Sensient Technologies Corporation

Good morning and welcome to the Sentient Technologies Corporation 2020 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please also note that today's 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 Sensian Technologies Corporation. I would like to welcome all of you to Sensian's conference call to discuss 2020 second quarter financial results. I am joined this morning by Paul Manning, Sensian's Chairman, President, and Chief Executive Officer. This morning we released our 2020 second quarter financial results. A copy of the release and our investor presentation is now available on our website at census.com. During our call today we will reference certain non-GAAP financial measures which we believe provide investors with additional information to evaluate the company's performance and improve the comparability of results between reporting periods. 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 non-GAAP financial measures to the most directly comparable GAAP financial measure is available on the investor information section of our website at sentient.com and in our press release. We encourage investors to review these reconciliations in connection with the comments we make this morning. I would also like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements. Our actual results may differ materially, particularly in view of the uncertainties created by the COVID-19 pandemic, governmental attempts at remedial action, and the timing of a return of more normal economic activity. We urge you to read Censian's filings, including our 10-K, our first quarter 10-Q, and our forthcoming second quarter 10-Q, 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. Thank you, Steve.

Good morning. Censian reported second quarter earnings this morning. I'm very pleased at the results of our flavors and fragrances group as well as our food and beverage business in the color group. Flavors and fragrances is up mid single digits in revenue and high single digits in operating profit during the quarter, continuing its revenue growth trend from the first quarter. We also had favorable growth in our natural colors and pharmaceutical businesses, which were up in the quarter. The growth in these businesses is offset by the adverse impact of COVID-19 in the personal care market and throughout Latin America, Europe, and Asia Pacific. Despite these COVID-19 headwinds and based on current trends, we expect to deliver on our EPS outlook for the year. I'm also pleased on the progress we have made during the quarter on our divestitures. We completed the sale of our inks business and signed a definitive agreement to sell our yogurt fruit prep business. We anticipate closing the yogurt fruit prep sale in the third quarter. We continue to make progress on the divestiture of our aroma chemical and fragrance compound business. Although we have been delayed by COVID-19, we believe we can close this transaction by the end of the year. All of our production facilities are open and have been throughout the pandemic. Our on-time delivery remains high and we have successfully managed our raw materials. Our staffing and attendance at our facilities remains outstanding and I'm very proud of the dedication of our employees. We will continue to closely monitor each of our production facilities to remain ahead of prevailing GMP and sanitation practices. As a result of COVID-19, we have incurred additional costs and we have experienced significant revenue headwinds in a number of businesses. Overall, the impact of COVID-19 has reduced our EPS by approximately 10 cents year-to-date. The impact of COVID-19 on our food and beverage business is mixed. However, the impact is significantly negative for our personal care business. Now let me turn to the groups. The flavor group had another nice quarter. Adjusted local currency revenue for the group was up 5.7%. The group continues to experience positive sales growth in the finished flavors and extract product lines as well as an improving picture in the flavor ingredient product lines. The natural ingredients business also had a solid quarter. The overall impact of COVID-19 was negative to the group's revenue. The group's revenue growth is based on strong new wins generated throughout 2019 and the first part of 2020, retaining existing business and an overall decline in attrition, which was a lingering effect from our earlier restructuring activities. Net of these factors, we have generated mid-single-digit growth year-to-date, and I anticipate the same growth rate for the remainder of the year. This quarter, the Flavor Group returned to quarterly profit growth, with adjusted local currency operating profit up 8%. The higher profit was a direct result of the higher volumes, new wins, and the group's production cost initiatives. Moving forward, I anticipate continued profit growth. Overall, the group's operating profit margin was up 30 basis points in the quarter and I would anticipate a 50 to 100 basis point improvement for the year. In summary, I expect mid single digit revenue growth and mid to high single digit operating profit growth for the flavor group for the remainder of the year. Within our color group, revenue for food and beverage colors was up low single digits for the quarter. Pharmaceutical had a nice quarter, up double digits, and natural colors continues to grow, and that product line is up mid-single digits for the year. Similar to the flavor group, colors continues to focus on retaining existing business and improving the group's overall sales win rate. Unfortunately, the growth in food and beverage colors revenue was offset by a more than 20% decline in our personal care business revenue. While we saw some improvement in our personal care business in Asia and Latin America, the demand for makeup in Europe and North America was down substantially in the quarter. Given the uncertainty with COVID-19 and continued restrictions, Thank you for joining us. and that was the main reason for the Color Group's overall decline in profit. The Color Group remains focused on production takeout actions. However, these actions need more time to realize their full potential and we do not expect that the actions will outpace the profit decline in personal care. Short of a significant opening of the world economy, I would expect the profit declines in the personal care business to continue for the remainder of the year. In summary, food and beverage colors revenue is up nearly mid single digits year to date and double digits for profit. For the back half of the year, I would expect mid single digit revenue growth and mid to high single digit profit growth for that product line. Because of the impact of personal care, we would expect the color group to be flat in revenue and profit for the year. Our Asia-Pacific group had solid revenue growth in some regions, but this growth was offset by declines in other regions as government COVID-19 restrictions have significantly impacted many sales channels. The group delivered outstanding profit growth in the quarter, and I anticipate the group to return to revenue growth once restrictions in certain areas begin to ease. Based upon current trends, I expect Asia to deliver low single-digit sales growth and mid to high single digit profit growth for the year. Overall for the company, we continue to focus on our supply chain. We have increased our inventory levels on certain key raw materials and as a result, we are providing outstanding on-time delivery to our customers around the world. While we do experience supply chain disruptions, we have avoided any significant financial disruptions and we continue to reduce our overall inventory levels for the company. I'm pleased with the progress we have made in the first six months of this year. The flavor group has had a great first half, and I would anticipate this to continue in the second half. Our food and beverage colors business is also performing well. In Asia Pacific, I'm confident that the strategy and investment we have in place will return this group to revenue growth. While I'm optimistic about our food businesses, our personal care business will continue to struggle. Furthermore, the ultimate impact of COVID-19 remains unknowable. New product launches are significantly below prior year, and there has been some customer SKU rationalization. Nevertheless, our business is strong and well-positioned to grow for the year. Steve will now provide you with additional details on the second quarter results.