Sensient Technologies Corporation

Good morning and welcome to the Censian Technologies Corporation 2023 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 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 Sentient's earnings call for the fourth quarter and full year of 2023. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sentient Technologies Corporation. I am joined today by Paul Manning, Sensient's chairman, president, and chief executive officer. Yesterday, we released our 2023 fourth quarter and full year 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, costs of the company's portfolio optimization plan, income related to an earn-out payment received in 2022 in connection with the divestiture of our yogurt fruit preparations business, 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 The 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 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.

Yesterday we reported our fourth quarter and full year results. As predicted, we continue to experience destocking throughout the fourth quarter as many of our customers continue their efforts to reduce their inventory and right-size their balance sheet by year-end. During the quarter, destocking was most pronounced in the color group, while the flavors group experienced sequential improvement. Now turning to our results. For the company, local currency revenue was down low single digits in the quarter and was about flat for the full year of 2023. Revenue in the flavors and extract group was flat in the fourth quarter, and the color group was down high single digits in local currency. Local currency revenue in both color and flavor improved sequentially in the fourth quarter of 23 from the third quarter. Revenue in the Asia Pacific Group was down mid-single digits in the fourth quarter, primarily due to destocking. Overall, the impact of destocking in the Asia Pacific Group has not been as pronounced as the impact in the flavor and color groups. As I mentioned previously, the impact quarter to quarter in Asia Pacific has been more volatile due to the order patterns of certain multinational customers. For the full year of 2023, Asia Pacific reported mid-single-digit local currency revenue growth. Our consolidated adjusted local currency EBITDA was down 5.9% for the full year of 2023. As mentioned throughout 2023, the volume declines due to destocking have had an outsized impact on our operating profit. especially when you compare our 2023 results to our outstanding results in 2022. Both Color and Flavor reported local currency operating profit declines of about 16% in the fourth quarter of 2023. The Asia Pacific Group reported a local currency operating profit decline of 12%. 2023 has been a transitional year, and we expect 2024 to be a more normal year. During 2023, customers were focused on reducing their inventory positions and right-sizing their working capital. As we begin 2024, we are already seeing an improvement in customer order patterns. We expect sequential improvement in our volumes throughout 2024, and I expect a much improved financial picture, including solid sales volume growth, local currency revenue growth, and local currency-adjusted operating profit growth. Our focus remains on the things that we can control. We continue to win new business across all three groups. Our sales win rate remains at a high level, and we are generating incremental sales wins across most of our product lines and geographies. We continue to be focused on retaining our existing business and working with our customers on new development activities. Our focus on customer service and on-time delivery are a direct contributor to our high sales win rates. In the fourth quarter, we also initiated a portfolio optimization plan. This plan is designed to right-size our cost base and to optimize our organizational structure with a focus on driving improved productivity in certain businesses and functions and delivering significant cost improvement. The plan will look to optimize our production operations in both colors and flavors, and to centralize and eliminate SG&A redundancies and activities in certain functional areas within both groups. The objective of this plan is to deliver annual cost savings of approximately $8 to $10 million once fully implemented by the end of 2025. Including the costs incurred in the fourth quarter of 2023, we expect to incur pre-tax charges of approximately $40 million of which approximately $30 million will be non-cash. We are carefully managing this process to ensure our ability to meet customers' needs and to minimize the disruption to the business. We are also beginning the consultation process with certain European employee groups in connection with our plan. We're also announcing that we are increasing our board of directors from nine seats to ten. We are nominating Brett Brueggemann for election to the Board of Directors at our 2024 Annual Meeting in April. Brett is the Chief Operating Officer of Land O'Lakes and brings over 30 years of food industry and agricultural experience. Brett's insights will be invaluable as we continue our expansion in natural colors and flavors across many of our businesses. Now turning to 2024. I expect Centient to return to sales volume growth and I expect consolidated annual revenue to grow at a low to mid single digit rate on a local currency basis with low single digit pricing. I expect good operating leverage and margin improvement across our groups as we experience improved fixed cost coverage and a lower inflationary environment. As revenue and volume growth resume, profit improvement will trail sales improvement by a quarter or so. On a consolidated basis, I expect Sentient to deliver low to mid single digit adjusted local currency EBITDA growth for the year. Within our flavors and extracts group, our new sales win rate is robust. The group delivered a high level of new sales wins in 2023, and we expect strong new sales wins in 2024. Customer service remains at a high level and continues to be a top priority. The group has seen a reduction in certain raw material costs. However, many raw material costs, such as citrus and various agricultural inputs, remain elevated. The impacts of destocking improved each quarter in 2023, and we believe our customers have substantially completed destocking. Therefore, I expect the flavor group to have a much improved 2024 with low- to mid-single-digit local currency revenue growth. The color group also had an outstanding new sales win rate in 2023, particularly in natural colors, and we expect an equally robust new sales win rate in 2024. Customers accelerated their destocking in the back half of last year, especially in the fourth quarter. Most of the impact of destocking is over, however, we do anticipate a modest amount in the first quarter of this year. overall i expect the color group to deliver low to mid single digit local currency revenue growth in 2024. asia pacific's focus on sales execution customer service and broadening its product portfolio has positioned the group nicely for 2024. the group continues to deliver a high level new sales wins throughout 2023 these new wins will continue to benefit 2024 and i expect the group will deliver new sales wins at a high rate again in 2024. The group has been impacted by destocking at certain larger multinational companies. As mentioned earlier, this has produced some volatile swings in the Asia-Pacific Group order patterns and results. That will be the case again during the first quarter of this year. Overall, I expect the Asia-Pacific Group to deliver mid-single-digit revenue growth in 2024. I'm optimistic about 2024. As I said earlier, we're focused on the things we can control. Our focus on sales execution, customer service, and our innovative technologies are contributing to the high level of new sales wins we are generating across the company. Our sales pipelines remain strong, and we continue to work on new product applications with our customers. We expect this focus on new sales wins and an overall moderation in destocking to drive volume growth in 2024 compared to 2023. Our portfolio optimization plan will improve our manufacturing footprint and improve our overall cost structure. We expect this plan will generate modest profit improvement in 2024. Once fully implemented by the end of 2025, we expect that it will generate annual savings of approximately $8 million to $10 million. We also continue to strategically manage our inventory positions, and we expect our overall inventory levels to decline in 2024. We have seen strong improvement to our cash flow in 2023 and we expect continued improvement in 2024. In this elevated interest environment, we remain focused on reducing our debt and our interest expense. Our product portfolio is strong and we remain focused on our key customer markets of food, pharmaceutical, and personal care. Our strategy remains sound and we are well positioned for future growth. Steve will now provide you with