Sensient Technologies Corporation

Good morning and welcome to the Sentient Technologies Corporation 2020 fourth quarter and year-end earnings conference call. All participants will be in 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 note, this event is being recorded. I would now like to turn the conference over to Mr. Steve Rolf. Please go ahead, sir.

Good morning. I'm Steve Rolf, 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 sentient.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 measures is available 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 Sentient'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. Thanks, Steve.

Good morning. Centian 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 and extracts group, our food and pharmaceutical business in the color group, and 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. Flavors and extract 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. Flavors and Extract Group had a great year in 2020 and finished with a very strong fourth quarter, with adjusted local currency revenue growth of 14% and adjusted local currency profit growth of 55%. The group's revenue and profit growth are driven by a high sales win rate, lower sales attrition, focus on sales execution, robust customer service, and our continued transition to more value-added product solutions. The cost reduction initiatives from our earlier restructuring efforts, along with our ongoing fixed cost takeout initiative, have also contributed to the overall profit and margin improvement. Within the flavors and extract group, the natural ingredients business had a strong year with double-digit local currency sales growth. Our natural ingredients business supplies CPG, food service, and innovative food and spice companies around the world with the highest quality natural, organic, and value-added ingredients. This business continues to grow by leveraging its robust supply chain, strong customer service model, and focus on new product development. The business is well-positioned for further growth in the years to come. Overall, the flavors and extract group's operating profit margin was up over 300 basis points in the quarter and 50 basis points for the year. Over the long term, I expect the flavors and extract group to deliver mid-single digit revenue growth with continued operating profit margin improvement. Within the color group, revenue for food and pharmaceutical colors is up mid-single digits for the quarter and year. The group continues to see solid demand for natural colors and functional extracts used in food, nutraceutical, and pharmaceutical OTC applications. The growth in these areas is a result of our focus on clean label technologies, innovative natural color solutions, strong customer service, and sales execution. As a result of these efforts, the business achieved a high win rate throughout 2020, which will continue to benefit 2021 and future years. Also within the color group, revenue in personal care continues to be down as a result of the negative impacts of COVID-19. Overall, the demand for makeup and hair care products in North America, Europe, and Asia was down substantially in 2020. Given the uncertainty with COVID-19, I anticipate continued strong headwinds for personal care at least through the first half of 2021. Despite this impact, we continue to make progress on our operational improvement plan, which is designed to consolidate some of our cosmetic manufacturing operations. These actions will better align our cost structure in the personal care business for long-term sustainable growth and continued strong operating leverage. Long-term for the color group, I continue to expect mid-single-digit revenue growth from food and pharmaceutical colors. driven by new product launches and growth in natural colors and extracts. Once the impacts of COVID-19 subside, I expect mid-single-digit revenue growth from our personal care business as a result of its strong technology platform and market trends toward natural products in skin, hair, and makeup. Over the long term, we expect to maintain our EBIT margin at or above 20% for the color group. Within our Asia Pacific group, we are seeing high sales win rate as a result of the group's focus on sales execution and building a stronger customer service and technology-driven organization. The group's revenue continues to be negatively impacted in certain regions by COVID-19 restrictions. However, as these restrictions begin to ease, the group should resume mid to high single-digit revenue growth. Overall, the group's local currency adjusted revenue is up 3% for the year, and local currency operating profit was up over 14% for the year. In summary, I expect flavors and extracts, Asia Pacific, and our food and pharmaceutical businesses to each grow revenue at a mid-single-digit rate in 2021. Our personal care business will continue to face headwinds for at least the first half of 2021 due to COVID. Our operating profit margin within the color group continues to be around 20%, which is a good long-term level for the group. The operating profit margin for our flavors and extract group continues to grow, and we expect a 50 to 100 basis point improvement in 2021. Our balance sheet and cash flow are strong. We have made good progress on reducing our inventory, which we reduced by more than 30 days in 2020. There's still more opportunity to reduce our inventory further. We continue to invest in good ROI capital projects and we are evaluating sensible acquisition opportunities. Absent an acquisition, we will continue to pay down debt and we have the option to buy back stock. Before I turn the call over to Steve, I want to take a moment to recognize all of our employees who supported our success throughout 2020. Our employees remain committed to keeping our plants open and delivering our products to our customers on time. I'm very proud of the way that our employees adapted to a constantly changing environment and tirelessly worked to ensure a safe and healthy workplace, all while supporting our essential mission to provide ingredients to the food, pharmaceutical, and personal care markets. Steve will now provide you with additional details on the fourth quarter results.