Q1 2024 Sensient Technologies Corp Earnings Call

Participants

Stephen Rolfs; Chief Financial Officer, Senior Vice President; Sensient Technologies Corp

Paul Manning; Chairman of the Board, President, Chief Executive Officer; Sensient Technologies Corp

Matt Krueger; Analyst; Robert W. Baird & Co., Inc.

Nicole Kieser; Analyst; BNP Exane

David Green; Analyst; BlackRock Inc.

John Lim; Analyst; BNP Paribas

Presentation

Operator

Good morning and welcome to the Sensient Technologies Corporation 2024 first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Steve Rolfs Please go ahead, sir.

Stephen Rolfs

Good morning. Welcome to Sensient's Earnings Call for the First first quarter of 2024. 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 2024 first quarter 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, costs of the Company's portfolio optimization plans 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. It 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 and 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 are 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 could potentially impact our financial results.
Please keep these factors in mind when you analyze our comments today. And now we'll hear from Paul Manning.

Paul Manning

Thank you, Steve. Good morning and good afternoon. Our first quarter results came in as expected. And now with greater visibility on the year, we are raising our full year guidance to mid-single digit local currency revenue growth and mid-single digit local currency adjusted EBITDA growth since its local currency revenue increased by 4% in the first quarter. This revenue increase was mostly volume driven with pricing contributing about 1%.
The positive trends we saw in customer order patterns in January continued throughout the quarter, giving us much greater confidence that we will continue to grow volume revenue and operating profit for the year. We're experiencing strong new sales wins across each of our groups and our sales pipelines remain robust. We believe the impacts of destocking are now behind us for both flavor and color groups.
As we noted in our last call, Asia Pacific will continue to feel the impact of destocking with certain larger multinational accounts in the second quarter, and we anticipate this will be the last quarter of destocking for Asia Pacific, our consolidated local currency adjusted EBITDA was up 2% for the first quarter of 2024.
As mentioned during our last call, I expect operating leverage and margin improvement across our groups as our volume improves and as raw material inflation subsides, we therefore expect profit improvement compared to the prior year to significantly strengthen as the year goes on.
Now turning to the group's Flavors & Extracts Group had a solid first quarter, delivering 7% local currency revenue growth and 6% local currency operating profit growth. The group continues to benefit from its strong new sales win rate and its focus on sales execution and customer service group benefited from a particularly strong volume growth in its natural ingredients.
Product Line Group continues to be impacted by elevated costs in certain agricultural ingredients and raw materials, primarily in the natural ingredients product line and based largely on inventory positions and crop cycles. These elevated costs will temper our operating leverage in the first half of the year, but we are confident that the Group will deliver on our full year expectations.
Furthermore, based on greater visibility for the year and now expect the group to deliver at least mid-single digit local currency revenue growth in 2024, which is an improvement from our previous guidance of low to mid-single digit local currency revenue growth. Color Group's local currency revenue was down low single digits in the first quarter.
As mentioned during our last call, we anticipated the impacts of destocking to continue throughout the first quarter. I'm happy to say that the headwinds of destocking for the Color Group are now behind us. We are seeing an improvement in customer order patterns and the group is benefiting from its strong new sales wins and exceptional customer service. I expect the volume picture will continue to improve sequentially throughout 2024 and now expect the Color Group to deliver mid-single digit local currency revenue growth in 2024, which is up from our previous guidance of low to mid single digit local currency revenue growth.
The Asia Pacific Group reported 4% local currency revenue growth in the first quarter. Group experienced good growth in most regions. As mentioned in prior calls, the group continued to be impacted by certain larger multinational customers, which has produced some volatile swings in order patterns and results. We believe this pattern will come to an end at the end of the second quarter.
Overall, the Group is well positioned for growth, and I continue to expect the group to deliver mid-single digit revenue growth in 2024 portfolio optimization plan that we initiated in the fourth quarter of 2023 is progressing as expected.
Our plan is designed to rightsize our cost base and to optimize our organizational structure with a focus on driving improved productivity in certain businesses and functions in both the color and flavor groups once fully implemented by the end of 2025 we expect that will generate annual cost savings of approximately $8 million to $10 million, including the costs incurred in the fourth quarter of 2023 and first quarter of 2024, we continue to expect to incur pretax charges of approximately $40 million, of which approximately $30 million will be non-cash.
To date, we have incurred approximately $30 million of portfolio optimization expense. We are carefully managing this process to ensure we continue to meet customers' needs and to minimize the disruption to the business. We also continue to focus on strategically managing our inventory positions. We reduced our inventory by $30 million in the first quarter, and we expect continued improvement in our inventory throughout the remainder of the year. We will use our improving cash flow to reduce our debt and interest expense.
As we communicated, we expect a much improved financial picture in 2024, including sales volume growth, local currency revenue growth and local currency adjusted EBITDA growth, we now expect to deliver on a consolidated basis mid-single digit local currency revenue and mid-single digit local currency adjusted EBITDA growth in 2024.
We previously expected low to mid single digit local currency growth in both revenue and adjusted EBITDA continue to expect our local currency adjusted EPS to grow at a low to mid digit rate in 2024. Overall, we have proven that our strategy supports solid growth across each of our businesses and our product portfolio is robust.
We are focused on the levers we can control to grow our business. These include our focus on sales execution, our strong customer service and our innovative product offering. Overall, I'm very excited about our opportunities within each of our groups and remain optimistic about 2020 for the future.
Our business now before I turn it over to Steve, I just wanted to thank Steve for his 27 years of service to Sensient. I should note that that is a GAAP number. Steve will tell you on a adjusted basis non-GAAP that felt more like about 102 years. As you know, though, Steve will be retiring at the end of June, and this is actually his last conference call. So I worked very closely with Steve for at least nine years. Well that more than that to a CFO and his other financial leadership roles within the company.
So, Steve, we'd like to thank you and all your hard work presenting on behalf of the Board and everyone here, we wish you luck in retirement. You'll have to let us know what you're doing.
So now for the last time, Steve, will provide additional details on the quarter.

Stephen Rolfs

Thank you, Paul. My comments this morning, I will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2020 for remove the cost of the portfolio optimization plan. We believe that the removal of these costs produces a more clear picture to investors of the Company's performance. This also reflects how management reviews the Company's operations and performance.
Sensient's operating income was $49.4 million in the first quarter of 2024 compared to $50.8 million of income in the comparable periods last year. Operating income in the first quarter of 2024 includes $2.8 million, which is approximately $0.06 per share of portfolio optimization costs. Excluding the costs of the portfolio optimization plan, adjusted operating income was $52.2 million in the first quarter of 2024 compared to $50.8 million in the prior year period.
The Company's consolidated adjusted tax rate was 26.1% in the first quarter of 2024 compared to 24.9% in the comparable period of 2023. In local currency, adjusted EBITDA was up 2.2% in the first quarter of 2020 for foreign currency translation was not material to EPS. Cash flow from operations was $15 million in the first quarter of 2024.
Capital expenditures were $11 million in the first quarter of 2024, we expect our capital expenditures to be around $65 million for the year. Our net debt to credit adjusted EBITDA is 2.6 Overall our balance sheet remains well positioned for future investments.
Regarding our 2024 guidance, we now expect our 2024 local currency revenue and local currency adjusted EBITDA to be up mid single digits in 2024. This is an increase from our previous guidance, which had called for a low to mid-digit growth rate in 2024 for both local currency revenue and local currency adjusted EBITDA growth.
We still expect our interest expense to be to increase this year compared to our 2023 full year interest expense and we continue to expect our 2024 full year adjusted tax rate to be in the range of 24% to 25%. As a result, we continue to expect our local currency adjusted EPS to be up low to mid-single digits in 2024. And considering our GAAP earnings per share in 2024, we continue to expect approximately $0.15 of portfolio optimization costs.
We continue to expect our GAAP EPS in 2024 to be to be between $2.80 and $2.90 compared to our 2023 GAAP EPS of $2.21.
To reiterate Paul's comments, he mentioned the elevated agricultural costs impacting our Flavors & Extracts segment as well as the order patterns impacting our Asia Pacific segment. These factors will impact the pattern of sequential quarterly results, but we are confident that each segment will deliver to our expectations for the year.
Thank you for participating in our call today. We will now open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Ghansham Panjabi, Baird.

Matt Krueger

Matt Krueger sitting in for Ghansham. Steve, I'm not going to match Paul's genetic level send off there, but congratulations on your on your pending retirement. I just wanted to touch on operating leverage flow through the Flavors & Extracts segment here a little bit. I'm just trying to dig into why it wasn't more significant given the strong volume growth compared to expectations. I know you mentioned higher ag and agricultural and raw material costs.
But can you talk a little more detail about what those were, you know, how big was that headwind on a year-over-year basis? And how would you expect that to progress moving forward? What's that what does that headwind for the year look like?

Paul Manning

Okay. So that I think as we look at I'll kind of give you an overview for each of the groups, but let let's start with flavors to go directly to your question. So yes, flavors had six 7% revenue growth. Most of that was volume. We noted it was only very moderately, say 1% price. So therefore, there was that big volume move a lot of that volume, the majority of that volume was S&I, but there was volume in other pockets around the balance of the Flavor Group, but it principally was an F&I story.
So they had an absolutely spectacular revenue quarter in S&I, lots of new wins and lots of good activity there in principally savory related foods. The comparison for S&I was not as difficult. So certainly that had some benefit to us as well.
Now where the leverage kind of comes into play here, I said for 6% to 7% revenue, you'd sort of start to see something a little bit better than mid single on profit. And you will as we get into the latter part of the year. But in the context of Q1, a lot of that selling was on these crops that had been grown in a previous crop year. So all those things we heard about with energy and water and fertilizers and agriculture and land and labor, all those things were built into that crop. And so that's the one we're selling right now.
The good news is the next crop comes in later this year and the cost situation on that is much improved. We won't know precisely how much, but the trends are quite positive because last crop one was probably among the most expensive we've ever seen period and so I would tell you that that was largely the story on operating leverage in the Flavor Group.
As we kind of go into Q2, you'll see a little bit more of that you'll see very nice revenue growth. Again, I'm feeling confident about that, but you won't quite see that operating leverage in Flavors yet you'll start to see the operating leverage in flavors in the back half of the year as the traditional flavors continues to accelerate and as we start selling the new crop at the lower cost position.
So yes, when you draw up volume growth should generate operating profit leverage and it will for the year. But in any one quarter, we could be contending with the more expensive inventory going over the Color Group. I kind of mentioned on the last call that you've given how much you hold inventory. So there's there's generally a lag between when you start seeing operating leverage from your volume growth and that tends to be about a quarter to two quarters, depending on the business unit.
Here you see colors was down in Q one, low single digit revenue low single digit profit. That's actually a positive sign because we had been, as you saw on 2023 for that low single digit revenue and minus mid-single digit revenue. We were seeing well into the minus double digits on operating profit. So you're seeing the inflection point now in Q1.
So therefore, as we get into, say, Q2 and beyond for the Color Group, I think you'll start to see that leverage very, very nicely play out in the Color Group. So I think you'll be very, very happy with how that progresses.
So progressive, it's faster than color. So that's principally just based on the inventory component associated with those agricultural products. So I think big picture as the year kind of normalizes and it is normalized, you're going to start to see that more traditional mid single digit, high single digit, mid-single digit revenue, leading to high single digit EBITDA growth. And we're very, very confident that we'll be at that type of pace as the year moves on here.

Matt Krueger

That, Sam, that's very helpful. And then just switching over to natural ingredients, specifically, that growth has ramped significantly higher to start the year and really has since the middle of last year.
And can you talk about what's driving this tick-up in growth and how sustainable that growth rate is for 2024 in the segments? And were there any specific conversions or legislative changes that are benefiting the naturals portfolio drive that pickup in growth?

Paul Manning

Nothing on the regulatory side. This is a business where you know, when you have that crop, you can sell it. And so we made comments over the last year or two that we want to continue to invest in that inventory because there is no substitute on the market. And so when you have it, you can sell it. And then when you can sell it you can have an outsized quarter like the one we did.
So I think number one, we had a very good inventory position. Number two, we had a very aggressive sales effort we have new leadership in that business and they're doing exceedingly well on the sales side. So that's another factor. I would tell you, as I mentioned earlier, the they had a little bit of an easier comp that explains maybe a portion of that for sure in the business. But I think ultimately that rate will normalize as the year goes on.
I would see that as more of a one-off rather than a sustained trend in that business. And so we would still expect them to have very solid growth of the year. The kind of growth we saw in Q1. Think of that as more of a statistical anomaly rather than a rather new steady state.

Operator

Nicole Kieser, BNP Exane.

Nicole Kieser

Hi, everyone. At ADA, Gordon's and say, and then I have echo my congratulations and best wishes to Steve as well. And on the guidance on the EPS side, I was wondering if you could explain a little bit or clarify what your expectations are in terms of interest cost? Do you still expect this plus $3 million year-on-year that you talked about previously? Just trying to understand why there's limited sort of just three on your EPS guide relative to the upgrade on the EBIT at an EBITDA level? Big picture on the SS&M?

Stephen Rolfs

Sure. So on the EPS guidance, you hit it on the head, it's really the interest expense and then we'll have a slightly higher tax rate this year as well. And that's the only reason why that guide was not increased from last quarter, we did say about $3 million more on interest expense.
And when you look at the interest rate environment, there seems to be less appetite for interest rate cuts so if that's the case, it could be a little bit elevated above the $3 million. It could be a little bit more towards four as the way we see it. But here, as Paul mentioned, we've got opportunities in inventory and cash flow. And so as we bring down leverage, which will be our some our priority, we could make up for some of that in terms of the interest expense.

Nicole Kieser

Got it. And then on the Flavors & Extracts side, I wanted to ask a little bit more about actually the flavors that whilst it sort of improves sequentially? It seems like you're lagging a bit some of the bigger F&F players who've reported so far. Can you help us understand the discrepancy and perhaps explain a little bit and some of the dynamics of what happened in Flavours in Q1?

Paul Manning

Yes. Well, I guess to the in a 91 day period, any number of things could happen across a segment or a customer group that customer's inventory position or launch.
So I wouldn't take too much away from from 91 days. I think as you look at the year for us, we do expect mid single digit growth, most of that being volume. And as you reflect back on the last number of years, I think you could see that the volume growth in Sensient was quite robust.
And so I think, again, it's one quarter is not indicative of anything. In my opinion. We continue to do exceedingly well on the new win front. And in fact, new wins continue to be quite robust in the first quarter. So I think it's just really more of a timing thing than anything else.

Nicole Kieser

All right. And then I'm on the input cost side. And you mentioned in there are you sort of talked in the release about higher inputs. And I was wondering and whether there's been any change in terms of your outlook on input costs for this year versus how you were thinking a couple of months ago? If you could talk a little bit about what you're seeing and you talked about, I think, low single digit pricing. Do you think this will be enough to sort of thing recover input cost inflation this year?

Paul Manning

Yes. So let me start off and then I'll let Steve add what he would like to there. I think the general picture on input costs as they're moving in the direction that's more favorable to us in our profit. And as you then liquidate your inventory, you start to enjoy that benefit to your operating profit.
So I think the general state of affairs is things remain elevated in many categories. They're not rising. There are a couple of exceptions, but there's always a couple of exceptions in any given year. And but I think the big picture is stable, declining in some. And so I think we'll start to see those benefits continue through the P&L.
I did mention that the one big one on the agricultural side, that improvement we anticipate in the back half of the year for sure, because that's driving a lot of the leverage impact in flavors. But I think the overall story is that our price should capture what we need to capture here and continue to help our customers to promote their own businesses. So I think that we feel good about the pricing that we got.

Stephen Rolfs

And so, Stephen, if you want to add anything to the mix there, I would just say that, yes, there's not been any big change in our outlook or expectations. As Paul said, we're seeing an improving picture across a lot of the spend. The one thing that we've mentioned a couple of times now is just when you're dealing with these agricultural products, there can be there can be a lag. And so that's the only thing I would I would add, but I think in general, the the picture is improving.

Operator

(Operator Instructions)
David Green, BlackRock.

David Green

Hi, everyone. Congratulations, Steven. And I guess that's our question around margins. And you talked about an expectation for an ongoing sequential improvement in volume and just to sort of qualify that. So I'm assuming that also means by definition, we shouldn't we should expect improving sequential performance in margins as well.

Paul Manning

Yes, I think that's right. I think as the year plays out, as I described earlier, I think you'd start to see that in color a bit sooner than flavors. But in flavors, you'd see that as well. And we're optimistic that color's begins to knock back on the door of 20%. We're very quite close here in Q1, but Asia will remain very, very profitable. And of course, flavors as the most uplift opportunity. And so yes, is the short answer to your question.

David Green

Right, many thanks. And then just thinking I just sort of wanted to ask specifically on win rates and obviously, you've talked about sort of very high levels. Are there any specific areas where it's been in, particularly where it's been particularly strong?

Paul Manning

Well, we've got a pretty broad-based portfolio. So we generally enjoy success in a lot of different areas. I would tell you that the win rates have they have grown very nicely in Personal Care so this is a market that was hit particularly hard during COVID, particularly our business, which was one of strong focus on makeup. So we're seeing a lot of nice wins there and we're seeing an improvement in the win rates in those businesses.
On the personal care side, we continue to enjoy very nice win rates in our Natural Color business. We are the largest food color company in the world. And so we continue to have very strong and very good access to those types of customers who are converting. And so that's backed up by a very, very strong innovation program. That is a very technically driven conversion program.
And then of course, in flavors, we enjoy very, very good win rates across a lot of the local and regionals. And I think as we continue to expand and raise our spectrum in the market, we continue to have improved access to some of the larger accounts as well.
Segment wise, you look at the launch activity in Q1 around the world is an interesting question that folks are sort of looking at like, hey, what's going to happen here, right? Because there's a lot of macroeconomic factors and what's going to happen in the market.
And so I think we've seen a little bit of a mixed bag overall launches were down globally in Q1. So what our customers would be launching and most notably in certain segments like frozen desserts and the like, you could see quite a reduction there.
And but I would tell you that the wins that we're seeing are pretty broad based and a lot of the differences, whether or not it's to a multinational to a local or regional to a branded or generic. The generic market is actually we talk about volume being flat in North America and Europe. The generic volume is actually up and it's up pretty decently in at least in North America, for example, Q1 they're up almost 3.5% on volume were generic brands, whereas the branded guys were down one or 2% in terms of volume.
So yes, our wins tend to be in again, a lot of places. But I would say that certainly s and I have a lot of wins in the savory foods areas, dressings and dips and sauces and things of that nature. We saw a lot of good activity in beverage. We saw a lot of good activity in natural colors for baked goods.
So pretty pretty broad-based. I don't think there's any one particular category that's outpacing other categories right now. I would although I would tell you, Frozen Desserts is perhaps a little bit slow at the moment from a launch activity standpoint. And so we would largely mirror what you're seeing in the market from that standpoint.

David Green

Right. And just I can't quite remember in terms of thinking about sort of margin and mix within the specific segments. Can you could you just remind me within So within color specifically, the margins in Personal Care sorry, broadly speaking versus the margins in certain pharma and in that segment, the margins are in a fairly on narrowband. I would say we earn similar margins across a lot of the different product lines there and then and then obviously natural ingredients, higher margin, then flavors and extra.

Paul Manning

Yes, that is that depends on the crop year in this case, is a bit lower, but ordinarily on long term, yes, be it would be probably right around the average and EBITDA margin for the Group.

David Green

And then I guess just a sort of final question around cash flow, which improved this quarter. I guess sort of referencing back to your expectations for improving our volume and margins that that is there anything that any reason why that doesn't drop through to we had a cash as well on a sequential basis?

Stephen Rolfs

No, I think we expect good cash flow this year. We expect continued improvement. We are up in the first quarter. First quarter traditionally is not the strongest quarter anyway. So but we do expect continued improvement. And if we see costs improve, which we expect that that will that will that will be additive to cash flow as well because we'll be spending less on the new inventory.
And then finally, our capital expenditures are going to be lower this year. So we should have good free cash flow this year.

Paul Manning

Yes. And where, Dave, I think I've mentioned this before, we're still fat on inventories. So we have have more work to do there. Q1, there was a nice move in about 30 million of reduction. So I'm not going to predict to you precisely how much inventory comes out in Q2 three and four. But there should be an ongoing trend of lowering our inventory levels, which well very, very strong source source of cash for the year.

Operator

John Lim, BNP Paribas.

John Lim

And just one question from me. Have you seen any changes in your competitive landscape for Callon because one of your peers was actually talking about the importance of colors at the Investor Day. So just interested to see to hear if there has been any changes?

Paul Manning

Well, we have we have good competitors and color, and we're very mindful of where they are and we want to meet them. And so no, I don't think there's any particularly different trends that I would note. I think there's certainly a lot of activity around the world with natural color conversions, but I would put our portfolio against anybody's in the world. And in terms of the ability to make new products and innovative products, I put that against anybody's in the world.

John Lim

Okay, that's helpful. And it's also a good trend I suppose, more competition and more interest in natural colors?

Paul Manning

Yes, for sure, we see different conversion rates in different parts of the world. So we still think that outside of Europe, these are this is still at sort of an earlier stage of the transition. So yes, there's a very nice long term runway for growth there on the backs of natural color conversions for sure.

John Lim

And then, of course, more notably on new products that contain natural colors and actually just a follow up, what are the growth rates on Natural Color conversions, emerging markets?

Paul Manning

Yes, that's a good question. It's a complex question. The easy way to answer that is they're probably low to mid, maybe mid in some regions. Now when you look at natural colors. Oftentimes what distorts numbers are, things like caramel colors and titanium dioxide, which tend to be very, very high volume contributors to natural colors, but they're not necessarily the highest value with the world of natural colors.
So things that we sell would be substantially dwarfed by things like caramel and titanium dioxide. That's why we don't traditionally talk about our market share of Natural Colors because, quite frankly, there's a whole chunk of the market that I have absolutely zero interest in. And so when you factor out those types of products, yes, you could see perhaps even a little bit of a better growth rate than that in emerging markets?
Asia Pacific, specifically Latin America, the growth rates are as we see it not as strong as you would see in a place in certain parts of Asia Pacific or Africa for that matter in the Middle East. So I think as you look over to North America and still parts of Europe, the growth rates, it can continue to be quite good as well.

Operator

There are no further questions. At this time, I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Stephen Rolfs

Okay. If there are no further questions, that will conclude our call. So thank you very much, everyone, for joining the call today.

Operator

The conference has now concluded. You may now disconnect.