Swedbank AB (publ) Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Sensient Technologies Corporation 20 24 Third Quarter Earnings Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornell. Please go ahead, sir.

Speaker 1

Good morning. Welcome to Sensient's earnings call for the Q3 of 2024. I'm Tobin Tornal, Vice President and Chief Financial Officer of Sensient Technologies Corporation. I'm joined today by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. Earlier today, we released our 2024 Q3 results.

Speaker 1

A copy of the earnings release and the slides we'll be using during today's call are available on the Investor Relations section of our website atsensient.com. During our call today, we will reference certain non GAAP financial measures, which remove the impact of currency movements, cost of the company's portfolio optimization plan and other items as noted in the company's filings. We believe the removal of these items provides investors with additional information to evaluate the company's performance and improves the comparability of results between reporting periods. This also reflects how management reviews and evaluates the company's operations and performance. Non GAAP financial results should not be considered in isolation from or a substitute for financial information calculated in accordance with GAAP.

Speaker 1

A reconciliation of non GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release and slides. We encourage investors to review these reconciliations in connection with the comments we make today. I'd also like to remind everyone that comments made during this call, including responses to your questions, may include forward looking statements. Our actual results may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings. We urge you to read Sensient's previous SEC filings, including our 10 ks and our forthcoming 10 Q for a description of additional factors that could potentially impact our financial results.

Speaker 1

Please keep these factors in mind when you analyze our comments today. As we introduced during our last quarterly call, we will be referring to a slide deck that will be referenced through today's call. This slide deck is also available on our website. We'll start on Slide 5 of that deck.

Speaker 2

Now we'll hear from Paul Manning. Thanks, Tobin. Good morning and good afternoon. Sensient reported strong local currency revenue growth of approximately 9% in the Q3. This revenue increase was primarily volume driven with price contributing low single digits.

Speaker 2

Our consolidated local currency adjusted EBITDA was up 13% for the Q3 of 2024. The company's 3rd quarter adjusted EBITDA margin was 17.6%, up 60 basis points from the prior year's Q3. With the continued resumption of volume growth across the groups, we expect revenue and EBITDA growth to continue to be strong in the Q4. The volume improvement is due to our high level of new sales wins across each of our groups, our focus on sales execution, the end of customer destocking and the stabilization of end customer demand in North America and Europe. Our sales pipelines remain robust in each of our regions.

Speaker 2

Each group is focused on expanding new sales win rates and working with our customers to support their development needs new product launches. Turning to Slide 6. The Color Group had an excellent quarter delivering 13% local currency revenue growth and 31% local currency operating profit growth. The group's 3rd quarter EBITDA margin was 22.2%, an increase of 2 50 basis points versus the prior year's Q3. The group's year to date local currency revenue now up 5% and local currency operating profit is up approximately 11%.

Speaker 2

We saw solid volume growth in both the food and pharmaceutical and personal care product lines. We expect this volume growth to continue throughout the remainder of the year. The group is benefiting from its strong new sales wins, particularly in natural colors, innovative products and exceptional customer service. As we expected and discussed during our last few calls, volume is the main driver of the strong operating leverage we now see in the Color Group. We expect this leverage to continue in the 4th quarter and we expect the relationship between local currency revenue and operating profit growth in the 4th quarter to be similar to the group's 3rd quarter results.

Speaker 2

For the year, I now expect Color Group to deliver high single digit local currency revenue growth. Previously, I expected the group to deliver mid to high single digit growth. Turning to Slide 7, the Flavors and Extracts group had a strong quarter delivering 7% local currency revenue growth and 13% local currency operating profit growth. The group's 3rd quarter EBITDA margin was 16.4%, up 30 basis points versus the prior year's Q3. The group's year to date local currency revenue is up 8% and local currency operating profit is up approximately 9%.

Speaker 2

The group continues to benefit from its strong new sales wins, its innovative product offerings and its focus on sales execution and customer service. The flavors extracts and flavor ingredient product lines reported solid volume growth in the quarter, which contributed to the group's operating leverage improvement. We expect this leverage to continue in the 4th quarter and we expect the relationship between local currency revenue and operating profit growth in the 4th quarter to be similar to the group's Q3 results. For the year, I now expect the Flavors Group to deliver high single digit local currency revenue growth. Previously, I expected the Flavors Group to deliver mid to high single digit growth.

Speaker 2

Now turning to Slide 8. The Asia Pacific Group reported 13% local currency revenue growth and 15% local currency operating profit growth in the 3rd quarter. The group recorded a strong 3rd quarter EBITDA margin of 23.8%, which is in line with prior year. The group's year to date local currency revenue is up 9% and local currency operating profit is up approximately 8%. The group continues to experience solid growth in all regions and continues to have a high level of new sales wins.

Speaker 2

The group is performing very well and I expect Asia Pacific to have a strong finish in 2024. I expect the group to deliver in the Q4 at least what the group delivered in the Q3 for local currency revenue and operating profit growth. I expect the Asia Pacific Group to deliver at least high single digit revenue growth for the full year of 2024. Turning to Slide 9. After a challenging 2023, Sensient's 2024 performance puts us back on track with our long term goals of mid single digit local currency revenue growth and high single digit local currency adjusted EBITDA.

Speaker 2

In 2024, we now expect to deliver consolidated high single digit local currency revenue and adjusted EBITDA growth. We previously expected to deliver mid to high single digit growth for both local currency revenue and adjusted EBITDA. We also expect to deliver mid single digit local currency adjusted EPS growth. The reason for the mid single digit adjusted EPS growth is primarily because of higher taxes and higher interest expense. And looking ahead to 2025, we expect our local currency revenue to grow at a mid single digit rate.

Speaker 2

We expect a decrease in our interest expense as a result of our focus on debt repayment and a lower expected interest rate environment. We also expect our tax rate to be relatively flat at approximately 25%. As we began to do last quarter, we thought it would be helpful to highlight a few new technologies within our businesses. Turning to Slide 10, we've highlighted a couple of our flavor technologies. The first to profile is called CentiMelt.

Speaker 2

SentiMelt is a novel technology that allows our bakery and savory customers to incorporate color and flavor bursts into their end products. Bakery and savory products are known for challenging production conditions, which typically degrade the performance of flavor in color. SENTIMEL technology can overcome these challenging manufacturing conditions, extend product shelf life and maintain the desired flavor profile. TrueBoost is a second technology we'd like to highlight. It is a portfolio of products that supports our customers' continuing efforts to reduce sugar and salt, amplify the boldness of flavors and enhance the overall mouthfeel of products by imparting juiciness and creaminess to the end product.

Speaker 2

True Boost provides natural and clean label benefits across all of our customers' end markets. More information on these technologies and others can be found at our website. Overall, the growth we are experiencing is a direct result of the implementation of our strategy and the opportunities from the markets we have chosen to operate in. I am excited about the growth opportunities within each of our groups and I remain optimistic about 2024 and the future of our business. Tobin will now provide you with additional details on the Q3 results.

Speaker 1

Thank you, Paul. In my comments this morning, I'll be explaining the differences between our results and our non GAAP or adjusted results. The adjusted results for 2024 remove the cost of the portfolio optimization plan. We believe the removal of these costs produces a clear picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance.

Speaker 1

Turning to Slide 12. Sensient's revenue was $392,600,000 in the Q3 of 2024 compared to $363,800,000 in last year's Q3. Operating income was $50,500,000 in the Q3 of 2024 compared to $44,500,000 of income in the comparable period last year. Operating income in the Q3 of 2024 includes $1,200,000 of portfolio optimization plan costs, which is approximately $0.03 per share. In the Q4 of 2023, we incurred $28,000,000 of portfolio optimization plan costs.

Speaker 1

So far this year, we've incurred approximately $5,800,000 of additional costs. Excluding the cost of the portfolio optimization plan, adjusted operating income was $51,700,000 in the Q3 of 2024 compared to $44,500,000 in the prior year period, an increase of 17.1% in local currency. The company's consolidated adjusted tax rate was 23.1 percent in the Q3 of 2024 compared to 17.5 percent in the comparable period of 2023. Local currency adjusted EBITDA was up 12.8% in the Q3 of 2024 and up 5.5% for the year to date period. Foreign currency translation reduced EPS by approximately 0 point 0 $1 in the Q3 of 2024.

Speaker 1

Turning to Slide 13. Cash flow from operations was $136,000,000 for the 9 months ended September 30, 2024, up 27% compared to last year's comparable period. Capital expenditures were $36,000,000 year to date as of September 30, 2024. We expect our capital expenditures to be between $60,000,000 $65,000,000 for the year. Our net debt to credit adjusted EBITDA is $2,400,000 With the continued high interest rate environment, we remain focused on reducing our debt levels and our interest expense.

Speaker 1

Overall, our balance sheet remains well positioned for future investments. Turning to Slide 14. As Paul noted, we have increased our 2024 local currency revenue and local currency adjusted EBITDA to grow at a high single digit growth rate for the year. We continue to expect our interest expense to be up approximately $4,000,000 for the year compared to our 2023 full year interest expense. We expect our 2024 full year adjusted tax rate to be around 25% compared to 23.4 percent in 2023.

Speaker 1

We continue to expect our local currency adjusted EPS to grow at a mid single digit rate in 2024. What this implies for the Q4 is that we expect our local currency revenue to grow at a high single digit rate and our local currency adjusted EBITDA to grow at a high teen growth rate. We expect our 4th quarter interest expense to be around $7,000,000 and we expect our adjusted tax rate to be approximately 25%. We expect our local currency adjusted EPS to grow at a low 20 percent growth rate in the Q4. In considering our GAAP earnings per share in 2024, we continue to expect our GAAP EPS to be between $2.77 $2.87 per share.

Speaker 1

Our GAAP EPS includes approximately $0.18 of portfolio optimization plan costs. Thank you for participating in the call today. We'll now open the call up for questions.

Operator

The first question comes from Ghansham Panjabi with Robert W. Baird and Co. Please go ahead.

Speaker 3

Hi, good morning, everyone. This is Matt Krueger sitting in for Ghansham.

Speaker 2

Hi, Matt.

Speaker 3

Hi. So my first question, I wanted to focus a bit in on the volumes for the quarter. Obviously, the volume performance was quite strong. By segment, can you break out what portion of your volume growth you feel was due to end market normalization due to the lack of destocking versus what portion of the volume growth is really sustainable kind of following the washout of the comparisons on a year over year basis as we move forward?

Speaker 2

Okay. So overall, you look at Q3, we were up revenue 9% for the company, price being kind of 2%, 3%, low single digit type levels. So you figure about 6%, 7% volume overall. Now it varies a bit with Asia Pacific having double digit volume, color having double digit volume and flavors more like mid single digit volume. And so to answer the question explicitly, sure, there's a number of factors here.

Speaker 2

So the end market, you heard me talk about for the last couple of years, as we measure the market, the North American market, the volume of our end customers was down 1% to 2% in terms of volume. Europe was kind of flattish, maybe up 1% and then of course things vary by Asia Pacific and LatAm. So now as we look at the market in North America, volume amongst all of our customers selling their product is more like flat. So we don't have that 1% to 2% headwind in our biggest market, North America. Europe is still fairly consistent.

Speaker 2

So I figure maybe a portion of it was that. The no destocking, so this is where I think more obviously. That destocking impact, I think, was re profiled last year. It was running anywhere from low to mid and in some cases even high single digit headwinds. And so Colors was largely at the peak of the destocking last year Q3.

Speaker 2

Flavors was not as much destocking last year Q3. You recall that Flavors kind of got a lot of their destocking out of their way faster than Colors did. So net net, kind of to your question, what does this look like into the future? 2025, we're guiding in accordance with our long term guidance mid single digit revenue where we anticipate pricing to be low single and the balance to be made up from volume. So specifically to Q3, a couple of points in the market, say low to mid on the destocking not happening as strongly in Color.

Speaker 2

But the majority of the volume growth in Colors and Flavors and Asia Pac are largely our new wins, which continue to be very, very strong in each of the regions. We had a particularly nice uptick in Asia Pacific in our new wins. So yes, while some of this is favorable comparisons to last year and again not having that destock, not having the market growth headwind, by and large the volume growth is stemming from new wins. This is why I have confidence that we can keep up that level of new wins into 25% and that should translate nicely and support the mid single digit projections.

Speaker 3

That's great. That's very helpful. And

Speaker 4

kind

Speaker 3

of building on that a little bit, you already mentioned that you expect volumes to be kind of in line with the long term expectation or guide or target. Are there any other high level variances for 2025 that you can provide us, maybe expected contribution from the productivity initiatives that you have ongoing or any other notable variances as we try to bridge to 2025 estimates?

Speaker 2

Yes. I think with that volume, as I just gave you for 2025, those expectations and low single digit pricing, We expect to continue to get this nice operating leverage, maybe not to the levels you're seeing right now. This is in part recovery from last year's weaker Q3, weaker Q4. But yes, I think as you think about 2025, what's going to feed into that? 1st and foremost, it's always new wins.

Speaker 2

That is the fundamentally most important metric we track as a company. That is the true barometer of the strength of the strategy, the strength of our execution, strength of our service levels, the strength of our product technologies. It's all governance starts as I see it with new win rates, which continue for us to be very, very high, I think kind of low to mid teens rate as a percentage of revenue. So that's going to I think continue in earnest. And so couple of the variances that we expect to potentially play out a little bit differently in 2025.

Speaker 2

So number 1, I mean the market, I would love it if the market would just be flat in Europe and North America. I'm not asking for a lot, just when it's down 2%, 3%, though that's a little bit of a headwind. So my expectation is these markets in North America and Europe, our 2 largest markets would be largely flat. They would potentially be upside to the market growth of LatAm and of course in Asia. And as much as you hear talk out of China, we still see growth in China, perhaps it's not as strong as it had been in the past, but it's still solid strong growth for us.

Speaker 2

So I think that will be a positive. One of the things we saw during COVID, you heard a lot of companies talking about SKU rationalization, right? It's like, hey, we can't even get our core products on the shelf, forget product number 300 that drives a very small part of our revenue. And so many of our customers, many CPG companies commissioned programs around SKU rationalization, which takes time and they can be complex. And so some of the discontinuations that we have seen in the market in 2023 and in 2024, I believe and I think we could say that across most of our businesses, I would point to a lot of these initiatives around SKU rationalization.

Speaker 2

I'd like to think that that could moderate in 2025, but my crystal ball is a little foggy on that one. But if discontinuation rates subside a little bit, that could be another touch of upside. To your point about the portfolio optimization, we remain on track there. I think that's going to go very, very well. We expect to have very, very strong savings from that program.

Speaker 2

As you recall, we estimated $8,000,000 to $10,000,000 of savings. We remain on track there. We expect on the cost side of that, the $40,000,000 of charges, we're still right about in that ballpark with again the vast majority of that being non cash related. So the timing of those, some of that is 2024, some of that is 2025, some of that 2026. So I think that would certainly give further credence to our operating leverage projections and our improvements in operating profit growth.

Speaker 2

But I think the big thing and the question that folks have is like, hey guys, the EBITDA growth looks good and the profit looks good. Why is that not translating to EPS growth? And there's 2 words, tax and interest. That's why. And so you look at 17% OP growth in Q3 and you're like, why is it 8% EPS, tax and interest.

Speaker 2

And those are the single biggest headwinds to EPS growth and why we're not getting that flow through. So you'll start to see us lapping some of that here in Q4. You heard Tobin estimate substantially higher growth rates on EPS. And so tax, we expect that not to be a headwind in 2025. So that's an important flow through to EPS.

Speaker 2

And interest rate, you saw the headwind there. I think that's somewhere around the order of magnitude about $0.08 for the year in terms of EPS headwind interest. So I'd like to think that that will also not be a headwind and possibly could be a slight tailwind with less debt and potentially actions from the Fed. So those are some of the variances that we would at this point as I am sitting here in late October would reasonably project for 2025.

Speaker 3

Great. That's very helpful, Paul. That's plenty for me. I'll step back in the queue.

Speaker 2

Okay, Matt.

Operator

The next question comes from Nizhong Tang with BNP. Please go ahead.

Speaker 5

Hi, everyone. Thanks for taking

Speaker 2

the question.

Speaker 5

Hello. First, maybe picking up on your comments there on new wins. I think you mentioned low to mid teens as a percentage of revenue, which is pretty impressive. Can you talk a little bit about what's driving this? Is it customers who are looking to reformulate?

Speaker 5

Is it penetration and wins with new customers? Just trying to understand a bit what's driving this momentum and what's giving you confidence as we look into 2025? That's the first one. I'll stop there.

Speaker 2

Okay. So I think it's very much part of our program here in the company. Great ideas are great, but it's really the ability to implement and execute on those ideas. So our sales force has done a really, really nice job. The leadership in each of our business units who are driving these sales folks and supporting them and working with them, the big part of the success, doing your job, being responsive to customers, understanding what they really need.

Speaker 2

And so I would put the first one at sales execution and the ability to service customers exceedingly well. Number 2, I would tell you that a lot of our product line has really driven a good deal of success here. I'll note Natural Colors, which has had our growth there, has been very, very strong this year. And I think that some of that is related to new launches. We typically discuss a launch rate of about 80% of new products containing natural colors.

Speaker 2

So I think that is a big part of it. So some of that is the market we chose to emphasize. But just to give you some perspective, we're up double digits on natural color growth. And in fact, we're up more than 20% of natural colors in Q3. So that's been a big driver.

Speaker 2

Lot of that just new launch activity. There is some conversion activity in the market. But by and large, the lion's share of new launches contain natural colors. And we have built a really strong outstanding natural color business with great products coming from a really strong new product development program, a very robust supply chain that we continue to invest in and a really strong capital program where we've invested in our plants to bring customers the types of volumes and performance they would expect in this kind of market. So it's a very complex market and you have to really be fully invested in it.

Speaker 2

And I think a lot of that growth we're seeing right now are the fruits of many of the investments we've made probably over the last 15 to 20 years, quite frankly. So I think that's very important. I think we continue in the flavor group to emphasize the local and regional customer base from start ups to more established brands. And I think the level of service and the level of innovation we are able to bring them is part and partial with the execution piece. But customer selection has been a big part of our success as well.

Speaker 2

We work very hard to identify where we can be successful and really emphasize those types of products. And related to that, the focus on selling more flavors. Years ago, we didn't have nearly the same focus we do today on selling flavors. Flavors generally constitute the most defensible products that we have in our entire portfolio. They are very technically driven in most cases and they rely on a lot of applications and formulation support from the business.

Speaker 2

So I think that's been another big driver. So it's really a combination of the markets we've chosen, right? We got out a lot of those industrial businesses after our restructuring actions were completed and we really honed in on food, pharma and personal care. So that's a big part of it. The types of products and technology we are able to deploy in natural colors and flavors in particular.

Speaker 2

And then of course, as I led off with, the very strong sales execution. So I think these are the things that really would drive that success. Many other factors, but those would be sort of top 3 that come to mind.

Speaker 5

That's great. Thank you. And second one, I wanted to ask a bit about personal care. I think some of the larger players, like beauty care players have been flagging a slowdown or fears of a slowdown in the industry, particularly in North America and in China. I was wondering whether that's something that you see as a risk or if you see any signs of slowdown in your Personal Care business?

Speaker 5

I know it was pretty strong in the last quarter, but I'm just trying to think ahead a little bit.

Speaker 2

Yes. Well, I would say that personal care has had a really good year. A lot of nice sales within our makeup category. We have been quite strong there. Body wash, we're doing very, very well.

Speaker 2

Skin care, and so here again, I think we've emphasized certain segments within personal care, which we've done very, very well with. We certainly also have in our Personal Care Ingredients business, we have a number of products that fit within the fragrance market, which as you know is doing quite well right now. So I would say this, personal care above any of the other markets we serve, the timing of where our customers are and where we are can have significant lags. Some of this stems from the shelf life of these products. It provides a level of flexibility for us and for our customers.

Speaker 2

But there's been a lot of changes in the personal care market, something like north of 20% of that market is now transacted through e commerce. And many, many years ago that number was probably more like about 2%. So there's been a lot of change there. There's been the growth in influencers and other brands that are low capital intensive brands that utilize contract manufacturers has driven a lot of the changes in that market as well. So it's not just large multinationals driving that industry.

Speaker 2

There's a lot of third party manufacturers really throughout the world supporting upstart brands, influencer brands, indies, whatever you want to call them. And so, yes, while there may be some who in the market, our customers who are having a little bit of a struggle right now, there's also plenty who are doing quite well. And so as you look ahead to 2025, we have a very high level of confidence that we're going to continue to perform, not the 17%. I don't think that's a realistic long term expectation. But certainly that mid single digit maybe a little bit higher in some regions and maybe about that in other regions, I think is a very sustainable level.

Speaker 2

And there again, mostly driven by volume, mostly driven by the selection of these customers, the implementation or the execution amongst the sales force and then of course having really good products.

Speaker 5

Thank you. It's actually quite nice that we are into my last question, which is on your long term targets. Thanks for articulating them in the slides. On the revenue, the mid single digits, can you just remind us of your ambitions by division? Does that help by division?

Speaker 5

And then in terms of the EBITDA, the high single digit EBITDA growth rate, can you talk us through the key levers here and where you see the most upside in terms of yes, from a margin perspective? Is it more on the flavors and extract side? Just remind us of the moving parts. Thanks.

Speaker 2

Yes. So I think the mid single digit, it's a good average to just use across the 3 groups. I mean, clearly Asia Pacific has been operating above that. So yes, they may have a little bit of a higher opportunity there. But of course, that's also a smaller part of the portfolio.

Speaker 2

Certainly, as you look at things like natural colors, they're going to be on the higher end of that, possibly even above that range, certain segments of personal care, certain segments within flavors. So without getting into 26 shades of gray here, I would say mid single digit across the groups would be a pretty good proxy. And we'll keep you posted as we go along during the course of the year where we sort of above that, where we are a little bit below that. With respect to your question around leverage, yes, I think a lot of that is going to be the product mix, the types of products we're emphasizing and where we have been emphasizing. A very, very strong focus on costs and maintaining costs and not letting costs get out of control from a production standpoint and from an SG and A standpoint.

Speaker 2

But really that the sales and the volume stemming from that, manufacturing businesses can be very, very sensitive to volume declines and that can have a outsized impact on EBITDA. But it works the other way too, So when volume is good and it's consistent and it's steady, that should offer us a nice operating leverage. Again, consistent with having a relatively strong focus on production cost mitigation, SG and A managing that, although being a little bit different in our thinking when it comes to R and D and investing in innovation. Those don't necessarily get the same scrutiny as Tobin's lunch expense that we look at very closely. So that leverage should continue to flow through very nicely.

Speaker 2

The biggest margin uplift opportunity continues to be flavors. I think you are going to see a nice improvement there. The EBITDA as we profile in Asia Pacific and Colors is quite robust, quite competitive and possibly even industry leading by some accounts. So our biggest opportunity is flavors and we are just going to continue to focus there on the product mix. And of course, we have got our portfolio optimization that's going to contribute there as well.

Operator

All right. Great. Thank you.

Speaker 2

Okay. Thanks, Nicola. Thank you.

Operator

Our next question comes from David Green with Boldhaven. Please go

Speaker 4

ahead. Hi, everyone.

Speaker 1

Good morning, David.

Speaker 4

A couple of quick questions. Just starting off on Colors. You've mentioned Natural Colors as a sort of area of strong growth. So is there anything else within colors you'd call out as being a big driver?

Speaker 2

Sure. Yes. I think our cosmetic business, our personal care business, that was even a bigger driver, although not as big as the food color business. It was a fairly significant driving force for our success here in Q3 and I think once again we will do the same in Q4. So that personal care whether we are talking about makeup, skin or hair, we have carved out a nice position there.

Speaker 2

We have really good products. And again, I think that there is constant need for innovation in that market, whether driven by performance expectations of the end consumer or regulatory changes. Regulatory drives a lot of our innovation work in the personal care market. Now pharma is a smaller part, pharmaceutical excipients where we are selling colors and flavors and coatings. That is also a nice piece of the growth picture as we look to the future.

Speaker 2

But here again, not as large as Food Colors, but certainly has many of the same attributes and technologies that we're able to deploy. So yes, Color is a very broad based level of success. And again, I go back to that. We don't have those industrial businesses like we used to, which tended to not be as businesses like we used to, which

Speaker 4

tended to not be as defensible, profitable.

Speaker 2

I think you like to use the term moat. They didn't have such a good moat. The moat was kind of dried up and the alligators that were on strike or something. So, we got rid of those. Really, it's food and personal care with a piece of pharma in there as well, and we feel good about that portfolio.

Speaker 4

And just on the destock, I know that Colors was the last in and will be the last out. Are we fully through the destock now? Or is there still been any headwind on this quarter?

Speaker 2

No. The destock is over for Colors. In fact, it was more or less over in the beginning of the year. There might have been a little bit in Personal Care in Europe maybe for Q1. But by and large, destocking is that's in the past, thankfully.

Speaker 1

Great.

Speaker 4

And a quick one, I'm not sure if I've got the right numbers here, but EBIT margins in Color were 18.4% in Q3?

Speaker 1

EBITDA margin per Color in Q3 was 22.2%.

Speaker 4

Sorry, I've got the wrong number there. Apologies.

Speaker 1

That's EBITDA though, David. EBIT, if you're asking, EBIT was 18.4% that you said.

Speaker 4

Yes. So the EBIT. So actually, your EBIT margin was 18.4% for Q3, which was actually below Q2, which was 18.8%. So I was just wondering, given the strength in top line within Colors, why the EBIT margin didn't actually improve more?

Speaker 2

Well, EBIT last year was 15.8%. So that was 260 basis point improvement.

Speaker 4

Right.

Speaker 5

So that's

Speaker 2

a touch short of the 18.8%. But yes, I wouldn't draw much of a conclusion from that. I think we will be approaching 19th of the year on EBIT. But as you see on EBITDA, it's quite robust. And I think you can kind of write down that figure for long term expectations, the EBITDA.

Speaker 4

Yes, great. A couple more if I can. Just on Flavors and Extracts. Q3 was a sequential deceleration from Q2. Any reason for that specifically?

Speaker 1

Let's see here. Well, we were up.

Speaker 2

Yes. No. I mean, there is seasonality in the business. Not all these quarters are the same. And there's seasonality factors as much as you sell a lot of ice cream, not many folks eat ice cream in January.

Speaker 2

Most folks don't. Beverage may be stronger in the beginning of the year where there's a lot more launches historically. So you just kind of have that natural seasonality more than anything else. Beyond that, it would really just be the timing of a win with a customer or the mix of a particular product sale from a customer. So no, again, I wouldn't take much away from that.

Speaker 2

These are not all equal quarters. Now traditionally, if you go back many, many years, Q2 and Q3 are traditionally the strongest quarters with Q1 then being next and Q4 generally being by far the lightest quarter across each of the groups. So that may vary by food and personal care ingredient businesses. Some competitors may have a different mix of customers than we do. But I think that seasonality in general is something you would see in most of the food industry.

Speaker 2

Okay.

Speaker 4

And then just final couple of questions. The obviously, the guidance for 2025 was the high single digit adjusted EBITDA growth, given the comments you've made about interest costs and tax, so we should expect an EPS growth obviously higher than the high single digit?

Speaker 1

Well, when you look at 25, right now, we're looking at about mid single digit from a revenue standpoint. We do expect interest to be more favorable. In Q4, we expect it to go down. In Q3, it was about $7,700,000 We expect it to go down about $7,000,000 And with hopefully a better interest rate environment, we expect our interest in $25,000,000 to be better from that standpoint. So to your point, we'll get a little leverage there.

Speaker 1

And then our tax rate, we expect not to be a headwind, which was about it's about 6% or $0.06 this year. So I don't think when you look at the bottom line, I mean, I don't think we'll be above. You will get leverage from that standpoint more than we're getting this year, but I don't think you're going to be as high as you're kind of indicating.

Speaker 4

And the final question, sorry, is just on the balance sheet. You have done a great job, obviously, of deleveraging now up to 2.4 times. You generated a lot of cash in the quarter as well. Could you just give us a feel more broadly, I mean, any sort of expectations for where you might be for or where you might be targeting for the end of next year? And then in terms of thinking about what's the right leverage for the business, where do you need to be to start thinking about options such as share buybacks?

Speaker 1

Yes. No, you're exactly right. So our leverage has improved. We're at about 2 point 4 now. So our focus this year has really been to pay down our debt, lower that interest expense and the headwind that we're experiencing right now.

Speaker 1

So we're at 2.4. I think as we kind of move forward with what I just mentioned on the lower interest expense and everything from that standpoint, we expect low-2s rolling into next year. So low-2s, I think, from that standpoint, then we'll start to look at potentials on buying back shares in 2025, aren't any acquisitions or anything else from that standpoint. I think when you look at our capital this year, we should be around $60,000,000 to $65,000,000 And I think that's a good proxy as we kind of move forward. Dollars 60,000,000 to $70,000,000 is the range we would anticipate our CapEx to be.

Speaker 1

And then our dividend is roughly around $70,000,000 a year.

Speaker 2

Yes. And I think I'd add to that, David. We're still a little bit fat on inventory. So I think we can do some more work there. That will be a net positive obviously to the cash flow.

Speaker 2

And so, yes, as we've been saying, we'll continue to drive down that debt. But it's probably safe to say as you think about all these numbers and how they come together that we would probably be in a reasonably good position to buy back in 2025. I think my philosophical approach to that would be one of you buyback with excess cash after you pay your dividend, your CapEx and maintain your debt. So if you're looking for what would conceptually be the order of magnitude, it would be whatever the excess cash is based on those other inputs that Tobin just gave you.

Speaker 4

Great. Many thanks.

Speaker 2

Okay. Thank you, David.

Operator

There are no further questions at this time. I will turn the conference back to the company for any closing remarks.

Speaker 1

Okay. Thank you. Before we end our call today, I'd just like to recap some items for the Q4 and some expectations. We expect our local currency revenue to grow at a high single digit rate and we expect our local currency adjusted EBITDA to grow at a high teen growth rate. We also expect our 4th quarter adjusted corporate expense to be similar to the 3rd quarter, interest expense to be approximately $7,000,000 and our adjusted tax rate to be around 25%.

Speaker 1

As a result, we expect our local currency adjusted EPS to grow at a low 20% growth rate in the 4th quarter. So thank you again. That concludes our call today. If you have any follow-up questions, please contact the company.

Speaker 2

Thank you.

Operator

The conference has concluded. You may now disconnect.

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Earnings Conference Call
Swedbank AB (publ) Q3 2024
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