Sensient Technologies Corporation (NYSE:SXT) Q3 2023 Earnings Call Transcript

Sensient Technologies Corporation (NYSE:SXT) Q3 2023 Earnings Call Transcript October 20, 2023

Sensient Technologies Corporation reports earnings inline with expectations. Reported EPS is $0.75 EPS, expectations were $0.75.

Operator: Good morning. And welcome to the Sensient Technologies Corporation 2023 Third Quarter Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. And at this time, I would now like to turn the floor over to Steve Rolfs. Sir, please go ahead.

Stephen Rolfs: Thank you. Good morning. Welcome to Sensient’s earnings call for the third quarter of 2023. I’m Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I’m joined today by Paul Manning, Sensient’s Chairman, President and Chief Executive Officer. Earlier today, we released our 2023 third quarter financial results. A copy of the release and our investor presentation is available on our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures which remove the impact of currency movements and other items as noted in the company’s filing. 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 Company’s 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 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 Sensient’s previous SEC filings, including our 10-K and our forthcoming 10-Q for a description of additional factors that can potentially impact our financial results. Please keep these factors in mind when you analyze our comments today. Now you will hear from Paul Manning.

Paul Manning: Thanks, 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. As predicted, customer destocking continued throughout the quarter, who is 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 is down low single digits in the quarter. Our local currency adjusted EBITDA was down about 7%, largely due to the continued impacts of de-stocking 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.

We also continue to manage cost inflation throughout our businesses and we continue to implement pricing where 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. Destocking has unfolded differently in each group, depending on product and customer mix and 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. For 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 impacts 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 geographies and is not as widespread, but we do expect some impact in the fourth quarter.

Adding to the destock volume declines is 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 profits this year. We are also facing difficult comparisons to our excellent volume driven performance of 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. While we are strategically investing in inventory for our natural ingredients business within the Flavors and Extracts Group, we continue to be focused 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 its 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 decline compared to the prior year’s substantial volume increase has had an outsize impact on the Group’s operating profit. Revenue of 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 experience in the Flavors and Color Group’s.

The Group is 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, my long-term growth expectations for these of the groups has not changed. I continue to expect the 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. As I mentioned during our last call, 2023 has become a transition year as we move from supply chain and inflationary burdens to a hopefully more normal environment in 2024. We have begun to see pockets of sales improvements in certain of our product lines and geographies. We should see continued improvement within the fourth quarter and in the first part of 2024. 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 have experienced over the last several years. Our strategy remains sound and we are well positioned for future growth. Steve will now provide you with additional details on the third quarter results.

Stephen Rolfs : Thank you, Paul. Sensient’s 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. 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 $0.75 in this year’s third quarter compared to $0.85 in last year’s third quarter. Foreign currency translation increased EPS by approximately $0.03 in the third quarter.

As Paul mentioned, we are focused on our inventory position while we are strategically investing in our inventory position in 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 revenue. And our 2023 local currency EPS to be down low double digits compared to our 2022 adjusted EPS of $3.29. 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 2023 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 gross 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 the call today. We will now open the call for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question today comes from Ghansham Panjabi from Baird.

Ghansham Panjabi: Hey, guys. Good morning. I guess, 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, food, pharmaceuticals, and personal care.

Paul Manning: Okay. So overall, if you look at Q3, pricing is kind of mid-single digits, roughly the same in each group, maybe 5% in flavors, 6% in colors, but all within that realm. So overall, price is 6%. And on the overall revenue were down 2%. So that implies an 8% reduction in volume. And so 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 lines. So for example, if you look across the portfolio, certain categories like, well, most market categories in the US continue 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 if you look at flavors, we’re 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, destocking in the market declines. Color, we got about maybe 6% price, but we’re down 8%. 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. Color did not really begin in earnest for another quarter after that.

There are a number of reasons for that, not least of which the value of flavors tends to be higher than color’s. Flavors tend 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. It would be the most critical factor. So that’s why color has a much more profound destocking impact right now. But because it is much bigger in magnitude, we don’t expect it perhaps 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 was just down slightly and there again to our point.

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 a little bit different, driven principally by multinationals. So then part two, your question around color in terms of food and personal care, the food part of the business was down maybe about 6% or 7% and the personal care was down up a little bit more than that. So we see a little bit more of the impact of the 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 US. So a little bit of a very, well, it’s a very different dynamic there. Our beliefs around that are that pharmaceutical excipient, which are sold to principally API providers, they’re less concerned about inventory values. There are not nearly the shelf life constraints that you’d see in some of the food-related products. And so perhaps that’s driving some of their behavior in the market.