Good morning and welcome to the Sensient Technologies Corporation 2021 First Quarter Earnings Conference Call. All participants will be in listen-only mode. 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 first quarter earnings call. I am joined this morning by Paul Manning, Sensient's Chairman, President, and Chief Executive Officer. This morning, we released our 2021 first 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. I'm pleased to report 4% consolidated adjusted local currency revenue growth. Our Flavors & Extracts Group reported 9% adjusted local currency revenue growth, more than 20% adjusted local currency operating profit growth, and 130 basis points adjusted operating profit margin improvement in the quarter. Our Asia Pacific Group reported 5% adjusted local currency revenue growth and over 30% adjusted local currency operating profit growth. Our balance sheet is strong, and our debt-to-EBITDA is now at 2.4, down from 2.9 a year ago. In April, we completed the sale of our Fragrances business, and we are currently assessing various acquisition opportunities. Overall, I'm pleased with our first quarter results and our start to the year. We continue to see an increase in new sampling requests and strong activity in the sales pipeline, both of which are good indicators of future product development opportunities and product launches. Our sales attrition rates continue to be at the low levels we achieved throughout 2020. The impact of COVID-19 continues to vary depending on geographic region and product line. Geographically, we are beginning to see positive trends in the U.S. and certain Asia Pacific countries. However, Europe and Latin America continue to be impacted by government regulations, slower vaccine rollouts, and softer markets. From a product line standpoint, we continue to see growth in a number of our sweet, savory, and natural ingredient product lines. However, we continue to see headwinds in personal care, makeup, and QSR. We expect much of the personal care headwind to subside later in the year.

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 2021 and 2020 remove the impact of the divestiture-related costs, the operations divested or to be divested, and the impact of the costs related to our operational improvement plan. 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. Our first quarter GAAP diluted earnings per share was $0.75. Included in these results are $3.1 million, or $0.07 per share, of costs related to the divestitures and the cost of the operational improvement plan. In addition, our GAAP earnings per share this quarter include approximately $0.05 of earnings related to the results of the operations targeted for divestiture, which represents approximately $25.6 million of revenue in the quarter. Last year's first quarter GAAP results include $10.9 million, or approximately $0.26 per share, of costs related to the divestitures. In addition, our GAAP earnings per share in the first quarter of 2020 include $0.03 of earnings per share from the operations to be divested and approximately $36.6 million of revenue. Excluding these items, consolidated adjusted revenue was $334.1 million, an increase of 4% in local currency compared to the first quarter of 2020. This revenue growth was primarily a result of the Flavors & Extracts Group, which was up 8.9% in adjusted local currency, and the Asia Pacific Group, which was up 4.7% in adjusted local currency. The Flavors & Extracts Group reported 21.2% adjusted local currency operating income growth, and the Asia Pacific Group reported 31.4% adjusted local currency operating income growth. Adjusted local currency operating income in the Color Group was down 13.3%, primarily as a result of the personal care performance.

Our first question comes from Heidi Vesterinen with Exane BNP Paribas. Please go ahead.

Morning. I just have a few questions.

Hello, Heidi.

Hi, how are you? So, I wondered if there is anything you can share on the exit rate in Q1. So is it fair to say Flavors & Extracts might be slowing and Color is improving? Do you see that already? So that's the first one. And then the second question is more specific on Colors. Could you talk more about the slowdown in food and pharma, please, the 1% growth that you saw and also the unfavorable product mix that you highlighted? Are both of these related to the slower launches in naturals that you talked about in your speech and what's the outlook? And then lastly, could you maybe update us on pricing and inflation trends for the year? Thank you.

Let me start with the exit rate for Q1. The businesses are on track to meet our mid-single digit revenue growth goals for the year, and I'm very confident about that. Flavors had an excellent quarter, and I expect strong growth to continue there. Regarding Colors, particularly in food and pharma, I’ll elaborate shortly, but overall, we've started to see a rebound in personal care and cosmetics. Many of our customers are reporting positive results, which typically lag behind our volume uptick due to the lengthy supply chain and longer shelf lives of products. As of now, we are seeing encouraging signs in personal care, which is promising for Q2 and beyond for Color. We weren't sure this rebound would happen as swiftly as it has. Therefore, I'm optimistic about mid-single digits growth for the Color Group for the remainder of the year. The situation in Asia is complicated with various lockdowns and unusual events, yet we're still managing respectable growth there. Looking at our activity across all three groups, I'm quite pleased. In reviewing the product launches from 2020, it's interesting to note that the total number of launches in the U.S. and Europe was not significantly different from 2019. While these launches were smaller in scale compared to 2019, the total number remained fairly stable. The primary difference was a decrease in larger product launches from major consumer packaged goods companies, which typically have a greater impact in a non-COVID year. Our win rate remains strong in Q1. The slowdown in food and pharma can fluctuate within any given 90-day period and is often tied to the timing of product launches, which may shift to later quarters. There is an undeniable slowdown in Europe that has proven challenging, but I see no systemic issues. The activity is looking positive as we approach Q2 and the rest of the year. We have a strong track record in natural colors growth, and this trend should continue. We've made substantial investments in this area and have a robust portfolio, with widespread access that gives us leverage. This access translates into launch activities from both large and small customers. While some larger customers have fewer launches, we feel this impact more in Color than in Flavor, where we typically serve a broader range of market segments. I remain confident that this downtime is temporary and that our outlook looks promising. Concerning pharmaceuticals, there has been a noticeable slowdown in certain nutraceutical categories. This sector gained significantly during COVID; however, as vaccines roll out and markets open up, I don't expect to see the same volume of nutraceutical products as last year. This slowdown is part of the natural adjustments following the easing of COVID restrictions and represents a smaller part of our portfolio, so I don't foresee it being a major obstacle for us. On the topic of pricing and inflation, there's been chatter about some consumer packaged goods companies planning to raise their prices. Last year, we primarily saw the removal of discounts rather than price increases, with customers no longer benefitting from promotions. This year, we are definitely witnessing announcements from brands looking to raise prices. We have encountered inflation related to transportation and certain raw materials, especially those impacted by production or export challenges in China. While we can manage some of these issues with surcharges, we don't anticipate a significant wave of inflation at this time. I expect that there could be some inflation next year, but we're generally successful at countering raw material inflation with our pricing strategies, so I'm not overly concerned about inflation at the moment. Individual price increases do exist, and transportation costs have risen, but so far, we've managed to handle these effectively.

Thank you.

Okay, sure.

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

Thank you. This is sort of a hard question to follow up on, but your Color performance was better than we expected overall, and I'm trying to get a sense of whether that's because cosmetics were less bad or the other pieces were significantly better than I had modeled. Can you just give a little sense of sort of what's going on sequentially or involving part of the cosmetic side?

Yes, if I were to answer your question very literally, it seems that the situation in Q1 for cosmetics was somewhat less negative. However, I think it would be helpful to provide more insight into what we're currently observing. Our personal care business includes makeup, hair care, and skincare. Skin care remains a strong part of the market and our portfolio, even though it's a smaller segment. Hair care performed reasonably, though not as well as we anticipated. On the other hand, we faced significant challenges in makeup. There have been some positive developments, particularly in Asia, where we're starting to see improvement in certain markets. As we approach Q2, daily sales are looking promising. Based on what I'm observing this month and the rest of the quarter, I have a positive outlook for cosmetics, particularly in the makeup segment. This will be an important factor for the second quarter and the latter half of the year for the Color Group. With regard to food and pharma, I believe we're going to perform well there, but the key factor is cosmetics making a comeback. I initially thought this wouldn't happen until the second half of the year, but I'm feeling optimistic that it's happening now, which is very encouraging.

That's really helpful color. Thank you. So one of the things that we keep hearing from food companies and QSRs in particular is that they may bring sort of new items to their menus more slowly. You talked about overall new product wins, and I know the QSR isn't necessarily the be-all and end-all. But we keep hearing you talk about how the shift they made to comfort food may evolve back to sort of normal more slowly. So, as you think about the kinds of products, you referenced the CPG separately. Their behavior is a little different. But as you think about the kinds of products that you're seeing in development right now, does it suggest that we're seeing a different kind of new product coming back or are we just in the early stages?

That's a very interesting question. At a broad level, the trends we observed before COVID continue to some extent during COVID. For instance, natural colors are a macro trend that I believe will persist, and the levels of natural colors in the U.S. market and coloring foods in the European market remain very high. Their usage in products stays consistent with what we saw both before and during COVID. A potential question could be about nutraceuticals and whether they maintain a robust level of product launches. I predict that this might decline in some of our product categories based on what I see in the pipeline today. However, many of our customers are quite aggressive; they are eager to launch new products, capture market share, and secure shelf space and online visibility. They continue to focus on many of the aspects we've built our business around, such as naturals, natural flavors, colors, and extracts. Thus, these trends among our B and C customers remain strong. We have also noticed an acceleration in SKU rationalization across various segments of the market. For example, foodservice has rationalized their menus during the pandemic. What they return with will likely be similar to their offerings before COVID-19. I don't expect significant changes in the types of products our customers are seeking, which also reflects what the end customers want. Whether we will see large-scale launches or more incremental ones remains to be seen, as our pipeline includes both major launches and incremental line extensions. Nevertheless, I don't think the nature of the products is going to change significantly.

That's super helpful. If I could just squeeze one more in. You talked about logistics. This past quarter we're hearing a lot more about difficulty in keeping plants fully staffed, either because workers are sick or quarantined or because hiring has got more difficult. What's been your experience this quarter and is it getting better or worse?

Our attendance has been outstanding since the onset of COVID-19. We have actively communicated our mission to employees, emphasizing the importance of their roles and customer service, particularly in critical areas like pharmaceuticals and food flavors. Our employees understand and strongly believe in this mission. Attendance has been excellent, and many of our employees are vaccinated. We have also been conducting proactive testing for several months, which has helped create a safe working environment and boosted confidence among our staff. While it may not be as easy to find workers everywhere as it was before, it hasn't significantly impacted us. We are still meeting our on-time delivery targets and maintaining strong customer service. It is important to note that, while there are challenges in staffing, this is not a major issue for us at the moment.

Super. A lot of good news there. Thank you, Paul.

Okay. Thanks, Mark.

The next question is from Mitra Ramgopal with Sidoti. Please go ahead.

Yes, hi, good morning. Thanks for taking the questions.

Hey, Mitra.

Hey, Paul, how is it going? First just want to get a sense in terms of the operational plan improvement. I think that was scheduled to be finished mid-year. Is that still on track?

Well, if you're referencing the one in personal care, yes.

Yes.

We are on track with that one. And yes, that's going to be really, really helpful as that business comes back because that business is going to come back not only with revenue but with lower fixed costs which every accountant in the world loves to hear.

Okay. That's great. I'm sure you're managing the audit costs. Can you give us an idea of how far along we are in the overall cost reduction effort?

I would think of it less as a baseball game or practice. We're always looking to cut costs and improve, which is integral to our operations each month. I'm discussing this with our group presidents, focusing on reductions in SG&A, fixed costs, and raw material expenses. This approach has become a standard within our organization, particularly as a result of our restructuring experiences. We faced some challenges in the past, but those experiences have made us adept at managing these processes moving forward. So, consider this an ongoing effort.

Okay.

I think personal care is a more recent one, but flavors and colors, you heard me reference a little bit of that for Asia as well. That's going to continue.

Okay. No, that's good. And then, Paul, I know you talked about a lot of acquisition opportunities. First, I was wondering if you can give us a little more color in terms of the New Mexico, Chile products acquisition, how meaningful that is. And obviously, you also mentioned expanded distribution of Univar. Both are in Mexico. Just curious if there is an increased desire to expand your presence there and just again overall maybe some of the acquisition opportunities we should be looking forward to.

Yes. New Mexico, Chile is a facility we recently closed on, which will provide us with additional capacity in our SNI business that is performing very well. This acquisition not only increases our capacity but also places us closer to certain growing regions, which we believe will enhance our logistical costs for that business. This is essentially an acquisition of a facility in Southern New Mexico. Regarding mergers and acquisitions, we often discuss sensible acquisitions and being prudent with our shareholders' wealth. We see some promising opportunities that I mentioned earlier, and you may hear more about them soon. We've sold off parts of our portfolio that we don't think align with our future, with the expectation that they will thrive under different ownership. Our core businesses in food, pharma, and personal care remain very strong with positive market dynamics and are driven by technology, so you might see an acquisition in any of these areas. However, regarding your question about Univar and New Mexico, Chile, this is not an attempt to necessarily expand our footprint in Mexico. We're concentrating on technology and making incremental improvements to our portfolio. At this moment, I don't have any large-scale acquisitions planned. Instead, we foresee sensible, reasonably priced, bolt-on acquisitions that involve minimal disruptive integration efforts. There may indeed be opportunities to discuss in the future.

Okay. No, that's great. And then again, congratulations on the divestitures, completing the ones you were planning to. And now, I know you're always looking at the underlying business, and I'm just curious as you look at where you are today in terms of divestitures, you feel pretty comfortable going forward you have their mix you're pretty comfortable with.

Yes. I feel great about the portfolio. Now, there may be some million-dollar paper dye business somewhere that Steve wants to sell, but other than that, no, I think we're feeling really good, Mitra. Steve, is there anything you-

No, I think the portfolio is in good shape after all of these moves over the last couple of years.

Okay, great. Thanks, again. Nice quarter and thanks for taking the questions.

Okay. Thanks, Mitra.

The next question is from Leigh Ferst with HighTower Advisors. Please go ahead.

Thank you. Good morning. I have kind of big picture question. Can you talk about the external factors that are kind of rolling through your outlook for the rest of the year? Like you said, Color is getting better now. Maybe some of the emerging markets are not recovering as quickly. How do those puts and takes growth through the rest of your year in terms of your outlook?

Well, I think we've taken into account many of these factors as we built out our projections, as we built out our EPS guidance. Certainly, COVID-19 has to top anybody's list of factors to consider. And I think if anything, personal care is coming back faster than we thought. But I would say in general, no real surprises there. Yes, maybe there are some questions about how much new nutraceutical maintains post-openings. But I think those broader macro trends continue to be very, very solid in our sampling, in our pipeline. So that's good. I think what we're potentially seeing in some markets is kind of a shift in share among our customers. I mentioned there are certain types of customers, we call them B and C customers, who have been fairly aggressive trying to take share in foodservice or in retail or in other outlets out there, and so that remains to be seen how that one plays out. But that could have some interesting implications in certain markets where perhaps larger participants once had a very large share, they could see some inroads being made there. I think that could certainly be an external factor. I talk about these logistic things, but you always have issues in a business. That's why you have folks here to fix problems because there's always things like that. Okay, a bottleneck in the Suez Canal, yes, that one was a rather unusual event, but things like that will happen, and we can mitigate through those. I don't really see like there's much systemic problem there. I think really what it is, is when you turn off a supply chain that's really, really finely-tuned and highly efficient and you turn it off suddenly without warning in certain parts of the world and then you try to start it back up, it's kind of tough. It's like a lawnmower you leave in your garage all winter and then you try to turn it on in the spring, it doesn't necessarily start up immediately. And so I think there's a little bit of startup challenge from that standpoint trying to re-optimize these supply chains. But again, we have mitigated that through holding more inventory, we’ve mitigated that by producing more, forecasting more with our customers to really get through that one. So, yes, I would say it's COVID, it's some of the trends around nutraceutical, and it's certainly the supply chain and logistics factors. A question came up about inflation for 2022. I think that's probably a foregone conclusion that there'll be some inflation, but I don't see that as being an impact in terms of our achieving our broader goals of mid-single-digit growth.

Thank you.

Okay. Thanks, Leigh.

The next question is from David Green with Boldhaven. Please go ahead.

Hi, Stephen. Hi, Paul.

Hello, David.

Hi, David.

A couple of questions. Thank you very much. Just sort of the ongoing trends that you're seeing within the shift from synthetic to natural, any just general comments you could make there. Are there any verticals or new verticals that are really taking off? Second question is really, are you seeing any changes in trend where your customers want more of an end-to-end solution, and whether in that regard that's something where you need to team up with another party or how you address that specific dynamic? On the balance sheet, just if you could give us any update there, the sort of impact potentially of the Fragrances disposal and more generally, any color you can give on cash flow generation as well would be great.

Okay. Let me start off and then Steve will fill in some blanks and certainly take your balance sheet item there. The trend from synthetic to natural, it's pretty broad-based. When we measure that, it's really the vast majority of new product launches contain natural colors. So that would suggest that, and that's across all categories. So whether you're talking about snacks or pet food or beverages, it's the vast majority of new product launches contain natural colors. Now, are there a lot of broad-based conversions of existing synthetic colors to natural? Not a huge number, but those certainly can happen as well. But I would say not a whole lot has changed there. It was 80% of new product launches contain natural colors going into COVID, and the last report I received says it's 79% right now. So not a lot has changed there. The question about teaming up. Now, are you getting more integrated selling? Let me understand where you're trying to go with that one.

I guess I was just thinking about whether it's more of an end-to-end solution I guess where a customer is asking you to provide the color component of that, but I'm not sure whether there would be another part of that which was something that you couldn't provide that they were asking you for.

Okay. Well, yes, we always look at backward integration and forward integration, whatever word you want to call it, but our bread and butter, so to speak, has always been we provide these food ingredients; some of our customers are providing a fully formulated product. That doesn't mean you'd necessarily sell them all those elements of their fully formulated product. And so we think a lot in terms of just really the development needs of our customers. We don't necessarily engage strongly in a lot of their production needs. To my knowledge, we may have a handful of products that go directly to consumers. The vast majority of our business, probably 98% of it, is B2B. And as far as I'm concerned, we will continue with that approach, unless something seismic happens. But, no, we like the position that we're in right now as an ingredient supplier, and we think that's where we create the most value for sure. Do you want to take the balance sheet one, Steve?

Sure. So first off on the divestiture. So the sum of all the proceeds that we'll realize on the Fragrance divestiture will be in the low-$40 million range. Some of that came in right at the end of the quarter. Most of it will come in Q2. There will be some charges related to the divestiture now that that is closed, but those are largely non-cash. So there won't be a lot of cash charges for the remainder of the year. On cash flow in general, we were down slightly in the first quarter primarily because of the incentive payments. But outside of that, cash flow held up very well, and we expect to have strong cash flow for the year. Last year we realized a lot of cash from inventory, over $40 million, and we still have opportunity in areas of inventory, but there's other areas where we need to build up inventory a little bit, particularly in our natural ingredients business where we've been very successful commercially. So, I would expect more of the cash flow this year to come from high-quality earnings growth as opposed to working capital, but we still have some opportunities in working capital.

Great. Could you just remind me as we look at the portfolio today, what percentage of revenues do you think is from natural?

In our food color business, we can distinguish that about 55% of our products are natural. For the rest of the business, the levels of naturality vary and are not as clearly defined. However, I can say that in the food sector, most new product development is focused on natural solutions, and there is also significant interest in naturals within the cosmetic and personal care sectors. While synthetic products continue to be widely used in personal care, there is a growing interest in natural options there as well.

Great. Many thanks.

Okay. Thanks, David.

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

Okay. I'd like to thank everybody for their time this morning, and that will conclude our call. Thank you.

The conference has now concluded. Thank you for participating in today's conversation. You may now disconnect.