Sensient Technologies Corporation (NYSE:SXT) Q2 2023 Earnings Call Transcript

Sensient Technologies Corporation (NYSE:SXT) Q2 2023 Earnings Call Transcript July 21, 2023

Sensient Technologies Corporation misses on earnings expectations. Reported EPS is $0.81 EPS, expectations were $0.88.

Operator: Good morning and welcome to the Sensient Technologies Corporation 2023 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. 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 second quarter of 2023. I’m Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I am joined today by Paul Manning, Sensient’s Chairman, President and Chief Executive Officer. Earlier today, we released our 2023 second 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 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 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 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.

Paul Manning: Thanks, Steve. Good morning and good afternoon. Sensient’s local currency revenue this quarter was in line with last year’s second quarter revenue. Our adjusted local currency EBITDA and operating income are each down about 7% largely due to the continued impacts of destocking globally, and declines in volumes on many consumer product categories, primarily in North America and Latin America. As we have been discussing, we anticipated the volume declines due to destocking to continue throughout the second quarter. In general, we saw the impact from our customers destocking activities broaden across additional product lines in the second quarter, and to a greater degree than we had anticipated. Destocking will obviously not last forever, but when it will end for different products and geographies is becoming more difficult to predict.

In parts of our business we have seen improving order patterns, but in others we have yet to see order patterns returned to normal. Despite destocking, we’re beginning to see an increase in promotional activity in certain North America food product categories, and new product launch activity remains healthy. Furthermore, we continue to experience strong sales wins, effective pricing implementation, and an overall low attrition rate. We’re focusing on the areas of our business we can control. Sales execution, customer service and avoiding attrition on our existing sales. Our new sales wins continue to be at a high level across all three groups and our sales pipelines across all of our businesses remain robust. These new sales have been across all our product lines and throughout most of our geographic regions.

These wins remain at a historically high rate for the company which bodes well for a post-destocking world. We still continue to see positive momentum in new product launch activity and we expect this activity continue into next year. We are monitoring cost inflation and continue to implement pricing actions as needed. We have begun to see supply chain and raw material cost improvement in some areas. However, we also continue to experience overall elevated energy, growing costs and commodity costs in certain geographic regions. As we have communicated over our last couple of calls, the timing of our pricing actions versus the timing of cost inflation may distort our quarterly year-over-year comparisons. Destocking continues to be the main headwind throughout many of our businesses.

While destocking initially had a more profound impact in our flavors and extracts group, we did experience an increased level of destocking in both our color and Asia Pacific groups during the second quarter compared to the first quarter. The magnitude and timing of this destocking was somewhat unexpected. In addition to destocking, retail data for many of our customers indicates they are seeing negative volume trends for the last 24 months. We are starting to see improvement in certain businesses and geographies. And we anticipate the volume declines due to destocking to continue to moderate throughout the back half of this year. This volume decline as well as the overall CPG volume declines in many food and personal care product categories has had an outsized negative impact on our operating profit this year.

Our outstanding performance and strong volume growth in 2022 has also made for an exceedingly difficult comparison plus our own efforts to reduce our inventory have impacted our margins. Now turning to the groups. The Color Group reported 2% local currency revenue growth in the second quarter. Local currency operating profit was down approximately 8% in the quarter. The group’s revenue growth benefited from a high single-digit price increase, which was partially offset by an almost double-digit revenue headwind due to destocking. For the year-to-date period the Color Group has reported 6% local currency revenue growth. The food and pharmaceutical product lines delivered 4% local currency revenue growth during the second quarter. Food and pharmaceutical product lines continued to benefit from new sales wins, particularly in the natural colors portfolio.

But even these product lines have experienced an increased level of customer destocking in the second quarter. Revenue in the personal care product line was down mid-single digits in the second quarter, primarily due to customer destocking, especially in North America. Based upon these developments, I now expect the color group’s local currency revenue to grow at a low to mid-single digit rate and local currency operating profit to decline at a low to mid-single digit rate in 2023. The lower revenue and operating profit decline in the color group are a direct result of the more than expected volume declines due to destocking and the continued volume declines in the CPG food and personal care product categories. These volume declines have an outsized impact on operating profit and are especially stark in comparison to the outstanding results reported by the color group in 2022.

Because I believe destocking will not last forever, I continue to expect the color group to deliver mid-single digit revenue growth and mid to high single-digit operating profit growth in the long-term. The Flavors and Extracts Group was down approximately 2% in local currency revenue in the quarter. The group strong win rate and pricing were offset by ongoing customer destocking and ongoing CPG volume declines in the food product categories, especially in North America and Latin America. The volume declines due to destocking that began in the fourth quarter of 2022 have continued throughout the first half of this year and have had an outsized impact on our operating profit. This impact is especially stark when you compare our current results to the outstanding results reported by the group in the first half of 2022.

Flavors and Extracts Group is well positioned for growth once the relatively short-term impacts of destocking subside. 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. I continue to expect the flavors and extracts group to deliver incremental improvements throughout the remainder of the year. For the year, I now expect the flavors and extracts group to deliver low to mid-single digit local currency revenue growth, and I expect local currency operating profit to be down mid to high single digits. Local currency revenue growth in the Asia Pacific Group was down approximately 1% in the second quarter, year-to-date local currency revenue was up 7% in this group.

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Similar to the Color Group, customer destocking in the region broadened and was greater than expected compared to the first quarter of this year. Despite this headwind, the Asia Pacific Group continues to benefit from strong new sales wins across almost all regions. The group’s focus on sales execution customer service, as well as the investments we have made positioned the group nicely for growth in the future. I continue to expect Asia Pacific Group to deliver mid to high-single digit local currency revenue growth and mid to high-single digit local currency operating profit growth in 2023. My long-term growth expectations for each of our groups has not changed. I continue to expect the flavors and extracts group to deliver mid-single digit local currency revenue growth with mid to high-single digit local currency operating income growth.

I continue to expect the color group to deliver mid-single digit local currency revenue growth and a mid to high-single digit 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 expect our local currency revenue to be up mid-single digits. But as a result of the volume declines due to destocking and the volume declines in the global food and personal care markets, I now expect our 2023 adjusted local currency EBITDA to be down mid-single digits and our local currency EPS to be down high-single digits. As I said, we’re focused on the areas we can control sales execution, customer service and our product portfolio.

This focus has fueled the exceptional growth we’ve experienced over the last few years. Our customers like many other businesses are currently focused on right sizing their inventory positions. Overall, destocking is a short-term activity that we believe should improve later this year and into 2024. That is a bit longer than I predicted 90 days ago, which speaks to the volatility and uncertainty in the market. 2023 has proven to be a transitional year as we move from supply chain inflationary burdens of the last two years to a more normal environment. Recently, we have seen an increase in promotional activity across many product categories. Our new development activity with customers is healthy and remains a key part to why we continue to win new business.

Overall, our strategy is sound and we are well positioned for future growth. While I’m not thrilled about the current market environment, I am excited about our opportunities within each of our businesses and remain optimistic about the future of our business. Steve will now provide you with additional details on the second quarter results.

Stephen Rolfs: Thank you, Paul. Sensient’s revenue was 374.3 million in the quarter compared to 371.7 million in last year’s second quarter. Operating income was 51.6 million compared to 55.2 million in the comparable period last year. Foreign currency, increased revenue and operating income by approximately 1% in the quarter. Interest expense was 6.4 million in this year’s second quarter compared to 3.1 million in last year’s second quarter. The company’s consolidated tax rate was 24.8% in this year’s second quarter compared to 25.9% in last year’s second quarter. Diluted earnings per share were $0.81 in this year’s second quarter compared to $0.92 in last year’s second quarter. Foreign currency translation did not have a material impact on EPS in the quarter.

As we have discussed during our last couple of calls, we continue to focus on our inventory position. While we are strategically investing in the inventory for our natural ingredients business, we continue to be focused on decreasing our inventory across the remainder of our businesses. As a result we are seeing an improving cash flow trend. Capital expenditures were 22.9 million in the second quarter of 2023. We have reduced our estimates for capital expenditures this year and now expect our capital expenditures to be between 80 million and 85 million for the year. Our net debt to credit adjusted EBITDA is 2.7. Our balance sheet remains well positioned to support our capital expenditures, sensible M&A, and our longstanding dividends. And any excess cash will be used to pay down debt.

Regarding our 2023 guidance, we continue to expect our 2023 local currency revenue to be up mid single digits compared to our 2022 revenue. As Paul mentioned earlier, we now expect our local currency adjusted EBITDA to be down mid-single digits in 2023. We also now expect our 2023 local currency EPS to be down high-single digits compared to our 2022 adjusted EPS of $3.29. Our previous guidance called for our adjusted EBITDA to grow at a mid- to high-single digit rate in 2023. And our local currency EPS to be flat to up low-single digits in 2023. As we have discussed in 2023, our EPS will be impacted by higher interest expense, approximately $0.22 or $12 million and a higher tax rate. 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 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 will come from Ghansham Panjabi of Baird. Please go ahead.

Ghansham Panjabi: I guess, Paul, going back to your comments on destocking, and clearly that dynamic will not last forever. But it does look like volumes out of the CPG space of the companies that are reported thus far. They’re still down mid- to high-single digits. So are we at a point where destocking is sort of intersecting with just flat out just weaker consumption at the end market level? And how do you see that dynamic playing out?

Paul Manning: Yes. So I agree with your comment that that they’re on their businesses, the decline is there plus their destocking both factors for them. I think one of the key things that we’re starting to see, particularly in North America is promotional activity. So for much of the Nielsen data we’ve been looking at, you’ve seen this sort of decline in the overall market for many categories. In fact, most categories, as consumers are destocking, transitioning how they purchase. Instead of stocking up on certain products, they’re only buying one and they’re shopping more frequently, these are all very real dynamics, which have impacted many CPG companies who have these noted these declining volumes. So you add to that they, in general, most branded companies and generic companies stocked up on inventory over the last couple of years.

And I think given the level of strength in the supply chain, the reliability improvements, there was almost a concerted effort across the board for everybody to start bringing inventory down. And so yes, they both sort of initiated at the same time, which is exacerbated this problem, and measurably for us, that’s kind of part of the overall volume, the two of the big factors that bring down volume. So I tend to think of what we’re seeing right now is we’re betting that the promotional activity signals kind of a flattening of the pricing in the market. So brands and generics and others will start promoting more products. Buy one get one free things of that nature, which obviously preserves the price of the product, but offers consumers a discounted version, the Buy One Get One Free scenario.

So we think that that will expand and expand to more markets and across more product lines. That will hopefully promote the volume in the market, hopefully then accelerate the end of the destocking, which is very much a mix game. I’ll come back to that in a second. So I think the promotional activity is a big one. I think the increase in new product launches, which we’re seeing in North America, Europe, and throughout most of Asia. In fact, it’s up everywhere except Latin America, new product launches. That’s another very good indication that there is a need to move volume in this market and get consumers trying new products. I think these factors are picking up all very positive. And again, I think I said in the beginning prices and sort of flattening out.

So those come together. And I think everything kind of works out — everything works out of the system. It’s the timing of when those things happen, right. So the destocking, we have some customers who are done destocking, their ordering, as they have always been ordering. There are some who — they were supposed to be done with destocking, but now we’ll need another quarter. It’s hard for them to predict that the market would be down as it has been. So that’s why some of those calculations were a bit off. And then of course, we have other customers who will be destocking until the end of the year. So it’s a very mixed bag. But as you look at our groups, I think flavors is closest to being out of the destocking, we see that largely coming to an end here in Q3.