Sensient Technologies Corporation

Good morning and welcome to the Sentient Technologies Corporation 2022 fourth quarter and year-end earnings conference call. All participants will be in a listening 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 sign. 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 Censient's earnings call for the fourth quarter and full year of 2022. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Censient Technologies Corporation. I am joined today by Paul Manning, Sentient's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2022 fourth quarter and full year 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. The adjusted results for 2022 remove income related to an earn-out payment received in connection with the divestiture of our yogurt fruit preparations business. The adjusted results for 2021 remove the impact of the divestiture-related costs, the results of the operations divested, and the costs and income related to our operational improvement plans. 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 the 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 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 and good afternoon. Earlier today, we reported our fourth quarter and full year 2022 results. I'm very pleased to report for the full year of 2022 that we delivered 10% adjusted local currency revenue growth and 13% adjusted local currency EBITDA growth. Each of our groups had outstanding adjusted local currency revenue and adjusted local currency operating profit growth in 2022. We exceeded the guidance we communicated at the start of 2022 for adjusted local currency revenue, adjusted local currency EBITDA, and adjusted local currency EPS. Our strong operating and financial performance in 2022 follows the very strong results we had in 2021 and 2020. Our performance is a direct result of our focus on sales execution and customer service, as well as our broad product portfolio. We have proven to be a reliable supplier to our customers, and we continue to achieve new sales wins at customers across each of our groups. Our portfolio of natural flavors and colors and our wide variety of product technologies continue to position us for future growth. Input costs grew throughout 2022, including the fourth quarter. Overall, we continue to see higher costs in a number of categories, particularly in agricultural and natural raw materials, which impacted our margins in the fourth quarter. We elected to wait to implement additional pricing until the first quarter of this year. We anticipate these costs to remain at elevated levels at least for the first half of 2023, and we plan to continue with disciplined pricing actions as needed. Because of the dramatic inflationary environment over the last two years and the timing of our pricing actions, Margin comparisons and other year-to-year comparisons will at times be distorted. As a result, we believe it is best to judge our performance over the full year. During the fourth quarter of 2022, we announced the acquisition of Endemics, a natural color and extract company based in Turkey. This acquisition is now included in the color group's results and strengthens our existing natural color portfolio and improves our vertical integration for several key raw materials. We consider this to be a bolt-on acquisition consistent with our natural color strategy. Endemics represents approximately 1% of the color group's fourth quarter revenue. We continue to look at other reasonable acquisition opportunities that support our strategic initiatives within our core product lines. Now, turning to the groups. The Color Group had an outstanding 2022 reporting 15% adjusted local currency revenue growth and 15% adjusted local currency operating profit growth. The food and pharmaceutical and personal care product lines each delivered excellent results in 2022 with strong adjusted local currency revenue and operating profit growth. Overall, the group's annual revenue growth was driven by high single digit volume, growth and high single digit pricing. Within the color group, food and pharmaceutical colors achieved 17% adjusted local currency revenue growth. We delivered a high level of new sales wins in 2022, stemming from the company's strong customer service levels and innovative natural color portfolio. The acquisition of endemics strengthens our natural color supply chain and supports our new natural color wins. I anticipate our food and pharmaceutical product line will have another good year in 2023. The personal care product line also had an excellent 2022, achieving 10% adjusted local currency revenue growth. The product line has rebounded nicely from the impacts of COVID. Personal care's focus on product line diversification, customer service, and innovative technologies are fueling our current growth. The color group also had a strong finish to 2022, reporting fourth quarter adjusted local currency revenue growth of 12% and adjusted local currency operating income growth of 8%. The group's revenue increase was driven by a high single-digit price increase and low single-digit volume growth. Food and pharmaceutical colors continued its strong performance in the fourth quarter, achieving 15% adjusted local currency revenue growth. Personal care slowed to a mid single digit growth rate in the fourth quarter, primarily due to customer de-stocking. Color Group is well positioned for growth in 2023 and beyond. I expect the group will deliver mid single digit local currency revenue growth and mid to high single digit local currency operating profit growth in 2023. We believe food and pharmaceutical colors will have solid growth throughout 2023. We believe personal care will improve throughout 2023 as customer destocking declines. The flavors and extracts group had another solid year in 2022, reporting 6% adjusted local currency revenue growth and 10% adjusted local currency operating profit growth. We also achieved an 80 basis point improvement to our operating profit margin for the year. For the year, flavors, extracts, and flavor ingredients reported double digit adjusted local currency revenue and operating profit growth. These product lines benefited from high single digit pricing and mid single digit volume growth in 2022. Revenue in the natural ingredients product line was down in 2022, primarily due to lower volumes related to customer destocking and lower production volumes from the 2022 crop, which we had previously discussed. In the fourth quarter of 2022, the flavors and extracts group delivered 3% adjusted local currency revenue growth. Adjusted local currency operating profit was down 4%. due to higher input costs and volume declines, primarily due to customer destocking in the natural ingredients product lines. The flavor group has implemented pricing actions that will begin to offset these increases, but we anticipate customer destocking to continue in the first quarter. Despite these first quarter headwinds in the flavors and extracts group, we expect sequential improvement throughout 2023. For the year, I expect the flavors and extracts group to deliver mid single digit revenue growth and mid to high single digit operating profit growth in 2023. The Asia Pacific group delivered an impressive 14% adjusted local currency revenue growth and 23% adjusted local currency operating profit growth in 2022. The group benefited from strong revenue growth in almost all regions. Overall, during 2022, the Asia Pacific Group achieved mid-single-digit pricing and high single-digit volume growth. In the fourth quarter of 2022, the Asia Pacific Group reported 6% adjusted local currency revenue growth and 4% adjusted local currency operating profit growth. The Group continues to benefit from solid revenue growth in almost all regions. revenue growth benefited from a mid-single-digit price increase and modest volume growth in the fourth quarter. As input costs continue to increase, the group has implemented pricing increases that will benefit the business during the start of the first quarter. For the year, I expect the Asia-Pacific Group to deliver mid- to high-single-digit revenue growth and mid- to high-single-digit operating profit growth in 2023. I'm very pleased with our performance in 2022 and over the last few years. Our focus on sales execution, customer service, and innovative technologies are fueling the growth in each of our groups. Our product portfolio is strong, and we remain focused on our key customer markets of food, pharmaceutical, and personal care. We continue to evaluate sensible acquisition opportunities. We spent approximately $80 million in capital expenditures in 2022. We have very good internal investment opportunities that should drive future growth. And as a result, I expect our capital expenditures to be between $85 and $95 million in 2023. Our inventory levels have peaked, and I would expect a reduction in our inventory throughout 2023. Absent an acquisition, our capital allocation plan will be focused on paying down debt. I'm very happy with our financial performance in 2022. We finished at the top end of our guidance for adjusted local currency revenue, adjusted local currency EBITDA, and adjusted local currency EPS for 2022. I am optimistic about 2023 and the future of our business. Steve will now provide you with additional details on the fourth quarter results.