Sensient Technologies Corporation

Good morning and welcome to the Sensing Technologies Corporation 2022 Third Quarter 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 touchtone phone. 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 Rolfs. Please go ahead, sir.

Good morning. Welcome to Censium's third quarter earnings call. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Censium Technologies Corporation. I am joined today by Paul Manning, Censium's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2022 third quarter financial results. A copy of the release and our investor presentation is available on our website at sentient.com. During our call today, we will be explaining the differences between our GAAP results and our adjusted results. We did not make any adjustments to our GAAP results for 2022. The adjusted results for 2021 remove the impact of the divestiture-related costs, the results of the operations divested, and the impact of the costs 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 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 Sentient's previous SEC filings, including our and our first quarter and second quarter 10Q and our forthcoming 10Q 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.

Thanks, Steve. Good morning and good afternoon. Earlier today, we reported our third quarter results. We had another strong quarter of revenue and operating profit growth in each group. Nearly every business in the company reported strong revenue and operating profit growth. Our year-to-date performance has been outstanding and follows our strong results from 2021 and 2020. In early October, we completed the acquisition of Endemics, a natural color and extract company based in Turkey. This acquisition strengthens our extensive natural color portfolio and improves our vertical integration for critical raw materials. We continue to look at other acquisition opportunities that support our strategic initiatives within our core product lines. Our focus on sales execution, technical support, and product delivery continue to fuel our growth. We have proven to be a reliable supplier to our customers, and we continue to win new projects across each group. Our focus on on-time customer delivery, technical support, and a robust product portfolio has positioned us nicely for future growth. As discussed throughout this year, we continue to experience increases in our input costs, including raw materials, transportation, energy, and labor. We are addressing these rising input costs with disciplined pricing actions, and we continue to maintain a higher inventory position to address ongoing supply chain challenges. While we have seen some signs of relief in select raw materials, Most categories remain elevated, and we saw continued increases in costs this quarter across the company. Despite the current global economic environment, I continue to expect to generate solid growth across the company. Sancient is a recession-resistant business that I believe can weather the current global economic challenges. Therefore, we are confirming our growth expectations for 2022. We're also confident in our 2023 prospects. Overall, we believe the year will finish with a more normal mid-single-digit revenue growth and mid-to-high single-digit operating profit growth. I will now discuss the group results. Color Group had another excellent quarter. The group delivered 15% adjusted local currency revenue growth and 11% adjusted local currency operating profit growth. Operating profit margin in the third quarter was 18.6%. and was impacted by our continuing increases in raw materials and other costs. Food and pharmaceutical colors and personal care both delivered strong third quarter results. The group's revenue increase was driven by a high single digit price increase and mid single digit volume growth. The food and pharmaceutical business delivered double digit adjusted local currency revenue and double digit adjusted local currency operating profit growth in the quarter. This year, the business has generated a high level of new sales wins stemming from its innovative natural color portfolio and its focus on customer service. Our recent acquisition of Endemics will strengthen our supply chain and support the strong project wins we are seeing in natural colors. The integration of Endemics has begun and I expect this integration will continue throughout 2023. The personal care business delivered high single digit local currency revenue and double digit local currency operating profit growth in the third quarter. Like the food and pharmaceutical business, the personal care business benefited from an innovative product portfolio, strong customer service, and product line diversification. These factors provide the foundation for growth going forward. Color Group is having an exceptional year. The group is on track to deliver double-digit revenue growth and double-digit operating profit growth and an operating margin close to 20% in 2022. Over the long term, I expect the color group to deliver mid-single-digit revenue growth and an operating margin of 20%. The flavors and extracts group delivered 7% adjusted local currency revenue growth and 6% adjusted local currency operating profit growth. The group's operating profit margin in the third quarter was 14.1% and is up 10 basis points compared to the prior year. The year-to-date operating profit margin is 15%, up 120 basis points compared to the prior year. Revenue growth in the group benefited from a 12% pricing increase in the quarter. As we have mentioned during our last few calls, the natural ingredients business has faced a volume headwind throughout 2022 as a result of onion availability. I had initially anticipated a return to normalcy in this product line in Q3, but that did not fully materialize. We are now better positioned on our supply of the product, and I expect volumes to improve in the future. In natural ingredients, we continue to see increasing costs as a result of the inflationary environment for labor, energy, land, water, fertilizer, and other grower costs, as well as the ongoing drought in California. We will need to manage these input costs with additional pricing actions. In the rest of the flavors and extract group, revenue growth and operating profit growth was up double digits, primarily driven by pricing and modest volume growth. I expect the flavors and extracts group to deliver high single-digit revenue growth and double-digit operating profit growth for the year. Over the long term, I expect the Flavors and Extract Group to deliver mid-single-digit revenue growth, and I expect operating profit margin to improve 50 to 100 basis points annually for the next few years. The Asia-Pacific Group delivered 14% adjusted local currency revenue growth and 16% adjusted local currency operating profit growth. Operating margin in the third quarter was 19.7%. The group had solid revenue growth in almost all regions. Revenue growth was almost equally split between pricing and volume. The group is on track to deliver double-digit revenue growth and double-digit operating profit growth for the year. Over the long term, I continue to expect the group to deliver mid-single-digit revenue growth at our current margins. This year has been an excellent year for Censian. Our focus on sales execution and product delivery and our robust product offerings are the foundation for the growth we have achieved. Clearly, we have seen outsized growth in 2022, which we expect to moderate beginning in the fourth quarter and continuing into 2023. Overall, we are well on track to meet our full year guidance for 2022, and I remain optimistic about the year and the future of our business. Steve will now provide you with additional details on the third quarter results.