Good morning and welcome to the Sensient Technologies Corporation 2020 Fourth Quarter and Year-End Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steve Rolfs. Please go ahead, sir.

Good morning. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's fourth quarter earnings call. I'm joined this morning by Paul Manning, Sensient's Chairman, President, and Chief Executive Officer. This morning, we released our 2020 fourth quarter financial results. A copy of the release and our investor presentation is now available on our website at sensient.com.

Thanks Steve. Good morning. Sensient reported fourth quarter earnings this morning, and I'm very pleased to report that we delivered adjusted fourth quarter local currency revenue growth of 7.9% and adjusted local currency operating profit growth of 19.2%. We continue to have strong results from our Flavors & Extracts group, our Food and Pharmaceutical business, and the Color group, as well as in our Asia Pacific group. Our results were at the top end of our EPS guidance for the year. Overall, the company had a strong financial and operating performance in 2020. The Flavors & Extracts group had an outstanding year achieving high-single-digit revenue growth and double-digit profit growth. Within the Color group, the Food and Pharmaceutical business also had a strong year with mid-single-digit revenue growth and double-digit operating profit growth in 2020. The company's cash flow from operations increased over 23%, and we reduced debt by over $90 million in 2020. We completed two of our three divestitures and signed a purchase agreement for the third, which we expect to close in the first half of 2021. Our focus over the past years on customer service levels has been a significant factor for our strong revenue growth in 2020. Our continued focus on sales execution, along with lower overall sales attrition across all three groups, is paying off and should continue to benefit future periods. In addition, our focus on reducing fixed costs has also contributed to our overall profit improvement and strong operating leverage.

Thank you, Paul. In my comments this morning, I will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2020 and 2019 remove the impact of the divestiture-related costs, the operations divested or to be divested, the impact of the costs related to our operational improvement plan, and a one-time COVID-related payment to our employees. We believe that the removal of these items provides a clearer picture to investors of the company's performance. This also reflects how management reviews the company's operations and performance. During the fourth quarter, the company's Board of Directors approved a one-time payment to our employees to recognize their commitment during the COVID-19 pandemic, and the extraordinary and unforeseeable challenges associated with COVID-19. The cost of this payment is approximately $3 million. Our fourth quarter GAAP diluted earnings per share was $0.59. Included in these results are 3.2 million, or approximately $0.07 per share, of costs related to the divestitures, the cost of the operational improvement plan, and the one-time COVID payment. In addition, our GAAP earnings per share this quarter include approximately $0.06 of earnings related to the results of the operations targeted for divestiture, which represents approximately $25.2 million in revenue in the quarter. Last year's fourth quarter GAAP results include approximately $0.01 of earnings per share from the operations to be divested, and approximately $33.7 million of revenue. Excluding these items, consolidated adjusted revenue was $309.5 million, an increase of approximately 7.9% in local currency, compared to the fourth quarter of 2019. This revenue growth was primarily a result of the Flavors & Extracts group, which was up approximately 14% in local currency. Consolidated adjusted operating income increased 19% in local currency to $36.8 million in the fourth quarter of 2020. This growth was led by the Flavors & Extracts group, which increased operating income by 54.9% in local currency. The Asia Pacific group also had nice growth in operating income in the quarter, up 7.8% in local currency. Operating income in the Food and Pharmaceutical business in the Color group was up nearly 15% in local currency. The increase in operating income in these businesses is a result of the volume growth Paul mentioned earlier, combined with the overall lower cost structure across the company. The overall impact of COVID on the company's results has been a net negative. The impact on our Food and Pharmaceutical businesses is mixed, but as we have discussed, the negative impact in our personal care business within the Color group was significant in 2020. Our adjusted local currency EBITDA increased 16.9% in the quarter, and 3.2% for the full year of 2020. Our cash flow from operations was extremely strong in 2020, up 53% for the quarter, and up 23% for the year due to our strong earnings growth and significant efforts to reduce our inventory levels. Capital expenditures were $52 million for 2020 and our free cash flow increased 58% in the quarter and 21% for the year. We have reduced debt by approximately $90 million since the beginning of the year. Our debt to adjusted EBITDA is now 2.4, down from 2.9 at the start of the year.

Our first question is from Heidi Vesterinen with Exane. Please go ahead.

Hi, good morning. Couple of questions on the strong growth in flavors please. On the 14%, could you please quantify how much was volume and price? And then the second question on flavors, we know that you have big exposure to the U.S. market, and the U.S. market overall was very strong last year. How much of your growth do you think was market driven and how much do you think was driven by the initiatives you outlined and regaining customers that you had lost? And on that point about customers, is there further to go on regaining the many customers you had previously disappointed? So let's start with that. Thanks.

Okay, so a couple of comments on the U.S. So, the U.S. market, as we observed, kind of went in cycles. A lot of the volume growth was towards the first half of the year, as consumers were stockpiling. By the second half of the year, a lot of that stockpiling had receded. I think that's one point. Number two, product launches were down throughout 2020, really across the board in these categories. Our estimates say product launches were down about 10% in just the raw number of product launches, but considering the value of those launches, it was down quite a bit more than that. There were fewer launches from the bigger customers, meaning less value attainable for suppliers. So those were two factors; the reduction in launches was a second-half factor. I think the volumes were very heavy at the beginning and much lower towards the end of the year. But as you can see in our flavor group, our growth accelerated throughout the year. I think it’s fair to say that we grew well in excess of the market in the second half. Regardless of what we can believe that market rate to be, it was probably about a 3% to 5% volume growth in some of these segments. Other segments were quite a bit higher. Our success was really across the board in the U.S. in each of our key segments within the flavor group, certainly within the food colors and pharma group. We've spent a lot of time focusing on our core customers, our P&C customers. As for regaining them, the restructuring is many years gone now. We are well past those impacts. The current success is built on the new wins that we've generated, our ability to hold on to the business that we have, which really hurt us back in 2019 and 2018. So, there are very key factors. Looking at 2021, there's certainly a lot of opportunity for us to continue winning and maintaining the business. We are in a very aggressive market about launching products to end consumers, and we are confident in our chances there.

Sure. So, the flavor growth was largely volume-driven. I would say price was about 1%. So, most of the growth there was volume.

Thanks. If I could follow up on your comments about product launches being down. Do you see that picking up and do you see innovation appetite picking up, or is it too early in flavors?

One of the bellwethers we use is our rate of sampling to customers. Interestingly enough, our sampling was down probably 10% to 15% on average during 2020, consistent with about a 10% to 15% reduction in launches with our customers. So, as we look forward here, I think our sampling suggests that we believe a mid-single-digit revenue growth rate is achievable in 2021. I think the launches will be more of a back-half factor than a first-half factor. This is certainly true for our personal care business. Even in our food business, there are indications in our pipeline that most of the launches in 2021 anticipate being more back-heavy in timing than first-half timing. We see considerable interest among our customers during COVID to revitalize their product lines by cleaning up labels and introducing more natural ingredients. There were a lot of good activities in 2020 for the long-term of the market. The short answer here is I would say the second half in particular for personal care and second half for food and beverage will see some incremental improvement.

Thank you.

The next question is from Mark Connelly with Stephens, Inc. Please go ahead.

Thank you. A couple of things, I'm thinking back to the first half of last year, really the second quarter when you got hit hard in categories like ice cream and candy and energy. Can you talk about how much recovery you've actually seen in those particular categories?

Yeah, I would say that ice cream, you're right, the first half of last year was pretty bad, particularly in Europe. As the year progressed, the ice cream market improved in the Americas, but it continued to face a lot of headwinds in Europe. Much of that is driven by occasion for use, right? So, a lot more ice cream is consumed outside of the home in Europe compared to the Americas market. Candy, in traditional areas that we would play, i.e., highly colored, highly flavored products, saw pretty significant headwinds throughout 2020. If anything, the second half was a little less worse than the first half, but I wouldn't say it was by much. There's definitely been improvements in chocolate, but we don't play in that area as it's not colored and not flavored beyond cocoa flavors. On the energy side, we saw steady growth in a pretty steady market across the world from Asia to the Americas and Europe, and energy drinks had a good year for us.

Okay, that's helpful. And second question, you've obviously made a lot of progress over the last couple of years on your manufacturing footprint. But in the last couple of quarters, there was some talk about maybe some more room to go there. Is that going to be a significant initiative or is it just sort of at the margin?

No, I would say it's at the margin. Our big work was the restructuring phase one and phase two many years ago, principally directed at flavors. We've got the right footprint substantially. The divestitures that you've seen completed in the last 12 months were certainly driven by that and are very much portfolio-driven. So where we are is a far more streamlined organization. Food and beverage, pharma, along with personal care has a very focused portfolio. I like our footprint, but we're always looking for areas to enhance the business. We took out 30 days' inventory in 2020. There’s still more for us to do. We're not done with optimizing the organization from a manufacturing or SG&A standpoint. There is no massive restructuring contemplated, but we’re always looking to take out costs to optimize the organization and improve efficiencies.

And if I could just slot in one more question, you pointed to lower customer attrition. You've made some significant changes in the way you market your products. Is there more room to run there or have you hit your lower attrition targets?

You always want attrition to be zero. So I suppose it's more of a philosophical target than a real target. But yes, our attrition is substantially down, and some of the attrition is natural. Customers have a product, they delist it and remove it from the market. This is kind of a natural thing that you would expect in the markets that we're serving. That said, you need to win many new projects to make up for things being pulled from the market. Some attrition is driven by providing poor service or letting your customer down in some way. This is the part I'm particularly focused on, and Sensient knows I hate losing business. We are making a strong point of providing our customers with excellent customer service. It's fundamental to running any business, but it's often overlooked in day-to-day activities. So we are focused on that. I think 2020 was a significant year in reversing some of those trends you might have seen in previous years. Regarding more sophisticated products we’re focused on selling, these tend to be far more defensible and represent solid business that other competitors might find too risky to replace.

That's very helpful. Thank you.

The next question is a follow-up from Heidi Vesterinen with Exane. Please go ahead.

Hi again, a couple, what is your outlook on raw material costs and pricing please? And specifically in Natural Ingredients, I think last year you had talked about cost headwinds. So what is the latest as we look out at 2021? And then the second question is on what is your exposure to the plant-based trend please, and perhaps if you could give some examples if you're exposed there? Lastly, you talked about looking at sensible acquisitions; what sort of sensible acquisitions are you interested in, please? Thanks.

Okay. I'll start with your price raw material and then have Steve speak more specifically about our Sensient Natural Ingredients (S&I) business, which I know folks are interested in. In general, we don't see significant inflation on raw materials. As we entered annual pricing discussions, there were always some products that were somewhat problematic due to availability or other factors. But overall, raw material inflation was very reasonable and had a minimal impact on us. Therefore, the growth in 2021 will be more of a volume game than a pricing game. Certainly, we may take some surgical pricing here and there, but it's not a broad-based initiative for revenue contribution in 2021. If I had to project, I would say around 80% to 90% of our growth will come from volume, with the balance from price. On your question about plant-based, yes, that's a booming market right now with many companies getting involved. It presents a good technical challenge, and it’s an open market. The producers have no core listings and trading constraints as you'd see in other parts of the market. Whoever has the best technical solution wins. We like competing there. We've done well there, particularly with our natural color solutions, so we see continued potential in that market.

Sure. So, S&I, or Sensient Natural Ingredients for everybody's benefit, is a product line within the flavor and extract group. It's our dehydrated onion, garlic, chili peppers, and other products like that. Paul mentioned in his prepared comments that it's performed well this year. Looking at the supply chain and cost looking into next year, parts of the crop look a little better, while other parts look about the same. No big change in the cost structure there, and we’ve gone out with pricing to recapture whatever we needed to. We expect that product line to perform well into 2021, just as it did in 2020.

As for sensible acquisitions, with a much more focused portfolio, we want to continue investing in these areas. Any of our product lines could present good acquisition opportunities. This includes food colors, pharmaceutical excipients, and personal care ingredients. There are many potential avenues for acquisition, given the market is filled with both startup and more established companies. We insist on being able to acquire and earn a return on our shareholders' investments. When I say sensible, I refer to our ability to implement and generate returns that serve our shareholders' interests. There may be fewer of those opportunities, but they tend to move in cycles. We can be very patient with some product segments, but I am optimistic that something interesting might come along in 2021. However, I do not anticipate us making a blockbuster acquisition this year. We want to be prudent, but you never know if something bigger may appear.

Thank you.

Okay, thanks Heidi.

Excuse me, the next question is from Mitra Ramgopal with Sidoti. Please go ahead.

Yes, hi, good morning. Thanks for taking the questions. First, as you look back at 2020, and I know it's a little subjective, can you give us a sense as to what you think the impact of COVID was on the bottom line?

Well, as Steve mentioned, it was very much a net negative for the company. Leading that net negative was clearly our personal care, particularly our makeup portion of that business. With people not going out, it took a real toll. Moving over to food and beverage, it was also somewhat mixed. Food service was hit very hard in the first half, less so in the second half, but still a headwind. Candy was a problem as there were headwinds. Ice cream was sort of a headwind at times but not always. In conclusion, it was a significant net negative for us. However, we took this as an opportunity to invest in parts of our business and to truly focus commercially on our customers. We took our mission seriously, providing excellent service. We believe this was instrumental in helping us secure a lot of business in this market. As we move into 2021, everybody is optimistic that the second half will improve, and we see incremental improvements with respect to product launches and customer activity. I am optimistic about our ability to achieve a mid-single-digit growth rate this year.

Okay, that sounds great. On the operating plan improvement, you're about halfway through that; I'm assuming the guidance includes some contribution from those initiatives?

Yes, when you think about what we’ve done in the past, this is a fraction in terms of magnitude. This is to say we're really talking about a couple of facilities, not a huge economic impact from a write-off, with most of that being non-cash. We're speaking in terms of millions rather than tens of millions. Those are progressing nicely. We have a lot of experience in restructuring. I feel confident that we'll get that done correctly. This will be a first-half event, and we should expect some of those benefits in the second half of the year, with more impactful benefits showing up in 2022, particularly in the Color group within the personal care segment.

Thank you. With the divestitures coming to a close with one more to go, I was curious, now with the revamped product offering, how comfortable are you with your existing business as you look forward to achieving growth?

I'm pleased with our prospects. We've shown a solid track record in our food colors and personal care right before COVID had performed well. We have a positive outlook with growing markets. We have strong strategies, good portfolios, and a solid innovation program. Our leaders are skilled, smart, and operate with integrity. This drives a lot of our success. We have great opportunities in the Flavors & Extracts group and the Sensient Natural Ingredients business, particularly with trends towards more local production and real food.

Thanks. Could you provide some insights on the Yat-Sun collaboration? Is that meant to establish a local partnership to gain traction in the China market or is it aimed more at global expansion?

Certainly, this goes a long way in China, and it is, in fact, a global partnership. We're optimistic about opportunities in the cosmetic market there. We believe that market will recover fully, allowing us to return to our consistent high growth rates. This partnership with Yat-Sun signifies the collaborative efforts we have with our customers, demonstrating significant co-development potential and insight sharing. We're optimistic and see great opportunities in the Asian cosmetic market.

Thanks for answering my questions.

Okay, thanks Mitra.

The next question is from David Green with Boldhaven. Please go ahead. Mr. Green, your line is open.

Hi Steve, hi Paul. Hi, Amy if you're there.

Hello, David.

Can you hear me?

Yeah, sure.

A couple of quick questions, please. When you talk about better sales execution, what does that actually mean in practice and what are you doing about it? Just on the flavors business specifically, are there specific end markets that are driving that? Lastly, can you comment on the trend in the industry towards full-service end-to-end offerings? How well placed do you see yourself?

On sales execution, it's about the basics of being responsive to your customer and understanding their expectations versus what we deliver. Often, customer interactions falter when expectations don't align. We aim to pick the right customers where we can compete successfully and deliver value. Our strategy emphasizes serving our customers and assisting them in making more money. That requires close management and collaboration between our salespeople and comprehensive organizational support for their efforts. These are cultural aspects of our business that require continuous improvement.

Any specific end markets driving the flavors business?

The growth was broad-based despite the headwinds. We did well in savory, sweetened beverages, and our S&I business performed strongly. Our growth stemmed from acquiring new customers, growing with existing customers, and focusing on our service model that enabled us to win business across segments, applicable both in the Americas and in Europe and Asia.

If we take the end markets with more headwinds, such as QSR, candy, and gum, how much would they be as a percentage of flavors?

Small enough that we could overcome them in some markets. I don't have a specific breakdown in front of me, but there were a lot of headwinds in some markets. The tailwinds in others allowed our distribution to work in our favor. Okay, thanks, David.

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

Okay. Thank you everyone for your time this morning, that will conclude our call, and thank you again for tuning in to hear about the results.

The conference has concluded. You may now disconnect.