Good morning everyone and welcome to the Sensient Technologies Corporation 2018 Fourth Quarter and Year-End 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.

Thank you. 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 2018 fourth quarter financial results. I'm joined this morning by Paul Manning, Sensient's Chairman, President and Chief Executive Officer. This morning we released our 2018 fourth quarter financial results. A copy of the release is now available on our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which we believe provide investors with additional information to evaluate the Company's performance and improve the comparability of results between reporting periods. These non-GAAP financial measures remove the impact of restructuring costs, currency movements, the impact of the 2017 US tax legislation, depreciation and amortization, non-cash stock-based compensation and other items 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 the 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 $0.79 in the quarter compared to adjusted earnings per share of $0.84 in last year's fourth quarter. Revenue in the quarter was up approximately 1% in local currency. Our consolidated earnings in fourth quarter were down slightly, which is in line with the guidance we communicated during our third quarter call. During that call, we indicated that the significant headwinds we faced in Flavors & Fragrances, of onion pricing and cost, and the restructuring fallout would be behind us in the fourth quarter. We can now confirm that these issues are behind us. Our overall flavor and color results were not as strong I would have liked, but our performance-based compensation adjusted accordingly to allow us to meet our overall earnings expectations for the quarter. Color delivered another nice quarter of local currency revenue growth, primarily driven by solid growth in Food Colors. For the year, Color delivered approximately 5% local currency revenue growth and operating profit was in line with last year's results. Revenue for the Food Colors business has been very strong this year, particularly in North America, as natural color conversions and sales continued to grow at a strong pace. Our sales mix and higher input costs held back our profit growth in the second half of 2018. We expect to address both of these issues in 2019 and return to profit growth as the year progresses. As we forecasted and discussed during our last quarter's call, the Cosmetic business continued to experience softness due to inventory stocking. Over the last several years, there has been a significant uptick in new product launches and strong demand particularly in the makeup market. This demand began to moderate starting in the third quarter, creating the softness in de-stocking…

Thank you, Paul. In my comments this morning, I'll be explaining the differences between our GAAP results and our adjusted results. During this year's fourth quarter, we updated our final estimate of the impact of the 2017 tax legislation. Separately, our 2017 results included restructuring and other costs, as well as the initial impact of 2017 tax legislation. The adjusted results for 2018 and 2017 remove the impact of the tax legislation accounting and the adjusted results for 2017 also remove the impact of restructuring and other costs. Sensient's revenue was $324.6 million in the quarter compared to $328.9 million in last year's fourth quarter. GAAP operating income was $45.3 million compared to $47.4 million in the comparable period last year. The 2017 operating income results include restructuring and other cost of $2.9 million, and excluding these costs, adjusted operating income was $50.3 million in 2017's fourth quarter. Foreign currency translation reduced both revenue and operating income by approximately 2% in the quarter. The impact of the 2018 acquisitions did not have a material impact on revenue and reduced operating income by approximately 2% in the quarter. GAAP diluted earnings per share were $0.78 in the quarter compared to $0.31 in the comparable period in 2017. The diluted earnings per share in the fourth quarter of 2018 include $0.01 of tax expense related to finalizing our estimate of the US tax law change, which went into effect in the fourth quarter of 2017. For 2017, restructuring and other cost reduced the fourth quarter earnings per share by $0.11 and the US tax law changes reduced fourth quarter earnings per share in 2017 by $0.42. When you normalize the EPS results for these items, adjusted diluted earnings per share were $0.79 in the quarter compared to $0.84 in 2017's fourth quarter.…

[Operator Instructions] First question comes from the line of Heidi Vesterinen from Exane.

So a couple of questions, please. So it was great to see that in the F&F business, we saw the two negative effects subside. Can you clarify if that happened at the start of Q4 or during Q4? I'm just wondering if you had any operating income benefit from that already or not? And then the second question, when you say the post restructuring sales have stabilized, does that just mean the erosion has stopped, but you haven't seen the volume recovery yet or are you seeing the volume come back already? And then maybe the next one on input cost. If you could specify, you know, where you're seeing inflation? I was kind of surprised you said that there would be pressure in Colors. There are some competitors saying there will be deflation. So, if you could have a bit information on that as well, please. I'll start with those three. Thank you.

So Flavors & Fragrances, that's right, the two headwinds are behind us. We would expect to see growth in each one of those businesses throughout 2019. So I think the first one, the onion, every indication will be given that crop is harvested from many different areas and all our indications continue to be very, very positive. So, I feel quite confident that that is behind us and SNI will be a contributor. Similarly for the Sweet & Beverage business, we moved past our restructuring hurdles. We got our plant operating well. We've got very good coverage of our customers. Our service levels are absolutely outstanding now. And so, we expect volume growth and growth in those businesses working on a lot of very large projects right now and I think that we are going to be in very good shape in each of those businesses and they will be strong contributors throughout the year. With respect to and that kind of gets into your second one, the post restructuring stabilizing, yes, there will be volume growth in each one of those areas. I think across SNI, lot of different product lines and they are showing good signs. Similarly for Sweet, we're seeing actually a continued nice turnaround in the ice cream market. Yogurt, for the year, market wise, in the Americas, which is really where our principal business is for yogurt, the US market was down only 6% in 2018, which strangely enough is a little bit of an improvement from the last two years. Various brands do have growth positions, but other brands are even worse than that 6% decline. But we are seeing a lot of nice progress with many of the customers we've honed in on that market. So, we think that the yogurt situation is…

And then just a follow-up actually on the first question. I think previously you had quantified the pain from the onion issue on profit. Can we expect that to reverse completely in 2019 or should we be a little bit more cautious on that?

I would be a little bit more cautious on that. I mean, obviously, we need to price to win at times. I think input cost, there is inflationary pressure in certain regions of California. So, I wouldn't tell you it is necessarily a one-for-one recovery. So, yes, I would say, be a bit more cautious than that, but we certainly expect to have a nice recovery in that business.

Next question comes from the line of Curt Siegmeyer from KeyBanc Capital. Your line is now open.

Paul, what gives you confidence that the Flavors business softness that you noted was more market related and not necessarily lost business from the restructuring? And just kind of where are you now from a volume or throughput perspective in that one plant that the restructuring took place and you know just relative to pre-restructuring?

Yes. So, I think that - so, first of all, look at the timing of the restructuring and we talked quite in detail fashion with our customers. So that would be - I think we have a good sense of where we are on our relationships there. So, I think as we look at 2019, we know precisely where the impact was felt on the restructuring front and I don't see those headwinds, and certainly, we see that in the progress of our pipeline and we see that with the engagement we have with our customers. How do I distinguish that from just general market declines? I'd link it up to the categories where our business is soft and where I see that softness in the market. I mentioned Yogurt, it continues to have that decline, but we certainly saw that softness in the soup market which then translated into our business as well. So I think the quality of the pipeline has improved in those businesses in particular in Flavors and that's really what gives me the confidence. There is always churn in these markets, right, I mean, a lot of products get launched for six months or a year and then that customer replaces them with something else. So, that's always the nature of these businesses. Now, they may not replace it one for one and they may not replace it on the same day that took out the other one, so there maybe some lags here or there, but in general, I think we have a high level of engagement with our customers and we can very well now distinguish between market declines and a piece of lost business from the restructuring fallout.

And then just on the volume, just kind of where you are at now relative to pre-restructuring?

I don't have that in front of me. I think that the key factor there is we have a plant that's been very much optimized to produce a whole range of products and cost position is going to be much better and it is much better than the pre-restructuring arrangement. And that was always the long-term gain with restructuring, as we felt we need to do - have a better more efficient footprint, you are seeing that obviously play out in CapEx. We're not spending as much as many on CapEx because in part we have fewer facilities. So, we are always looking to utilize these plants well and if the plants aren't being utilized well, we're always looking very diligently at the cost of those plants because you can't keep operating if you don't have the volume, but I've got a lot of confidence that as we go through this year, I'm going to be talking about the successes that we are seeing in that business.

And if I could one follow-up. Last quarter, you mentioned some of the CPG companies cutting down to core brands and some of that was impacting new product launches. Can you just provide us with an update on what you're seeing from your customers on that topic since the end of 3Q and just what your outlook is for this dynamic in 2019?

Yes. I mean, the dynamic varies a little bit by - I had some comments about personal care and food. But I think that is a consistent theme now throughout the Americas and Europe that some of the large multinationals that we've all heard of and you see this in a lot of their press releases, there is a stronger emphasis from them on again their core brands. There is fewer launches of line extensions or limited time offerings. My ability to predict when that comes back, I mean, certainly, we're always working on those projects, but when a customer or even a whole market segment goes back to pursue that rigorously, that's harder to tell. I would anticipate 2019 would be a little better than 2018 just because we've seen these in the past and they tend to move in cycles and that cycle tends to last about 12 to 18 months. So I would expect some uptick there. But as you look at personal care and cosmetics in general, certainly, the launches continue on the real premium brands and in certainly brands throughout Asia Pacific, but more of the mass market brands particularly in the US, there was a real decline in launches in general in 2018. In fact, by some indications, we see that being down as much as 10% versus 2017. But again, these things move in cycles. And we'll stick to our knitting, we will focus on the pipeline and support these customers. But, yes, there is definitely a much more profound focus in general on the large brands towards their core brands.

[Operator Instructions] Next question comes from the line of Garo Norian from Palisade Capital. Your line is now open.

I just wanted to circle back a little bit to some of the comments around onions and the plant. And if I remember earlier in the year, I think you guys had kind of sized onion issue as may be about $0.15, maybe the plant even more than that. And so I guess the implication I thought was just by those issues going away, you had a pretty good setup going into 2019. So just wanted to kind of better understand what the hold back is related to the improvement on those?

So. Yes, I think they were obviously both headwinds, and they were about, I want to say, order of magnitude about the same magnitude. What do we say on EPS?

So. We said about - for the onion issue, we had talked about that being from $0.05 to $0.08 per quarter. So...

In 2018?

Yes.

And then I think we also indicated the restructuring piece was about that magnitude, perhaps even larger in certain quarters. So, onion, it's a situation where it was a price and cost scenario, right. So, as we look at 2019, we could expect to get much of that back just by the natural course of things. People are still buying onion, volumes will be up. But we are able to respond to some of the pricing constraints that we're able to - we see a much better and different cost situation than we did last year even on a consistent level of volume. So, just by the natural course of things, you would expect an improvement in 2019. Now, with respect to the post restructuring, that's a little bit of a different scenario because - and as much as chunk of that businesses was lost business. So that's a matter of regaining that business and growing that business post restructuring. So because that is not the headwind - that's right that in and of itself will be a incrementally a big improvement versus 2018. But as you think about that compared to 2017, that's a different analysis. So, we endeavor to regain business, we endeavor to grow the business, but yes, as compared to 2018, those headwinds go that there is a significant and clear ability for Flavors to incrementally grow 2019 versus 2018.

And then just on the comments that you provided on the raw material side, the synthetic colors, if the industry is so tight that getting supply is even a challenge. What is it specifically that kind of causes the delay in passing through? I would think that that's almost the optimal situation to have - if you need to pass higher costs through?

Well, it's probably not unlike how a lot of business is pass along cost, right. In the many cases, you have a contract and so you're obliged to maintain a cost position until a particular anniversary date. So, that is a scenario where you would be limited. In other cases, you will get it, but it's not like customers just sort of rollover and take it, because you walk in the door and you smile at them. And so, sometimes there is great resistance until these pricing increases and that is where you have to make decisions with respect to the size of the business and a lot of other factors. So, we get it but again there can be delays plus in the case off a lot of these raw materials, the price goes up, two weeks later, it goes up again; a month later, it goes up again and these things can be a source of considerable frustration to us, to customers, to others and we have to be sensitive to some of that dynamic as well. But I'm confident that the situation resolves itself. Pricing is one of the mechanisms, having more availability is a mechanism and then perhaps the regulatory situation on the ground changing could be a third mechanism. But I think we've demonstrated over the years particularly in Color and this is where the impact is most profoundly being felt. We have the ability to recover or even in other cases, we will just reformulate at some level, that's always an option, but that one takes time too.

And then just last - just for modeling purposes, what's the right tax rate assumption to use for 2019?

So, we're budgeting internally between 22% and 23%. So, 22.5% is right in the middle.

Next question comes from the line of Heidi Vesterinen from Exane. Your line is now open.

I wondered if you could talk more about your new business head in F&F. What is his background and has he made any changes to the business strategy yet? And then second question, could you maybe, Steve, talk a little bit more about working capital because of the accounting change, it's quite difficult to see in the statement what actually happened on an underlying basis year-on-year and how do you hope to improve that as you go to 2019?

So, for the first one, I'll take that and I'll give a little comment about the working capital, but that's one of Steve's focus areas for 2019, so I guess I can give you some more detail. Yes, the new President of Flavors, sales and specialty chemical background. So, I think he's ideally suited to run this business. Very focused on sales execution, very focused on running the trains on time, very focused at servicing our customers, all very, very fundamental to successfully growing the Flavors & Fragrances business. I think again, in the post restructuring world, these are the things we can focus on and these are the things that are going to grow the need. I have a lot of confidence in him and I have a lot of confidence in the management of the Flavor Group. We, as you know, over the years, have made a lot of changes there. I think we have right composition of people who have the right mindset and the right ability to really execute the strategy. So, with respect to working capital, yes, I think that one of the things that we talked about in 2018 was that, if you are not providing good service levels to your customers, it doesn't matter how good your technology is, it doesn't matter how many products and plants and all this other good stuff, if you can't get things to customers on time, it just doesn't matter. And so we have a very, very intense focus on getting those to a level that was best-in-class and keeping them at a level that was best-in-class. Part of that initiative, in the interest of speed, was to raise inventory levels in certain businesses until such time is a better optimized the supply chain and we are now in that phase such that as you look at 2019, we've got a lot of levers available to us to reduce inventory in many of our businesses. But I know, Steve, you got some other things you'd like to talk about there?

Sure. First off, in terms of the presentation of cash flows, going forward that will be much cleaner. So, when we brought some financing vehicles back on balance sheet, we no longer have this different presentation. So, our presentation going forward will be pure and it's really just the first six months of the prior year where there will have to be an adjustment. So, going forward, it will be much cleaner. But the improvement in the year and in the fourth quarter, it really comes from all of the different areas of working capital. We're focused on inventory, as Paul said, and so there was no longer any need to build that later in the year. But we also focused on payables terms. We've been working to extend those and we've been focusing on this receivables as well. And so the improvement we saw in the fourth quarter was really a lot attributable to each of those elements, but primarily receivables and payables. And then going forward, we won't have the need to continue to build inventory and in fact, we think there's number of good opportunities to decrease it in certain areas. And some of those will be easily achievable, some of them will require a little bit of more work. But we put some different incentives in place and our goal is to try to get back a big part of the number of days that we saw slip in 2018.

And then, lastly, if you could comment on Cosmetics. So, is the destocking over or is that still continuing in Q1?

It will continue - actually, there is kind of a range of answers to that, I mean to be cagey here, but it kind of flows from region to region. So, to begin, I'll take the four regions that we conduct business. Asia Pacific, very good growth, we don't see this destocking phenomena, we don't see the slowdown in demand, so the dynamics are quite good there. North America will be the first of the other regions to really come out of this. We see that destocking lightening up considerably, we see demand returning to - we expect North America to really be out of that at the end of Q1. Europe will follow. We see indications that Europe is probably about a quarter out of the phase with the US market. And then, Latin America is kind of a - there is elements of that but there is also some of the economic factors that play there. Most of our business in Latin America is really associated with Brazil. And as with most folks in Brazil right now, there are a lot of challenges economically and otherwise to contend with. And so I would expect that Latin America would be the last to come out of this sort of slowdown in demand. But it's important to distinguish too in the cosmetic market. We deal very strongly in terms of makeup. So you may not see all these phenomenon and say in the other segment like skin care but you will also see it in hair coloring, but you may not see it in hair care. So just to clarify, when we talk about the cosmetics what aspects of the market that we see and that we are talking about.

Thank you. We have reached the end of the question-and-answer session. Please contact the Company with any additional questions. At this time, I will turn the conference call back to the Company for closing remarks.

Okay. Let me just say one other - I just want to clarify one or two points for the folks on the line today. So, we are talking about guidance a little bit differently than how we have in the past. We're obviously still providing EPS guidance, but fundamentally, as you've gathered from the discussion about headwinds and the like, EPS alone is going to be insufficient to really measure the health and the performance of the business, right. So, you look at Color and say we're going to have revenue growth, we're going to have profit growth, it's going to be tougher first half on profit for Color, but I expect them to deliver in that mid-single digit revenue for the year, again, which they have done a number of years now, and mid-single digit profit growth. We're the number one player in most of the segments we operate in and I think we're going to do quite well. We've good strategy, good management, Color will have a good year. Flavors, coming out of a lot of headwinds. We expect a much improved situation there. We are guiding mid-to-high - sorry, low-to-mid revenue and mid-single on profit. So we expect EBIT margin to be up. This is the inflection point we're waiting for. This is the - really what we wanted to have in 2018; I think it's kind of delayed about year on account of those headwinds we talked about. Asia Pac, expect mid-single digit revenue growth, mid-single digit profit growth. So the profit and the revenue from the business groups, I expect those to be good, I expect just to have a strong year there. So then, we're balancing that with those three headwinds. So, the headwinds just to recap again, the first being the performance comp. We are a 100% performance-based stock grants. And so, there are no participation certificates here. So if you don't do well, we don't pay that out. When we do well, which we expect to do in 2019, we would pay that out. Now, obviously, it's a non-cash expense, that is captured at the consolidated corporate line. So, this is why there is a distinction between what we will do from the groups and what you will see at corporate. So this is why we will talk EBITDA less this non-cash PSU compensation piece. And so just to clarify that. And then, of course, the tax, I think should be pretty clear. And then, the FX, we're estimating $0.05. We'll give you updates on how that evolves as the year goes on but I'm not going to necessarily get into business of predicting currency swings. But for right now where we see the rates, we expect that to be about $0.05. So, if you have any questions, happy to talk to anybody who would like to get some additional detail there. But otherwise, Steve, anything else you want to add here?

Nothing else to add. Thank you everyone for your time this morning. This will conclude our call. Thank you.

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