Sensient Technologies' (SXT) CEO Paul Manning on Q4 2016 Results - Earnings Call Transcript

| About: Sensient Technologies (SXT)

Sensient Technologies Corporation (NYSE:SXT)

Q4 2016 Earnings Conference Call

February 10, 2017 11:00 A.M. ET

Executives

Paul Manning - Chairman, President and CEO

Stephen J. Rolfs - SVP and CFO

Analysts

Mike Sison - KeyBanc Capital Markets

Brandon Groeger - The Vertical Group

Francesco Pellegrino - Sidoti & Company

Andrew Lane - Morningstar

Christopher Perrella - Bloomberg Intelligence

Operator

Good morning everyone and welcome to the Sensient Technologies Corporation 2016 Fourth Quarter and Year-End Conference Call. Today's call is being recorded. At this time for opening remarks, I would now like to turn the call over to Mr. Steve Rolfs. Please go ahead, sir.

Stephen J. Rolfs

Good morning, I’m Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2016 fourth quarter and full-year financial results. I'm joined this morning by Paul Manning, Sensient's Chairman, President, and Chief Executive Officer.

Yesterday, we released our 2016 fourth quarter financial results. A copy of the release is now available on our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which we believe provide investors with additional information to evaluate the company's performance and improve the comparability of results between reporting periods. These non-GAAP financial measures remove the impact of restructuring costs, currency movements, and other costs as noted in the company's filings.

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 on the Investor Information section of our website at sensient.com and in our press release. We encourage investors to review these reconciliations in connection with the comments we make this morning.

I would also like to remind everyone that comments made this morning, including responses to your questions may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Our statements may be affected by certain factors, including risks and uncertainties, which are discussed in detail in the company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today.

Now, we'll hear from Paul Manning.

Paul Manning

Thanks Steve, good morning. Sensient reported adjusted earnings per share of $0.80 in the quarter compared to $0.71 last year. The impact of exchange rates reduced the adjusted EPS results by $0.02. In local currency adjusted EPS grew by 15.5%. Revenue was up slightly in the quarter due to lower revenue in flavors and fragrances.

Adjusted operating income increased by 9% in local currency as each of the Groups reported strong results. Colors operating income was up almost 9% despite a challenging comparison from last year's fourth quarter. Flavors and fragrances operating income was up 5% and Asia Pacific was up 3%. The full year results were also very strong. Adjusted earnings per share were $3.21 in 2016 up 8% in local currency from the 2015 result of $3.05. In local currency, revenue increased by 2.5% with both color and Asia Pacific reporting strong growth. Adjusted operating income increased 3% excluding the impact of currency.

As I’ve noted throughout the year, corporate costs were unusually low in 2015 due to lower performance based compensation which normalized in 2016. Adjusted operating income excluding these corporate costs increased by 7% in local currency for the year. Cash flow from operations was 222 million in 2016 compared to 128 million in 2015. Excluding the impact of a onetime securitization transaction, operating cash flows were up more than 40% for the year and free cash flow was up more than 70%.

Color had another great performance in the fourth quarter and the group had an outstanding year. In local currency revenue increased 4% and operating income increased by 8.5% in the fourth quarter. The cosmetics and food color businesses continue their strong performances in the quarter and the inks business improved solidly over last year's results.

Cosmetics reported double-digit growth for both revenue and operating income. The food color business reported flat revenue and operating income against last year's fourth quarter results and as we noted last year, the 2015 result included a one off sale of natural colors. Removing the impact of that one off sale the food colors business had mid single-digit revenue growth and low teen profit growth.

Our cosmetics business had a very successful year on strong demand for makeup, lipstick and other personal care products. Our revenue growth has been driven by new product launches across a wide range of products due to changing consumer preferences. Our cosmetic group has a strong innovation program which allows us to develop solutions for a wide range of ingredients including makeup, skin, nail, and hair care and hair colors. We also have very good sales coverage throughout the world and each of our geographical regions exceeded performance expectations in 2016. It was a very good year and we expect demand for cosmetic products to remain strong in 2017.

We are continuing to see strong interest in natural colors for food and beverage applications. Last year about 75% of all new product launches in the U.S. featured natural colors and the numbers are similar on a global basis. Many of the world's largest food companies including some of the largest food retailers have announced their intentions to use natural colors in their products. Some of these products have already hit the shelves and others will take several years to make the conversion to natural colors. We expect these conversions to take place gradually and consistently over the next few years, with more of the near term conversion activity coming from local and regional manufacturers or private label brands.

In the U.S. about one third of all products on store shelves use natural colors and interest in natural colors is growing in most of the regions around the world. Our natural color sales have been strong all year with double-digit sales growth in North America and Latin America and solid growth in the mature European market. We are the market leader for food and beverage colors and similar our cosmetics business our technical capabilities and robust innovation program have positioned us for long-term growth.

Flavors and fragrances continues to progress with our efforts to shift the group's product mix from simple ingredients to more complex flavors, flavor systems, and fragrances. Restructuring activities are now essentially complete. The combination of upgrading our product mix and reducing our cost structure will enable us to deliver sustainable profit growth, and additional margin improvement over the next several years.

Flavors and fragrances had another good quarter reporting operating income growth of more than 5% in local currency with an operating margin of 15.2%. The operating profit margin improved 150 basis points from last year's fourth quarter and this is the third consecutive quarter in which the group's operating profit margin increased at least 100 basis points over the previous year's results.

Fourth quarter revenue was up by approximately 4.5% in local currency principally related to culling of low margin and non-strategic products. A number of businesses contributed to the group's strong performance in the quarter. The Natural Ingredients, North America Savory, North America Beverage and Bio-Nutrients businesses each delivered double-digit profit growth in the quarter.

The profit growth and higher margins over the last few quarters are very encouraging signs. In 2013 before we started the restructuring program, the group's operating margin was 13.8%. It has increased steadily over the last three years to get it to 15.5% and we are looking for at least another 100 to 200 basis points of improvement in 2017. We will accomplish this by continuing to develop and strengthen our innovation and new product development programs and by improving our product mix.

The restructuring program has been challenging at times and the related distractions have complicated the efforts of implementing new strategic initiatives. We are continuing to work on optimizing our plants to assimilate new production activities and to improve plant efficiencies. The affected businesses have had more challenges than other businesses in the group but they will continue to improve with lower cost and better execution against their respective strategies.

In the middle of last year we noted that we were evaluating strategic alternatives for a facility within our flavors business. The facility primarily produced ingredients that did not align well with our strategy of producing value added savory flavors. We completed the sale of the facility during the first week of January. The sale will remove approximately $10 million of revenue from the flavors and fragrance group in 2017 but it will significantly improve the group's product mix.

Asia Pacific also had a very good quarter delivering solid revenue and operating income growth. The businesses in Thailand, the Philippines, Japan, Australia, and New Zealand each delivered solid results. The full year results were also very good with revenue and operating income increasing by approximately 11% and 8% respectively in local currency. We have been investing in the Asia Pacific region and we believe we can continue to generate strong growth in these markets.

Last year we opened a new R&D center in Singapore adding personnel and technical capabilities that allow us to work more closely with customers and to sell more products that align with our strategies and colors and flavors. We are also expanding local production capabilities throughout the region to reduce costs and to shorten lead times. I'm pleased with the progress that we've made in Asia Pacific and we see a very bright future in these markets.

We performed very well in 2016 and we are confident that we will deliver another strong performance in 2017. We expect adjusted EPS growth to approach or to exceed 10% in local currency. In terms of the group's performances excluding the impact of currency we expect flavors and fragrances revenue will be flat with mid to high single-digit profit growth in 2017. The revenue growth will be affected by the aforementioned sale of the flavors facility and other culling activities which will be largely completed by the end of the year.

We expect color to deliver a mid to high single-digit revenue growth and high single-digit profit growth in 2017. And we see Asia Pacific delivering double-digit revenue growth with high single-digit and perhaps double-digit profit growth for the year.

Once again the strong dollar is going to have a significant impact on EPS in 2017. Many currencies have weakened against the dollar since the end of October which will affect our 2017 results. Based on current exchange rates we believe that the effect will be approximately $0.10 for the year.

On a local currency basis, our adjusted earnings per share guidance for 2017 would have been between $3.45 and $3.55 which implies a growth rate of approximately 10%. The $0.10 impact of the stronger dollar reduces our adjusted EPS guidance to a range of $3.35 and $3.45. I'm very pleased with the company's performance in 2016. In local currency terms adjusted EPS increased by 8%. Cash flow from operations was very strong at 222 million and free cash flow was just short of $150 million.

All of our operating groups performed very well. Color had an outstanding year reporting operating profit growth over 11%. Flavors and fragrances delivered solid operating profit growth in the year and improved its operating profit margin by at least 100 basis points for each of the last three quarters. And Asia Pacific had a strong year delivering top line growth of 11% with 8% operating income growth.

We share the company's success with our shareholders increasing our quarterly dividend to $0.30 per quarter or $1.20 on an annualized basis. We repurchased more than 300,000 shares of company stock during the fourth quarter and 700,000 shares during the year. In total we returned $100 million via dividends and share repurchases during the year.

The company's return on invested capital has increased steadily over the last five years. Adjusted ROIC was 10.8% in 2016 which is up 30 basis points over last year and 120 basis points over the last five years. We will continue to take a long term approach to capital allocation focusing on strong capital projects and taking an opportunistic approach to both acquisitions and share repurchases.

Sensient performed well in the year and I'm very optimistic about the company's future. Steve will now provide you with additional details on the fourth quarter and full year financial results.

Stephen J. Rolfs

Thank you, Paul. Sensient reported revenue of $330.2 million in the quarter compared to $339.2 million in the fourth quarter of 2015. Operating income was $43.3 million in the quarter compared to $31.6 million in last year's fourth quarter. The operating income results include restructuring and other costs of $6.2 million in the quarter and $15.1 million in the capital period last year. Excluding the restructuring and other costs adjusted operating income was $49.5 million and $46.7 million in the fourth quarters of 2016 and 2015 respectively.

Foreign currency translation reduced revenue by approximately 2% and adjusted operating income by approximately 3% in the quarter. Diluted earnings per share from continuing operations were $0.70 in the quarter compared to $0.43 in the comparable period of last year. Restructuring and other costs reduced earnings per share by $0.09 in this year's fourth quarter and by $0.28 in last year's fourth quarter. Adjusted earnings per share were $0.80 in the quarter and $0.71 in the comparable period last year.

Foreign currency translation reduced adjusted EPS by approximately 3% or $0.02 per share in the fourth quarter. In local currency adjusted earnings per share grew by 15.5%. For the full year revenue was approximately 1.4 billion in both 2016 and 2015. Operating income was 185.6 million in 2016 and 166.3 million last year. Restructuring and other costs reduced operating income by 26.1 million this year and by 43.6 million in 2015.

Excluding restructuring and other costs adjusted operating income was 211.7 million in 2016 and 210 million in 2015. Foreign currency translation reduced both revenue and adjusted operating income by approximately 2% for the year. Diluted earnings per share from continuing operations were $2.74 in 2016 and $2.32 in 2015. Restructuring and other costs reduced earnings per share by $0.47 and $0.73 in 2016 and 2015 respectively. Adjusted earnings per share from continuing operations were $3.21 in 2016 and $3.05 last year.

Foreign currency translation reduced adjusted earnings per share by approximately 3% and local currency adjusted earnings per share increased by 7.9%. Cash flow from operations was 71.9 million in the fourth quarter compared to 34.6 million in last year's fourth quarter. The fourth quarter results included a $40 million benefit related to an accounts receivable financing transaction which reduces the company's effective borrowing costs. Excluding the benefit of this transaction, the fourth quarter cash flows were slightly below last year's result due to a one time pension payment.

For the year operating cash flows were 222.5 million compared to 128 million in 2015. The strong working capital performance was driven by higher earnings, better management of working capital, and a financing transaction. Capital expenditures were 81 million in 2016 and we expect capital expenditures to be between 60 million and 70 million in 2017.

Our balance sheet remains strong, adjusted debt to adjusted EBITDA was 2.5 at the end of the year. We plan to keep debt levels in line with an investment grade profile to maintain the flexibility for capital expenditures, dividend payments, share repurchases, and acquisitions. We will continue to take a balanced, prudent, and long term approach to our capital allocation strategy which includes evaluating share repurchases and acquisitions on an opportunistic basis.

Thank you very much for your time this morning, I will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from the line of Mike Sison with KeyBanc.

Mike Sison

Hey guys, nice end to 2016 there. Paul, when you think about flavors and fragrances in 2016, you talked about flattish top line growth largely because of the restructuring and recent plant reduction. But can you walk through some of the other pieces that should grow and maybe highlight areas where the growth should look better than the actual full year.

Paul Manning

Okay, now 2016 or 2017.

Mike Sison

2017, heading into 2018.

Paul Manning

Yes, so I think as I mentioned in my notes and it has been our approach with flavors, this is a really a combination of several key things going on in the group right now. Number one, it's a fundamental and continued strategic shift and strategy is all about how we are creating value in the context of competition to our customer. I think we spent a lot of time with that concept in the flavors group and I think a lot of the execution of that we're going to continue to see improvements on that in 2017. That is going to be key to really selling the most differentiated, the most sophisticated of products which as you could imagine versus the kind of classical ingredients business tends to be more sticky, tends to be more dispensable. It is better from a pricing standpoint. And certainly at a fundamental level just makes us more competitive.

So I think that is going to continue to be the fundamental drive in flavors and fragrances. Not unlike that was a fundamental drive and continues to be a fundamental drive for the color group. But as you can appreciate this is an evolving story but I think one that we've made some nice progress in. I think we have pointed out a couple of businesses throughout the year that continue to execute on this very well. So we have a number of benchmarks and data points that suggest that we are doing this, that we've made a lot of progress here. And I think that one piece will continue.

With respect to the restructuring, as I noted in the prepared comments, restructuring is a tremendous impact on an organization. It's a tremendous burden and we think that that's key to our future. Not only that the smaller footprint from a cost standpoint but a smaller footprint ordinarily leads to more simplified business, simplified infrastructure, and one that's not as capitally draining say as a different type of flavors group would.

In short fewer plants is simpler to execute on, less capital spending is required to maintain those, less complexities associated with hiring all the people necessary to run those plants very well. Nonetheless as you simplify this production structure optimizing the plant becomes the natural follow up to a restructuring. The restructuring is great when you take out those costs but, really the cost should continue to come out of these businesses as we optimize that as we get better at producing these products. When you're moving specialty and fine chemicals from one plant to the next it's not like, the books and accounting class said you had three widget plants now you have one widget plant and what does that look like. These are fairly sophisticated operations, and how you make these products, how you source them and all those other factors are very, very precise.

So there is an optimization phase. You're going to continue to see a lot of improvement operationally in the flavors group in 2017 and even in the 2018. I think there's a lot of opportunity to continue to improve and to strengthen these businesses to better serve the customers and then obviously to take out more cost and improve that side of the business. So those are key factors.

Now as it pertains to your comments around essentially culling and in terms of revenue projections for next year, as we set out on these shifts in flavors strategic and restructuring and otherwise, we looked at the portfolio, we looked at what we had and we looked at what we wanted to be. And we estimated at that time that probably about 10% of the portfolio would be something that we would use either nonstrategic, low margin, no margin, or really something that's of limited value to the customer not very dispensable. Perhaps you might even use the word commodity to describe it.

We are well on our way there. We mentioned the sale of one of our facilities which is about a 10 million piece of that. And so as I've been guiding for the last couple of years the culling will be largely if not totally done by the end of 2017. And then as we get into 2018 is where we’d expect to see a more normalized top line growth which we would point to colors as an example, we believe the achievable level there will be a mid single-digit top line growth.

Mike Sison

Great and then you know I was intrigued with your comment that in natural colors outside the U.S. where you are seeing some traction in Europe that maybe that it's starting to become a little bit more of a trend over in other areas. Can you maybe flesh that out and talk about what the opportunity there is?

Paul Manning

So I think -- it's a good question. As we talk a lot about natural color conversions in the U.S. and certainly that is an essential market. It's our biggest market for colors today. There's a lot of interest although I don't believe it will be driven by regulatory factors or the government imposing such restrictions on synthetic colors. I believe it will be a market driven, consumer driven trend which will go for many, many years.

Now given the influence of the U.S. market has on many other parts of the world, we have seen how this has impacted other regions. For instance Latin America and Brazil we had outstanding growth rates in natural colors in those regions for the year. We see it in the Middle East, we see it in South Africa where here again we had very good growth. And then we're also seeing it in parts of Asia Pacific.

We had fairly good growth in a number of the regions of Asia Pacific as it pertains to natural colors. But there's certainly a lot more we think we can do. But on the other end of the spectrum to some degree is Europe. Now Europe is, from a continental standpoint, they essentially legislate the conversion to natural colors. It became a de facto ban on synthetic colors when they instituted labeling requirements suggesting that the presence of these synthetic colors was not in the consumers' best interest. That was the outcome there. And so a lot of that conversion had already taken place such that probably about 80% of that market has converted. But we still had nearly high single-digit growth in Europe in the quarter because I think there continues to be benefits in innovation in terms of how these products are performing, the vividness of these colors, how well they perform in various storage and production type operations. So there's still growth even to be had in Europe which on the natural color spectrum would be viewed as a more mature market. We still see opportunities in Europe on the standpoint of natural colors or I don't want to get into a regulatory discussion but what they call coloring foodstuffs, still a fairly good market for us.

Mike Sison

Great, thank you.

Paul Manning

Okay, thanks Mike.

Operator

Your next question comes from the line of Brett Hundley from The Vertical Group.

Brandon Groeger

Good morning. This is Brandon Groeger on the line here for Brett Hundley.

Paul Manning

Hey Brandon.

Brandon Groeger

Hey, how are you guys doing. As we think about cash flows relative to the income statement going forward, does the company expect to continue to deliver these elevated cash flow margins and with that in mind do you think in coming years it's going to be time to up the dividend or would you prefer to allocate capital towards growth potentially including acquisitions?

Paul Manning

Okay, so let me start with the cash flow question. So the answer to that question is yes, there is more that can be done to continue to improve our cash flow. We certainly have a lot more that we can do on working capital. I have certainly mentioned this over the years to a number of our folks about the opportunities we have there to improve our inventory management and even how we manage receivables and payables, fairly fundamental aspects of our business. So, a lot of opportunity still exists in terms of bringing that working capital level down to a more efficient level. With respect to free cash flow, certainly in cash flow as well operating profit growth is always the first input there. And so to that end we have strong expectations for 2017. I think that's going to figure into the cash flow discussion as well.

We talk in terms of and this is now getting into the capital allocation piece of your question. Our CAPEX will not be as high this year as it was last year. Last year and the year before that, certainly for the flavor group it was a bit artificially high because we had a lot of restructuring activities which we see as hopefully a once in a lifetime event for any particular business. But we had to put a lot of capital into the flavor group to accommodate those moves in those consolidations. That is moving down to a more normalized level and to Steve's question or to Steve's commentary you noted that we would be spending about 60 million to 70 million which is still well above our depreciation and amortization level which is between about 50 million to 55 million. So I think that's a pretty good level and so as a consequence of that you would anticipate that there would be somewhat of a growth in free cash flow as well.

So, again in conclusion on this one there is more that can be done there. I think we've raised the level on both free cash flow and cash flow from operations. We want to continue to demonstrate that the company can operate at these types of levels. But nonetheless there's still a lot more work that can be done. The securitization was a onetime event. It was a rather important and profound event but certainly there -- that's an example of I think better working capital management for a business like ours which tends to have very little risk in the receivables debt.

As it pertains to your capital allocation question, as I continue to like to emphasize CAPEX is our number one priority. There's no better, more efficient way to return to shareholders than good ROI executed, internally developed, capital expenditure projects. Lot of these projects are related to new technologies and those are my favorite. We have very high expectations for the returns that we can get on those. We still have more CAPEX that can be done in terms of expanding. I have noted some of our expansion opportunities and efforts in Asia.

These are all important uses of capital and those will continue. I don't want to get anywhere near a D&A level because that would suggest that we've run out of investment opportunities and that's certainly by no means the case. So CAPEX is always number one, dividends is number two. We have tended to pay out between 35% and 40%. I think that's my expectation that we will continue to do that.

Now, the last piece getting at acquisitions and buybacks and other things like that, we do both on an opportunistic basis. In my opinion it is very easy to overpay for a company today and to the extent we can say well we'll buy this because it's accretive that's not exactly a good litmus test in my opinion. Because I don't think it's very hard to make an accretive acquisition nowadays. So that's not our threshold. Our threshold is can we return at a level that is as good as our CAPEX or our dividends or any other of the internal moves that we can make as an organization. So those will be opportunistic and acquisitions got to be a win-win. And in my definition, a win-win. Does not mean we overpay for a company. But if there are opportunities to buy something that is technically unique, could extend one of our chemical areas as a business, provide some new form of innovation to us we would be very interested. But I don't think at this point as I sit here you would anticipate us buying something on the basis of market share. I believe that that can be a very inefficient way to return to shareholders.

Brandon Groeger

Thank you. That's very helpful. Looking at the color segment again growth was solid during this quarter. If we strip out the currency effects we’re looking about 7%. We're hoping for a little bit more in growth given the conversion to natural ingredients that's happening in food and beverage, solid cosmetics color industry trends, and what sounds like an attractive category dynamics in specialty inks, what do you think is the right growth rate to think about given these factors in place?

Stephen J. Rolfs

I think the right growth rate as I’ll say for 2017 and beyond is mid single possibly even high single-digit revenue growth but I think mid singles is a good level to begin at. I think in terms of operating profit high single is where you ought to be thinking. For the year we did 7.5% top line growth in the color group. We did 11% operating profit growth in the color group and this is in the context of what some would describe as a lot of challenges in the market. And so it's the culmination of picking good acquisitions 20 years ago, spending a lot of time on new product development developing those businesses, investing in the sales and technical forces, and I think that's culminating enough having a very strong position in the natural color conversion that you see today.

Now as you look at the fourth quarter, yeah, we were up probably more like mid single-digit top line and 8.5% bottom line. I wouldn't -- it's hard to predict what it's going to turn out to be at any 90 day increment of time. So when I give you those estimates for the year it may not be a straight line on any given quarter, could be above, could be below. But I think as you take sort of an average run rate what I forecasted in the prepared comments and share with you here is pretty much where we think we can be for colors longer term.

Brandon Groeger

Okay, that makes sense and then if we look at the color segment margins in Q4 we know that the segments usually see a sequential decline for the quarter and we were down at 19%. We kind of expected a little bit higher but across the years as to remove quarterly volatility, can the company's color business stay above that 20% margin level?

Paul Manning

Yes. So for the year we were 20 -- now call it 21 if you're okay with me rounding up 10 basis points.

Brandon Groeger

Sure.

Paul Manning

We think that's a pretty good indication of where the business is right now. Could there be some opportunity to grow that, sure. But I think that's running at a pretty good level all things considered. Yeah, to the point you raised there is certainly some seasonality in this business. Not every quarter is equal. We tend to have stronger Q2s and Q3s than we do Q1s and Q4s in many of these businesses. Some of that is just simply the fact that you don't see as many launches in Q4 as you would in a different quarter. So I think it's just something to keep in mind.

Kind of going back to your previous question each quarter maybe a little bit unique and in a 90 day period if colors is up by 4% instead of 7% I wouldn't necessarily get too concerned about it. I think what we look at here is longer-term trends. If a customer -- you know hey, I'm going to order next week instead of this week, that could be worth a percentage point in growth right there if it's a big enough opportunity that we're talking about. So those ins and outs that can happen at a quarter-end, that can really have an impact and this is why I always encourage everyone to look at the year in totality and kind of take a year-to-date view of things. It makes it very helpful in terms of how you look at these businesses.

Brandon Groeger

Thank you, that is helpful and one more quick question from a large beauty products company reported results yesterday and it was talking about its own portfolio seeing some challenges amidst smaller competitors doing well. Can you discuss the customer mix you're seeing in cosmetic colors and visibility on sales trends going forward?

Paul Manning

Well, I think we've got a pretty good coverage of the customer base. Of course it's not where we want it to be. There's always opportunity to identify new customers, up and coming ones or even grow within many of your existing ones. You should probably know we tend to have very good access to customers in the world of personal care and cosmetics. And so I think we will continue to emphasize thoughtful growth. I think we'll continue to emphasize customers that would value our approach to this market. And we see, yes, it's not universal growth. There are some larger multinationals that perhaps may have some challenges right now but then there are others that are doing quite well and ditto for many of these local and regional customers.

So, I think overall as I look at that market it's one that's very good. It's one that is constantly looking for innovative products. Products that have multi functional benefits, you can ever, you know, as I'm looking over here at Steve Rolfs you can ever look as young as Steve. I mean Steve has been using this stuff for years. But right here you are going to take it up a notch though and I think what happens with cosmetics, you always want the dye to last a little bit longer in your hair, can the lipstick go a little bit longer, can it also have this attribute. That's the key part why we are continuing to see a lot of growth in this market because we've invested heavily in R&D and development work in that business. And a lot of our new sales are coming from those types of customers that are emphasizing new launches and new products.

Brandon Groeger

Makes sense, thank you.

Paul Manning

Okay.

Operator

Your next question comes from the line of Francesco Pellegrino with Sidoti & Company.

Francesco Pellegrino

Good morning guys. First up looking forward to working with the restated figures for the Asia Pacific group and the color group so I appreciate that. Going forward, I want to talk about your guidance. So, I think you said in local currency you're guiding for 10% growth ex currency, it comes out to like 4% to 7%. You did 700,000, you repurchased 700,000 shares in 2016. Does 2017 guidance incorporate any share repurchases at all?

Stephen J. Rolfs

Well, since we do it on an opportunistic basis nothing explicitly for 2017 but certainly there is benefits that you realize from 2016 buybacks. That would obviously be in the baseline for 2017. So in other words we bought in Q4, we would expect there be some nominal benefit in Q1 through Q3 for the reduced share count stemming from those purchases. But that we have factored into the budget.

Francesco Pellegrino

So would you guys -- right now what's being factored in is just the ending share count at Q4 2016 and no repurchases in Q1 through Q4 of the 2017?

Stephen J. Rolfs

Yes.

Francesco Pellegrino

Okay, and then I -- it was either Steve or you Paul that mentioned something about normalized compensation in 2016, what is the compensation I guess outlook that's being incorporated into guidance for 2017?

Stephen J. Rolfs

So it would be it would be similar to what we had in 2016. So just to step back and give the details on that, in 2015 for a number of reasons our performance based cap was extremely low and in 2016 we are at a more normalized level. So most of that is -- you'll see that flowing through the corporate line, the corporate expense line and that accounts for most of the increase you saw from 2015 to 2016. In 2017 I would expect more of just an inflationary increase in that line.

Francesco Pellegrino

Okay, I guess going back to the Asia Pacific Group and the restated figures. I know the rule of thumb on that lease maybe when looking at 2016 numbers or where they were restated with Asia Pacific business was like one third colors, two thirds flavors and fragrances. Is now what's -- what's left in Asia Pacific right now, just all flavors and fragrance business?

Paul Manning

Well no, it's still a that was a smaller piece that was transferred to the color group. As we effectively globalize that food colors business to incorporate North Asia that's only a small chunk of it. So the remaining part of Asia Pacific is it's a combination of flavor and color and probably pretty close to that ratio you just quoted.

Francesco Pellegrino

Okay, the guidance that you had given for each group I think you said flat revenue for flavors and fragrances and flat and what you said for operating profit?

Paul Manning

Mid to high single digit OP growth.

Francesco Pellegrino

Okay and then, I was a little bit taken aback by the color group when you gave high single revenue growth but only high single operating profit growth. Given how well the segment performed in 2016, I thought we could possibly be seeing some low double-digit teen growth possibly for the color group and I'm not sure maybe it's because you had such a standout -- that the group had such a standout performance in 2016 but I'm wondering if maybe the operating profit growth might be viewed as a little bit conservative or maybe if there is upside?

Paul Manning

Yeah, I think that's a fair comment.

Francesco Pellegrino

Okay, and then you said that in the flavors and fragrances group you got rid of $10 million of some savory business, you sold that business right?

Paul Manning

We sold the facility.

Francesco Pellegrino

Okay, so you still have about like $100 million of savory exposure because I think savory represents like 20% of the flavors and fragrances group?

Stephen J. Rolfs

That's right. It's just a little under 20%. So this is just one facility.

Francesco Pellegrino

Right, just one facility. So it seems as if you're trying to sort of maximize the efficiencies of each of the groups and I know you guys are excited about the color group. I know you see the inkjet market as something that could really accelerate growth for the color group. But, at the end of day are there any maybe additional subcategories within each group to sell and when I ask that question, only because I look at like fragrances in the flavors and fragrances group and when I think about your market shares each are a different subcategories. Fragrances you have some nice exposure, it's probably one of the smaller items within the flavors and fragrances product platform but then at the end of the day the market share is really low. I'm just -- maybe the question is like what type of benefit you get within flavors and fragrances to having this fragrance exposure?

Paul Manning

Yeah and that’s a good question. So we see a lot of growth opportunity in fragrance. We have traditionally really emphasized aroma chemicals and just for everybody's benefit if you think of it many of the aroma chemicals that are sold in the market are building blocks to what we would describe as a fragrance compound. And so some of the aroma chemicals are quite commoditized, some of them are quite sophisticated, protected by IP and other trade secrets. So there's a whole range of aroma chemicals. Our business had historically focused on aroma chemicals that more and more had become somewhat commoditized. And so to that end we set about to not only to develop some new aroma chemicals but also emphasize the fragrance compound portion of the business where we saw a lot of opportunities, a lot of opportunities for growth. Many of these geographies that we sell into are quite fragmented, and so there's very good opportunities for a company like us that has a lot of resources and technology. But perhaps we're not the premier name in fragrances. These types of local and regional companies perhaps afford us an opportunity to grow in a very competitive way.

So I think fragrances is a good opportunity for us. We've got a lot of work that we've been doing in that business. There's certainly some overlap with our cosmetic business that could potentially afford us some new growth opportunities. But in general I think that's an important piece to the future. Perhaps it's not as linked to our flavors group and maybe over time that becomes more linked to the color group, hard to say. But yes, I think that's a good business, but you're right, it is a low market share, smaller piece of the pie right now.

Francesco Pellegrino

Okay, so I threw you the fragrance subcategory just as an example, is there any subcategory out there that maybe you want to start reducing your exposure to a little bit more?

Paul Manning

Well I think that's what we're doing in this culling exercise where it's not so much a segment like savory or beverage as it is a group of products. And those group of products could span any number of segments. We can do as a company conceptualize the business according to a chemistry. And let's say in end market what is the chemistry and where could the chemistry be applied as opposed to here's my end market and what chemistries or technologies do I have. And so to that end it gives us a lot of flexibility in terms of how we think about growing the business.

Francesco Pellegrino

Shifting to and I always appreciate the industry color commentary that you provide us with especially within food and beverages given your industry leading market share for that category. When I think about the category and I think you said one third of products shelves use natural colors but then in 2015 or 2016 75% of all new product launches we are incorporating natural colors. I know that customer relationships tend to be very sticky in the industry and I was just wondering if your customer base is becoming more fragmented and if instead of large multinationals really coming to you with purchases you're seeing some more smaller companies popping up that I think would sort of provide a little bit more stability to the top line in case you would lose a customer here or a customer there. It's just more smaller customers as compared to larger multinational customers that you would really rely on for a significant part of your business within the color group?

Paul Manning

Yeah, so let me answer it this way, people would say, boy it is kind of a flat food market in many of these countries you guys serve and you're pretty well aligned with these multinationals. And despite that your color group was still at 7.5%. What's the secret here and I think the secret is you go after the right customers. And the customers maybe big, they maybe small but you have to have a business that is flexible enough to accommodate both when we're talking about natural colors here. The movement depending on this segment in the market may not be driven by a large multinational. It may be driven by a local or regional account that is very influential and could potentially even influence that large multinational to convert or to do something else in the form of a natural color conversion. So those are some of the dynamics that we look at. We spend a lot of time finding the right customers, finding the right opportunities to grow. And I guess it's working because like I said the color group is up well in excess of any of the markets that they're currently operating in.

Francesco Pellegrino

Okay, and just one last question for you and new administration in the White House, when I think about just where the FDA rules had been for like color additive it can be interpreted by some as being very vague, very loose. Where do you see this administration going with rules and regulations regarding the color group, opportunities that this could present for Sensient, it could present for the market, and maybe some restrictions that it could present for you going forward?

Paul Manning

I would say we are very adaptable as a company. Whether something is going to be legislated or it's just going to be consumer driven you have to accept the outcome of whatever political environment that you're in. So I would not anticipate the FDA, this is in my opinion, I would not anticipate the FDA legislating in a similar fashion has occurred in Europe. But if they were we're prepared to meet that particular approach to the market. We don't fight City Hall. We don't make political donations. So we are very ambivalent, agnostic to whatever political parties may be in office in any country that we're in.

Francesco Pellegrino

Is there anything specific that the industry or you guys are closely monitoring within the FDA that is up for debate?

Paul Manning

Well, I think what you're hinting at here is with respect to natural colors, what could be the legislation governing what natural colors are permitted for use in the U.S. This is something that is being discussed in committee perhaps even as we speak. And so yeah, we always watch the FDA and other government bodies, Health Canada and any number of these bodies throughout the world and we're prepared to operate within whatever constraints that they provide to the market. So that said I can't begin to predict where any one of these government bodies may come out but I think we're prepared to be successful in any eventuality.

Francesco Pellegrino

So there's like no concern that maybe, I know right now there's like seven FDA certified color additives that it might go from seven to six or seven to eight, that the industry is just like chomping at the bit to see what happens, like there's nothing that you can hone in on to provide us with a little bit more insight or things to monitor is there?

Paul Manning

I'll keep you posted.

Francesco Pellegrino

Okay, I appreciate it. Thanks again guys.

Paul Manning

Okay, thanks Francesco.

Operator

We have approximately five minutes remaining in the conference call and we will try to handle one more call, one more question. If anyone has a follow-up question that we are unable to get to please contact the company. Your next question comes from the line of Andrew Lane with Morningstar.

Andrew Lane

Hi Paul and Steve, congrats on a strong quarter.

Paul Manning

Thank you.

Andrew Lane

To start with a more of a high level question, you indicated that the shift from synthetic to natural colors in the later innings in Europe, I think you said something along the lines of 80% of the way there. What inning would you say the U.S. market is in on the shift towards natural colors and then more importantly is the rate of change in the U.S. steady or accelerating in recent quarters?

Paul Manning

To bat in the third inning maybe we start at the second quarter for the football fans out there. I don't want to disenfranchise them. Try about a third of the way through. In terms of what we're seeing now versus perhaps what we've seen in previous years, we're seeing more of a push towards converting existing brands. But, the momentum previously was about incorporating natural colors into new products. So the real potential change here that we think could be rather profound is existing legacy brands converting to natural colors. So I would tell you that there's been an acceleration of interest and certainly an acceleration of public declarations by many of those companies suggesting that they wanted to move in this direction.

Andrew Lane

Okay, great. And then you'd previously laid out a long-term target of 20% operating margins for the flavors and fragrances segment, a couple questions on that front. First, is that a target you're expecting to hit by the end the decade and then additionally you made a distinction earlier between the restructuring process and then the optimization process. Could you give us a sense for how much of this margin expansion would you expect to come from restructuring versus the subsequent optimization once your new footprint is established and static?

Paul Manning

So yes, the long-term goal is 20% operating profit margin which I think is a symptom of the types of products and the types of customers that we're pursuing. So that is our goal as an organization. We have done and we moved on that by continuing pretty well in the last three quarters. I continued to see momentum on the operating profit margin moving into 2017 and 2018. So I think that's a very achievable goal. Many of our businesses are already at that level, some in excess of that level. So again we've got a lot of good benchmarks which would suggest that this is achievable. This is not just simply a pipe dream that we hope would come true. And so I think that would be my comment about the first part.

Now with respect to restructuring versus post restructuring optimization, we had an overall savings target for restructuring. We expect to get the balance of those benefits in 2017. But the kind of this other optimization -- so that will be the bulk of it certainly in 2017. And as we get into 2018 you would see the savings or optimization in that post restructuring world we would expect there to be some improvement 2018 even perhaps beyond that. So for 2017 purposes it's really going to be about restructuring some post optimization out of the plants that have completed most of their restructuring activities.

So, but it would be hard for me to quantify that at this point because I think it's a matter of completing the restructuring in these plants and then seeing where the economics are versus where you wanted them to be and then defining your improvement program for there. But I think where we've begun this process already we have seen, we're going to start to see some benefits here in a small way in 2017 but perhaps even into 2018 we'll start seeing the bigger benefits.

Andrew Lane

Great, thank you very much.

Paul Manning

We can take one more question. I know we're probably up, getting close to limit but go ahead. Whoever's got the next question.

Operator

Your next question comes from the line of Christopher Perrella with Bloomberg Intelligence.

Christopher Perrella

Hi, good morning, thanks for taking the question. What are your thoughts around FX hedging and ways to reduce the volatility on earnings with the strong dollar that seems to be in place for the foreseeable future?

Paul Manning

Sure, so our best plan to hedge would be to have a natural hedge and as a general statement, a lot of our businesses if they're selling in a currency they're also going to have a lot other costs in the currency. Now there are exceptions where we are selling across currencies and in that case we try to hedge those transactions.

But of course the big impact we've been seeing the last couple years, the $0.08 last year, the $0.10 we are predicting this year there we’re referring to translation and we do not attempt really in any big way to hedge translation. So what we try to do as we try to base our businesses in the markets in which we operate match our costs and our revenues. And when we are buying our raw material in another currency we do try to hedge that.

Christopher Perrella

Alright, so the bulk of the -- primarily all of the FX headwind is translational?

Paul Manning

The $0.08 and $0.10 we spoke of, yes.

Christopher Perrella

Okay, that's it for me. Thank you very much.

Paul Manning

Okay let me just make one other comment for everybody. Since we're on a public conference call this makes this very easy. Let me just talk about the guidance for 2017 in terms of maybe some of the timing. There are a number of questions about assumptions around individual quarters and the like and again I would just, it's certainly much easier for me and others to predict these trends on a year basis rather than any 90 day increment of time. However, just as you're building out these models for 2017 please keep in mind in Q2 of 2016 we did have a onetime $0.04 positive benefit in those results. Onetime meaning it will not repeat in Q2 of 2017.

We've got the overall $3.35 to $3.45. So as you're building your model I ask you to keep that in mind. And one other note with respect to FX we anticipated a $0.10 impact as was our custom in 2016, 2015, 2014 and seemingly every year I've been talking on these calls. We will update you on the impact. Is it $0.10, is it above it, is it below it, so we will provide that guidance to you as we go. But as we're sitting here today $0.10 would appear to be the annual impact. Now, that will be more heavily weighted to the first half because most of that FX change took place in the second half of last year.

So just two factors, I'd ask you to consider as you're building your platforms, your models, your guidance, etc. for the year. But otherwise I think the growth rates that we described are what we expect to achieve for the year. We didn’t get to everybody possibly. If you do have call as you all know we're very happy to speak with anybody. You can reach us and Steve as a more formal way of saying this.

Stephen J. Rolfs

Yes, so if we missed anybody by all means please contact us at the contact information included in our press release. So with that, that will conclude our call for today. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Specialty Chemicals,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.