different types of input costs, that's why you're seeing that lag. So the lag was Q1 and Q2, as I had indicated that it would be.
Speaker Change: Q3, we'll have a little bit more of an evenly matched revenue and profit growth rate. And then again, I think you'll see as we get into Q4, you'll see an even better dynamic between revenue and profit.
Speaker Change: All right, thanks. And then maybe just the final one on AIPAC.
Speaker Change: It seems like you saw pretty good growth in the quarter. I think the last quarter you were still talking about de-stocking, but you know, is it fair to say that de-stocking is now done in APAC?
Speaker Change: Yeah, I was a little bit concerned in Q2, so I'll have to apologize that they did much better than I thought they were going to. But yeah, I think the net-net is, I think we could say that.
Speaker Change: The destocking, the order timing dynamics that we were concerned with really didn't play out and I have no reason to believe that they would.
Speaker Change: in three or four.
Speaker Change: Okay, thank you.
Speaker Change: Again, if you would like to ask a question, please press star then 1.
Speaker Change: Our next question will come from David Green with Boldhaven.
Speaker Change: You may now go ahead.
David Green: Hi Paul, hi Tobin. Hey, good morning David. Hello.
David Green: Yeah, I guess a few questions.
David Green: So that's sort of wanting to, I guess, labor the point in terms of operating leverage.
Speaker Change: with an F&E.
Speaker Change: We saw a sort of 500 basis points sequential
Speaker Change: improvement in constant currency revenue growth. But obviously, you know, we only saw around 20 basis points improvement in margin. It just even with that sort of input cost headwind, it just feels like a very, very large delta there. Is there anything else other than those input costs?
Speaker Change: that is impacting the operating leverage.
Tolman: Short answer is no, but maybe Tolman can give a more complex answer here to that one.
Tolman: I don't think there is one. No, no, there's really not playing into it. I mean, they're running at a higher rate from a performance-based compensation compared to last year, but other than that, it's really the higher cost in our natural ingredients product line.
Speaker Change: I guess second question is, is it sort of fair to say now that we are pretty much through all of the D-Stock headwinds across the different segments?
Speaker Change: [inaudible]
Speaker Change: Well, I think I noted some of the highlighted wins.
Speaker Change: in the first set of questions around natural colors and personal care.
Speaker Change: We continue to feel very, very good about that.
Speaker Change: We certainly want to see an uptick in the flavor numbers, which I already hinted you will see that in the back half here as well.
Speaker Change: But no, I think the dynamics are good from the standpoint of our customers that we sell to and the types of projects we're working on. The pipelines look very, very good.
Speaker Change: You know, one of the big things that's going on right now is the amount of new product launches that are taking place.
Speaker Change: New product launches can be defined in a lot of different ways.
Speaker Change: and they're all sort of under this umbrella of innovation and so when we talk about new products
Speaker Change: There are things like new packaging. There's more of the safe innovation, what we would call a line extension.
Speaker Change: and then there's the kind of the new-to-the-world products.
Speaker Change: And one of the dynamics we've been seeing here in 2024 is quite a reduction in actual new product launches in food and beverage.
Speaker Change: So, in fact, in some cases, these are quite low for U.S., for Europe .
Speaker Change: And a lot of what's driving that, we think, is just a return to normalcy in the supply chain, customers, some of which are working quite extensively on reformulations and consolidations.
Speaker Change: And so, the one metric that we pay very, very close attention to is, what is the degree of new-to-the-world products being launched?
Speaker Change: and are we getting the lion's share of those? And so that would be a dynamic that we continue to focus very, very strongly on, to make sure that we are very closely aligned to those customers that are launching.
Speaker Change: Sure, the line extensions are good, but those new-to-the-world products are also very, very important, and most of that activity...
Speaker Change: is largely driven from these local, regional, what we traditionally call the B&C customers.
Speaker Change: And so that's our commercial strategy of lining up with those customers very, very closely. I think it's definitely paying off, and it's enabling us to weather this downturn in the Americas, in Europe .
Speaker Change: with respect to new-to-the-world product launches.
Speaker Change: So is that sort of, Paul, just to sort of understand in terms of...
Speaker Change: Within your sort of mix, how much would be new-to-the-world products versus sort of line extensions and repackaging?
Speaker Change: Well, it's funny, I was just reading this Mintel report just the other day. If you look at about the first five months of 2024,
Speaker Change: New to the world products is less than a third of all launches in the Americas, to 29% if I could quote Mintel here.
Speaker Change: which is a rather low level. If you look at food specifically, because that 29% encapsulates food, beverage, personal care, beauty, health, etc.
Speaker Change: More specifically around food, it's more like about 26% of all market launches are new to the world products.
Speaker Change: And so, I don't have that at my fingertips, what percentage of our wins.
Speaker Change: would be derived from these new-to-the-world versus line extensions. Those can be a little bit tricky even for some of these marketing surveys to define.
Speaker Change: But I wouldn't be surprised if our wins follow that same type of pattern, maybe a quarter of them represented new-to-the-world products, and then the other three-quarters were line extensions and other.
Speaker Change: safe innovation type moves.
Speaker Change: And just a couple of quick ones, if that's okay. Yeah.
Speaker Change: I think earnings season so far...
Speaker Change: within
Speaker Change: Your sort of end markets in terms of customers have been still pretty pretty negative About the world certainly there's been some pretty pervasive trends along sort of down trading Just sort of interested that the sort of
Speaker Change: The backdrop you're painting seems to be much more constructive, or certainly more constructive. And I just wanted to get a feel for why you think that might be.
Speaker Change: We've got a pretty diversified customer base.
Speaker Change: all around the world, and we've not been totally dependent on any one type of customer in any one of our markets.
Speaker Change: and so we employ a fairly large sales force to help us to do that.
Speaker Change: Some customers who are very focused on innovation, whereas others may be very focused on just
Speaker Change: Let's hold the line and let's just secure what we already sell today and make sure it's on the shelves.
Speaker Change: I think because we're so very well represented, and we have very, very good access in the vast majority of our businesses, that really allows us to...
Speaker Change: focus on those bigger opportunities within that realm.
Speaker Change: So, I think we have very high expectations for our sales people, we have very high expectations for our general managers.
Speaker Change: You've got to find ways to grow your business and to grow your business profitably.
Tobin Tornel: Just, I guess, one final question for Tobin.
Speaker Change: The OPEX came in quite a lot higher to the quarter, and I think you said part of that was the stock-based compensation.
Speaker Change: and I think that was about four million dollars. I'm just trying to understand how that kind of phases for the rest of the year and is there any, do we kind of get any of that back year on year as we go through the year and the same question as well for the corporate and other line which I think was around...
Speaker Change: [inaudible]
Speaker Change: You're getting at a very, very important element of the cost and the leverage piece that you see at the macro level for the company. So, number one, Sensient is a pay for performance business.
Speaker Change: So when you perform, you're paid. If you don't perform financially, you don't get paid.
Speaker Change: So we don't offer incentives. You know, Tobin shows up on time every day for work. He does not get a bonus for that.
Speaker Change: If Tobin does some other highly subjective thing that really doesn't necessarily translate into financial results, he doesn't get anything for that. He gets a pat on the back from me, but no additional financial incentive for that.
Speaker Change: And so, for that reason, when you come into a year like 2023...
Speaker Change: where there's essentially a once-in-a-generation de-stocking effort in the food and personal care businesses.
Speaker Change: It has a tremendous impact such that people effectively get no annual incentive bonus out of that from me on down within the organization.
Speaker Change: Now, as you get into 2024, you have a step up.
Speaker Change: Right, we're back on track. We're back on track with good revenue. As I've noted, operating leverage will continue to improve as the year goes on.
Speaker Change: But then that pay for performance becomes a in this case a substantial headwind because it was effectively zero last year So that's the macro
Speaker Change: and a philosophical view of this one. Yeah, just to touch on what Paul talked about. So last year, 2023 was a very low base for our annual incentive compensation and our three-year performance stock. The annual performance...
Speaker Change: Compensation is within our flavor group, color group, and Asia group from that standpoint. So we're running much higher.
Speaker Change: this year. Within corporate and other, it's the same thing. We're running a much, much higher from that standpoint. And I would say for corporate and other, it's about four to five cents.
Speaker Change: during the quarter impact. Now, as we kind of move forward through the rest of the year, we will be running higher than last year, but they'll be more evened out.
Speaker Change: okay so so less of a headwind than the four to five for the second half
Speaker Change: Yeah, I would say it is still going to be elevated, so we're still going to have elevated costs from that standpoint, but I think Q2 is a little slightly more than what I would anticipate as we kind of roll forward through the remainder of the sixth quarter.
Speaker Change: and the stock price.
Speaker Change: and the stock-based comp in terms of what kind of headwinds you think that would have represented in terms of sense for this quarter. What I quoted was all together so our annual stock-based comp. I didn't split them apart.
Speaker Change: Right. Perfect. Thank you. Thanks very much.
Speaker Change: You're welcome. Okay, thanks, David.
Speaker Change: There are no further questions at this time. This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.
Speaker Change: Okay, that concludes our call today. Thank you everyone for joining. If you have any follow-up questions, please feel free to contact the company. Have a great day.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.