Earnings Call Transcript - SXT Q4 2022

Operator, Operator

Good morning and welcome to the Sensient Technologies Corporation 2022 Fourth Quarter and Year-End Earnings Conference Call. I would now like to turn the conference over to Mr. Steve Rolfs. Please go ahead, sir.

Stephen Rolfs, CFO

Good morning. Welcome to Sensient's earnings call for the fourth quarter and full year of 2022. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I am joined today by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. Earlier today, we released our 2022 fourth quarter and full year financial results. A copy of the release and our investor presentation is available on our website at sensient.com. During our call today, we will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2022 remove income related to an earn-out payment received in connection with the divestiture of our yogurt fruit preparation business. The adjusted results for 2021 remove the impact of the divestiture-related costs, the results of the operations divested, and the cost and income related to our operational improvement plan. 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. These non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release. We encourage investors to review these reconciliations in connection with the comments we make today. I would 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 and our forthcoming 10-K for a description of additional factors that could potentially impact our financial results. Please bear these factors in mind when you analyze our comments today. Now we'll hear from Paul Manning.

Paul Manning, CEO

Thanks, Steve. Good morning and good afternoon. Earlier today, we reported our fourth quarter and full year 2022 results. I'm very pleased to report for the full year of 2022 that we delivered 10% adjusted local currency revenue growth and 13% adjusted local currency EBITDA growth. Each of our groups had outstanding adjusted local currency revenue and adjusted local currency operating profit growth in 2022. We exceeded the guidance we communicated at the start of 2022 for adjusted local currency revenue, adjusted local currency EBITDA and adjusted local currency EPS. Our strong operating and financial performance in 2022 follows the very strong results we had in 2021 and 2020. Our performance is a direct result of our focus on sales execution and customer service as well as our broad product portfolio. We have proven to be a reliable supplier to our customers, and we continue to achieve new sales wins with customers across each of our groups. Our portfolio of natural flavors and colors and our wide variety of product technologies continue to position us for future growth. Input costs grew throughout 2022, including the fourth quarter. Overall, we continue to see higher costs in a number of categories, particularly in agricultural and natural raw materials, which impacted our margins in the fourth quarter. We elected to wait to implement additional pricing until the first quarter of this year. We anticipate these costs to remain at elevated levels at least for the first half of 2023 and we plan to continue with disciplined pricing actions as needed. Because of the dramatic inflationary environment over the last two years and the timing of our pricing actions, margin comparisons and other year-to-year comparisons will at times be distorted. As a result, we believe it is best to judge our performance over the full year. During the fourth quarter of 2022, we announced the acquisition of Endemix, a natural color and extract company based in Turkey. This acquisition is now included in the Color Group's results and strengthens our existing natural color portfolio and improves our vertical integration for several key raw materials. We consider this to be a bolt-on acquisition consistent with our natural color strategy. Endemix represents approximately 1% of the Color Group's fourth quarter revenue. We continue to look at other reasonable acquisition opportunities that support our strategic initiatives within our core product lines. Now turning to the groups. The Color Group had an outstanding 2022 reporting 15% adjusted local currency revenue growth and 15% adjusted local currency operating profit growth. The Food and Pharmaceutical and Personal Care product lines each delivered excellent results in 2022 with strong adjusted local currency revenue and operating profit growth. Overall, the group's annual revenue growth was driven by high single-digit volume growth and high single-digit pricing. Within the Color Group, Food and Pharmaceutical colors achieved 17% adjusted local currency revenue growth. We delivered a high level of new sales wins in 2022, stemming from the company's strong customer service levels and innovative natural color portfolio. The acquisition of Endemix strengthens our natural color supply chain and supports our new natural color wins. I anticipate our food and pharmaceutical product line will have another good year in 2023. The Personal Care product line also had an excellent 2022, achieving 10% adjusted local currency revenue growth. The product line has rebounded nicely from the impacts of COVID. Personal Care's focus on product line diversification, customer service and innovative technologies are fueling our current growth. The Color Group also had a strong finish to 2022, reporting fourth quarter adjusted local currency revenue growth of 12% and adjusted local currency operating income growth of 8%. The group's revenue increase was driven by a high single-digit price increase and low single-digit volume growth. Food & Pharmaceutical colors continued its strong performance in the fourth quarter, achieving 15% adjusted local currency revenue growth. Personal Care slowed to a mid-single-digit growth rate in the fourth quarter, primarily due to customer destocking. The Color Group is well-positioned for growth in 2023 and beyond. I expect the group will deliver mid-single-digit local currency revenue growth and mid- to high single-digit local currency operating profit growth in 2023. We believe food and pharmaceutical colors will have solid growth throughout 2023. We believe personal care will improve throughout 2023 as customer destocking declines. The Flavors & Extracts Group had another solid year in 2022, reporting 6% adjusted local currency revenue growth and 10% adjusted local currency operating profit growth. We also achieved an 80 basis point improvement to our operating profit margin for the year. For the year, flavors, extracts and flavor ingredients reported double-digit adjusted local currency revenue and operating profit growth. These product lines benefited from high single-digit pricing and mid-single-digit volume growth in 2022. Revenue in the Natural Ingredients product line was down in 2022, primarily due to lower volumes related to customer destocking and lower production volumes from the 2022 crop, which we had previously discussed. In the fourth quarter of 2022, the Flavors & Extracts Group delivered 3% adjusted local currency revenue growth. Adjusted local currency operating profit was down 4% due to higher input costs and volume declines, primarily due to customer destocking in the Natural Ingredients product lines. The Flavor Group has implemented pricing actions that will begin to offset these increases, but we anticipate customer destocking to continue in the first quarter. Despite these first quarter headwinds in the Flavors & Extracts Group, we expect sequential improvement throughout 2023. For the year, I expect the Flavors & Extracts Group to deliver mid-single-digit revenue growth and mid- to high single-digit operating profit growth in 2023. The Asia Pacific Group delivered an impressive 14% adjusted local currency revenue growth and 23% adjusted local currency operating profit growth in 2022. The group benefited from strong revenue growth in almost all regions. Overall, during 2022, the Asia Pacific group achieved mid-single-digit pricing and high single-digit volume growth. In the fourth quarter of 2022, the Asia Pacific Group reported 6% adjusted local currency revenue growth and 4% adjusted local currency operating profit growth. The group continues to benefit from solid revenue growth in almost all regions. Revenue growth benefited from a mid-single-digit price increase and modest volume growth in the fourth quarter. As input costs continue to increase, the group has implemented pricing increases that will benefit the business during the start of the first quarter. For the year, I expect the Asia Pacific Group to deliver mid- to high single-digit revenue growth and mid- to high single-digit operating profit growth in 2023. I'm very pleased with our performance in 2022 and over the last few years. Our focus on sales execution, customer service and innovative technologies are fueling the growth in each of our groups. Our product portfolio is strong, and we remain focused on our key customer markets of food, pharmaceutical and personal care. We continue to evaluate sensible acquisition opportunities. We spent approximately $80 million in capital expenditures in 2022. We have very good internal investment opportunities that should drive future growth. And as a result, I expect our capital expenditures to be between $85 million and $95 million in 2023. Our inventory levels have peaked and I would expect a reduction in our inventory throughout 2023. Absent an acquisition, our capital allocation plan will be focused on paying down debt. I'm very happy with our financial performance in 2022. We finished at the top end of our guidance for adjusted local currency revenue, adjusted local currency EBITDA and adjusted local currency EPS for 2022. I am optimistic about 2023 and the future of our business. Steve will now provide you with additional details on the fourth quarter results.

Stephen Rolfs, CFO

Thank you, Paul. Sensient's fourth quarter GAAP diluted earnings per share was $0.69, included in these results are $0.04 per share of income related to an earn-out payment received in connection with the divestiture of our yogurt fruit preparations business. Last year's fourth quarter GAAP results included divestiture and operational improvement plan costs, which decreased last year's fourth quarter results by approximately $0.07 per share. Our GAAP earnings per share in the fourth quarter of 2021 include an immaterial amount of revenue and operating expenses related to the results of the divested operations. Excluding these items, our consolidated adjusted revenue in the fourth quarter of 2022 grew by 5.9% in local currency to $348.7 million. Our adjusted local currency EBITDA was up just under 1% for the quarter, and our adjusted local currency EPS was down 6.8% for the quarter, primarily the result of higher interest expense. Foreign currency exchange rates decreased adjusted earnings per share by approximately $0.04 in the fourth quarter. As we have stated throughout this year, we made strategic investments in our inventory position, which is the main reason for our lower cash flow from operations this year. We have invested in our inventory position to support the high demand we are experiencing and to ensure we have appropriate safety stock positions as supply chain and energy challenges continue. We believe our inventory levels have peaked and as Paul mentioned, I would expect a reduction in our inventory levels throughout 2023. Capital expenditures were $79 million for 2022, and our net debt-to-credit adjusted EBITDA is now 2.4 as of December 31, 2022. Our balance sheet remains well positioned to support our capital expenditures, sensible M&A and our longstanding dividend and any excess cash will be used to pay down debt. Regarding our 2023 guidance, we expect our 2023 local currency revenue to be up mid-single digits compared to our 2022 revenue, and we expect our local currency adjusted EBITDA to grow at a mid- to high single-digit rate in 2023. We expect our 2023 local currency EPS to be flat, to up low single digits compared to our 2022 adjusted EPS of $3.29. In 2023, our EPS will be impacted by higher interest expense and a higher tax rate. Based on current interest rates, we expect our interest expense to increase by approximately $11 million or approximately $0.20 per share in 2023 compared to 2022 full year interest expense of $14.5 million. Also, we expect our 2023 tax rate to be around 25% for the full year. On a quarter-to-quarter basis, our tax rate will fluctuate, and therefore, we continue to believe our local currency adjusted EBITDA growth is an important measure of our performance. Based on current exchange rates, we expect currency to be a headwind for the beginning of the year and modestly favorable for the full year. Thank you for participating in the call today. We will now open the call for questions.

Operator, Operator

And the first question will be from Ghansham Panjabi from Baird.

Ghansham Panjabi, Analyst

Yes. Congrats on all the progress. So first off, on the destocking paradigm that you called out, obviously, it's not unique to you, but rather the whole supply chain. But can you just give us more color on how exactly that dynamic played out throughout the fourth quarter? And then also, what customers are specifically sharing with you as it relates to channel inventory and the likelihood that it basically fades by the first quarter?

Paul Manning, CEO

Okay. I didn't get the second part of your question there, Ghansham.

Ghansham Panjabi, Analyst

Yes. I was just asking about channel. What customers are sharing with you in terms of inventory levels in the channels and your confidence, I guess, as it relates to maybe that stops in terms of destocking in the first quarter.

Paul Manning, CEO

Yes, we are certainly seeing destocking across our product lines, particularly in Europe and the U.S., while Asia Pacific is experiencing less of this trend. This destocking aligns with reports in the media, as consumers are responding to price increases by purchasing smaller quantities. Additionally, many customers are reducing their inventory levels due to less need to manage supply chain disruptions. The S&I business was hit the hardest in Q4, followed by Personal Care. Even though we faced challenges across all our businesses, the new wins we achieved in Flavors & Extracts, Food Colors, and Pharma exceeded the negative impact of destocking, allowing us to maintain revenue and profitability in color in Asia. Some customers have communicated plans to dramatically reduce their inventory, by 20% to 30% for example, and I believe this had a significant effect in Q4, more so than at any other time in 2022. Looking ahead, I expect Q1 to be the peak of destocking. We will still see effects in S&I and Personal Care, which will slightly impact the Flavors & Extracts Group in Q1, but I anticipate these challenges will largely ease by Q2. As for Color and Asia, I believe we will navigate through the destocking actions in Q1 and that conditions will improve as we progress into Q2 and Q3. I have seen specific cases where customers have indicated they won't be placing orders in Q1 but have shown interest in Q2. The wins from 2022 and ongoing successes in 2023, combined with our effective pricing strategies in Q1, give me confidence that we will have a solid year ahead. However, we will start with a slight slowdown in S&I, impacting both top and bottom lines in Flavors & Extracts. Nonetheless, I believe we will largely overcome these challenges in Color and Asia even in Q1, and continuing throughout the year.

Ghansham Panjabi, Analyst

Okay. And I guess on that, maybe you can just touch on your specific inventory levels as well, just given what you just said in terms of what customers are doing. And then also, is that starting to impact your cost basket as well, just given previous inflation, et cetera?

Paul Manning, CEO

Yes. So inventory was up right around $150 million in 2022. About one-third of that was just inflation related to the cost side of that. But these are very specific directed actions to ensure that we were well positioned. We've been able to win business on account of having product and being able to deliver it consistently and reliably. So in my estimation, it was a very good investment. Now we have a much higher proportion of raw materials than we ordinarily have historically, right? So if you look back at the company, we had a much higher percentage of finished goods inventory versus raw materials. But this time around, we were very, very specific about the types of inventory we wanted to invest in. And again, it was largely much disproportionately raw material based. So the positive about that is I think we can manage the absorption, the balance sheet activity as the market settles in as maybe we have destocking in certain areas, I don't think there's going to be an economic impact, financial impact of Sensient as we start taking down our inventory. But I would say this is more of a dimmer switch for us than an actual on or off switch, so we will manage that down. There's still a lot of opportunity in the market where there's bad service and there's that availability of raw materials. So this idea that companies can just kind of drop their inventory back to normal levels, I'm not quite there yet. You know we've had some crop yield issues over the years of S&I. And quite frankly, I'm a little bit tired of talking about that. And I know you folks are tired of hearing about that. And so to remediate that once and for all and forever ideally, we have made a big investment in our inventory in SNI. And so I think having inventory in that business is a really good thing. It's a good investment. We have very limited risk of obsolescence and I think that's going to play out in our favor. So I feel good about our ability to bring inventory down, but I would not expect for you to be hearing about 20% reductions and 25% reductions. It will be more of a slow, steady progress consistent with maintaining good supply to our customers.

Operator, Operator

And the next question is from Heidi Vesterinen from BNP Paribas.

Heidi Vesterinen, Analyst

Good morning, everyone. I've got three questions. I'll go one by one. First question, I wondered what you're assuming for pricing and inflation this year? And are you assuming any deflation in your guidance, please?

Paul Manning, CEO

I find it interesting that while inflation persists, there may still be a need for additional pricing. Compared to 2022, the pricing in 2023 is likely to be more targeted towards specific raw materials. We are seeing some stabilization in costs related to sea freight and energy, and in some instances, those costs have decreased. Some commodities are moving favorably regarding price or cost inflation, but there are still areas of inflation that remain. Although not at the same intensity, they are ongoing, and we must remain vigilant about adjusting prices accordingly throughout the year. Overall, it seems inflation has stabilized in the business concerning the range of raw materials and energy inputs we utilize. Thus, pricing adjustments will be less critical than they were in 2022.

Heidi Vesterinen, Analyst

So is the mid-single-digit top line guidance, both volume and price?

Stephen Rolfs, CFO

Yes. The mid-single-digit revenue guidance includes volume and price.

Heidi Vesterinen, Analyst

Okay. And then maybe if we move to Natural Ingredients. So I think last year, you had talked about supply challenges. The idea was that would use over time. I know that there's the short-term destocking issues. What are you seeing in terms of supply of raw materials?

Paul Manning, CEO

So SNI, you're right. We discussed this throughout 2022. Looking ahead to 2023, we'll have a clearer understanding as the year progresses regarding crop yields. We've implemented some measures, as I mentioned earlier, to ensure we are well supplied for 2023 and into 2024. There’s nothing significant to report at this time. I noted the destocking issue; in each of our businesses and product lines, we serve various types of customers. Some businesses might be more exposed to specific customer types. It's fair to say that SNI has a different customer composition compared to the rest of Flavors & Extracts, which is why we experienced a more pronounced destocking effect with SNI than with the rest of that portfolio. However, as the year unfolds in 2023, I believe we will perform well there. Reflecting on 2022, despite the challenges in SNI, Flavors managed to achieve mid-single-digit revenue growth and double-digit profit growth. We've effectively navigated through these challenges in the portfolio. I think we managed to do the same in 2021 and 2020. We've established a solid program, but I believe there’s still room for improvement so that this business and product line can contribute more positively to the overall Flavors & Extracts Group.

Heidi Vesterinen, Analyst

And then a final one is on innovation. Could you talk about innovation rates among your customers? Has anything changed given the challenging environment? And additionally, what are some Sensient innovations that you're excited about?

Paul Manning, CEO

First, I'll discuss our recent innovations by looking at the product launches we’ve experienced. In Europe, during the first half of 2022, launches decreased significantly by about 14% to 15%. However, in the second half of the year, this decline improved to a slight drop of about 1%. This suggests a positive trend for 2023. In the U.S., overall launches fell by approximately 5% to 6% last year, which marks an improvement from 2021’s decline of around 10%. Notably, in the fourth quarter, U.S. launch activities even saw a slight increase. These factors are critical for our guidance and fuel my confidence in our revenue and profit projections moving forward. The nature of our launches has shifted somewhat. In Europe, for instance, last year's food and beverage launches consisted of 40% line extensions, about 30% were new products, and roughly 25% involved packaging modifications, which might not qualify as a traditional new launch. This indicates a greater emphasis on packaging compared to previous years, but all these launches still have a positive impact on Sensient. We’re particularly excited about several new products in our Natural Color portfolio, aimed at enhancing the effectiveness and economic appeal of natural colors to encourage customer conversions. In the Food Color segment, we’re seeing strong results driven by innovation. Our Personal Care division is also rolling out numerous exciting products focused on natural colors and ingredients in makeup, which we anticipate will drive long-term growth. In the Flavors & Extracts segment, we are introducing novel extracts that we can source and manufacture ourselves. These offer a richer taste profile for a variety of applications. Additionally, in our Bionutrients business, we have intriguing launches in plant nutrition that could significantly improve growth rates and yields for growers worldwide. We closely monitor what percentage of our revenue comes from new launches, as this will be essential for our growth in 2023 and beyond.

Operator, Operator

And the next question is from Mitra Ramgopal from Sidoti.

Mitra Ramgopal, Analyst

Just a couple for me. Paul, I guess, in terms of the guidance for 2023 and the volume growth you're expecting, how should we think about it, as it relates to just continue to expand your services to the existing customers versus maybe new customer wins?

Paul Manning, CEO

Yes, I’ll start with this. The mid-single-digit guidance is reflective of Steve's earlier comments, considering both price and volume. I believe that this growth expectation is something you can rely on. There is potential for some upside. In 2022, there were numerous uncertainties, particularly regarding destocking and price adjustments. However, we managed to navigate those challenges and achieved a 10% growth for the company. You heard about the strong volume metrics I shared, indicating solid growth across many of our businesses and product lines. While the guidance may seem slightly conservative, I wanted to provide you with reliable top line expectations for the year. There is likely potential for upside in either volume or price. Regarding the revenues from expanding existing customers or acquiring new ones, our focus is significantly on local and regional customers. In our Flavors & Extracts segment, we anticipate that new customers will contribute to our ongoing success. Interestingly, in our Color Group, we have access to a diverse range of customers and still generate substantial revenue from new customers. I don’t have a specific percentage breakdown for you, but while it's often more efficient to sell more to existing customers, there are scenarios where some existing customers may show modest growth, leading us to rely more on new customer revenue. So it varies across the board, and while I can’t provide a precise percentage, that is how we approach it in our businesses.

Mitra Ramgopal, Analyst

No, that's very helpful. And then switching gears a little, obviously, interest expense is going to be a significant headwind in terms of EPS for this year. Just curious if it's causing you to maybe revisit your capital allocation priorities, maybe looking to be more aggressive in terms of debt reduction or still focusing on M&A and dividend share repurchase, if maybe we can get a sense how you're thinking about that?

Stephen Rolfs, CFO

Yes, Mitra, I would say our leverage is still at a very reasonable rate. So 2.4 debt-to-EBITDA. We have plenty of flexibility to do what we need to do. We have a lot of good investment opportunities in the business. So we are going to continue to step up our capital expenditures, and we're going to continue to look at small bolt-on acquisitions. So I think from that point of view, there's not really any change, but anything we do have remaining after those priorities, we will look to pay down debt. I think that's accurate.

Mitra Ramgopal, Analyst

Okay. And then just following up with it on the CapEx, I know if you look at '22 versus maybe a couple of years ago, obviously, significant increases, and you mentioned step-ups. Just curious in terms of any major investments you feel you need to do at this point? And should we expect the elevated CapEx to continue for the foreseeable future?

Paul Manning, CEO

We've invested in many ROI projects over the past few years and have several more planned for 2023, which makes me optimistic about our prospects. These projects are closely tied to our core product lines. When considering if the amounts in the range of $80 million to $95 million will persist, the baseline should reflect our current depreciation and amortization, which is around $50 million. I can't see us falling below that figure. The extent to which we exceed it will depend on how many ROI projects we can effectively complete each year. Given the size of our business and the number of locations, there are structural constraints on the amount of capital we can invest within a year, especially since some projects may disrupt operations by requiring plant shutdowns. While historically, $80 million seems high, I'm confident we can sustain and even enhance our growth due to the upcoming CapEx implementations. For this year, I project $85 million to $95 million, which includes promising opportunities, and I'm also optimistic about 2024 with more solid projects lined up. This is very encouraging for the company as these projects represent our best chances for high returns on capital allocation. We’ll continue to guide within this range for 2023 and likely be close to it in 2024. However, as we approach 2025, we aim to capitalize on the investments we've made, keeping the $50 million figure as a benchmark for our maintenance needs.

Mitra Ramgopal, Analyst

Okay. No, that's great. And then finally, just maybe circle back on the Personal Care business, a little in terms of what you're seeing, your expectations, obviously, things have sort of settled down in terms of remote and back to office. I don't know if you still expect further bounce back or that has sort of played out a little for you?

Paul Manning, CEO

I believe Personal Care experienced a strong recovery in 2022, as we mentioned during the call. However, we did observe a slight slowdown in the fourth quarter and the first quarter, mainly due to destocking. As we move into 2023, I believe the markets for makeup, hair care, and skin care are quite resilient. A significant positive for 2023 is the reopening of China, which is an important market for us in personal care and should benefit our performance. In Europe and North America, we are still experiencing some destocking pressures in the first quarter, but I am optimistic about our business prospects for the year, although they might not be as robust as those for Food Colors, Pharma, or Flavors & Extracts. Nonetheless, Personal Care remains a fantastic business with a strong technical focus. Our efforts to diversify within these segments are ongoing, and we have made significant progress that we are pleased about. There is also considerable new product development activity, presenting opportunities for continued growth in personal care. Additionally, the fact that people are now out and about without wearing masks is very beneficial.

Operator, Operator

The next question is from David Green from Boldhaven.

David Green, Analyst

A couple of questions following up on some of the previous ones. In terms of the price and taking price this year, I appreciate it's very early on in the year. But have you had any sort of color or do you have any thoughts on the risk of pushback from customers, especially given the levels of inventory that they might have and the consumer demand backdrop?

Paul Manning, CEO

Yes. One of the least enjoyable discussions for a salesperson is approaching a customer about a price increase. There hasn't been much change in that area. Customers might be a bit more dissatisfied with price increases now compared to last year. However, no one welcomes a price hike; it's always challenging. Timing and the extent of the increase need careful consideration, taking into account the customer's ability to incorporate this into their financial model while still making a profit. It's essential to create mutually beneficial solutions in the market. I believe inflation has mostly stabilized in key markets and critical inputs like energy. However, as we move into 2023, I don't expect a sudden resolution to inflation by July 1st, making everything revert to normal. Rather, it will be a gradual process, with potential deflation in some essential raw materials and inputs, but the timing and scale are uncertain. Everyone is making educated guesses about this. My prediction is that while inflation should stabilize overall, there will still be some areas of increase, as well as downward trends. We collaborate closely with our customers to ensure we cover our costs, but they also need to maintain sales. If they aren’t selling, then just covering costs isn’t very beneficial. Therefore, it’s crucial to find a winning situation for both sides. We were quite successful in 2022, and I have every reason to expect we will similarly succeed in 2023, at least in terms of cost coverage.

David Green, Analyst

Yes. And whether or not you can give any granularity on this, given it's a moving goal post at the moment. I think cost inflation for this year was probably running at 9% to 10%. I'm just sort of thinking forward to this year, you touched on a few things in terms of some specific commodity prices have come down. You've got sea freight coming down. One thing you called out historically has been energy costs in Europe, which have also gone down as well. So I guess, more broadly speaking, what would be an expectation for cost inflation for '23? Or is it just too much of a guess at this point?

Paul Manning, CEO

I don't know the exact answer. However, I believe we can manage any potential issues through our pricing strategy. If I had to make a prediction, I don't think it will be as challenging as it was in 2022, which aligns with common expectations. It's difficult to determine until the year progresses. It's important to remember that inflation is increasing our costs and requiring us to adjust pricing. Nevertheless, our products don't represent a major cost burden for our customers. Even though customers may face significant expenses, those usually do not stem largely from food colors and flavors. One of the advantages of our business is our ability to pass on pricing while still providing valuable products that support our customers' success. Overall, I wouldn't say we're significantly burdening our customers due to inflation—most of their challenges will come from other areas. In summary, I believe we can achieve the necessary pricing to cover our costs and maintain our business.

David Green, Analyst

Okay. No, that's great. I don't think you're going to like me very much because I've got a quick question on SNI, which you didn't want to talk about that anyway. I think you may have spoken about SNI being, give or take, a 5% drag on F&E for 2022. And on that basis, we'd expect a rebound to come through this year. I just wanted to maybe try and get a feel for how much of that might unwind this year and what kind of tailwind it could generate?

Paul Manning, CEO

Yes. So yes, SNI was a drag in 2022. I think SNI will rebound in 2023 for some of the reasons that I've already discussed. So yes, I think it's fundamentally a terrific business and it's a tremendous benefit to have that business in Flavors & Extracts as it does broaden our portfolio at many of these related customers. So yes, I would tell you that the rebound is not going to be in Q1. But I would tell you that the rebound will take place in 2023. And I think that's only going to add to the success of the Flavors and Extracts group.

David Green, Analyst

Great. Just one final quick question. Just touching on the question earlier on product launches. And obviously, you talked about a higher mix of line extensions versus new products in 2022. Just wondering on for 2023, if that sort of mix changes more towards new products. Is there a big difference in terms of revenue or profit contribution when you are dealing with a new product versus a line extension?

Paul Manning, CEO

Well, so the first part of your question, I would anticipate, just as I think about and look at our pipeline, that there would be more kind of new-to-the-world style products this year, as opposed to a line extension. I wouldn't necessarily say there's a significant difference in the profit stemming from a line extension versus a new launch. The difference tends to be the magnitude. So the magnitude of a new launch may be significantly greater than a line extension, but a new launch is a heck of a lot riskier than a line extension. Think of a line extension of like a sequel, like Jaws 4. Not much of a risk, right? Jaws 1, 2 and 3 were pretty good. It kind of lends itself to a pretty good idea to extend that line. But a new product on the other hand, you're launching a whole different category of movie potentially there to go along with this cinematic thriller metaphor I've got here. So bigger impact potentially, but it can be a lot more risky. So the thing that launches in 6 months later goes away, that doesn't feel real good versus, say, a line extension, which you could have for several years. And it's the very nature of that risk profile that is why you see fewer launches when tightening starts or recessionary environment starts. So what gives me optimism about '23 was that comment I made earlier about how there's been an inflection point in new launches, regardless of their type, that's a super positive. That demonstrates to me a customer's eagerness to really engage very thoroughly in the market and potentially even take some risks.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back to the company for any closing remarks.

Stephen Rolfs, CFO

Okay. Thank you. Since we are starting the new year in our prepared comments, we made some comments to help with modeling for 2023, just to reiterate that. I indicated, we did expect interest expense to be up about $11 million over the level in 2022. I indicated our tax rate would be slightly higher. We're expecting a 25% tax rate. One other comment on our corporate expense, our unallocated corporate expense that's a line item that has increased significantly the last couple of years because we've had to reset our performance-based compensation. I would say that, that has now normalized. And I would expect a more normal inflationary increase of about 3% in our corporate expense. So I would look at that at about the level of $57 million for 2023. And then the last comment I made was after a year of FX headwinds, we do expect one more quarter where FX will be a headwind. But then in the second half of 2023, based on where rates are today, it should be a moderate tailwind for us. So with those comments, we'll conclude our call. Thank you, everyone, for joining us this morning.

Operator, Operator

The conference has concluded. You may now disconnect your lines.