Sensient Technologies Corporation (NYSE:SXT) Q1 2024 Earnings Call Transcript April 27, 2024
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Operator: Good morning. And welcome to the Sensient Technologies Corporation 2024 First Quarter Earnings Conference Call. [Operator Instructions]. Please also note today’s 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 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 have 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, cost 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 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: 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. Sensient’s 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 impacts of destocking with certain larger multinational accounts in the second quarter. 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, let’s turn into the groups. 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. The group benefited from the particularly strong volume growth in its natural ingredients product line. The 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, I 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.
The Color Group’s local currency revenue is 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. I 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.
The group experienced good growth in most regions. As mentioned in prior calls, the group continues 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. The portfolio optimization plan that we initiated in the fourth quarter of 2023 is progressing as expected. Our plan is designed to right-size 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 it will generate annual cost savings of approximately $8 million to $10 million, including the cost incurred in the fourth quarter of 2023 and first quarter of 2024. We continue to expect to incur pre-tax 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 that 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. We continue to expect our local currency adjusted EPS to grow at a low to mid single 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 2024 and the future of 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 would tell you on an adjusted basis, non-GAAP, that felt more like about 102 years. So as you know, though, Steve will be retiring at the end of June, and this is actually his last conference call. So I’ve worked very closely with Steve for at least nine years, a little bit more than that too.
He’s a CFO and has other financial leadership roles within the company. So Steve, we’d like to thank you and all your hard work for Sensient 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. In my comments this morning, I will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2024 removed 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 period 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 cost 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. Local currency adjusted EBITDA was up 2.2% in the first quarter of 2024. 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 per 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 single digit growth rate in 2024 for both local currency revenue and local currency adjusted EBITDA growth.
We still expect our interest expense 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. In 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 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.
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