Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sensient Technologies Corp (SXT, Financial) reported an 8% increase in local currency revenue for the second quarter of 2024, driven primarily by volume growth.
- The Flavors & Extracts Group achieved 11% local currency revenue growth and 7% operating profit growth for the first six months of 2024.
- The Color Group delivered 5% local currency revenue growth and 9% operating profit growth in the second quarter.
- The Asia-Pacific Group reported 11% local currency revenue growth and 9% operating profit growth in the second quarter.
- Sensient Technologies Corp (SXT) raised its guidance for 2024, now expecting mid to high single-digit growth in local currency revenue and adjusted EBITDA.
Negative Points
- Operating income for the second quarter of 2024 was $49.7 million, down from $51.6 million in the same period last year.
- The Flavors & Extracts Group faced elevated costs in certain agricultural ingredients and raw materials, impacting operating leverage.
- The company's consolidated adjusted tax rate increased to 25.8% in the second quarter of 2024, up from 24.8% in the same period last year.
- Foreign currency translation reduced EPS by approximately $0.02 in the second quarter of 2024.
- Performance-based compensation increased compared to the low value recorded in 2023, impacting operating income.
Q & A Highlights
Q: Can you provide some added detail on where you're winning business along with a characterization of the customer promotional activity or innovation activity that might play into some of these business wins? Also, what did the new business wins contribute volumetrically during the quarter versus just a normal rebound from prior destocking or normal business growth?
A: The new wins are very broad-based, with strong win rates in flavors, colors, and Asia-Pacific. Particularly strong growth was seen in natural colors, personal care, and natural ingredients. The majority of the volume growth in flavors was driven by new wins, while in colors, it was a mix of new wins and underlying growth. In Asia, it was a combination of new wins and organic growth.
Q: How are higher agricultural and other costs weighing on the operating leverage across the Flavors & Extracts segment, and what should we expect from this segment as the year progresses?
A: The current crop being sold is at peak cost, impacting operating leverage. As new crops come in during the back half of the year, we expect some relief. Q3 will likely see similar dynamics to Q1 and Q2, but Q4 and beyond should show more resounding operating leverage from the volume growth and new wins.
Q: Could you help us understand the dynamics and expectations for the rest of the year around growth in natural ingredients and the overall flavors and extracts business?
A: The outsized growth in natural ingredients seen in the first half will moderate as we lap those highs in the back half. Traditional flavors had low single-digit growth in Q1 and Q2, but we expect a more balanced contribution between natural ingredients and traditional flavors for the rest of the year.
Q: Why didn't we see any improvement sequentially in terms of margins in Q2 versus Q1, despite improved volumes?
A: The lack of sequential improvement is primarily due to high agricultural input costs and inventory positions. As we sell through the expensive inventory and move to new crops, operating leverage will improve. The Color Group, which didn't face the same input cost issues, showed better leverage and this trend is expected to continue.
Q: Is it fair to say that destocking is now done in Asia-Pacific?
A: Yes, the destocking and order timing dynamics that were a concern in Q2 did not play out as expected, and we have no reason to believe they will in Q3 or Q4.
Q: Are there any other segments that are still growing slowly or underperforming at the moment?
A: We continue to see strong performance in natural colors and personal care. We expect an uptick in flavor numbers in the back half of the year. The dynamics are good across our customer base, and our sales pipelines look very strong.
Q: Can you provide more detail on the operating leverage within the Flavors & Extracts segment, given the significant revenue growth but minimal margin improvement?
A: The minimal margin improvement despite significant revenue growth is primarily due to high input costs in the natural ingredients product line. Performance-based compensation is also higher this year compared to last year.
Q: How does the current environment of new product launches and innovation impact your business?
A: There has been a reduction in actual new product launches in food and beverage, driven by supply chain normalization and reformulations. We focus on aligning closely with customers launching new-to-the-world products, which are crucial for growth. Our diversified customer base and strong sales force help us navigate these dynamics effectively.
Q: How do you view the current trends of down-trading in the market, and why does your outlook seem more constructive?
A: Our diversified customer base and strong representation across different markets allow us to focus on bigger opportunities. We have high expectations for our sales force and general managers to find ways to grow the business profitably, despite market challenges.
Q: Can you explain the higher operating expenses in the quarter and how they will phase for the rest of the year?
A: The higher operating expenses are due to increased performance-based compensation compared to last year. This will continue to be a headwind but will be more evened out for the rest of the year. The corporate and other costs are also elevated but should moderate as the year progresses.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
