SXT
#No, I think there is a ---+ the answer is that fundamentally operating profit margin will be a very good metric to think about.
We have ---+ so part one of that answer would also include the notion that we've probably culled about half of what we would intend to cull from that portfolio.
Okay.
Now the future of that culling could be very much related to a number of factors: pricing actions; it could be related potentially to the sale of a product line or an asset; it could be any number of factors.
So the timing of those things is not necessarily always highly predictable.
But certainly the intent and the strategy to essentially divest ourselves of some of these nonstrategic and lower profit margin products is very prevalent throughout these businesses.
So, I think as you look at this year, my guidance is essentially flat revenue for Flavors for the year, and that's about where we are.
So there's been, clearly, some culling activity there.
As you look at 2017, there's going to be more culling, and that is expected.
I don't want to try to give you a sense of is it a Q1 or Q3 or Q4.
That's harder to say.
What's easier to say is that, yes, I think there will be a fair amount of activity in 2017 as I look here in my crystal ball.
So, yes, I think operating profit margin will be very, very important.
It's somewhat analogous to the Color Group over that six- or seven-year period were there were times where you saw a lot of flat revenue but you continued see operating profit growth.
That was very much intended, because there was a lot of culling that was associated with that effort.
So I think you're going to continue to see a similar analogy here for Flavor at that ---+ sort of the highest level.
We don't necessarily need in every quarter to see revenue growth to see profit growth.
And it's going to be driven ---+ that mix, that restructuring, pricing where we can get it, and then of course culling.
Great.
Appreciate it.
Have a good day.
(Operator Instructions) <UNK> <UNK>, Sidoti & Company.
Morning, guys.
So, just a quick update on the timeline for the restructuring for Flavors & Fragrances.
Still first-half 2017.
And do we have an update for additional costs to be incurred.
No, I think that what we've been highlighting in the Q each quarter here is fairly consistent.
I think most of the big charges that we've taken I think we've taken.
You've probably noted by now that the majority of these costs, approximately two-thirds of them, are noncash in nature, obviously related to closures and writing off some assets or writing down other assets and property and the like.
But the cash components ---+ the severance, most notably ---+ I think that's probably about ---+ mostly the hay is in the barn on that one.
I think we're more or less there.
There could be some other smaller activity, but the bulk of that activity is complete.
In terms of the operational side of restructuring, we fully anticipate to close our last site the end of this year, transfer those products.
There will be a little bit of a carryover of restructuring into other related costs that you'll see in 2017.
To some degree that will be related to things well beyond our control like pension accounting, which is a bit of a nebulous topic for mere mortals; but for others, it's pretty garden-variety staff.
So you'll see some of that bleeding over into 2017, but I think the vast bulk of the cash has been done and even the vast bulk of the noncash has been completed as well.
It was just a housekeeping item for me.
I just want to move on to, I guess, where the conversation with <UNK> was.
Just keeping with the macroeconomic trends that you were discussing previously and just how food and beverages ---+ you see a lot of potential at retail supermarkets it sounds like.
Are you running into any product reformulation challenges as you were seeing what could be some really nice growth for a lot of new product categories coming around.
Well, I would say as a product ---+ and I think what you're getting at here is as companies convert maybe some of their existing brands to a brand that embodies a more natural look and feel and taste, that tends to be fairly complex.
And that's been probably one of the biggest factors in why you see some brands moving slower, whether they're converting to a natural sugar to a natural color or some other element of naturalness in their product.
Synthetic products, they work really, really well.
They are very robust.
They can survive a lot of production complexity.
They can be stored on shelves at 150 degrees.
There's a lot of great things that you get obviously with synthetic chemicals.
God didn't necessarily intend some of these natural products to exist in the way we want them to in a manufactured product.
This is why innovation in this industry is so incredibly important, and this is why we've been managing innovation so closely and investing so much money in that, because the nature of these products is such that ---+ hey, for every different application, and even in cases some products, you may have a totally different underlying technology associated with getting to that conversion from a synthetic to a natural color.
So I think this bodes very well for Sensient, who has really invested heavily in this area not only on the capital side but on the innovation, the people that we've brought in to really spearhead this effort.
And I think just the broad-based capabilities that we have throughout the world has suited us very well.
Just one thing about the Colors, I think it's a little bit more apparent as you transition from synthetic colors to natural colors.
But when we look at the Flavors & Fragrances side, you had mentioned that Flavors will be a rather interesting component going forward.
When we look at the product mix within Flavors is it going to be more like sweet products or savory products that you think will help drive top-line growth.
Or will it be a rather fair mix between the two.
Ideally I'd like it to be a fair mix.
Now, these businesses are not all the same size, but the one thing that is different about the business is that, as you look back at the history of this Company, some of these segments ---+ whether beverage or savory or sweet ---+ were far more involved with selling flavors.
As I've noted a number of times in the past, when you look at our savory business, the history of that business has essentially largely been attached to selling ingredients, things like yeast extract and hydrolyzed vegetable proteins, which in some markets constitute the flavor, but in the markets that we're really focusing on they are really more just like a building block.
So from that standpoint I would expect to see the largest percentage growth of flavors to be in businesses like savory flavors.
But I see, based on the customers and the markets that we are pursuing, the technology that we're developing, we intend to have a very broad-based approach.
The chemistries that separate beverage and sweet are not great.
The chemistry that maybe separates beverage and sweet from savory are much greater, but not impossible.
But I think that's a little bit of the difference as well.
So, yes, this is very much a broad-based approach, because many of the customers we deal with and work with, they have a broader portfolio.
They deal in perhaps any one of these flavor categories.
But as you look at each of the markets, we may have a stronger outcome in some, simply because of macroeconomic trends.
But in other cases, the stronger outcome just simply may be related to the size of the current Flavor business today.
So, yes, you're not going to ---+ I don't think you're necessarily going to hear me say: Hey, we're going to really focus in on beverage and maybe less so on sweet and flavors.
That's not my thinking on it.
Okay.
Just when I think about your end-market customers ---+ and I don't know if maybe there's a data point that you have, and if you do, I would think it would be more skewed towards retail as compared to food service.
But what percentage of your food and beverage products end up at retail as compared to food service.
Well, the vast majority, I would say, would be retail.
But that's not to say that we don't have a significant presence in food service.
I would say our presence in food service would be stronger in Color than it is in Flavors.
But to give you the distribution, I don't have that off the top of my head.
We would have to do a little work on that one to get you an answer there.
But I can tell you this, that certainly the majority of it is related to retail.
I'm speaking with more and more management teams; and depending upon where they are situated, the concern has been that food service is losing share to these retail supermarkets, which I think positions Sensient well to capture a changing consumer and a changing consumer's habits.
When I just look at some of the differences between the Colors Group and the Flavors & Fragrances Group, is it fair to say that we should continue to expect Colors to outperform Flavors & Fragrances at retail.
I think for the time being, sure.
I think the macroeconomic trend towards natural colors at this point is very compelling.
In our position across a broad base of A, B, C customers ---+ food service, you name it ---+ it's quite considerable in Colors.
A few years ago, in anticipation of this perhaps slowdown in growth in certain segments of the market, we invested very heavily in a sales and technical force.
So rather than try to go out and find some little color company and go after little customers, we just invested organically in that effort.
So I think that has positioned us very well to be successful, whether our growth is going to come from the A, B, or C, customers.
Now on Flavors, we have a little bit of a different scenario.
We weren't as invested in those big A customers because, again, we weren't necessarily traditionally focused exclusively on Flavors.
So much of our effort on Flavors is more of these B and C local, regional generics; in some cases quick-service; in some cases, what you would call a retail-type outfit.
And I think that positioned us very well to take advantage of the fact that, to be perfectly frank about it, they're launching more products more quickly, and they are more perhaps dependent upon a supplier to bring a product to market ---+ certainly more so than what you would view as or I would call a big multinational or an A customer.
So yes, I think the fact that we invested there in Colors, that's positioning us well for whatever shift you may see in the market.
But I think because Flavors were not as invested or we don't have as much business with those bigger brands, I think it positions us to be fairly nimble in terms of where we spend our time today.
Okay; that color was helpful.
The last thing before I jump back into queue, when it comes to your raw material costs, I get that no single raw material accounts for more than 3% of cost.
But it always seems like something pops up every quarter, whether it was like garlic powder or onion raw material costs.
Anything that we should really be focusing in on that's moving one way or the other, whether it's going to crimp margins or help margins, over the short term.
No.
I think certainly there is a well-documented shortage of garlic in the market, the global markets.
That's not just a US phenomenon.
Garlic, as you probably know, is grown in a lot of places ---+ the US, China, many parts of the world.
That would be an area that, just due to shortages from lower crop yields, that has been an area where raw material costs have certainly ---+ we talked about this year.
But, yes, beyond that, most of the other products there are substitutes.
Sure, we could talk about vanilla; we could talk about citrus, things of that nature.
But as you read it back to me in the first part, it's only 3 or 4 percentage points of the overall business.
The reality is, some of these things come suddenly without warning.
So to that end, whether it was eggs last year or vanilla this year, there's invariably going to be a raw material that you're going to have to try to mitigate the impact of that inflation.
Ideally, pricing is an avenue.
But in a lot of cases we work directly with the customer to substitute the product.
So if it's a raw material X, and you have a substitution which consists of raw material Y and Z, many, many customers are very interested in taking that approach.
Okay.
We understand; help us to formulate out of that raw material.
Now some products and based on some labeling requirements, that can be very, very difficult.
And quite practically speaking, that's not a solution in a six- or nine-month period.
For smaller brands, oh, yes; you could do that much more quickly.
But that is always a lever as well that you could utilize.
But I think between those two levers I think we fared pretty well over the years, despite a lot of inflation in some unusual raw materials that we've utilized.
But, other than garlic, you may not necessarily hear us talk about those because the impact we've been able to mitigate.
I know you guys have been mentioning over the past couple calls about garlic.
I just wanted to make sure nothing else popped up, as it seems ---+ nothing has, but it could always be a surprise.
That's it for me.
Thanks again for your time, guys.
<UNK> <UNK>, KeyBanc Capital Markets.
Hey, guys.
Hey, on Flavors & Fragrances, just as far as the top line, you mentioned culling being a big piece of that.
Did that accelerate relative to 2Q.
Would the top line have been closer to flat or positive potentially, excluding culling.
Yes, I think that's a fair assessment on both counts.
Oftentimes when you cull on Q2, well then you'll feel a similar impact on Q3 or 4.
But there is a seasonality effect on some of these products.
So in other words, if you cull say a dairy-related product, yes, the impact would more than likely be greater in certain quarters over another.
Same goes for a beverage because again there is some seasonality in those products.
So that may be some of the effect that we would feel as you cull.
Okay.
That makes sense.
You mentioned in your prepared remarks Natural Ingredients and the beverage business both being pretty strong in the quarter.
Were there any categories that potentially look a little softer or are showing signs of weakness at all.
Or would you characterize it more as relatively stable in some of the other businesses.
Yes, I would say that in addition to the beverage and the SNI that you mentioned, certainly we had a lot of very good wins in our sweet flavors business, a lot of very good wins in our fragrance business in the fragrance compound area.
I would say probably, when you're thinking about the other parts of the business, savory would have trailed those segments in terms of its wins.
There was probably a little bit of a trailing factor in Europe as well versus North America and certainly versus Latin America, where growth was s quite strong.
And the same go ---+ ditto for Asia Pacific where growth was quite strong.
So, does that clarify that a bit.
Yes, yes.
Then if I could, just a quick one on Colors.
Obviously you guys have shown really nice growth there.
It last quarter was up double digits, moderated to the mid single-digit range, and I know there's these transitions going on.
So I guess the question is, how should we think about just variability ---+ and I'm talking about the top line ---+ variability in the top line quarter to quarter as these new wins that you've talked about occur and these conversions occur.
Should we think of or expect more variability than maybe in the past, or what are your expectations around that.
Well, if I off the top of my head remember, I think Q2 top-line growth in Colors is about 8.6%; and in this quarter it was about 7.4%.
So in local currency, they were both above 10%, so I'm pretty happy with that.
If it's plus or minus a percentage or two at that level, I can probably live with it and let the guys in Color go on without being punished.
Great.
Thanks.
(Operator Instructions) If anyone has a follow-up question that we were unable to get to, you may contact Kim Chase at Sensient Technologies at 414-347-3972.
<UNK> <UNK>, Roubaix Capital.
Hi, good morning.
Could you just speak to when you think you'll be complete with the culling in Flavors & Fragrances, and what you think the growth rate might look like after that.
Then secondly, do you care to comment at all on the Ink business and some of the growth initiatives that have been in place there.
Sure.
So culling, I would expect the bulk of that activity to be completed by the end of 2017, although given my earlier comments that that's ---+ there could be a little bit of plus or minus on that one.
But I think we will be substantially to where we want to be by the end of 2017.
In terms of the Inks business, as I referenced in the prepared comments, we showed a tremendous improvement versus prior year in that business.
I think this is a market that is very, very interesting, from my standpoint.
You've got a massive conversion opportunity here ---+ not unlike, although very different, but not unlike what you're seeing in the food market, this conversion from a synthetic to a natural.
But in the industrial inks world you're seeing a conversion from an analog solvent-based product, with all the related environmental problems and the like, converting to a digital, which is to say variable data type transfer of information to a printer based on water-based inks.
So to me this is an inevitability of the market.
When you consider the fact that there is a tremendous amount of pollution in the world generated from analog solvent-based inks, and the opportunity to convert those to a water-based product, that to me is a very obvious and compelling market to be going after.
Now when you also consider the fact that it's a very technically driven market in many of these segments, that, too, is a very appealing market to us, because we see technology in that type of industry as a real broad-based differentiator for us.
Now we've historically operated in a lot of the textile world.
Polyester was our ECS acquisition that dates back to I think the late 1990s; and then as well our acquisition of Xennia, which got us into products that were suitable for natural fibers ---+ cotton, in other words.
So, the sky is the limit there in terms of where you could take that market and where that conversion will take place next.
Because if you look around you, just about anything you see with a color on it ---+ furniture, rugs, apparel, many different products ---+ they are printed in such a way that they could be suitable or they could be eligible for a conversion to digital aqueous inks.
We think this is an enormous opportunity.
This is a big part of why we made the big investment in Switzerland a couple years ago.
Yes, last year was a bad year.
But you know what.
I'm undeterred.
This is a terrific market.
The investments we made are right.
If I'm wrong ---+ I don't think I am, because all the indicators in the market and all the activity we see from the OEMs, printer and otherwise, are that this is the future.
This is where the printers are being developed for.
This is what the customers want.
And it's our goal to be on the tip of the spear of that market.
Great, thank you.
Thank you.
