Sensient Technologies Corporation

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 and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded, and at this time, I would like to turn the floor over to Steve Rolfes. Sir, please go ahead.

Thank you. Good morning. Welcome to Sentient's earnings call for the third quarter of 2023. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sentient Technologies Corporation. I am joined today by Paul Manning, Sentient's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2023 third 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 Sentient'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. Before turning to our results, I'd like to provide an update on the market conditions during the third quarter. As predicted, customer destocking continued throughout the quarter. It was most pronounced in the color group with gradual improvement in the flavors group. We continue to see lower volumes across many of our market categories in the Americas with a moderate improvement in Europe. We think these outcomes with respect to destocking and lower volumes are consistent with the broad-based volume declines and efforts to reduce inventory at most of our CPG customers. Now, turning to our results. Local currency revenue is down low single digits in the quarter. Our local currency adjusted EBITDA was down about 7%. largely due to the continued impacts of destocking globally, and in particular in North America, as well as declines in volumes in many consumer product categories. In some areas of our business, we have seen improvements in customer order patterns and sequential improvements in volumes. However, in other areas of the business, we continue to be impacted by destocking and lower volumes. Right now, we believe volumes will sequentially improve in the fourth quarter and into the first quarter of next year. As I said last time during our second quarter call, we continue to focus on the things that we can control. We continue to win new business while executing on customer service and on-time delivery and avoiding attrition of our existing sales. Our new sales wins continue to be a high level across all three groups, and our sales pipelines across all of our businesses remain robust. This speaks well to our ongoing strategy and our commercial focus activities and suggests a much improved picture in 2024 compared to 2023. We also continue to manage cost inflation throughout our businesses, and we continue to implement pricing where required. While we have begun to see improvements in certain input costs, we do continue to experience overall elevated energy, employee, agricultural, and commodity costs in certain geographic regions. As always, we continue to look for areas to optimize our cost structure and to improve our production capabilities. Destocking has unfolded differently in each group, depending on product and customer mix and within each geographic region. Within the flavors and extracts group, Destocking began in late 2022 and was more pronounced in the first half of this year. Flavors Group began to experience sequential improvements in customer order patterns in the third quarter. We anticipate continued improvement in the fourth quarter with a much improved picture starting in 2024. For the Color Group, destocking began in the second quarter of this year and became even more pronounced during the third quarter. The impacts of destocking on the color group are about a quarter behind flavors. We're beginning to see some improved customer order patterns in the color group and anticipate the impacts of destocking to be largely behind us by the early part of next year. Destocking impacted the Asia-Pacific group beginning in the second quarter of this year. In contrast to flavors and colors, destocking in Asia-Pacific is mainly with multinationals and in certain geographies, and is not as widespread, but we do expect some impact in the fourth quarter. Adding to the destock volume declines is a decline in CPG volumes in many food and personal care product categories, particularly in the Americas. Overall, the combined volume declines resulting from destocking and overall market downturns have had an outsized negative impact on our sales and operating profit this year. We are also facing difficult comparisons to our excellent volume-driven performance of 2022. As we have discussed during our last couple of calls and similar to our customers, we continue to focus on our inventory position across all three groups. While we are strategically investing in inventory for our natural ingredients business within the flavors and extracts group, We continue to be focused on decreasing our inventory across the remainder of our businesses. As a result, we are seeing an improving trend in cash flow, and we will continue to focus on improving cash flow throughout the remainder of this year and in 2024. Now turning to the groups. Revenue in flavors and extracts was down less than 1% in local currency in the third quarter. The group's revenue benefited from its strong sales win rate and pricing actions. which were offset by volume declines from customer destocking and lower demand in certain food and beverage categories. We continue to see sequential improvement in the group's local currency revenue and operating profit in comparison to the prior year's periods, and we anticipate the sequential improvement to continue in the fourth quarter, culminating with an improved 2024. Our operating profit has suffered as a result of the volume declines that have continued throughout this year, especially in comparison to the outstanding volume in 2022. 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 for the flavors and extracts group. Revenue in the color group is down 8% in local currency in the third quarter. Local currency operating profit was down approximately 23% in the quarter. The group's revenue was impacted by a high single-digit revenue headwind due to destocking and declines in overall market demand, which was partially offset by pricing and strong new wins. This quarter's volume decline compared to the prior year's substantial volume increase has had an outsized impact on the group's operating profits. Revenue in both the food and pharmaceutical product line and personal care product line was down, primarily due to destocking and lower market demand. While we have begun to see improvements in certain geographies at customers across both product lines, the headwinds due to destocking will continue throughout the fourth quarter. To work against these headwinds, we continue to focus on new sales wins, customer service, and minimizing attrition on existing business. Local currency revenue growth in the Asia-Pacific Group was up approximately 4% in the third quarter. Year-to-date, local currency revenue is up 6%. Revenue benefited from new sales wins in pricing, partially offset by lower volumes, primarily due to lower market demand, and destocking headwinds in certain regions. Overall, the impact of destocking within the Asia-Pacific Group is less profound than what we experienced in the flavors and color groups. The group is also successfully focused on sales execution, customer service, and broadening its product offerings within the region, which positions the group for future growth. Despite the headwinds due to destocking and some decline in demand, my long-term growth expectations for each of the groups has not changed. I continue to expect Flavors and Extracts Group and Color Group to both deliver mid-single-digit local currency revenue growth with mid-to-high single-digit local currency 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 now expect our local currency revenue to be up low single digits and our local currency EPS to be down low double digits. Our previous guidance called for revenue to be up mid single digits and for adjusted EPS to be down high single digits. I continue to expect our 2023 local currency adjusted EBITDA to be down mid single digits. As I mentioned during our last call, 2023 has become a transition year as we move from supply chain inflationary burdens to a hopefully more normal environment in 2024. We have begun to see pockets of sales improvements in certain of our product lines and geographies. We should see continued improvement within the fourth quarter and in the first part of 2024. Continue to focus on right-sizing our inventory positions. Despite the headwinds, we will remain focused on the areas we can control, including new development activities with our customers, winning new business, and retaining our existing business. This focus has fueled the exceptional growth we have experienced over the last several years. Our strategy remains sound, and we are well positioned for future growth. Steve will now provide you with additional details on the third quarter results.