Sensient Technologies Corporation

Good morning and welcome to the Sentient Technologies Corporation 2023 Second 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 2. 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. Welcome to Censient's earnings call for the second quarter of 2023. I'm Steve Rolf, Senior Vice President and Chief Financial Officer of Censient Technologies Corporation. I am joined today by Paul Manning, Censient's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2023 second quarter results. A copy of the release and our investor presentation is available on our website at sentient.com. During our call today, we will reference certain non-GAAP financial measures which remove the impact of currency movements and other items as noted in the company's filings. 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. 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 Censian's previous SEC filings, including our 10-K and our forthcoming 10-Q, for a description of additional factors that could potentially impact our financial results. Please keep these factors in mind when you analyze our comments today. Now we'll hear from Paul Manning.

Thanks, Steve. Good morning and good afternoon. Censian's local currency revenue this quarter was in line with last year's second quarter revenue, Our adjusted local currency EBITDA and operating income were each down about 7%, largely due to the continued impacts of destocking globally and declines in volumes on many consumer product categories, primarily in North America and Latin America. As we have been discussing, we anticipated the volume declines due to destocking to continue throughout the second quarter. In general, we saw the impact from our customers' destocking activities broaden, across additional product lines in the second quarter and to a greater degree than we had anticipated. D-stocking will obviously not last forever, but when it will end for different products and geographies, it's becoming more difficult to predict. In parts of our business, we have seen improving order patterns, but in others, we have yet to see order patterns return to normal. Despite these stopping, we are beginning to see an increase in promotional activity in certain North America's food product categories, and new product launch activity remains healthy. Furthermore, we continue to experience strong sales wins, effective pricing implementation, and an overall low attrition rate. We're focusing on the areas of our business we can control, sales execution, customer service, and avoiding attrition on our existing sales. Our new sales wins continue to be at a high level across all three groups, and our sales pipelines across all of our businesses remain robust. These new sales have been across all our product lines and throughout most of our geographic regions. These wins remain at a historically high rate for the company, which bodes well for a post-destocking world. We still continue to see positive momentum in new product launch activity, and we expect this activity to continue into next year. We are monitoring cost inflation and continue to implement pricing actions as needed. We have begun to see supply chain and raw material cost improvement in some areas. However, we also continue to experience overall elevated energy, growing costs, and commodity costs in certain geographic regions. As we have communicated over our last couple of calls, the timing of our pricing actions versus the timing of cost inflation may distort our quarterly year-over-year comparisons. Destocking continues to be the main headwind throughout many of our businesses. While destocking initially had a more profound impact in our flavors and extracts group, we did experience an increased level of destocking in both our color and Asia Pacific groups during the second quarter compared to the first quarter. The magnitude and timing of this destocking was somewhat unexpected. In addition to destocking, retail data for many of our customers indicates they are seeing negative volume trends for the last 24 months. We are starting to see improvement in certain businesses and geographies, and we anticipate the volume declines due to destocking to continue to moderate throughout the back half of this year. This volume decline, as well as the overall CPG volume declines in many food and personal care product categories, has had an outsized negative impact on our operating profit this year. Our outstanding performance and strong volume growth in 2022 has also made for an exceedingly difficult comparison, plus our own efforts to reduce our inventory have impacted our margins. Now turning to the groups. The color group reported 2% local currency revenue growth in the second quarter. Local currency operating profit was down approximately 8% in the quarter. The group's revenue growth benefited from a high single-digit price increase, which was partially offset by an almost double-digit revenue headwind due to destocking. For the year-to-date period, the color group has reported 6% local currency revenue growth. The food and pharmaceutical product lines delivered 4% local currency revenue growth during the second quarter. Food and pharmaceutical product lines continued to benefit from new sales wins, particularly in the natural colors portfolio. But even these product lines have experienced an increased level of customer destocking in the second quarter. Revenue in the personal care product line was down mid-single digits in the second quarter, primarily due to customer destocking, especially in North America. Based upon these developments, I now expect the color group's local currency revenue to grow at a low to mid single digit rate and local currency operating profit to decline at a low to mid single digit rate in 2023. The lower revenue and operating profit decline in the color group are a direct result of the more than expected volume declines due to destocking and the continued volume declines in the CPG food and personal care product categories. These volume declines have an outsized impact on operating profit and are especially stark in comparison to the outstanding results reported by the Color Group in 2022. Because I believe destocking will not last forever, I continue to expect the Color Group to deliver mid-single-digit revenue growth and mid-to-high single-digit operating profit growth in the long term. The flavors and extracts group was down approximately 2% in local currency revenue in the quarter. The group's strong win rate and pricing were offset by ongoing customer destocking and ongoing CPG volume declines in the food product categories, especially in North America and Latin America. The volume declines due to destocking that began in the fourth quarter of 2022 have continued throughout the first half of this year and have had an outsized impact on our operating profit. This impact is especially stark when you compare our current results to the outstanding results reported by the group in the first half of 2022. The flavors and extracts group is well positioned for growth once the relatively short-term impacts of destocking subside. Our focus over the years on our product portfolio, sales execution, and customer service are the foundation that will support growth over the long term. I continue to expect the flavors and extracts group to deliver incremental improvements throughout the remainder of the year. For the year, I now expect the flavors and extracts group to deliver low to mid-single-digit local currency revenue growth, and I expect local currency operating profit to be down mid to high single digits. Local currency revenue growth in the Asia Pacific group was down approximately 1% in the second quarter. Year to date, local currency revenue is up 7% in this group. Similar to the color group, customer destocking in the region broadened and was greater than expected compared to the first quarter of this year. Despite this headwind, the Asia Pacific Group continues to benefit from strong new sales winds across almost all regions. The Group's focus on sales execution and customer service, as well as the investments we have made, position the Group nicely for growth in the future. I continue to expect Asia Pacific Group to deliver mid- to high-single-digit local currency revenue growth and mid- to high-single-digit local currency operating profit growth in 2023. My long-term growth expectations for each of our groups has not changed. I continue to expect the Flavors and Extracts group to deliver mid-single-digit local currency revenue growth with mid-to-high single-digit local currency operating income growth. I continue to expect the Color group to deliver mid-single-digit local currency revenue growth and a mid-to-high single-digit operating income growth. And I continue to expect the Asia Pacific Group to deliver mid to high single-digit local currency revenue growth and operating profit growth of high single-digit to double-digit local currency growth. For 2023, I expect our local currency revenue to be up mid-single digits. But as a result of the volume declines due to the stocking and the volume declines in the global food and personal care markets, I now expect our 2023 adjusted local currency EBITDA to be down mid-single digits and our local currency EPS to be down high single digits. As I said, we're focused on the areas we can control, sales execution, customer service, and our product portfolio. This focus has fueled the exceptional growth we've experienced over the last few years. Our customers, like many other businesses, are currently focused on right-sizing their inventory positions. Overall, destocking is a short-term activity that we believe should improve later this year and into 2024. That is a bit longer than I predicted 90 days ago, which speaks to the volatility and uncertainty in the market. 2023 has proven to be a transitional year as we move from supply chain inflationary burden of the last two years to a more normal environment. Recently, we have seen an increase in promotional activity across many product categories. Our new development activity with customers is healthy and remains a key part to why we continue to win new business. Overall, our strategy is sound and we are well positioned for future growth. While I'm not thrilled about the current market environment, I am excited about our opportunities within each of our businesses and remain optimistic about the future of our business. Steve will now provide you with additional details on the second quarter results.