Good morning, and welcome to the Sensient Technologies Corporation 2020 First Quarter Earnings Conference call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss the 2020 first quarter financial results. I'm joined this morning by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. This morning, we released our 2020 first quarter financial results. A copy of the release is now available on our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which we believe provide investors with additional information to evaluate the company's performance and improve the comparability of results between reporting periods. 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 on the Investor Information section of our website at sensient.com and in our press release. We encourage investors to review these reconciliations in connection with the comments we make this morning. I would also like to remind everyone that comments made this morning, including in responses to your questions, may include forward-looking statements. Our actual results may differ materially, particularly in view of the uncertainties created by the COVID-19 pandemic, governmental attempts at remedial action and the timing of a return of more normal economic activity. We urge you to read Sensient's filings, including our 10-K and forthcoming 10-Q 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.

Thank you, Steve. Good morning and thanks for joining. Sensient’s adjusted local currency revenue increased by approximately 3% during the quarter with each group showing solid sales growth. This growth was in line with our expectations and occurred in almost all of our business units across the company. As I outlined in our last call, we expected our profit to be down in the first quarter, as a result of the impacts from the inventory reduction efforts in 2019, product mix in cosmetics, higher raw material costs in natural ingredients and the timing of our fixed cost takeout actions. We continue to expect profit improvement in both flavors and colors as the year progresses. Despite COVID-19, we believe we are on track with our plan and outlook for the year. Before I talk about the performance of our groups, I would like to take this time to talk about COVID-19 and what we are seeing in the market. As a provider of ingredients to the food, beverage, and personal care markets, our businesses are considered essential. All of our production facilities are open and operating. On average, our staffing and attendance at our facilities is at 95%. We are actively monitoring and addressing the implications of COVID-19 with our already robust GMP and sanitation practices. Our stringent sanitation practices ensure our employees remain safe and our products continue to meet our quality expectations. Our on-time delivery continues to be high at nearly 95% as our supply chain teams are continually monitoring raw material supply base, increasing safety stock in certain areas and working to ensure raw materials are delivered to our facilities, despite transportation and shipping challenges. This has not been easy. News articles are full of stories about food and personal care companies that are either closing facilities or…

Thank you, Paul. In my comments this morning, I will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2020 and 2019, removed the impact of the divestiture related costs and the operations to be divested. The first quarter 2019 results do not include any divestiture related costs. Included in this year's first quarter reported results are divestiture related costs of $11.8 million or approximately $0.26 per share, which are primarily non-cash charges related to the divestitures of our three product lines. In addition, this year's first quarter reported results include $36.6 million of revenue and $1.4 million of operating income related to the results of the operations to be divested. Last year's first quarter results include $39 million of revenue and an immaterial amount of operating income from the operations to be divested. The impact of the divestiture-related costs and operations to be divested reduced diluted earnings per share by $0.23 in this year's first quarter. Excluding divestiture-related costs and the results of operations to be divested in 2020 and 2019, consolidated adjusted revenue grew 1.8% to $314.1 million in the first quarter of 2020. Consolidated adjusted operating income was $45 million in the first quarter of 2020, compared to $49.4 million in the first quarter of 2019. Adjusted diluted earnings per share was $0.72 in this year's first quarter, compared to $0.78 in last year's first quarter. Cash flow from operations was $36.9 million in this year's first quarter, compared to $23.4 million in the first quarter of 2019, an increase of approximately 58%. Capital expenditures were $9.4 million in the current quarter. Our free cash flow increased approximately 80% in the quarter to $27.5 million. Total debt was $609.4 million as of March 31st, 2020, compared to $619.1 million as…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Heidi Vesterinen of Exane BNP Paribas. Please go ahead.

Hi, good morning and congratulations today. A couple of questions. So maybe starting with cosmetics, you did highlight a number of headwinds, especially on the makeup side. Could you maybe elaborate on what you are factoring in, in terms of cosmetics demand by region? When you think about your guidance, you just assume that recent trends continue for the rest of the year. And then secondly, on the packaged food side, anecdotally we're hearing that the big CPGs are winning and people are now gravitating towards traditional products made by traditional bigger companies and bigger brands. You have traditional, you talked about being more exposed to the B and C customers. So what are you seeing in terms of customer trends? And then lastly, perhaps, could you talk about bionutrients please? Because we're hearing that probiotics demand is picking up and I wondered if that could benefit your business. Thank you.

Okay, sure thing, Heidi. So number one, cosmetics, and so just for everybody's clarification here. So we talk about personal care within that we have a lot of different product areas. So we talk about makeup, we talk about hair care and hair dyes, we talk about skin care. But we also have products related to oral care, we have products related to personal care, things like body washes and soaps, et cetera. So it's a pretty broad-based portfolio for us. But, makeup is certainly the single biggest component of our personal care business. And so, as you all are fairly aware makeup took a big – there were a lot of headwinds towards – in the makeup category in Q1 that continued here in Q2. Most notably because people aren't – they're not going out, they're not going to work, they're not traveling. So that's the big headwind there, as we think about how that impacts us for the year, certainly, it will vary by geography to the point you made there. But I think there is elements of it recovering potentially as the year would go on. So for example, in Q1 Asia Pacific was a big headwind for us. China was shut down for a number of weeks, quarantines were issued, lockdown orders were put in place. So the impact was felt most strongly for Sensient in Q1 in the Asia Pacific region. But as those lockdowns continued, we started feeling more of that pressure in Europe and North America, less so in Latin America because, we tend to be more oversubscribed to say hair care and some other product categories. So now we're in a phase where interestingly enough, Asia is kind of recovering a little bit, North America taken a big hit. We've got a…

Thank you.

Okay. Sure, Heidi.

[Operator Instructions] The next question is from Mitra Ramgopal with Sidoti. Please go ahead.

Yes. Hi, good morning. Thanks for taking the questions. First just wanted to follow-up on the earlier comments. Paul, I know you’ve mentioned a lot of positives, a lot of minuses, et cetera. But then the environment where we think COVID resulting in a lot of companies essentially pulling their guidance, et cetera. You've certainly kept yours intact to a large extent. And I was just curious in terms of just, what really gives you the confidence that you have that maybe a lot of the companies and I getting and I noticed spaces are a little different, but your underlying environment is still pretty difficult for many.

Well, I think this Mitra. Number one, we are what is viewed as an essential business. So food, pharmaceuticals and many of our personal care items are viewed as essential. Now some governments that took them a little bit longer to declare us that. But that has been a very strong rallying cry for us as an organization. I think – so that would be number one. Our employees believe in that mission, we continue to articulate that mission and that gives many of them the confidence and the desire to come to work to support the mission. So anytime you have a problem, you have to kind of define a mission for folks, because otherwise people can be very concerned and they can be very fearful. Related to that is we built over the years a very strong GMP and sanitation program. And so, we are always very spiteful of any bacteria or viruses in our facilities. And so coronavirus is okay, it's a new virus, but listen, whether it's E. coli or Salmonella or Pseudomonas or any number of things, we're scared of all of them. So we built a very robust infrastructure around these areas, that has also given our employees tremendous confidence that they could come to work in a safe environment. We were well ahead on many of the sanitation practices that are becoming more common in facilities. So in short, we took great initiative in terms of defining the mission, building the sanitation protocols that were necessary, not only in – well principally in our non-production parts of our business. But we continue to lay out the expectations, very early on. I said, listen folks on-time delivery, coronavirus is not an excuse, we will deliver and we will deliver at the world-class levels that…

Okay. That's great. And then just wondering again relates to COVID, how was that – if it is at all affecting the divesture process in terms of potential buyers, et cetera, and if you can give us an update on that front.

Yes. So we've got the three pieces that we're selling, we're in the process of selling. I think that – sure I would love to, in normal times I can probably sit here and give you a very definitive date on those. But with – right now with the travel restrictions as they are, it's a little bit tricky. But I can tell you this, that we are committed to these transactions. The folks we're talking to on the buying side of this are very committed to these transactions, both parties, us and them are very interested in getting it done as soon as we can. And hopefully in due course, I'll have some good news that we've been able to execute on them. But I think that, it gets a little bit tricky in the course of due diligence when there is some element that somebody needs to see on site and they can't travel to that site or they, right – there may be some other restriction in place. So yes, hopefully, we can have another update for you here in about, well, certainly on the next call. But if something were to happen before then, then of course we would make that a publicly available event.

Okay. That's great. And Stephen I’m sorry, I don't know if you’ve mentioned it, I might've missed it. But I was wondering if you had the gross margin on the adjusted basis

The gross margin on an adjusted basis for the quarter, it's going to be 33.6%.

Okay.

And that's – go ahead…

No, sorry. I was just seeing if they're ready. I think you’d highlighted some one-time costs in there.

So the two big things impacting in the first quarter are going to be the decline in the makeup segment that Paul talked about, that's a high profit area for us. So just in terms of mix of business, that has an impact on our gross margin. And then within our natural ingredients business, for the year, we think we'll be good on pricing and costs, but there is just a little bit of misalignment in the first quarter on raw material cost versus pricing. So those are two of the items that are impacting that.

Yes. There is some – yes, there is obviously some incremental costs related to COVID, where you have to enhance sanitation in areas that you typically weren't necessarily routinely – in some cases by the hour cleaning, like break rooms, like office spaces, things like that. So there are costs there, there have been some cost to expedite certain products. There have been costs because you don't necessarily have the most optimal transportation options all the time. So these costs as we see them would be probably annualized, a couple of EPS – couple pennies on an EPS basis, if they continue at the current pace. So probably less diluted to gross margin at this point, but certainly not something to be ignored.

Okay. And I know on the SG&A side, I guess the big highlight there was again the divestiture and related costs, if you adjust that and move around too much.

That's right.

Yes. We very much held the line on headcount throughout the organization that's been going on for well over a year, much to the chagrin of many folks out there in the company. But hey, we've got to continue to generate the revenue, we're doing that. I think we're going to continue to do that in Q2 and Q3 and Q4, and then as we get into 2021 as well. So we have the footprint not only from an SG&A standpoint, but from a production standpoint to have a much larger revenue business, without having. So in other words, we don't have to make significant investments in SG&A or production to continue to grow the revenue of this business for the foreseeable future. So I think that's an important consideration.

Great. That’s certainly fair. And I think also in an environment where a lot of companies are looking to conserve cash, et cetera, you clearly have that ability to continue to invest in the development activity you've talked about in the past – as opposed to maybe holding tight right now. Is that fair?

Yes. And speaking of cash, right, we placed we had a nice year last year from a cash flow standpoint. You saw a very nice uptick in not only cash flow from operations, but free cash flow in the first quarter. A lot of that driven by inventory reductions, we've taken out, if you compare the balance sheet last year to this year on inventory, you would see $80 million, $85 million reduction. Now some of that is related to FX and divestitures, that's about half, but the other half is related to deliberate actions to reduce inventory in our businesses. And as we noted, that was going to be a profit headwind here in Q1. As I said to one of our accounts the other day, I said, I suppose we could have made $40 million of inventory in the course of Q4 and Q1 and that would have had a nice tailwind for profit, but that probably wouldn't make a whole heck of a lot of sense from a cash flow standpoint. So a little bit of – you see that in flavors in particular right now and even in colors, the combination of the lower volumes in Q4 from sales side of things, but also lower production output deliberately. There's a very strong effort around the company to continue to reduce inventory for all the obvious reasons why that's a good idea. And – but there is a little bit of an accounting overhang as we like to call it, that will trail you for a few months after you do that. So that's certainly bit of the headwind that you see there in flavors in particular here in Q1. But that moderates right as that sort of – is digested in the organization, you would expect to then see profit growth. And that's what we expect for flavors. And that's going back to your question about what gives me confidence. That's another area that gives me confidence.

Okay. Thanks for the color on that. And then finally, just on the tax rate, I know obviously, there are a lot of moving parts in the first quarter but what should we look for in terms of the underlying tax rate going forward?

So last year, we were pretty low. You'll recall we were just below 15%. A more normal cash tax rate for us is going to be probably 20% to 22%. We had some planning last year that lowered the rate. We may have some additional planning this year that may take it a little bit below the 20% to 22%, but that would be our – our more normal would be say 20% to 22%.

Okay. That's great. Thanks again for taking the questions.

Okay, Mitra, sure thing.

The next question is from Leigh Ferst with HighTower. Please go ahead.

Thank you. Good morning. Thanks for your leadership.

Hi, Leigh.

Good. Hello. You talked about supporting changes in demand around health trends and local trends. Could you elaborate that on that a little bit more pleased and also discuss if your natural products business fits into changing trends or just what the dynamic is there in the natural product side?

Sure. So if I understood you correctly, you're trying to get a little bit more color around sort of health and how the changes in the market and consumer demand, how that can help or hurt our business. So yes, I think it's a great question, right, because everybody's sort of wondering, what's going to happen after this COVID thing, right? You hear this joke about the COVID-15 how people are at home, just gaining weight and eating unhealthy. And I don't know, how to chew a lot of that is, but I can speak for myself when I'm at home I eat more, but that's just a sample size of one so maybe not so meaningful. But nevertheless, there has been an ongoing interest within the marketplace for health, more healthy products, whether that's less sugar, less salt, products derived more closely from nature, whether it's an extract or a natural flavor or a natural color. That has been a very broad based trend in our food and beverage business, in our cosmetics business, pretty much in most of the businesses that we have saved, obviously our inks business. And so that trend is there that can be impacted strongly depending on how many of our customers come out of this pandemic, right. So if many of them focus on core business and scale back their new launches, okay, we would have a benefit because they're buying more of existing products. But if they're not launching new products, that becomes a little bit of a headwind for us. But I think that you're going to continue to see a very strong emphasis on that. I only caution that some companies may scale back on that a little bit. That's the part of the equation right now that we are…

Thank you. And on a different note it's not surprising that you had some transportation and shipping challenges, but could you give us a little more color on that piece and how to manage it?

So yes, a lot of those were early on as you saw lockdowns in China and you saw lockdowns in India. I think that certainly that impacted our ability to get some raw materials. How we manage that was I guess back in March when we started making some pretty good assumptions about what was going to happen here. We said, well, we need to go long on some of our key raw materials, the ones that are very essential to our operation and most closely driving the revenue. And so we that in some cases since we're dual or even we have three sources, we were able to shift our supply chain. That was another important action we took in addition to going long on some of those key raw materials. But I think the fact of the matter is we were well ahead of this and we bought things before there were transportation shortages and challenges of a great scale. If you waited until April, you were probably a little bit behind the eight ball, which is to say, you were going to have some bigger challenges. So now it's just a matter of how good your supply chain people are. And we've got really good supply chain people, who've been very, very creative. I had no idea that there was still a train line from China to Switzerland, for example, but there is. And so we found very, very clever and very, very novel transportation options to continue to help our businesses move along. And that's why you say, or I say, the on-time delivery factor is still really strong in this company. So people found a way because we said the expectation is still 95%, no excuses find a way. And people did. So I say those would probably be three or four of the ways we have done that. I would tell you that today, there's still some backlog in India. I think how that lockdown was enforced or instituted was a bit different than some of the other countries that had more of a kind of a systematic that was more of a just broad based. Everything is shut down. So there's still a lot of shipping delay out of India. China is really done a nice job of catching up, but there is still a backlog out of China. So by no means is anybody out of the woods. But the last point I'll make here, Leigh, is that we're not so strongly dependent on any one raw material in this company. I think the biggest impact of revenue from any raw materials, maybe about 4% or 5% of our revenue. So we've got a pretty diversified footprint when it comes to our supply chain. And I think that's been a real important aspect of our success there as well.

Thank you. That was interesting.

Okay, sure thing.

The next question is a follow-up from Heidi Vesterinen with Exane. Please go ahead.

Hi, few more questions please. Could you talk about why natural ingredients was so strong, was this price or volume or mix of both? And what's your outlook there? And in Asia-Pacific please, some of the segment where you really focused on too much but the growth was quite strong, what drove this. And you had talked about a positive outlook there as well. What will drive this? Thank you.

Okay. So natural ingredients – so onion, garlic, capsicums, parsley, other vegetables. So it was strong for a couple of reasons. We have – so we've got a very broad customer base that we continue to expand. We generated a lot of new wins in that business. So I think that would be number one. Number two, in some cases we share a customer with say, a foreign source of onion or garlic or capsicums and there might have been a little bit more at least in the U.S. preference for a domestic supplier given again, some of the shortages out of China and other parts of the world. So I think that was helpful. But I think really, on top of that is we just had unbelievable service level. I think our on-time delivery in that business, Heidi, it was like about 99% in the quarter, which is just unbelievable because they're really good and they're very focused on it. And the customers recognized and they wanted to stick with a source that was very, very reliable. And I think – now is not the time, perhaps some purchasing folks have concluded to think about saving a penny. What you're really right now is need reliability and assurance and we are really good at providing both of those factors. So I think those would be some of the things that really buoyed our first quarter results. I think you can just continue to see really good results in that business for the year. What you're also going to see is as these raw material costs inflation on onion, you're going to see that continue to moderate as the year goes by as well. So that will be yet another factor and another source of confidence for me, certainly, that…

This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

Okay, thanks. Are there any other questions?

No, there are no other questions in the queue.

Okay. So if you do have any other questions, we're always happy to talk, give us a call and we can certainly continue any type of conversation you'd like. And – but Steve, you wanted to say something else?

No, I would just say, that concludes our call. Thank you everyone. And as Paul, if there are any follow-ups please contact us. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.