Sensient Technologies Corporation (SXT) Q2 2015 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Sensient Technologies Corporation 2015 Second Quarter Conference Call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call 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 2015 second quarter financial results. I'm joined this morning by Paul Manning, Sensient's President and Chief Executive Officer. Yesterday, we released our 2015 second quarter financial results. A copy of the release is now available on our website at sensient.com. Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Securities Litigation Reform Act of 1995. Our statements may be affected by certain factors, including risks and uncertainties, which are discussed in detail in the company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today. Now, we'll hear from Paul Manning. Paul Manning - President, Chief Executive Officer & Director: Thanks, Steve. Good morning. Sensient reported adjusted earnings per share of $0.80 in the quarter, compared to $0.81 reported in last year's second quarter. Foreign currency translation had a significant impact on the company's second quarter results, reducing adjusted EPS by $0.07 or more than 8%. In local currency, adjusted earnings per share increased by $0.06 or 7.4%. Adjusted operating income was off about 2% in local currency, principally because of soft demand and operating issues at our specialty inks business. The adjusted operating margin was 16.1% for the second quarter, a solid result, but slightly off last year's margin. Most of the Color Groups businesses performed well in the second quarter, but the group delivered disappointing results, because of issues within our specialty inks business. The other Color Group businesses, each generated strong local currency revenue growth. In local currency, revenue for the food and beverage colors, and cosmetic colors were up by mid-single digits and pharmaceutical colors reported double-digit revenue growth. Color Group operating profit, outside of the specialty inks business, was also up nicely. Excluding specialty inks, the group's operating profit increased by 6% in local currency. As I mentioned last quarter, our specialty inks business has been affected by soft demand and the strong Swiss franc. And as we expected, these issues continued to challenge this business in the second quarter. In addition to these factors, this business also had some product quality issues with one of its products, which negatively affected it's performance in the second quarter. We have resolved the quality issues, however, we expect the underlying demand and currency issues to continue and the Color Group will be challenged by these headwinds for the remainder of the year. After this year, I'm very optimistic about the growth prospects for this business. Our specialty inks business has delivered superb growth for the past few years and we improved our position in this market by completing the Xennia acquisition at the end of June. Xennia has strengthens our technical capabilities and broadens the product offerings for our inks business. Xennia's product lines include reactive, acid and sublimation inks for printing on a range of textiles and other substrates, including cotton. We have begun the process of integrating Xennia's personnel and products and we expect this acquisition to be accretive to earnings next year. We're very excited about this acquisition and we continue to see good long-term opportunities in the inks market. Natural color conversions have been in the news lately with many of the leading U.S. food brands in both the packaged foods and the casual restaurant segments committing to using colors from natural sources. Sensient has made significant investments into developing and producing natural colors over the last 10 years and we are ready to assist our customers in making these conversions. Our sales of natural colors were up 10% in the U.S. in the second quarter, driven by new wins in both branded and private-labeled products. In addition, about 75% of the new projects that we are developing for customers in North America are focused on natural colors. Sensient is the market leader for food and beverage colors and we are very well positioned to lead the conversion to naturals. The Flavors & Fragrances Group has strong capabilities in Sweet, Beverage and Savory Flavors, Natural Ingredients and Fragrances. We've realigned our commercial and technical activities around common product lines to better serve our customers, and we are continuing our efforts to shift the group's product mix from simple ingredients to more complex flavors and flavor systems. We are progressing with the restructuring program and other efforts to lower costs. The combination of upgrading our product mix and reducing our cost structure will improve the group's margins and enable us to deliver sustainable profit growth. We are making progress, but there is more work to do. Because our restructuring program affects multiple sites, a number of our sales, technical and production resources are focused on these activities. In the short term, their efforts will facilitate the timely execution of the plan and minimize disruption to our customers. As we near completion in the second half of 2016, these resources will be fully focused on completing our strategies to drive growth. We're looking forward to completing the restructuring program. We are absolutely demonstrating success with our strategy and remain optimistic about the outlook for the Flavors & Fragrances Group. In local currency, the Flavors & Fragrances Group revenue was up slightly, while second quarter operating income was down by approximately 1%. We're continuing our efforts to rationalize non-strategic and low-margin business, which reduced revenue by approximately 50 basis points in the quarter. The group's operating margin was 15.9% for the second quarter. Continue to make progress on many of our initiatives, but this quarter's results were impacted by restructuring activities, uneven demand and higher SG&A costs, as we continue to make investments in sales and technical positions across the group. Some of our businesses are further along in their strategic shift and they were able to more than offset these investments with new wins. Other businesses are working through restructuring and this factored into a relatively flat operating profit performance this quarter. Despite these mixed results, our actions and strategies to shift the business toward higher-value products are making progress. For some perspective on that, the group's operating margin has improved by almost 200 basis points in the last two years. The group's operating margin was 14.2% in the second quarter of 2013 and the higher margins have been achieved by improving our product mix and lowering costs. Several of the group's businesses delivered solid local currency profit growth, including Beverage, BioNutrients, Savory, Fragrances and Natural Ingredients. We'll continue to drive margin improvement by completing the restructuring program and executing on initiatives to reposition the flavors business. We are turning a corner in a number of businesses and I expect good local currency profit growth for the remainder of this year. Let me give you an update on our restructuring plan. We've been working on the restructuring program for a little over a year and we expect it to be completed by the second half of next year. Our plan was to close six sites in the Flavors & Fragrances Group and one site in the Color Group. Earlier this year, we closed a flavor office and Technical Center in Canada. And we just recently closed one of our Canadian flavor manufacturing sites. We expect to close three more international flavor sites before the end of the year and the last flavor site, which is a U.S.-based flavor manufacturing facility, will close in the back half of next year. We have realized some of the cost savings from the restructuring plan, but the more significant savings will be realized as more plants close and the related production has been effectively transferred. In 2015, the corporation will realize an incremental $7 million to $8 million of restructuring savings. And the cumulative savings from restructuring through the end of 2015 will be about $10 million. We expect to realize incremental savings of about $9 million next year and the full benefit of the restructuring in 2017. Our expectations with respect to savings at each of the affected locations have not changed, but the timing of some of the closures has shifted modestly. In addition, the savings may also be affected by foreign exchange rates, which have moved since we initiated the plan. But we have implemented price increases, specifically, to offset the loss related to these currency movements. We are committed to growing shareholder value. Yesterday, the board of directors voted to increase the company's quarterly dividend to $0.27 per share. This increase will be effective for the dividend paid in September. This is the sixth consecutive year that Sensient has increased its quarterly dividend and the quarterly dividend has increased 42% over that timeframe. We also purchased approximately 1 million shares in the second quarter. During the first half of this year, Sensient has repurchased more than 1.9 million shares and we have returned more than $140 million to shareholders via dividends and stock buybacks. We will continue to evaluate opportunistic share repurchases as part of our capital allocation strategy. As I mentioned in the last two conference calls, foreign currency translation has had a significant impact on this year's earnings. There has been some movement in exchange rate since the end of the first quarter, but the net impact is consistent with last quarter's estimate. We will continue to have challenges with the inks business for the next two quarters, but we are maintaining our adjusted earnings per share guidance in the range of $3 to $3.09. This is a challenging quarter for Sensient, but there are a lot of positive results. The Color Group remained strong and most of the groups' businesses performed very well in the quarter. We completed the Xennia acquisition, which expands our technical expertise and broadens our product offerings within the specialty inks market. We're progressing with our efforts to reposition the Flavors & Fragrances Group. And many of that group's businesses reported significantly higher profits in the quarter. Our strategy is working and Sensient is moving in the positive direction. Steve Rolfs will now provide you with additional details on the quarter.

Thank you, Paul. Sensient reported revenue of $346 million and operating income of $45.1 million in the second quarter. The reported results include $10.5 million of restructuring and other costs. Excluding these costs, operating income was $55.5 million. Foreign currency translation reduced revenue by approximately 8% and adjusted operating income by 7.3%. The adjusted operating margin was 16.1%. Diluted earnings per share, as reported, were $0.64 compared to $0.62 in last year's second quarter. Restructuring and other costs reduced earnings per share by $0.17 in the current quarter and by $0.20 in last year's second quarter. Adjusted earnings per share were $0.80 in this year's second quarter compared to $0.81 in the comparable period last year. Foreign currency translation had a significant impact on earnings per share, reducing EPS by 8.6% or $0.07 per share. In local currency, adjusted earnings per share grew by 7.4%. For the first half of the year, diluted earnings per share from continuing operations were $1.28 compared to $0.66 in the first half of last year. The reported EPS results included $0.28 of restructuring and other costs for the first half of this year and $0.86 of restructuring and other costs for the first six months of 2014. Adjusted earnings per share were $1.56 in the first half of 2015 and $1.53 in the first half of 2014. In local currency, adjusted earnings per share grew by $0.10 or $0.15 per share in the first half, as foreign currency translation reduced EPS by $0.12 per share. Cash flows from operating activities were $46.3 million in the second quarter and $76.9 million for the first half of 2015. The second quarter cash flow was off last year's results by $3.3 million due to foreign currency translation and higher restructuring-related payments, which were partially offset by working capital improvements. Year-to-date operating cash flows are up more than 10%. Capital expenditures were $23.5 million during the second quarter and we are maintaining our full-year guidance to be in the range of $75 million to $85 million for CapEx. Free cash flow was $22.8 million in the quarter despite the foreign currency headwinds and higher capital expenditures related to restructuring. Our balance sheet remains strong. Our debt currently stands at 2.2 times EBITDA. We plan to keep debt levels in line with an investment-grade profile to maintain the flexibility for capital expenditures, dividend payments, share buybacks and acquisitions. Thank you for your time this morning. We will now open the call for questions.

Today's question-and-answer session will be conducted electronically. Your first question comes from the line of Mike Ritzenthaler with Piper Jaffray.

Good morning, Mike. Paul Manning - President, Chief Executive Officer & Director: Hi, Mike. Mike Ritzenthaler - Piper Jaffray & Co (Broker): In the past, we've discussed, in approximate terms, what portion of the sales within flavors has achieved some of these longer-term margin targets, something approaching to 20% up margins. Could you update us on how that metric has changed over the past three months or maybe six months? And within the context of your – maybe, Paul, your opinion on the pace of new business wins within the sales organization, are you ahead or behind plan on wining new business there? Paul Manning - President, Chief Executive Officer & Director: Okay. First let me apologies, the Thunderbirds are doing a training session outside our office here. So, if you hear some rocketing going by. We asked them to delay it, but they unfortunately couldn't. So, I apologize for that ahead of time. Mike Ritzenthaler - Piper Jaffray & Co (Broker): Interesting. Yeah. No problem. Paul Manning - President, Chief Executive Officer & Director: Yeah. I think, to answer your question, why I feel we're making progress and why I feel these operating margins, these 20% operating margins are achievable, as I've indicated previously, is that we see this in businesses – in a number of our businesses. In fact, what has changed in the last, say, year has been the number of businesses that are operating at that level. And at this point, certainly, the majority of our businesses are very close to or even in excess of that level of profitability. I would tell you that the ones that, perhaps, are struggling at this point to be there have some issues related to restructuring, which obviously provides that eventual uplift that we would be expecting. But I think that at this phase, when you look at our businesses, I'm very pleased with the progress that a number of them have made in achieving that level, and it has come – to your question about new wins, let me get into that. It has come with new wins, specifically in flavors. Our gross margin potential in flavors is certainly well in excess of the gross margin that we would have traditionally gotten in a more basic ingredient sale. And so, certainly, some of that uplift is coming from that mix improvement and from those new wins and again from a de-emphasis on lower-margin wins. But the other piece in this is that we obviously had some opportunities to cull, some of that culling takes place with pricing movements. Some of that comes from more systematic consolidation or rationalization of the portfolio, so that's also helped. But I think in the businesses that are, say, struggling to get to that 20%, the restructuring will provide a very strong improvement to their overall operating margin performance. But as far as new wins are concerned, certainly, I see ample evidence that these are the types of wins that we want, wins that are flavors that to the extent they can utilize our internally-produced building blocks or ingredients, I'm seeing more evidence of that. I'm seeing that a lot of the technology platforms that we've developed related to taste masking or taste blocking, depending on which scientist you want to quiz on that one. Sugar reduction, salt reduction that these products are compelling offering to many of our customers. We also have a lot of line of proprietary extracts that we've developed that are having a tremendous benefit for our selling efforts. So, the change is very real. It is very palpable to our customers and they see us more and more – particularly in markets where they have not traditionally done so, they see us more and more as a legitimate flavors company. Mike Ritzenthaler - Piper Jaffray & Co (Broker): Yeah, that's really helpful context. I guess, as an extension, following our chat recently in Chicago, one of the things that I've been trying to get hands around is somehow quantifying the impact to the P&L from the changing consumer preferences in North America. Paul, you'd alluded to in your prepared remarks about food retailers and restaurants, those announcements seem to be spreading from colored M&M's to label simplification at, whatever, Taco Bell or Pizza Hut. What could, having 75% of new projects being centered on natural colors, mean for top-line growth in 2016? For example, it's – I'm not looking for anything like quantified, but I guess that's – in terms of how – what's the right way to think about that – those – that pipeline of projects? What that could mean for top-line growth? Paul Manning - President, Chief Executive Officer & Director: Well, I think what we saw this quarter and in the U.S. in particular, our natural colors is strong double-digit top-line growth. As this pace of conversions continues, I think that is a fair expectation to look for in the U.S. I think overall, as I would project ahead, my expectations for food colors is mid, and possibly even mid to high in other markets, top-line growth. A lot of that benefit and uplift coming from the sale of natural colors. They are obviously not one-for-one on a comparison to synthetic colors and as much as you have to use typically more natural color to achieve the same synthetic color. Although we've done a lot within the world of innovation to really close that gap, the benefits are very good to the business. So, I think, I look forward to that trend. And when I look at the flavors business – and just a little more context on that, I look forward to that trend, because we made a lot of investment in natural colors over the last few years. As everybody is well aware, we spent a lot on CapEx and, in particularly, in the Color Group and it's because our view of the market was that there would be a seismic conversion in natural colors and we wanted to be there to capture it. So, between our CapEx, between our very strong and robust innovation program, which is absolutely industry leading, with our investment in sales and technical people, with our acquisitions that actually go back to the late-1990s, in fact, in some cases, I think we are very well positioned to continue to capture that benefit on a go-forward basis. When I think about flavors and the changing consumer preferences we see there, a move towards less salt, less fat, more label-friendly, more identifiable ingredients on labels, I think we are very well positioned. I referenced some of our technology platforms that we have, our extracts, these are all very, very important elements. I think it's a little bit less clear who the market leaders are on anyone of those technology platforms. So, I think we have ample opportunities to pursue wins in those areas as well. So, we're very – I'm very excited about where we're positioned and the types of customers we're going after in flavors to take advantage of these changing consumer preferences. Mike Ritzenthaler - Piper Jaffray & Co (Broker): That makes a lot of sense. I guess, to kind of close out my line of question, I'm wondering if I could ask a modeling question. Just given some of the challenges in specialty inks, could you help us understand what you see as a reasonable run rate, the margins in color in the second half? I know you don't specifically guide by segment, but is it reasonable that the run rate should be kind of between the 21% to 22% up margin range? Are there things that are going to abate that will maybe provide a little bit of a lift in the second half? Paul Manning - President, Chief Executive Officer & Director: Yeah, I think, number one, I think we're going to be sequentially better with the specialty inks business. We referenced this quality issue. We also indicated that we've addressed this. And so, now on a sequential basis, you'll see some improvement there. Our specialty inks business, certainly, as we see those improvements come along, will provide some uplift to the operating margin. It's my expectation that we will continue to stay above 20%. And in due time, we would be back up to our 22% to 23% operating margin level. And I think that can happen reasonably quickly. I think unlike some of the industries we deal in, the adoption rate in inks for new products and for new customers is much faster. In other words, the product lifecycle whereas it may take you six months, 12 months, even 18 months to 24 months to get new win at some food companies, the inks industry tends to move much faster. There is much quicker turnaround on the inks. And so, I think that plays in our favor in terms of recovering in that business and building off of where we are right now in Q2. I think Q2 is the low point for that operating margin. And I think, sequentially, you'll continue to see improvements and we'll be back in the 22% to 23% range in short order. Mike Ritzenthaler - Piper Jaffray & Co (Broker): All right. Thanks very much, Paul. Paul Manning - President, Chief Executive Officer & Director: Okay. Thanks, Mike.

Your next question comes from the line of Mike Sison with KeyBanc.

Hey, guys. Nice quarter. Paul Manning - President, Chief Executive Officer & Director: Hey, Mike.

Hey, Mike.

Paul, in terms of Flavors & Fragrances operating margins, you got it to that 16% – close to 16%, congrats on that. But maybe could you frame up that you are – now that you've made a decent move here; A, do you think it's sustainable in the second half? And how do you bridge the remaining 400 basis points to get the 20% over time? What are you looking for in terms of growth and what are you looking for in terms of cost savings to get you there? Paul Manning - President, Chief Executive Officer & Director: Well, I would tell you this. I pledged in February that the Flavor Group would have operating profit growth of mid-single digits and perhaps even a little bit higher, mid- to high-single digit for the year. So, implicit within that estimate would be an improvement in Q3 and Q4 from where we are today. So, I think that is certainly going to provide some of the improvement. And again, the other piece of what I pledged in February was a 100 basis points to 200 basis points improvement in operating margin for the Flavors & Fragrances Group by the end of the year. So, I'm going to continue to make that pledge. I think what I mentioned in the previous commentary is that the new wins that we are generating are aligned very closely to our strategy and what I've been communicating on this call. Those margins – those gross margins are certainly better. As we mentioned, closing a site in Canada, we have three more production sites that will close by the end of the year. Obviously, once we cycle through that inventory, the savings are going to accelerate. We have another $9 million of savings coming in 2016 and that's almost entirely for the Flavors & Fragrances Group. So, that's going to be a big impact in terms of generating an operating margin. And I'm seeing in the businesses that are not involved with restructuring, Mike, I'm seeing very good top line, very good operating margin improvements in every one of them. The story of Flavors & Fragrances this quarter was a lot about: if you're involved with restructuring, there's a lot of challenges. As you're bringing in new products, you may have yield problems; you may have some inventory write-offs. And obviously, we had all those things. But as you then settle into consolidating those sites, that impact dissipates. So there, again, I think we're going to see the improvements just from the full integration of these restructuring sites. So I think the new wins will continue and I think they will improve in the businesses that have been undergoing restructuring. I think that the cost savings are going to only accelerate at this point, because, again, we'll have only one flavor site left to close after – at the end of this year. And I think that's going to be a high positive. Restructuring, there is no doubt, is a very distracting exercise for an organization and, certainly, we are no exception. So, I feel very good about that gap between that last 400 basis points, as you described. I think it is very much in reach. The key here is getting those sites through the restructuring and continue to accelerate the rate of new wins. We may have some strategic pricing and culling coming up here. Obviously, we've taken advantage of that. That's also going to be a factor. So, I'm feeling good about our ability to get there, and then ability to get there in the timeframe we've all been discussing. So, that's where I'd leave that one.

Great. And then, in order to get to that mid-single digits to high-single digits growth rate for Flavors & Fragrances, is that more due to your new wins and your R&D work or do you need some help from the economy to get there? Can you maybe frame up what needs your – why so confident in getting that type of growth in the second half? Paul Manning - President, Chief Executive Officer & Director: Because I see it; I look at the third quarter, how that's starting out. It's starting out very nicely. We're seeing the new wins and we've had that much more time to continue to execute on our strategy, which, again, we've already indicated is showing signs of life in these businesses. So, on the economy side, sure, I'd love a really robust exciting economy, but I don't want to really – to some markets that we deal in, that may not be coming in the next quarter. So, we want to really condition our businesses to learn how to operate in those new economic environments. And my philosophy is very simple, people aren't eating and drinking less; they're just eating and drinking differently. And so, to the extent we have cast a wide net and have identified those customers, as I think we have in flavors and as well in colors, maybe some of those untouched customers who have all the same technical needs and growth desires as bigger companies, but they are largely underserved, I think, to me, that provides a good opportunity, because that's fundamentally where the growth is. The growth is not coming in many of the big CPG companies at this point. So, instead of sticking our head in the sand, we've been really focused very strongly on a broader range of customers that we feel, again, have those same needs as the big guys, but perhaps are looking to launch products today and rather than deferring products. So, I think, to me, yeah, it would be nice for stronger economic output from some of the bigger companies, but we're going to make do and we're just going to – we're going to attract – we're going to spend our time with the customers that do have the gross prospects.

Great. And then what about, on the external front, acquisitions? How is the pipeline? Is something that – it sounds like you're getting closer and closer maybe to taking a look at some – anything in – and where you're focusing your attention? What's the opportunity given the balance sheet is still in very good shape? Paul Manning - President, Chief Executive Officer & Director: Well, I think the Xennia acquisition is a fairly good indication of the types of companies that we like; very reasonably priced with a good portfolio of products, something that fills in a gap in our portfolio, something that brings us an extra dimension of technical expertise, in this case, ink developers, which they have many very good ones. So, that type of acquisition, I think, works very well for our company. Say, unlike some previous acquisitions, which we had as more or less bolt-on, our approach has changed modestly and is much that we're fully integrating these businesses right from the outset. So, we closed on day one, and on day two, we're having consolidated sales meetings, we are rationalizing production into one site, making those types of changes immediately so that we can make this accretive as quickly as possible and so that we can have a one common voice and view of the market. So, I think that inks market and related products is always very interesting to us. We could certainly see opportunities within the world of cosmetics and fragrances. And now, I feel like as though in most of our flavor businesses, we're in a very good position to potentially take on an acquisition in that range of the market. And so, we're always open. I'm not looking to heap a whole bunch of goodwill on the balance sheet. So, we will need to be very thoughtful about how we do that. So, we will continue to move forward very opportunistically. And from an overall capital allocation standpoint, we're going to balance buybacks with things like acquisitions and where we come out on one may determine where we come out on the other. So, always open, always looking, always have a pipeline. And those business areas that I just mentioned would be the more interesting ones for us to take advantage of.

Great. Thank you. Paul Manning - President, Chief Executive Officer & Director: Okay. Thanks, Mike.

Your next question comes from the line of Christopher Butler with Sidoti & Company. Christopher W. Butler - Sidoti & Co. LLC: Hi. Good morning, everyone. Paul Manning - President, Chief Executive Officer & Director: Hi, Chris.

Hello, Chris. Paul Manning - President, Chief Executive Officer & Director: Good morning. How are you doing, Chris? Christopher W. Butler - Sidoti & Co. LLC: Good. Good. Sort of getting back to something you were talking about just a minute ago, the reports on natural seems to be that you're seeing some of the bigger players move now, because smaller players are taking share. With your strategy to move from ingredients to more sophisticated compounds, do you want the smaller players to win in that contest? Paul Manning - President, Chief Executive Officer & Director: Well, I want the most-competitive market possible and I want the customers that we're most fully aligned with to win. And so, we certainly have relationships with big CPG companies and we certainly have relationships with what would be viewed as sort of smaller and more regional local flavor companies. And so, yeah, I would love to see broad-based winning. Christopher W. Butler - Sidoti & Co. LLC: And as far as the differentiation strategy, you're comfortable that you'd have as much success with the larger players as smaller players, I read that in your comments. Paul Manning - President, Chief Executive Officer & Director: Yes and no. I think we look very – we start off with what value can we create at this customer, what's our value proposition, what makes us different or better in the face of competition. And so some of this will depend on who we may be competing with at any given customer and what product segment we're talking about. So, we always look at that opportunity first. If there is a customer out there, who maybe has one competitor that you feel like you have a better product offering in some other dimensions that are better, we very strongly orient ourselves that way. At a bigger company, maybe a real big CPG company that has 12 flavor companies calling on it, that may be less compelling and less efficient use of our time and that may be one that we're not going to win, despite the fact that they have a name that sounds kind of interesting. So, we're very selective and we like to have that discipline around the commercial process. Otherwise, we're going to be chasing opportunities that may be four years off. I'm not saying that that's wrong. But our pipeline – we have to be able to deliver now. We also have to be able to deliver next year and the year after that. So, we really think a lot about balancing the pipeline as well. When you think about some of these natural color projects that we've been working on, going over to the color side for a moment, some of these have been open for several years, as companies were positioning themselves for this point. And so, a lot of that work has been done two years, three years, four years ago, in some cases, as a contingency in a lot of those customers. And now, with the movement, many of these customers may strike and, in some cases, we've already done all that work to make that conversion. So, those are some of the things we think about. But yeah, it's a good question in as much of what makes it different at that customer; we can't just go after everybody and expect to win. We're not going to win everywhere. But where we can win, we want to win very resoundingly and bring a lot of resources to bear against the competition. Christopher W. Butler - Sidoti & Co. LLC: And you'd mention increased SG&A spending to help support this transition. Could you walk me through the SG&A decrease year-over-year with that in mind? Paul Manning - President, Chief Executive Officer & Director: Well, I think we have – it's kind of on a business by business. Some of our restructuring was related to SG&A, so that plays somewhat of a factor. But in some businesses, the – we made very strong investments in not only the sales, but the technical and R&D groups, particularly within the world of innovation that – most particularly in flavors, but I think we've also found ways to operate more efficiently in a lot of these areas in certain administrative tasks, in certain management structures and apparatuses that used to exist. So, I would tell you that the investments in sales and SG&A continue, and those are very important and those have increased. But the overall SG&A is being impacted favorably from restructuring and favorably from – we're automating where we can. We're reducing redundancies where we can. We're selectively centralizing some administrative functions as well. And I think those have been very strongly helping us. Christopher W. Butler - Sidoti & Co. LLC: I appreciate your time. Paul Manning - President, Chief Executive Officer & Director: Okay. Thanks, Chris.

Your next question comes from the line of Brett Hundley with BB&T Capital Markets. Brett Michael Hundley - BB&T Capital Markets: Hi, guys. Paul Manning - President, Chief Executive Officer & Director: Hey, Brett. Brett Michael Hundley - BB&T Capital Markets: Paul, I apologize if I am repeating this question, but just so I make sure I heard it correctly on your prepared remarks, it sounds like broadly savings efficiencies related to the restructuring about a third in 2015, third in 2016, third in 2017. Is that how I understand it? Paul Manning - President, Chief Executive Officer & Director: That's about right. Brett Michael Hundley - BB&T Capital Markets: Okay. Paul Manning - President, Chief Executive Officer & Director: Yeah. Brett Michael Hundley - BB&T Capital Markets: And one of your larger competitors on the Flavors & Fragrances side recently called to H2 maybe being a little bit weaker. He talked about large format being a particularly tough area. I just wanted to run that by you and get your thoughts more broadly about the overall landscape. I mean, you talked about some channel expectations that you had and some favorable growth opportunities there. But do you guys see any potential slowing in the back half of the year? Paul Manning - President, Chief Executive Officer & Director: Nothing that I'm seeing right now is giving me any indication of a deteriorating situation. I referenced that July is off to a good start on orders for August. I don't see a deteriorating situation there, either. We've got many new wins teed up. So, I think, to some extent, it's about which companies and which areas you're looking at; whether we're talking about inks or pharma or cosmetics. Yeah, there are definitely customers that are struggling in each one of those segments, but there's also customers that are doing quite well. And so, I think the key to winning nowadays is – it's not about saying, oh, woe is me, the economy is down, what do I do, because we don't see the overall consumption in demand decreasing across the board. Yeah, we see it very strongly in certain regions and at certain customers and at certain types of products. But no, I don't have any reason to tell you at this point. And then, what I would also tell you is, in addition to those wins and what I'm seeing right now in Q3, we've got a lot of savings that are coming online from these plant closures that we're very excited about and, I guess, I see it a little bit differently than my competitor. Brett Michael Hundley - BB&T Capital Markets: Okay. And the growth that you pointed to, some very solid growth on the color side and food and beverage, cosmetics, sounds like that's largely a volume component. Is there a pricing component to that, too, particularly as conversion takes place? Paul Manning - President, Chief Executive Officer & Director: Yeah. I would tell you that – I'll break those down. If your pharma business was up over almost 12% and it was basically all volume – and by the way, our operating margins improved there. On the cosmetic side, it was all volume, or nearly all volume, and cosmetics is up about 5%. And then our food, which is up almost 7% and well into the double digits on operating profit, was probably about 50/50, price/volume. Brett Michael Hundley - BB&T Capital Markets: Okay. That's helpful. And then other... Paul Manning - President, Chief Executive Officer & Director: I'm sorry, Brett, by price, I would say, price and mix, price/mix. Brett Michael Hundley - BB&T Capital Markets: Exactly, exactly. Yeah. Paul Manning - President, Chief Executive Officer & Director: (42:24) there. Brett Michael Hundley - BB&T Capital Markets: Okay. No, that makes sense. And then, Paul or Steve, was there a particular reason that you decided to buy back shares the way you did during the quarter? Can you maybe give us some more color just on capital allocation decisions in the quarter? Paul Manning - President, Chief Executive Officer & Director: Well, I think that, again, I look at share buybacks on an opportunistic basis, as I've indicated before on these calls. I see $100 stock and so, to that end, you could very easily say buybacks make a whole heck a lot of sense. Now, I also like to balance that in the context of acquisitions. So, in our capital allocation strategy, CapEx will always come first and we're feeling very good that will be in our range of $75 million to $85 million, much of that related to restructuring activity. Dividend, we have a commitment as a company for the dividend. We've increased our dividend and consistent with our desire to be within that 35% to 40% payout ratio. And then, from there, it's a question of, if you have a strong acquisition opportunity or you don't, we want to be a returning maximum amounts to our shareholders. And so, we have a very strong interest in doing that. Our shareholders are – like any other, are very interested in that type of payback. And so, as I looked at this year, I didn't see a massive acquisition that was on the horizon in the first half. And so, I saw an opportunity, based on where the stock is, to buy back to the tune of about a 2 million shares. So, now, as we look at the second half, we will see. We'll see how the opportunities come our way. Brett Michael Hundley - BB&T Capital Markets: Good color. Go ahead.

Brett, let me just – this is Steve, let me just add to that. I think we're able to make all of the investments we need in our business right now. So, over the last 12 months, we've invested $87 million in CapEx. We were able to make an acquisition. And so, on top of that, we were able to buy back stock and, as Paul said, increase our dividends. And where our debt is at today, 2.2 times EBITDA, that provides ample flexibility should other opportunities come along. Brett Michael Hundley - BB&T Capital Markets: Good to hear. And just one last one for me. Regarding M&A, this may be tough to answer, but in the areas that you are looking, do you see things for sale out there or is this much more the type of market where you need to identify targets, proactively approach them, et cetera? Paul Manning - President, Chief Executive Officer & Director: We see both. We see companies that are for sale, but we also see companies that may be kind of interesting. And so maybe they're not outwardly or there is not a for-sale sign out in front of them, but clearly there is an interest by that owner or that company in selling that. So, yeah, there is a lot of activity. Typically, by the time that everybody knows about it, you're going to be paying an awful lot of money for it. And so, from that standpoint, auctions may, in fact, raise price premiums significantly, making it very hard to make it a compelling investment case. So, yeah, we do a lot of our own work. I make a lot of visits. I talk to a lot of companies, a lot of owners. And I think that's the best way to go about doing it. And I think that you get to understand the business is very well and you're not necessarily doing that through an intermediary, you're doing that directly with your own staff and your in-house group, because you know your business best and you know how that business that you're looking at may work into it. But am I seeing more than I saw a year ago? Probably not, probably about the same. Am I seeing more than we saw five years ago? I'd say yes. So there's certainly an uptick in that one. So, those would be my comments there. Brett Michael Hundley - BB&T Capital Markets: Okay. Thanks for taking my questions, guys. Paul Manning - President, Chief Executive Officer & Director: Okay. Thanks, Brett.

We've reached the allotted time for questions. I would now turn the conference back to the company for closing remarks.

Okay. I hope we got to everybody's questions. I think we did. If we missed anybody or if anybody has a follow-up question, by all means, please call us at the company, we'll be happy to handle any follow-up. Thank you.

This concludes today's conference call. You may now disconnect.