SXT
#The short answer is yes for both.
We think right now certainly we've seen some improvements.
In other words, the dollar has weakened to certain currencies for which it had strengthened considerably in the last couple of years, most notably the Canadian dollar.
We see some reverse in a few other currencies.
But we had estimated for the year approximately $0.15, but to the extent the situation would improve, yes, I would expect that we would be better positioned to reflect that in our EPS guidance for the year.
But 8% to 11% is where we came in in the range for local currency, so I think we will certainly ---+ local currency normalizes all these discussions.
But sure.
With respect to as reported EPS results, we would certainly be consistent with where we framed up the currency for the year.
Sure.
So, let's start with the natural food colors piece first.
I think that, to answer the first part about what inning, I'll answer it this way.
About 30% of the products in North America would contain a natural color.
So one could say it's about the second or third inning from that standpoint.
Another interesting fact that I could give you is approximately 3/4 of all new launches contain natural colors.
So I think you have that as kind of the quantitative background of what we are talking about here.
Now, what do we hear from customers and what has been our specific experience I think is very consistent with that.
It's broad-based.
It's large CPG companies.
It's regional companies.
It's local companies.
It's drinks.
It's yogurts.
It's candies.
It's across the spectrum of food.
It's very exciting, and I think, quite frankly, there is a good analogy that this is very much a tipping point that, sure, there have been activities and last five or six years, a little bit here, a little bit there, but I think, with the number of large influential CPG companies issuing press releases to the effect of we're going to continue convert to natural colors and we're going to do so by the end of 2016 or 2017 on these very specific products, that has created a tremendous momentum for those who perhaps were on the fence or those who were deliberating on it such that, from my standpoint, this is inevitable.
And the inevitability is that I believe probably 75%, 80% of this market would be natural colors in the next several years.
You're never going to have 100% conversion, and I don't think anybody would expect as much.
But certainly we see broad-based conversion.
We see a tremendous amount of interest.
What we also find is that, in some of these conversions, if they are not done correctly, there can be some impact on the brand.
In other words, if customers select the more diluted watered-down colors which you may see out there in the market not from us but perhaps from some others, those products don't do as well in the market.
But when the consumers, the end customers, you and me buying products, see colors that are equally as vivid and equally as interesting as synthetic colors, we have seen a lot of evidence that suggests that those brands, because they can still show those vivid colors but declare that they are natural colors, those brands do very well.
And I'm talking about brands that have been around there for a long time are getting a nice boost from this.
So I think that kind of tends to build on this conversion, because it's generating success for those customers.
So, I think with all the investments in product development and production that we have taken over the years, all those elevated capital expenditures that we've made for the last five or six years, many of which and much of which was made in colors, was very much in preparation for this moment in time.
So I think we made some good decisions there and we are seeing those benefits.
Taking it over to the cosmetics side of things, your question was can that be sustained.
And I believe the answer to that is yes.
Cosmetics and personal care, however you want to define the market, it's a very ---+ it's a significantly sized market and there is a significant pace of new product introductions.
Look no further than commonly consumed makeup.
There is a constant change in those portfolios, upgrading the portfolios.
The end consumers are very interested in sustainable and natural products.
They are very interested in removing products that they don't like in those ---+ whether it's a lipstick or an eyeshadow or you name it.
And so that is probably one of our strongest product development and innovation driven businesses in the Company.
And we have spent many, many years building that program up and turning that into what it is today.
And the market is very, very accommodative to that because, again, they are always changing, much of it consumer driven, some of it governmentally driven.
And so there is going to be a constant need to continue to improve performance on these products because the end-user always want something more.
If it makes me look 40, I want it to make me look 30.
And you can apply that to foundations or really any other personal care products.
So it's a tremendous market, it's a great market for us, and I think here again, with our capital investments ---+ and going back to the acquisitions we made in cosmetics, I think these were all very well placed, and I think they fit in very nicely today and we are seeing those benefits in this market as well.
Oh, and one other thing, just for everybody's benefit on this one, in the script, I think, when I was talking about the buyback, I said 250.
It was 250,000 shares.
So just to clarify that for everybody's benefit.
But go ahead.
I think that the reason we are successful, and the reason this company makes money, is because we are an applied science company.
Now, that's a fairly broad statement, but what it's meant to tell you is the products are important and they are very critical to the success.
The new products we develop are very critical.
The types of customers we elect to target and market to and develop products for also very important.
But fundamentally there are a lot of companies that make products, but what are they helping the customer to do with that product.
And I think really this is where we drive a lot of the success in our business.
So in every model where we can do that, whether it's food colors or cosmetics or flavors or inks, demonstrating how the products work for that customer either in the presence of these other ingredients, based on shelf life considerations or storage considerations, based on how they produce the product and the complications associated with that, those are three of the more important factors that ultimately say if you are an applied science company, in other words you can show your customer how your products work in their applications, that's a very, very powerful core skill, capability, value of our company.
If you are just a company that's going to go out there and try to peddle a product, sure, you may sell that but there's a lot of companies that can do that.
So I think really where we are today and why I give this guidance and why I feel confident is because, at its foundation, that is the organization we have built and that is the organization we continue to add onto and to enhance through innovation, through expansion of production, through acquisitions.
So I think that, yes, we are very well positioned in a lot of these businesses, and the more interactions we can establish between our businesses, the better, so color and flavor together, cosmetic and fragrances together.
These are very, very powerful connections to a consumer base that ---+ to a customer base who more and more is looking to its suppliers to do a lot of its development for them.
I would say that restructuring is hard no matter where you are.
And in whatever industry you are in there's always complications.
We deal with customers who routinely are acquired by another company and they say, hey, we are in a restructuring phase, we'll talk to you next year and in a lot of ways business stops.
I would say that our restructuring from that standpoint, yes, it's very complex.
It's not just taking three widget plants and converting them into one widget plant.
You're taking products that perhaps have not been made in one plant, and now you're going to move them over there.
You've got a lot of new people.
Moving a specialty and fine chemical from one plant to the next, you don't just buy the same equipment, turn the button and it works.
It's science.
And so science, there is oftentimes some art associated with it.
So as you saw here in Q1, and as we commented on a little bit, you're going to have some complications, and we're not ---+ I am not going to hide that.
We had some yield issues in some of our plants.
We had overruns on some of the costs.
I share those as restructuring startup complications but, again, I think many of those we got past, and again, we hold to our and I hold our guidance for the year.
But restructuring alone is one thing.
But restructuring in the context of really redefining a strategy for a business, adding a lot of new people, moving a headquarters, introducing a tremendous focus in a lot of areas that we have not historically had in flavors is a fairly significant undertaking.
And I think we showed very good signs of progress last year in 2015.
It's never as good as I want it to be, but I think certainly it was a shift in momentum.
I would call Q1 2016 as a bump in the road.
And I think Q2 and beyond is going to be quite good.
I see a lot of progress.
And based on the things that I see, that's why I feel very comfortable giving you that projection for the rest of the year.
And you look at our history.
We did a different kind of turnaround, but we made a substantial improvement to colors.
We've made a substantial improvement to inks.
We've made a lot of governance changes.
We've made a lot of changes to corporate.
And so I think I guess as I would talk to an investor, I would say they should feel confident that we are well-positioned to pull this off, because we've pulled off very similar things in different parts of our business.
And so to that end, I think, yes, getting through restructuring will be a profoundly important part of this evolution of the flavors group because it is.
It's very distracting.
It's very challenging.
It doesn't go perfectly.
But we've got through the bulk of it.
That's the positive.
We have one more plant, and we have had a lot of time to work on that plant, a lot of preparation, so I think we're going to be very well positioned when we have that consolidated by the end of the year.
And so, no, I feel very good about this.
As you probably saw, I bought another chunk of stock myself in the last quarter, because I perhaps see things that not other people see.
And I see the potential of the business and the fundamentally good foundation we have, and I see there's going to be a lot of continued improvement in flavors and continued sustained results in Asia-Pacific in colors.
Yes, that's a great question.
I think the investments really go back to our acquisition program of several natural color companies in the late 1990s.
So I think we were somewhat ---+ as we looked into our ---+ the market at the time, we saw an inevitability to natural colors in many markets.
So that's really where it started.
Obviously, over the years, we've added a tremendous amount of capacity.
We've also added a lot of very unique technologies that nobody else in this industry has, which are enabling us to have really a lot of superior products today, not the dull, watered-down stuff that you kind of see out there, but the more comparable to synthetic colors that consumers would expect to see.
Much of this has been driven from these production type technologies, but we've also made a huge investment for at least the last six or seven years in new product development with a broad theme of how do you make a natural color look, act and cost about the same as a synthetic color.
And that's been a big focus for our innovation, and I think really at the root of a lot of the success we are having today.
All those things continue.
We watched capacity, to your point, very, very carefully, not only capacity on production but capacity within the supply chain.
And so we've got very strong ties to our customer base, and I think we've got a lot of projects, but certainly within each one of those is maintaining that level of infrastructure so that, when there are more and more large conversions, we are well-positioned to make those.
But we've had some press releases over the years, expansions within Mexico, the US, Germany, Italy, really ---+ China.
All over the world, we've made these investments in anticipation of this moment.
That's certainly my expectation.
As I mentioned in the first question from <UNK>, it's really pretty broad-based across a lot of different customers and product segments.
And we've got a fairly significant sales and technical organization throughout the world, which is going to be very, very important to capture the lion's share of these wins.
But natural colors, as you look at the overall food colors part of our business, natural colors is I want to say closing in on about 60% of that overall total of revenue.
A couple years ago, I think it was about 40%, so it's a big change.
Oh, yes, absolutely.
In fact ---+ and it's interesting because it's not talked about as frequently in the market as, say, a natural color, at least in some of the markets we deal in.
But clearly there is an interest from customers in a more natural profile for many of their ingredients, including color, including flavor.
So you sometimes see this described in the flavor industry as an extract or a botanical, or even just as a natural flavor.
So, yes, certainly that is a big part of our emphasis with our customers as well.
And you see a very strong impact of that or very strong interest in that, particularly in the beverage part of the business.
But certainly even within segments that are traditionally very process-oriented, like savory, there's a tremendous interest there to have more natural flavor, natural ingredient profile.
I look at a lot of ---+
You know, acquisitions I think can always fill in very specific gaps that you have in any number of your portfolios.
You saw the one we made last year in inks.
That filled a very specific gap in our portfolio.
So to that end, sure.
There is no one company that has a monopoly on all technologies and all production processing techniques within the industry.
So, we would be very open to an acquisition in flavors or any other of our segments, quite frankly.
Yes.
I think it's the acceleration of new wins.
One of the comments I made on our last conference call for both colors and flavors was that most of the wins that we were anticipating for the year were very much back half in terms of when they would close.
I would tell you that this garlic shortage that we've had for Q1 and Q2 we will not have for the second half of the year.
And that was a significant impact in Q1.
That was certainly in the seven digits in terms of its impact.
So, I think you ---+ we are expecting to erase that for each of the third and fourth quarters.
I think we've had a lot of ---+ I mentioned order timing, many of which we've seen those come through in Q2.
And then, again, a lot of these restructuring benefits were being watered-down by some of the operational challenges that we had in these plants.
And so as we've addressed those and we've moved past those, we would then see the full impact of those savings that we would expect to be getting as well.
So those are four or five of the factors.
But the thing I want to emphasize over and over and what I emphasize in the business is it's all about new wins.
And that's what is ultimately going to move us in the right direction long-term ---+ new wins, new wins utilizing new and different technology platforms.
Certainly, the costs are going to benefit us.
A lot of these other factors that I mentioned are going to benefit us, but they are not going to benefit us for the next five or 10 years.
And the model you hear me talk about and what we are generating out of Colors right now was really based on the programs we put in place over the last several years.
And so this is why I see stronger and much better potential for new wins within flavors as we move forward because it does take some time; it does take some time to change customers impression of you.
Six years ago, nobody even knew we sold natural colors.
And today, some people would wonder if we even sell synthetic colors.
So you can change an impression in the market, but it just takes some time, at times, and but once you do, and again you go back to the foundation of this business as an applied science company, when you can demonstrate that kind of success with the customers, now you've got a program for long-term success, and I think that's very much the trajectory we are on in flavors right now.
So, first, just to comment on the overall change, we've had some changes in our organization and reporting has followed that.
So, we are trying to get better cooperation between the color group, and we think there are opportunities in north Asia, China in particular, that we are not taking full advantage of.
And so we are moving that into the Color Group, so that's the reason for the change.
You know, the revenue of that piece in the first quarter is about $3 million.
It's a little bit ---+ the margin is a little bit below the overall Color Group, but it's pretty comparable.
So I'm not ---+ go ahead.
Yes, I'll take the first part and then if <UNK> wants to add something, we will go that way.
But I think right now as we've ---+ probably over the last four or five years, we've taken pieces out.
So we took a cosmetic piece out, maybe four years ago a pharmaceutical piece out, maybe three years ago, and then we took the small piece of food colors out of north Asia.
So where we have identified businesses that are obviously in each of the cosmetic and pharma cases were quite small, so it might not even have been noticed.
Where we see opportunities to really further globalize these businesses and create a much stronger tie to the other regions within color or flavor, that's made a lot of sense for us.
At the end of the day, what does Asia-Pacific look like in five years or so.
I could still see it operating very much as it does today ex these pieces of food colors, cosmetics and pharma, and then probably also fragrances.
So I think that we would still see it because it is a vast region.
It's culturally entirely different from any other markets that we operate in.
So it still lends itself to some structure that is somewhat independent of Color Group and Flavor Group, but I think, ultimately, for right now, we kind of have a little bit of a hybrid approach where we have taken off little pieces here and there consistent with what we think is going to help mostly with our global customers but also to the extent we can also hook up on innovation and have innovation centers in Asia-Pacific that are linked to our European, Latin American, and North American businesses.
So I think, in short, it will remain an Asia-Pacific group, but the composition main change puts and takes here and there over the coming years.
Well, in some cases, you want to replicate what you have in other regions on some of the more broad-based products.
In other cases, where you have a big, significant capital investment in a certain product portfolio, you may not add that to Asia-Pacific as the current point.
So I think really we focus on those products that are most sensitive to lead time with the customer.
We think about those products that are most sensitive to logistical costs and shelf life considerations.
In other words, when you're getting into the world of naturals and botanicals, they don't have the same shelf life as a synthetic product would.
So to that end, it's much more practical and cost-effective to make those things locally and even source them locally.
So there are some supply chain considerations as well to consider.
So those are the many things we think about.
I would not anticipate replicating the capabilities of the rest of the Color and the Flavor group in Asia-Pacific across every product, but certainly, again, the products that meets those criteria that I just described would be first in line.
Sure.
So for the benefit of all, <UNK>'s comment is related to the conversion of inks, industrial inks, what we call our specialty inks, from these traditional analog solvent-based products to a new version of that ink, which is digital, water-based.
And so you really have to look at that according to product segments.
So there's many different segments within the industrial inks world.
There's packaging; there's textiles; there's food products, contact and noncontact; there's furniture.
You can kind of go down the line.
Anything with color in the world today may very well have been printed by an industrial ink.
And so as you can imagine, each one of those segments are on a different conversion trajectory.
Textiles has led the way.
That's been the focus of our business up until to date, mostly polyester, but as you noted last year when we were losing out on cotton opportunities and we made our acquisition, cotton has also been an important part of that conversion in the world of textiles.
Now, maybe 20% of that market is converted from solvent to water-based inks, which ---+ and again, I'm using it ---+ in my mind, every solvent-based ink is a traditional ---+ is an analog printing application, which is to say very rigid, very inflexible, not at all consistent with the supply chain needs of the industries today.
So say that market has converted about 20% to 25% to digital.
With my expectation it would be 100% digital.
When.
Some would say 15 years, some would say 10, some would say never.
Someone say you're always going to have some portion of that that's traditional.
But okay.
Without splitting hairs, I think we see a nice growth trajectory within textiles for the next many, many years.
As you move over from there, there are other segments that have almost no conversion.
So you look at things like, say, furniture and home goods in general.
There's maybe a 1% or 2% conversion to digital, and to some degree that's related to the fact that the inks are not suitable.
They don't print with the same characteristics as their traditional solvent-based comparison.
So, the technology will continue to evolve.
Our innovation is focused on a number of these different segments for which we believe we can win and be very successful.
And in a lot of these other segments, the conversions are just starting.
This is why, as I've said a couple times in the past, in addition to the food conversions to natural ingredients, most notably color but also flavor, the strong changes within the personal care market towards more natural ingredients and products that are free of raw materials that many consumers believe to be harmful, there is a tremendous opportunity for Sensient in this conversion to inks.
And the opportunities will differ across those segments, but I think we are very well-suited and well-positioned to be quite successful in any number of those segments, which, again, are just getting started in many cases.
Sure.
So, it's really tied to opportunities.
What are the alternative opportunities to share repurchase, and then how attractive does share repurchase itself look.
Keep in mind we have built up our leverage over the last two years.
We were ---+ we had some capacity there, and so some of the share repurchase we've added debt to do that.
We are very comfortable with where our leverage is right now, but we do want to maintain flexibility.
So if there is an acquisition, we can pursue that.
And so going forward, it may be a little bit more closely tied to cash flow barring a change in how we view the opportunities.
So in the first quarter, the shares we bought back, we essentially were able to use our free cash flow to fund the dividend and the share repurchase, and there's very little change in debt as a result of that.
So, I don't mean to be evasive, but that is the way we look at it, and I think it is a matter of weighing the different opportunities that are in front of us.
Okay.
That will conclude our call.
Thank you to everyone who has listened in today.
If there are any follow-up questions, by all means, you may contact the Company.
Thank you.
