This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: increasing profit picture as we went. In terms of one-off, I would not point to any one-off. I think the demand has been pretty solid and it's been pretty well across the board. You look at each of our product categories I've referenced in the script, whether it's S&I or flavor ingredients or any of our segments for that matter, the growth was really quite good and quite broad-based. Certainly there were pockets. where demand is struggling considerably. For example, quick service restaurants. I think that's been a very hard hit area. You look at some other product categories in the sweet flavors and even some of the dairy categories. Some of them not doing as well. Some of them are rebounding. But then, of course, you see seasonings and snacks and things like that doing quite well. So no, I wouldn't point to any one-off. They just generate a lot of good wins. I think that our attrition is way down. And I think one of the things that I kind of talked about last year, but obviously it was somewhat lost in what was going on, but we had very good win rates last year in the flavor group. And what was ultimately suppressing that optically was the fact that we had very high attrition in some of our legacy product lines. Now that we've largely flushed that through, And of course, as you know, we've sold two of our businesses and we expect to sell that third. I think we've very strongly removed that headwind. So I suppose if there's a one-timer that I would point to, maybe it's those businesses kind of going away and you can kind of see that distinction between our gap and non-gap on those business lines. But no, I think ultimately you're getting at the sustainability of the flavor results And I feel really good about flavors moving forward. And I think that mid-single-digit revenue is going to be very, very achievable. And I think we've got a real nice future going there in flavors.
spk00: Thank you very much. I'll get back in the queue.
spk04: Okay. Thanks, Heidi.
spk02: Thank you. And our next question is from Mitra Ramgopal with Sidoti. Please go ahead.
spk05: Yes, hi, good morning. Thanks for taking the questions. I believe in the first half, the net impact of COVID on EPS was about 10 cents. Just trying to get a sense as to that impact in 3Q and how you see it playing out over the rest of the year.
spk01: So on the negative impact, and understand that this is somewhat subjective because we don't know exactly where every product goes with our customers, but we looked at You know, we looked at direct costs, and then we also looked at the sales impact. So, you know, year to date, the direct costs are probably close to $5 million. However, you know, we're seeing an offset by lower travel and other SG&A-type expenses. So, you know, that mitigates most of the direct cost impact. And so where we really see the negative impact is on the top line. It is certainly most pronounced within the color group, where our cosmetic business is down about 12% on the top line in the quarter. So we really have probably in excess of $20 million of revenue year-to-date that we believe we're down as a result of COVID. And what that converts into in terms of EPS, it's
spk05: uh it's around 20 cents okay no that's great uh thanks for the uh color there um and obviously you know you've talked about the operational improvement plan was that something that was sort of as a result of what you're seeing in with the covet 19 pandemic or was that something you're probably going to do in any event as you look to improve efficiencies
spk04: Yeah, it's probably a matter of interpretation. I think the profit improvement plan, as we look at that, you know, for some folks who may be newer to the Sensian story, they'll note that we did have a series of restructuring events over the last number of years. And those were designed to consolidate many of our facilities, to shrink some of our capacity, to... ultimately remove some of our legacy products that had become quite a headwind. We had tremendously high fixed costs in many parts of the company. And so we went through those restructuring programs, we took out a lot of that cost, and I think some of the impact you see in some of that operating leverage is obviously very closely linked to some of those efforts. But, you know, we're always looking at the business. And any time you talk to a plant manager and he's talking about volume and the need for volume to cover his fixed costs, well, you intuitively know you have a fixed cost problem in that facility. And so with that philosophy, which we've applied really everywhere in the company, we're always looking for opportunities in different parts of the world. And so, you know, and in different business lines for that matter. We've done a lot of work there in flavors. We've done work there in colors. We're doing some additional work there in colors now. So I would say, Mitra, it's really in the normal course of business for us to be looking to operate as efficiently as possible. The rounds that we've been working on really closely have really been tied to fixed costs. But we're not blind to opportunities with an SG&A as well, and whether that is automating certain processes or standardizing. It's always in the mix for us. So we're always looking to drive that OP margin. There's a lot more OP margin that this company is able to, I think, going to be able to produce. Many of you also who've been with the story for some time would note that flavors is now starting to move up on the OP margin ladder. And I think that's going to continue, certainly as we get into 2021. I could see that being up another 50 to 100 basis points. And Color in Asia right now, you see those folks are 20% roughly and 20% plus at times. So I feel quite good about those groups. And I think the focus here is going to be in flavors. And so a lot of the activity has been in flavors. But, yeah, in short, it's kind of in the normal course of things, I would tell you, Mitra.
spk05: Okay, no, that's definitely great. And then just curious on the – personal care side, obviously you're experiencing some softness due to COVID, but I believe, you know, at one point this was an area you felt there were some really nice opportunities you'd be looking to expand into, whether it was oral care, et cetera. I was wondering if anything has changed on that front.
spk04: No. Cosmetics, or as we will oftentimes refer to it as personal care, is an outstanding business for us. It's generated a lot of profit over the years. It's very profitable. It's a very technically driven business. A lot of applications are required. We have a very extensive portfolio. And it's a tremendous market with tremendous customers. We deal in the who's who of the cosmetic world. And so as you look at that business today, it's makeup, it's skin care, it's hair care, but it's also more specifically personal care items, as you referenced, such as oral care, things like body wash, and those types of products, which, as you can imagine, are doing quite well. Well, actually, not so much the oral care. You may find this one interesting, Mitchell. A lot fewer people are brushing their teeth nowadays and also chewing gum, right? So be mindful of the next person you get close to, although you shouldn't get close to them, right, with COVID times. But you get the idea here. There's some temporary factors in the market that are playing out. But our business is, the majority of our business, more than 50% of that business that we have is makeup. And then, of course, as you know, we have a lot within hair care and hair colors. And then we also have skin care and other related products. So we continue to diversify that business. Makeup is still going to be a very good category. I think as restrictions continue to ease and as we potentially find vaccines and other opportunities to suppress this virus, I think we're going to see a very nice return to that business. But even with that, you know, come March, we start lapping a lot of these real negative headwinds we've had in cosmetics moving forward. But, no, this is an outstanding business. It's very much going to be a part of our future. The dynamics are outstanding in it, and I think we've got a very strong leadership position there to boot.
spk05: Okay, no, that's great. And then finally, just again, as a result of COVID, obviously, there have been some positives to you. I believe you've talked in the past about a favorable product mix shift in terms of customers transitioning from synthetic to more natural, etc. Just wondering if there are any other trends you're seeing that you think, you know, would really be positive for you along the term.
spk04: Well, I think you mentioned one. You mentioned natural colors, which is going to continue to be a very nice trend for our company. Natural flavors, which has been a longstanding trend, I think that continues. But extracts and functional ingredients in general, whether it's designed for a nutraceutical product, for a food product, or even for a pharmaceutical over-the-counter product, That continues to be a very, very strong part of the portfolio for us. You probably noted some CPGs talking about returning to their core brands, many of which do not really contain a lot of natural ingredients. I think that's kind of more of a temporary statement because as I look at our pipelines around the company, I see a lot of activity continuing in this world of natural colors, extracts, functional ingredients. So while there may be a small hiatus from new product launches in many of the markets from the large multinationals, the level of product launches and pipelines on B and C customers continues to be quite strong. And we continue to generate wins. The revenue you're seeing in the company right now is no accident. And Steve I told you about the headwinds here, but we've been able to be successfully winning new projects at a lot of different customers, and it's because we're very committed to continuing to operate this company. Our employees are very committed to the mission of this company, and that is providing these essential products throughout the world. But in some cases, we've won because customers call up and say, you guys are the only guys who are working. So we continue to take advantage where we can take advantage, and these products that we have are ideally suited for many of our customers right now who are trying to advance these more health-driven products. But long-term, it's a tremendous portfolio to do just that because I think those trends are trends. They're by no means fads in any way. Okay, no, that's great. Thanks for taking the questions. Okay, thanks, Mitra.
spk02: Once again, if you would like to ask a question, please press star, then Y. The next question is a follow-up from Mark Connolly with Stevens. Please go ahead.
spk03: Thank you. Just two more. I was hoping you could give us a little bit of a sense of what the impact of this restaurant recovery, you know, with restaurants opening at reduced capacities. If this ends up being a new normal for, say, you know, the next year or so, would you have to scale back any of your operations during that market more than you already have?
spk04: I would say no. When we talk about restaurants, there's really kind of a very simple interpretation of things. You have the quick service, the brands you know and love, and oftentimes those are serviced through drive-thrus anyway. They are still being hurt, but I think we can – ultimately mitigate the impacts from that standpoint. But in a traditional sit-down restaurant, you know, that's certainly part of our portfolio, but that doesn't constitute a vast part of our portfolio. So the short answer is no. Even if this were to continue, I would not anticipate the need to do any sort of production or supply chain reconfiguration on the food side of things to address that.
spk03: Okay, helpful. And just one financial question. I was a little bit high on my cash flow assumptions. Can you tell us if there's anything that might be swinging in the fourth quarter and how I should be thinking about working capital next year, assuming that we do have sort of a steady recovery?
spk01: Yeah, so, you know, year to date, our results on cash flow are good. We're up about 12% in cash flow from operations. There's a little bit of a dip in the third quarter. You know, one of the things going on there, there were a number of tax payment deferrals. So a lot of companies did not, and Sentient included, did not make their federal tax payments in the first half of the year and then had to catch up in the third quarter. And that was in place in some other countries as well. And then our sales were very strong really throughout the quarter in certain product lines. And so I think there's a little bit of a timing element on receivables. So if there was a little bit of dip in the quarter, it's those two items. But again, still up double digits year to date. You know, we've made a lot of really nice progress in bringing inventories down primarily in our flavors and extracts group this year. So if you look at our On a normalized basis, taking out the divestitures, I think we're down about 24 days year over year. I think we have some additional improvement we can make in flavors and in colors, but we've made a lot of improvement really over the last year. So I would look for more, maybe smaller incremental improvement next year.
spk03: That's super helpful. Thank you.
spk02: And our next question is also a follow-up, and it's from Heidi Vesternin with Exane. Please go ahead. Please proceed, Heidi. Perhaps your line is muted on your end.
spk00: Sorry about that. Thanks for that. So we saw recently that Christian Hansen's colors business was sold for nearly 21 times EBITDA. Can you explain how your food and beverage colors business compares with Christian Hansen's, please? Thank you.
spk04: Well, I think Christian Hansen is a great competitor. And I think under their new ownership, I think they're going to continue to be a great competitor. So, yeah, I guess that's what I'd say about that.
spk02: Thank you. At this time, I would like to turn the conference back over to the company for any closing remarks as there are no further questions.
spk01: Okay. Thank you very much, everyone. That will conclude our call for this quarter. Thank you for your time this morning. Goodbye.
spk02: Thank you. That concludes today's presentation. Thank you very much for joining the call. You may now disconnect. Thank you.
Disclaimer