Good morning everyone and welcome to the Sensient Technologies Corporation 2017 Third 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 2017 third quarter financial results. I'm joined this morning by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. Yesterday, we released our 2017 third quarter financial results. A copy of the release is now available on our web site 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 measures remove the impact of restructuring costs, currency movements and other costs as noted in the Company's filings. 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 responses to your questions, may include forward-looking statements as defined in the Private 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.

Thanks Steve. Good morning. Sensient reported adjusted earnings per share of $0.89 in the quarter, an increase of 7% compared to last year's third quarter result of $0.83. Flavors and Fragrances rebounded from a challenging second quarter and reported an operating increase of 2%. Color had another strong quarter, reporting in an operating income increase of 8%. Overall, the company's adjusted operating income increased 7% and the adjusted operating margin increased 90 basis points to 16.4%. Flavors and Fragrances delivered a solid performance in the quarter, with many of the Group's businesses reporting double digit operating profit growth. Operating income increased 2% and the Group's operating margin improved 70 basis points to 16.8%. The Bionutrients, Latin American flavors, North American Beverage, North America Savory, Europe Savory and Natural Ingredients businesses, each had solid improvements over last year's results and contributed to the improved performance in the third quarter. Flavors and Fragrances has continued to execute on its strategy of developing flavors for small and mid-sized customers, and there have been a number of positive developments this year. The majority of our business units are now successfully executing against this strategy. As an example of this, Flavors sales were up significantly in our North American and European Savory businesses, driving double digit profit growth in these business units in the third quarter. Another example is our Bionutrients business, which delivered an outstanding performance this year, driven by innovative solutions for the growing probiotics market. These items contributed to the Group's solid performance in the quarter, and are areas that we will continue to develop going forward. Last quarter, I discussed a number of issues that affected the second quarter results. Most notably, these included production inefficiencies, higher costs and shipping backlogs, stemming from the closure of the last plant under the…

Thank you, Paul. Sensient's operating income was $52 million in the quarter compared to $51.2 million in last year's third quarter. The operating income results include restructuring and other costs of $6 million in the quarter to $3 million in the comparable period last year. The restructuring costs in this year's third quarter are primarily due to non-cash charges for asset impairments, related to the closure of the Indianapolis site. Excluding the restructuring and other costs, adjusted operating income was $58 million and $54.1 million in the third quarters of 2017 and 2016 respectively. Foreign currency translation increased revenue by approximately 2% and operating income by approximately 1% in the quarter. Diluted earnings per share from continuing operations were $0.73 in the quarter compared to $0.79 in the comparable period last year. Restructuring and other costs reduced earnings per share by $0.15 in this year's third quarter and by $0.04 in last year's third quarter. Adjusted earnings per share were $0.89 in the quarter and $0.83 in the comparable period last year. The increase in adjusted EPS in the third quarter was driven by higher operating income in both Color and Flavors and Fragrances and lower corporate expenses. Foreign currency translation increased adjusted EPS by $0.01 per share in the quarter. Operating income was $120.4 million in the first nine months of this year, and $142.3 million in the first nine months of 2016. The operating income results include $45.2 million and $19.9 million of restructuring and other costs in the first nine months of 2017 and 2016 respectively. Removing the impact of restructuring and other costs, adjusted operating income was $165.6 million in the first nine months of this year and $162.2 million in the comparable period, last year. Adjusted diluted earnings per share from continuing operations were $2.58…

[Operator Instructions]. And our first question comes from Mike Sison from KeyBanc.

Hey guys. Nice quarter there. Paul, when you think about 2018 in Flavors and Fragrances, the struggle has been kind of that consistent revenue growth. What gives you confidence, as you look out now, as you head into 2018, that you can generate that low to mid-single digit type of growth?

Couple of factors; so I think number one, I am seeing in a lot of our businesses right now, whether they'd be in the Americas or beyond, so I think there are some good trends there. I think number two, the types of customers that we are actively focused on. We mentioned small regional and then local customers, whose underlining growth rate, I think, certainly exceeds the market overall. And that plays out, not only in Flavors, but also in colors. So I think those factors are good. When I look at this last quarter, we were down about 2.5%. When you factor in culling [ph], we are up about a 1.5% and then when you factor in that Asia Pacific situation, we are up more like about 2.5. So I think that's another positive from my standpoint. And I think probably the fourth is -- again, I can't underestimate or can't say it enough, that the major distraction of restructuring is behind us. I think that gives a new found focus on commercial activities and less of fixing sort of homemade issues. So those will be say three or four issues that I think are particularly important. There is certainly as well, very good trends developing in many of the markets, with respect to swapping out sugar for something a little bit less -- a little bit more desired. Taking out salt, there has been legislative changes in a number of regions for both salt and sugar, and I think we have a very good offering there, from a technical standpoint. And then I think, certainly there is a growing interest in the use of extracts, as a substitute for flavors in a number of these markets. So I think each one of these offer a good opportunity for us, because they are very technically driven sales as well, and that's I think where we have been able to be successful as a company historically.

Okay, great. And then, when you embarked on improving the Flavors and Fragrance business in ’13 , margins have improved and you talked about, really repositioning the portfolio to be more solutions driven. And as you know that you have called a lot of lower margin stuff divested in it. As you head into 2018, is this the portfolio that you have been looking to improve, and if not, what are the other areas that you'd like to add, maybe via acquisition or just new products and such?

Well I think the portfolio, well certainly -- it was good to start with in many of the businesses. We have obviously enhanced that consistent with a lot of these changing consumer trends. The taste palettes in a lot of these regions continue to change and continue to evolve. So the libraries for these flavors had to do that as well. And I think that's something that we do a pretty good job with, throughout the organization. So I think that's a big part of it. I can tell you that the effectiveness of these portfolios plays out very well. It prefaces with the growth in EBIT that we expected. As I look at the Group today, we are now -- I can now tell you that, essentially every business in the Americas is at that benchmark EBIT margin that I have declared publicly as our goal for the overall group. So what you would then conclude from that is, okay, the portfolio is very good and that we are executing on the strategy of selling flavors, certainly at better price points than the historical flavor ingredients, with which we had a strong emphasis on. But then that would also tell you that the GAAP and the EBIT margin, and really where we need to enhance our efforts would be in Europe. So the real positive there is, we have demonstrated in quantifiable evidence throughout the Americas, and actually in -- and certainly in Asia Pacific, that we can execute on selling these flavors, we can do so, at the enhanced price points and therefore enhanced EBIT margins that are indicative of the type of flavor company that we want overall. So the efforts will continue to focus as well in Europe. There is quite frankly, still more upside potentially in these Americas businesses as well. So this gives me lot of confidence that, the results that we are showing there, that we have been able to grow there, are definitely transferrable to our operations beyond, and more specific to Europe.

Okay. And one quick follow-up, in terms of cosmetics, I don't sense that the [considering the price companies are][ph] growing that fast, but double digits pretty impressive. Maybe I am wrong, is the market growing that fast, or is this your ability to help customers adapt and grow that, which is driving your double digit growth in that part of the business?

The latter. In other words, the market overall is not growing at that rate. Yet there are pockets in certain parts of the world or perhaps even on certain product lines. But I think, what is very fulfilling about our results in cosmetics, is these are really borne of a very long term approach to innovation. The sales cycles in cosmetics and personal care in general, tend to be a bit longer than what you'd see in the food industry. In other words, from the moment you show an innovation, to when that innovation on a store shelf, can stretch on a bit longer, and in some cases, quite a bit longer. So a lot of these results and success we have been seeing in cosmetics, for certainly this year and last year, and even a little bit into the prior year, are from those efforts. And so, oftentimes folks will say, hey, are you fellows spending enough money on R&D? And well, I don't know precisely how much money they are spending in R&D, but I know -- can tell you exactly what our five to seven year NPD plan is, of what we want to launch and when. And I think that -- the results we are seeing throughout the cosmetics business right now, are being driven significantly by the innovation efforts that we have had in place for many-many years. However, it's a good market, right? There is a lot of interest in personal care items now, throughout a lot of the different regions, for different reasons as well. Adoption of new users at younger ages, certainly is a positive in say, the U.S., North American market. But even just the globalization of more of these products, the sophistication of the cosmetics products that can be sold in parts of the world, where they traditionally were not sold. So these are all fundamentally very positive market dynamics, that I think we are able to take advantage of right now.

Great. Thank you.

Okay. Thanks Mike.

And your next question comes from Brett Hundley from the Vertical Group.

Hey, good morning guys.

Hey Brett.

Paul, I had a two part question for you on the Flavor/Fragrance margin. So you are seemingly easing off your margin improvement goal for that segment this year, with your statement of an expectation of at least 16% for the year. And you talked about how that's mainly due to your Q2 performance this year. However, at the end of Q2 or on the Q2 report, at least at that time, you had remained committed to being hopeful for at least 100 bips improvement for the full year. So I just wanted to get a sense from you on whether you had certain expectations for Q3, and it just didn't develop as you thought, or if you have kind of just rebased your expectations period? And then my kind of second point or related question there was, you just touched on Europe here and talked to me about your Flavors business, are you kind of prepared to give the investment community an understanding of what that bridge to 20% looks like? I guess, I myself have a hard time understanding, whether it's the timeline or the event occurrence that kind of builds us to 20%? And I guess I am just curious, if you are able to give us a sense of those building blocks and how they come and then what your own visibility is there?

Okay. So the first part on the margins and the margin expectation to this year. As you look back to -- I think it was about three out of the four quarters of last year, we were 100 to 150 basis points of EBIT. We certainly did that again in Q1. We are up about 70 here in Q3, and certainly we all know the story on Q2. We are always pushing the businesses, and we create very high expectations. Some of this is a matter of, we have got a lot of good products and projects in the pipeline, and when projects close, they generally are projects that are very consistent with the strategy, and therefore carry higher margin benefit to the overall business. So sometimes these estimates can be affected by the timing of these launches, and it shouldn't come as any surprise to anybody that a lot of launches, unfortunately for the last year in particular and put beyond that, even last two or three years, have been delayed, have been pushed back a quarter, pushed back even two quarters. And so, you want to remain realistic about what the pipeline can do. We have certainly seen a lot of improvement in the business. We have certainly seen in individual business units. And I guess, all I could tell you about that is, this is what I can tell you, over the long term, I see that improvement as being a very realistic. But in any one quarter, there may be some choppiness to that figure, and certainly, I don't want there to be, and I would like to be able to predict with great accuracy, where I think we will come out. But I think -- again, I will point to where we had now achieved…

That's really helpful. I appreciate that color. Just to switch over to Colors and look inside food and beverage. We had seen an announcement somewhat recently from General Mills, where they were actually looking to switch back one of their serial brands to a synthetic color, away from natural. And it just got me thinking; I know you said that conversion remains solid globally. But just in the event, where maybe some of these guys do start to turn back towards synthetic, the question I get a lot is, from an earnings cash flow standpoint for you guys, just removing the whole revenue discussion, from an earnings cash flow standpoint; is Sensient somewhat agnostic between synthetic, natural? I'd just be curious to get your thoughts on that.

Well, I would say this. Let me answer this somewhat deductively. I am going to take you on a little bit of a journey, Brett, on this one. So I think number one, the notion of moving from synthetic back to -- or from natural back to synthetic, that is not necessarily a new thing that we have seen in markets. We have seen that type of activity, even in Europe, where there is a de facto ban on the use of synthetic colors in many products. So that's not terribly new to us. In fact, we have certainly even seen that type of activity in the Americas. I think what was unique about this case, is it was a fairly high profile movement from natural back to synthetic. And so I think, those will continue. So we weren't terribly surprised by that, because in short, we have seen that type of activity. Now as you look at the evolution of natural colors; a lot of -- and I am not going to speak specifically about that customer or any of those products or any other brands in the market. So much as to say that, there is two views of natural colors. There is one view in which -- and I have talked about this before on these conference calls; you look at a food product in Europe. The same type of vividness and intensity of flavor is oftentimes not there on a lot of products. You typically don't see as bright a food color use in the European market. Very different from the American and the Americas market and even most of Asia, where very-very bright intense colors are pretty normal. And so, I think that at times, there has been question about well -- will the U.S.…

I appreciate the journey. Just real quick Steve, on the CapEx change, is that more of a delay? Should we read that as more of a delay into 2018 or should we read that as more of updated views by management?

It's a little bit of both. Certainly with the focus we have put on the restructuring in Q2 and even in Q3, it may have changed some of our priorities, so there could be a little bit of a delay. I think we are relatively conservative in our number going into the year. We do have a lot fewer facilities because of the restructuring, and so our maintenance CapEx needs to come down, and so I think the revised number is the little bit of an update, and a revision based on that realization also.

Yeah. And I'd add this as well, Brett; you know, we have articulated our long term goals for return on invested capital. I would tell you that, we would probably be close to about 11% by the end of this year, up from about 9% a few years back. But there is more work to be done there. Part of achieving that is, being more judicious about some of the investments we make. So some of this decline is me simply saying no to certain projects, that don't yield a significant ROI opportunity or any ROI opportunity for the company. And so I think that's part of this calculation as well. As things have evolved or changed, some certain projects perhaps didn't look as appealing as they had formally, and I think that's a real positive sign.

That's great. All right. Thanks for the time guys.

Okay. Thanks Brett.

And our next question comes from the line of Francesco Pellegrino from Sidoti.

Good morning guys.

Good morning.

Hi Francesco.

Just to carry over a little bit, since we -- you were just discussing the CapEx delay, and you had just mentioned that some of the projects may not be as appealing. I am sort of left here wondering, whether or not like the tempered fourth quarter expectations causing to maybe reassess certain investments in certain product lines, given where maybe next year's revenue streams could be between -- I am not sure if it's Flavors or Fragrances or for Colors, if there is any end market concern, specifically, will about $10 million reduction might be attributable to?

No. In fact not at all. When you think of about CapEx, if it's a significant project. First of all, it's going to take anywhere from year or two to complete it. So much of CapEx is done in anticipation. It's done in anticipation of a new technology being adopted. It's done in anticipation of a change in the market, like everybody is going to start buying natural colors, so make sure we are invested wisely there. So these are typically very long term in nature. Now of course, you get the -- every year, I got to upgrade these parts of the plan, or I got to change floors out here, that's kind of the standard stuff and that remains. But no, I think there is a lot that goes into CapEx planning; but this is not some indication of me saying, uh-oh, we are in trouble, we better hold out on CapEx. In fact, if I thought we are in trouble, you might see the CapEx number shoot up, because we then need to find more opportunities to invest in the business to generate more revenue.

Okay. But then again, it is a fair question that there is a reduction in your CapEx guidance and all the planning that you had indicated, how long term in nature it needs to be that -- any change in your forward thinking could be actually indicative of a slowing down of a potential end market then?

No. It's indicative of, I have changed my mind on anything that would be a good investment.

Okay. In regards to your Flavors and in regards to the guidance that you had given for the fourth quarter Flavors and Fragrances, I think you actually provided full year revenue guidance to be flat, is that right?

That was Q4.

Okay.

It was a flat revenue guidance applied to Q4.

Okay, okay, Q4. Okay. Then one other thing that I wanted to touch on was, on the second quarter call, you guys had -- Paul had said something about companies undergoing like conversion from synthetic to natural colors and how there was basically two approaches? There is the right approach and there is the wrong approach, and the wrong approach is the company that's sort of looking -- that's a little bit more cost conscious, that's going to be go the cheaper route, but at the end of the day, the cheaper route is actually going to create a lot more problems, just due to product group formulations, and not necessarily getting the right hue that you would want. You had discussed at the time that you had noticed that a lot of these companies eventually were going to come around to making the right decision, ultimately the more costly decision for them. And I am wondering if you have been able to see any of those decisions being made during the third quarter?

Well yeah, I think that there are -- the view I hold of the market, is the view that's also shared by many customers and prospects as well that, if you are going to do this, you have to do it correctly. The worst thing you can do is, to spend the incremental dollars to make a natural color conversion and then not do it correctly. So now you have incremental costs, and in some cases, you may actually be hurting your revenue and the revenue of the category overall. And so, I would say of the pipelines that we manage around the world on this topic, the vast majority of the expectations of customers are to match the synthetic offering in each case. Now that's when you are converting from an existing brand. On a go forward, right, there is plenty of new launches as well, and I think you can -- this is more of an empirical comment than anything, you can go to the food store, and you don't necessarily see a diminishment in the use of colors as a wide scale trend in any of the markets that we are talking about here. So I think the signs are still quite good, in terms of I think the majority of the market and the customer base here would agree with what I have said; because fundamentally, the problem you run into, is that the color does not match the previous offering. So visually, it's a problem. But what we have found through our own study, primary research and secondary research on the topic is that, people's concepts and their impression of the flavor is generated significantly by the color. So if something was red and now it's not as red in the minds of many consumers, it now tastes differently, and what we have researched and seen here is a lot of products that have converted, but did not convert optimally. Customers, they actually were complaining more about the flavor than the color, and the irony of that is, that the flavor had not changed. So what that tells you, is the impact of color is significant, not only from a marketing standpoint and the appeal that it generates for a product, but it also is inextricably tied to the flavor and the experience of that product as well. So I think that's an important consideration and we watch that very closely.

Okay. That was helpful. One housekeeping item in regards to the adjusted EPS guidance range; given the addition to the share repurchase authorization, does your implied fourth quarter adjusted EPS guidance range imply any number of share repurchases during the fourth quarter?

No, not really. Not a significant amount. It's really given based on our share count right now, and our share repurchase program, is on an opportunistic basis. You can see in the third quarter, when the stock reacted a bit to the results from the second quarter, we chose that as a good opportunity to go in and buy stock. And that's the way we will continue to look at it. So we will continue to look at that steady as she goes, but also we will pick up activity when there is an opportunity. But anything done in the fourth quarter wouldn't really have a dramatic impact on the fourth quarter EPS anyway. So no, that's not in the guidance.

Okay. And I am not sure if you mentioned it, the implied tax rate for the fourth quarter?

Not much of a change from what I said last quarter. The second half of the year, I think I said somewhere between 25% and 26%, and that's kind of still where we are. So I think we will finish up the year, probably within 100 basis points on an annual basis of the prior year's tax rate.

Okay, perfect. Thank you guys so much.

Okay. Thanks Francesco.

And our next question comes from Christopher Perrella from Bloomberg Intelligence.

Hi, good morning. A question on Asia; has that business stabilized in regards to the customer disruption that happened in the first half of the year?

Well, nothing has really changed on the customer disruption side. But I think, what has changed for the rest of the business, is obviously, they have been able to make up for a lot of that. You saw that the top line was up, certainly nowhere near where I want it to be, and where it can be. So yeah, I think they have done a reasonably good job of compensating for that. We have seen a lot of good growth in many of these territories, some of which we have made some investments recently in. So I think the future continues to be very-very good in Asia.

All right. And in the flavors business, among the small regional customers, have you seen increased competition from other players in the market trying to reach down, since growth has slowed at the larger companies? Have you seen increased activity or bids among regional and smaller private label companies?

Well some of it depends on what your definition of small is, and I don't mean to be a basic here, but I think what we see is, flavors has always been a competitive market. I think, are we seeing an onslaught of brand new folks that we would not have normally seen? I wouldn't necessarily say so. There are certainly certain sized customers that moved the needle for us, and that may be very different for what would move the needle for a much bigger flavor company. So we try to compete where we are going to be successful. And so I think that guides a little bit of how we target these customers as well. But no, I wouldn't tell you that there has been a seismic shift there, but yeah, I mean, flavors is a competitive market. Color is a competitive market, every one of these businesses is competitive, because people are -- a number of people are chasing some of the trends that we are as well.

Okay. Fair enough. One housekeeping question, any restructuring savings still to be realized for 2018, what are your expectations for that number?

We are talking in the range of $4 million to $5 million.

Okay. Thank you very much.

Okay. Thank you, Christopher.

And our next question comes from the line of Garo Norian from Palisade Capital.

Hey guys.

Hey Garo.

Just a few small things here. What would you ballpark your maintenance CapEx these days?

I would say -- I am thinking about $25 million to $30 million.

I would about $30 million.

Okay. And then just on the kind of incremental restructuring for this year, I guess, can you give a little color on what that is? Is that kind of, you are doing things sooner than you might have thought, that would have rolled into next year, or just you are doing things that you haven't been expecting or what is that exactly?

I want to make sure I understand your question. On which, on the restructuring --

Well yeah, the restructuring, I mean considering the GAAP versus the non-GAAP for the year. Has the gap kind of gotten reduced, because this is some incremental restructuring I guess?

Yeah. So what was it. So that was primarily related to the closure and exit out of the Indianapolis facility. So we had some write down on the fixed assets. Some of the other assets, as we closed it, moved out, and prepared it for sale. That's the majority of it. And then there was some also, things like decommissioning or demolition of certain areas that we had to remove some equipment.

Got it. Great. Okay, that's all I need. Thanks so much.

Okay, thanks Garo.

[Operator Instructions]. We have reached the end of our question-and-answer session. Please contact the company with any additional questions. At this time, I will turn the conference back to the company for closing remarks.

Okay, thank you everybody for your time this morning. As the moderator said, if you have any follow-up questions by all means, you can give us a call, and that will conclude our call for today. Thank you.

And that does conclude today's conference. We thank you for your participation and ask that you please disconnect your lines.