Good morning. And welcome to the Sensient Technologies Corporation 2023 Fourth Quarter and Year-end Earnings Conference Call. [Operator Instructions]. Please also note today's event is being recorded. I would now like to turn the floor over to Steve Rolfs. Please go ahead, sir.

Good morning. Welcome to Sensient's earnings call for the fourth quarter and full year of 2023. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I'm joined today by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. Earlier today, we have released our 2023 fourth quarter and full-year results. A copy of the release and our investor presentation is available on our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which remove the impact of currency movements, cost of the company's portfolio optimization plans, income related to earnout 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 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 Sensient's previous SEC filings and our forthcoming 10-Ks 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 turn into 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 Flavors improved sequentially in the fourth quarter of ‘23 from the third quarter. Revenue in the age-specific 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 Flavors 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. But 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 Flavors 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…

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 2023, remove the cost of the portfolio optimization plan and the adjusted results for 2022 remove the income related to an earn-out payment received in connection with the divestiture of our yogurt fruit prep business. We believe that, the removal of these items provides a more clear picture to investors of the company's performance. This also reflects how management reviews the company's operations and performance. Sensient's revenue was $349.3 million in the fourth quarter of 2023 compared to $348.7 million in the fourth quarter of 2022. Sensient's operating income was $8.1 million in the fourth quarter of 2023, compared to $41.2 million of income in the comparable period last year. Operating income in the fourth quarter of 2023 includes $27.8 million approximately $0.65 per share of portfolio optimization costs, which are primarily non-cash. Operating income in the fourth quarter of 2022 included income of $2.5 million or approximately $0.04 per share, related to the post-closing earnout payment received from the sale of our yogurt fruit prep business in 2020. Excluding the items just mentioned, adjusted operating income was $35.9 million in the fourth quarter of 2023 compared to $38.7 million in the prior year period. Interest expense was $6.5 million in the fourth quarter of 2023, compared to $4.8 million in the fourth quarter of 2022. The company's consolidated adjusted tax rate 26.5% in the fourth quarter of 2023, compared to 19.7% in the comparable period of 2022. Adjusted local currency EBITDA was down 8.5% in the fourth quarter of 2023. Foreign currency increased revenue and adjusted operating income by approximately 2%. Cash flow from operations was $170 million in 2023, compared to $12…

[Operator Instructions]. And our first question will come from Ghansham Panjabi of Baird. Please go ahead.

Good morning. Maybe just first off kind of thinking back to the fourth quarter, just give us a sense as to what surprised you from a volume standpoint in the quarter, kind of looking back and maybe you can give us a sense as to how the quarter progressed monthly and also what you're seeing what you saw, I should say in January.

So, I would tell you the thing that surprised me the most was the acceleration of the destocking in Color. As we were going through 2023 Flavors really started destocking, you could say, in late 2022. And that continued pretty well throughout the year. Color lagged that though. You may recall last year, Q1 Color had a pretty good, I think it was something like about 9% or 10% top-line growth. So, the Color destocking really didn't begin until about Q2 in earnest with our customers. And so all along we had kind of projected that Flavors would be done largely by the end of 2023 with Destocking. And I think we could say that that is the case. But we also felt Color would lag by really a full quarter, that destocking impact, I think with the acceleration and destocking that we saw in Q4. I think, we could now say that to the extent there would be destocking in the color group in Q1 of ‘24, it would be rather modest. So that was probably the single biggest surprise. But I suppose in retrospect as customers are trying to kind of clear the decks, so to speak, on the balance sheet and working capital and just kind of right size things, they would've attempted to do that across each of their ingredients and other raw materials. So that would've really been the only one from a surprise standpoint on volume. As we looked at January, as you kind of got from my comments in the opening, we're kind of cautiously optimistic. There's a lot of positives that we're seeing right now. I think January was a pretty good month for us. Let's see though, right, there's a lot of we're coming off probably one of the most unusual markets in the last 50 years, which was what I would call 2023 as our customers transitioned out of COVID inventory positions, and they changed their focus with respect to developmental opportunities in some cases. So, I think 2024, we'd like to all believe that it is a back-to-normal year. Early signs would suggest that is the case. But I think that, the plot will continue to unfold as the year progresses, but I would say we're cautiously optimistic following the results we saw in January.

That's helpful. And then in terms of the new wins that you cited any specific segments, any new products that you want to highlight, as we sort of think about 2024, just from a customer appetite for new innovation and kind of kickstart velocity, if you will, at the end market retailer level?

Yes, so the new win rate, I was very, very happy with that. In each of the groups throughout 2023. That is one of the key metrics that we measure in the business. The size of your sales pipeline, that could be a good metric, but really the reality is it's points on the board. And that's best represented by wins, which is to say a customer now gives you a purchase order for that project you've been working on. And so, we had record wins in 2022 across each of the groups. And we came -- we exceeded that in some in ‘23, and we came very, very close in others. But overall, still very strong new win rate across each of the groups. Lots of new wins within the realm of natural colors. So as our strategy has been focused in the food color business on accelerating our innovation there, our supply chain and our production capacity, we were able to really leverage all three of those in developing some very, very unique applications and technologies for a number of customers, not only for new to the market launches, but actually some compelling and very interesting conversions from synthetic colors. So those are some very exciting wins there. We have a number of very exciting wins on the flavor front. High quality flavor wins that not only would utilize a traditional flavor, but could also incorporate an extract. They could also incorporate some dimension of a taste modulation technology, whether this is sweetness enhancement or sodium reduction. And so, we had a number of very, very interesting winds across not only beverage and sweet, but in some of our savory segments as well. The pharmaceutical business. We continue to make very, very good progress there, not only with respect to natural colors and these over the counter nutraceutical applications, but also in flavors. And so, we have uncovered some very good opportunities there. Generate some very interesting wins on that front. And then of course our S&I business, part of our Flavors Group, we had a series of very, very interesting and significant wins in our onion and our garlic business. Lots to be very, very excited about in '24. These wins that we generated in '23, many of them carry over into '24. But the pace of our wins right out of the gate in January, I'm quite excited about. Yes, pretty broad-based set of wins, which speaks to the investments we made in our sales force, in our innovation platforms and in overall is customer service and responsiveness.

And then just finally on your guidance, it looks like it's low-to-mid single-digits throughout sales, EBITDA, EPS. Why wouldn't operating leverage be higher in context of what you're doing in terms of portfolio optimization et cetera? And then just separately Steve, congrats on your retirement announcement, best wishes for the future. Thanks so much.

Thanks so much. I would say maybe the guidance is a little bit conservative. We say low single-digits to mid-single-digits. There's a bit of a change implied within each one of those. I think after the first quarter as has been our practice, we will kind of give you an update and a sense of things as the year progresses. But I'd like to set kind of the floor where we're going to be and I feel very confident that unlike '23 where there was a tremendous amount of volatility in destocking and all these other factors, our guidance kind of signals that we believe that, that is over and the magnitude of our new wins would be able to overcome any market dynamics. The degree of that ability to overcome, let's see how the year progresses. Many of our customers are very much driving for volume growth, that would be a really nice development. The new wins generate lots of volume, pricing is a fairly nominal thing for 2024. So, yes, the volume comes and to your point we should have really nice operating leverage in the businesses. But with respect to the portfolio improvement plan, much of that benefit will be obviously spread out over 2024 and 2025. We endeavor to get those things done as quickly as possible, but I'm realistic enough to realize that, you can screw those up if you're not very, very thoughtful and particular about how you do those. We have a lot of experience here. We have a lot of lessons learned, Ghansham, as well going back to sort of 2017. I'm feeling very, very confident that this one will be executed quite smartly and I don't anticipate any issues there. But the savings will flow in over that say, two-year period. But yes, I'd like to be able to tell you next quarter, you know what, things are looking even better than I thought. But for right now, I think this is a pretty good start to the year and a pretty good guidance that I think we could all feel very committed to achieving.

The next question comes from Nicola Tang of BNP Paribas. Please go ahead.

Hi everyone. Thanks for taking the questions. Actually, you're just starting to touch on one of the topics which I wanted to ask about, which is, the portfolio optimization and you referenced learnings from 2017. I was wondering if you could talk a little bit more about that and what gives you confidence that the portfolio optimization plan will run more smoothly this time? And also, just in terms of the areas that you identified, how did you sort of make that assessment around which specific plants or production sites to shut down and just tie another one on the same topic? Should we kind of take an even split in terms of the cost savings across Flavors and Colors?

So, number one, we will periodically review sites, business units. We look at different dimensions of the business and we see what part is running well and has optimized production footprint, for example, or we're able to achieve good synergies. And so, I think as we looked at the overall portfolio, we came up with the one that we did. It's quite a bit smaller than anything we've done previously. So, I suppose to your question about, how do we think this is going to go and do you think we'll do well here? I think it's much smaller. In one instance we're moving a plant in Europe. We've begun the consultation process there. And so that is a plant that's very similar to one that we successfully consolidated in the past. That gives me a great deal of confidence. In fact, most of the folks who were involved with that are running this one as well. So, that would probably be the biggest component of the project is a value, is that one plan in Europe that we would consolidate into the Americas? I think the other thing is just -- there were lots of lessons learned from the previous restructuring and I was the CEO then and I'm responsible for the screw ups then. And so, I know what all the screw ups are. And so, we've made a very concerted effort to plan differently and evaluate those differently. And so, I think, we've put more resources towards this project and again, we can anticipate with a great deal of confidence that where the trouble areas would be on such a move beyond that one plant that produces products. Most of the other activities are really SG&A related, so they don't specifically involve the production of a product,…

Can I ask a question about pricing? I think in the opening remarks you mentioned for 2024, you expect low single-digit pricing. Are you implementing new pricing as of today, or is this carryover from previous price initiatives? And then I suppose tied onto that, could you talk a little bit about your expectations for input cost this year? Thanks.

Yes, so that's right. So low single digit is what we would expect the impact to be. If you were to add up all the pricing and divide it by the total revenue of the company, it would be in that low single-digit range. And that's principally pricing that was put into effect January 1st. I would say if there was carryover, it was fairly modest. We are more than likely back into a world where we negotiate pricing annually. Traditionally in this ingredient space, it would be kind of a January 1st anniversary date for the majority of your customers, but there may be others who have an April 1st or a July 1st, but in general, think January 1st. And so, this was, I think we're back to that more traditional, we negotiate once per year with an effective date of January 1st. And so, that low single digit is sort of the culmination of that fourth quarter activity with a January 1st effective date. With respect to input costs, as I mentioned, many have moderated, some of them linger, but I think by and large, the low single digits gets us to where we need to be with respect to recovering, any of the inflation on those input costs. But on the negative side, right, there's still elevated energy costs in parts of the world. Labor is still an elevated dimension of input costs. We do have agricultural products, we talked about that on the last call. You grow those in a previous year where fertilizers were expensive and water was expensive and land was expensive and there was a lot of run up to that. And now we're in the world of selling those products that had the elevated previously elevated costs. And so, we have a little bit of that going on from the agricultural side of the business, but I think by and large, the market's moving in the right direction with respect to input costs.

Thanks. And then maybe a final one on the Asian business. You mentioned that there's been quite a lot of volatility linked to kind of the order volatility of the multinational customer base. With that in mind, what gives you confidence in the mid-single-digit growth outlook for Asia in 2024?

The new win rate that they have, their execution of pricing increases and very, very clear communications with our customer as to what they see in the market and when they believe their order patterns would resume, which is to say this year. So, I think those three factors come together and I think, again, we have a little bit of a choppy Q1 owing to that destocking, but not as a result of a poor win rate or poor pricing or out of control inflation. Those factors, the ones again, that we can control, I think are well in hand, and it's just a matter of kind of working through the last of this patchy destocking. But yes, I think that we're through that in Q1, and then Asia's back on track. They've been on a nice tear for the last say four or five years. So, I think they're back on track largely after Q1 here.

[Operator Instructions]. Our next question comes from David Green of Boldhaven. Please go ahead.

Just an initial question regarding the guidance which you have alluded to, Paul, anyway. The narrative this year in terms of the headwind from the destock has been very much along the lines of destock running at high single-digits, but the win rates or underlying growth running a similar amount. And so net, you're kind of in the middle of sort of like flattish growth. I'm just trying to understand as we go through 2024 and the destock fully unwinds, why would we not be seeing a more significant improvement in top-line come through in '24? In terms of the areas that you identified, how did you sort of make that assessment around which specific plants or production sites to shut down and just tie another one on the same topic? Should we kind of take an even split in terms of the cost savings across Flavors and Colors?

So, number one, we will periodically review sites, business units. We look at different dimensions of the business and we see what part is running well and has optimized production footprint, for example, or we're able to achieve good synergies. And so, I think as we looked at the overall portfolio, we came up with the one that we did. It's quite a bit smaller than anything we've done previously. So, I suppose to your question about, how do we think this is going to go and do you think we'll do well here? I think it's much smaller. In one instance we're moving a plant in Europe. We've begun the consultation process there. And so that is a plant that's very similar to one that we successfully consolidated in the past. That gives me a great deal of confidence. In fact, most of the folks who were involved with that are running this one as well. So, that would probably be the biggest component of the project is a value, is that one plan in Europe that we would consolidate into the Americas? I think the other thing is just -- there were lots of lessons learned from the previous restructuring and I was the CEO then and I'm responsible for the screw ups then. And so, I know what all the screw ups are. And so, we've made a very concerted effort to plan differently and evaluate those differently. And so, I think, we've put more resources towards this project and again, we can anticipate with a great deal of confidence that where the trouble areas would be on such a move beyond that one plant that produces products. Most of the other activities are really SG&A related, so they don't specifically involve the production of a product,…

Can I ask a question about pricing? I think in the opening remarks you mentioned for 2024, you expect low single-digit pricing. Are you implementing new? It could is the short answer. I've got it low-to-mid. As I said, let's see how -- your math is correct. I mean destocking did have a negative high single-digit impact from a revenue standpoint. New wins more than eclipsed that. Sure, that could definitely happen. But then again, if I'm wrong, I'm in big trouble. Let's start with low-to-mid and let's see how things go from there.

Yes. I guess just in terms of understanding Color specifically in the destock there, and then the sort of trajectory as we go into sort of Q1 and the rest of the year, has that been focused on any specific areas still? Is that still mainly cosmetics, where there's a destock that is needing to come through? And then I guess thinking more about what kind of top-line you can deliver in Colors, should we expect to sort of return to sort of positive organic growth within Colors within the first half?

The Color destocking, it was food colors and cosmetics. You're right about that. It would appear as we look back at this and conduct somewhat of an autopsy, although we were seeing this, as it was going as well. Customers very much started with destocking at the highest value items they had on their balance sheet, which is a fairly logical approach. Flavors and Colors whether derived for food products or in the case of Colors cosmetic products, those tend to be lower-valued items on a balance sheet, right? They're just not nearly as expensive as some of the ingredients and input costs that our customers have. As they went down the list and focused on the highest value, eventually they got to Flavors and then they got to Colors. I think that's largely why you saw the progression that you did and then of course with Colors being somewhat after Flavors, but still with the desire to kind of clear the decks by the end of the year, you saw that Q4 acceleration of destocking in Color, not only for food, but for cosmetics. The underlying growth in the food industry in North America continues to be, well, in Q4 of 2023, it was negative. It was actually a decline of 1% or 2% in the overall market. Europe, we believe it was about flattish and then in other parts of Asia it was up. With respect to cosmetics though, you have somewhat of a mixed bag at the prestige level, the high-end level, we see good volume growth and we see good volume opportunities. At the mass market level, that's where there was a considerable degree of destocking and perhaps even a reduction in consumer demand, that though is very good for our business because in terms of…

And then just thinking about the momentum that you're seeing in Flavors and extracts, it sounds like there are some really sort of solid wins there. Should we expect those to be coming through pretty quickly in terms of the top line?

I think Flavors will kind of be faster out to the gate than Colors and again, they have very, very strong win rate and they got, they're kind of out of the destocking now. So, I think those two things conspire to make for a good start to the year for Flavors.

There are no further questions at this time. I would now like to turn the conference back over to the company for any closing remarks.

Thank you everyone for participating in our call today. That will conclude our call. Thank you.

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