Good morning and welcome to the Sensient Technologies Corporation 2020 Fourth Quarter and Year-End Earnings Conference Call. All participants will be in listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . Please note, this event is being recorded. I would now like to turn the conference over to Mr. Steve Rolfs. Please go ahead, sir.

Good morning. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's fourth quarter earnings call. I'm joined this morning by Paul Manning, Sensient's Chairman, President, and Chief Executive Officer. This morning, we released our 2020 fourth quarter financial results. A copy of the release and our investor presentation is now available on our website at sensient.com.

Thanks Steve. Good morning. Sensient reported fourth quarter earnings this morning, and I'm very pleased to report that we delivered adjusted fourth quarter local currency revenue growth of 7.9% and adjusted local currency operating profit growth of 19.2%. We continue to have strong results from our Flavors & Extracts group, our Food and Pharmaceutical business and the Color group, and in our Asia Pacific group. Our results were at the top end of our EPS guidance for the year. Overall, the company had a strong financial and operating performance in 2020. Flavors Extract group had an outstanding year achieving high-single-digit revenue growth and double-digit profit growth. Within the Color group, the Food and Pharmaceutical business also had a strong year with mid-single-digit revenue growth and double-digit operating profit growth in 2020. The company's cash flow from operations increased over 23%, and we reduced debt by over $90 million in 2020. We completed two of our three divestitures and signed a purchase agreement for the third, which we expect to close in the first half of 2021. Our focus over the past years on customer service levels has been a significant factor for our strong revenue growth in 2020. Our continued focus on sales execution along with lower overall sales attrition across all three groups is paying off and should continue to benefit future periods. In addition, our focus on reducing fixed costs has also contributed to our overall profit improvement and strong operating leverage.

Thank you, Paul. In my comments this morning, I will be explaining the differences between our GAAP results and our adjusted results. The adjusted results for 2020 and 2019 remove the impact of the divestiture related costs, the operations divested or to be divested, the impact of the costs related to our operational improvement plan, and a one-time COVID related payment to our employees. We believe that the removal of these items provides a clearer picture to investors of the company's performance. This also reflects how management reviews the company's operations and performance. During the fourth quarter, the company's Board of Directors approved a one-time payment to our employees to recognize their commitment during the COVID-19 pandemic, and the extraordinary and unforeseeable challenges associated with COVID-19. The cost of this payment is approximately $3 million. Our fourth quarter GAAP diluted earnings per share was $0.59. Included in these results are 3.2 million or approximately $0.07 per share of costs related to the divestitures, the cost of the operational improvement plan, and the one time COVID payment. In addition, our GAAP earnings per share this quarter include approximately $0.06 of earnings related to the results of the operations targeted for divestiture which represents approximately 25.2 million in revenue in the quarter. Last year's fourth quarter GAAP results include approximately $0.01 of earnings per share from the operations to be divested, and approximately 33.7 million of revenue. Excluding these items, consolidated adjusted revenue was 309.5 million, an increase of approximately 7.9% in local currency, compared to the fourth quarter of 2019. This revenue growth was primarily a result of the Flavors & Extracts group, which was up approximately 14% in local currency. Consolidated adjusted operating income increased 19% in local currency to 36.8 million in the fourth quarter of 2020. This growth…

. Our first question is from Heidi Vesterinen with Exane. Please go ahead.

Hi, good morning.

Hi Heidi.

Couple of questions on the strong growth in flavors please. On the 14% first of all, could you please quantify how much was volume and price? And then the second question on flavors, we know that you have big exposure to the U.S. market and the U.S. market overall was very, very strong last year, how much of your growth do you think was market driven and how much do you think was driven by the initiatives you outlined and you regaining customers that you had lost? And on that point on customers, is there further to go on to regain the many customers you had previously disappointed? So let's start with that. Thanks.

Okay, so a couple of comments on the U.S. So, the U.S. market as we observed was -- it kind of went in cycles or ways, however you want to describe it. A lot of the volume growth was certainly towards the first half of the year, as consumers were stockpiling. By the second half of the year, a lot of that stockpiling had receded. I think that's one point. Number two, product launches were certainly down throughout 2020, really across the Board in these categories. Now the product launches by our estimates were down about 10% in just the raw number of product launches, but when you consider the value of those launches, it was down quite a bit more than that. In other words, it was a lot of smaller customers launching fewer launches from the bigger customers, meaning less Value attainable, I think for suppliers. So those were two factors, I think the reduction in launches, it was a second half factor. I think the volumes as I mentioned really kind of -- were very heavy in the beginning, and then we're much lower towards the end of the year. But as you can see in our flavor group, our growth accelerated throughout the year. And so, I think it's fair to say that we grew well in excess of the market in second half regardless of what we could believe that market rate to be, it was probably in actuality about a 3% to 5% volume growth in some of these segments. Other segments were quite a bit higher. So, our success was really kind of across the board in the U.S. in each of our key segments within the flavor group and certainly within the food colors and pharma group. So, we spent a lot of time focusing on our core customers, our P&C customers. And to your question about regaining them, the restructuring is many, many years gone now. I think that we are well past those impacts. I think really the success is built upon the new wins that we've generated, our ability to hold on to the business that we have, which was something that really hurt us certainly back in 2019 and 2018. So, I think these are two very, very key factors. As you look at 2021, there's certainly a lot of opportunity for us to continue to win, to continue to maintain the business that we have. We're in a part of the market that's very, very aggressive about launching products to end consumers. And so, we like our chances there, we think we compete very, very effectively there. With respect to your volume price, I'll let Steve take that.

Sure. So, the flavor growth was largely volume driven. I would say price was about 1%. So, most of the growth there was volume.

Thanks. So then if I could follow up on your talks about product launches being down. So do you see that picking up and do you see innovation appetite picking up or is it too early in flavors?

Well, one of the bellwethers we use is our rate of sampling to customers. So, interestingly enough our sampling was down probably 10% to 15% on average during 2020, consistent with about a 10% to 15% reduction in launches with our customers. So as we look forward here, I think our sampling would suggest that we believe a mid-single-digit revenue growth rate is achievable in 2021. I think the launches would be more of a back half factor than they would be in the first half factor. That is absolutely true when you're thinking about our personal care business. But even in our food business I think there is definitely indications as we look at our pipeline, that most of the launch is at 2021, we would anticipate being more back heavy second half type timing than first half timing. That's using the sample bellwether. Certainly, as we talk with our customers, I think that would -- we would see -- we certainly see indications of a tremendous interest in our customers launching. We have a lot of customers who've taken this opportunity during COVID to really revitalize their product line, cleaning up labels, introducing more natural ingredients. So, there was a lot of very good activity in 2020, I think for the long-term of the market. But the real short answer here Heidi is I would say second half in particular for personal care on launches, second half for food and beverage, but I would anticipate some incremental improvement here in the first half in food and beverage.

Thank you.

. The next question is from Mark Connelly with Stephens, Inc. Please go ahead.

Thank you. A couple of things, I'm thinking back to the first half of last year, well really the second quarter when you got hit hard in categories like ice cream and candy and energy, can you talk about how much recovery you've actually seen in those particular categories?

Yeah, I would say that ice cream you're right, the first half of last year was pretty bad, particularly in Europe. I think as the year progressed, the ice cream market improved in the Americas, but it continued to be feeling a lot of headwinds in Europe. Much of that is driven occasion for use, right. So, a lot more ice cream is consumed outside of the home in Europe than, say, in the Americas market. And so, we saw that continue to be a big headwind in Europe, because folks aren't going out. Candy, I think in the traditional areas that we would play, i.e., highly colored, highly flavored products, I think that growth was pretty. There were a lot of headwinds there throughout 2020. If anything, maybe second half was a little less worse than first half, but I wouldn't say was by much. There's definitely been improvements in chocolate, but we don't really play in that area because it's not colored, and it's not flavored beyond cocoa flavors and things that we don't necessarily indulge in. On the energy side, energy drinks, we saw a pretty steady growth in a pretty steady market, really across the world from Asia to the Americas, to Europe on energy drinks, and that's certainly -- that had a good year for us.

Okay, that's helpful. And second question, you've obviously made a lot of progress over the last couple of years on your manufacturing footprint. But in the last couple of quarters, there was some talk about maybe some more room to go there. Is that going to be a significant initiative or is that just sort of at the market?

No, I would say it's at the margin. I mean our big work was the restructuring phase one and phase two many years ago, principally directed that flavors. I think we've got the right footprint substantially. The divestitures that you saw and we completed in the last 12 months, those were certainly on top of that and certainly very much portfolio driven. So I think in the wake of that, where we are far more streamlined organization, food and beverage, pharma, along with personal care it's a very, very focused portfolio for us. I like our footprint, but I'll tell you, we're always looking at areas to enhance the business, right. We took out 30 days inventory, actually I think it was like more like about 34 in 2020. There's still more for us to do. We're not done, we're not by any means done with optimizing the organization from a manufacturing standpoint or an SG&A standpoint. But yeah, there is no massive restructuring on contemplating, but we're always looking to take out costs to optimize the organization, to utilize technology, to really improving efficiencies around here. So still a lot of good opportunities there. We got a big team working on that for us and so I think these are going to be very, very helpful as we continue to improve the operating profit margin in particular in flavors.

And if I could just slot in one more question, you pointed to lower customer attrition. You've obviously made some significant changes in the way you market your products. Is there more room to run there or have you hit your lower attrition targets?

Well, you always want attrition to be zero. So I suppose it's more of a philosophical target than a real target. But yeah, I mean our attrition is substantially down and some of the attrition is natural. Customers they have a product, they delist it, they remove it from the market. So that's kind of a natural thing that you would expect in the markets that we're serving, which is to say then you got to win a lot of new projects to make up for the things that are being pulled from the market. But there's other attrition driven by providing poor service or letting your customer down in some other way. And this is the part I'm particularly focused on and everybody out there in Sensient knows I hate losing business. And so we make a very strong point of really blanketing our customers with really good customer service. It's a very fundamental part of running any business, but I think it's often something that gets lost in the day to day activities and the other things that businesses may indulge in. So now we're very, very focused on that. I think 2020 was a real banner year in terms of improving and reversing some of those trends you might've seen in say 2018 and 2019. So I like that. And the last point on the attrition is there are certainly more sophisticated products that we've been focused on selling in our groups. Those tend to be far more defensible as we send us a sticky business that represents a very good and technically sophisticated answer for our customer that perhaps other competitors don't have or there would be tremendous risk in contemplating swapping those out. So those are some of the things we think about with respect to attrition, it's going to be an ongoing part of how we think commercially. So yeah, I would like to get it down even lower if I could.

That's very helpful. Thank you.

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

Hi again, a couple, what is your outlook on raw material costs and pricing please? And specifically in Natural Ingredients, I think last year you had talked about our cost headwinds. So what is the latest there as we look out 2021? And then the second question is on, what is your exposure to the plant-based trend please and perhaps if you could give some examples if you're exposed there? And then lastly, you talked about looking at sensible acquisitions, what sort of sensible acquisitions are you interested in please? Thanks.

Okay. So, I'm going to talk about -- I'll start with your price raw material and have Steve speak more specifically about our S&I business which I know folks can be interested in. I think in general, we don't see a tremendous amount of inflation on raw materials. As we went into annual pricing discussions, there were of course always some, there were a couple of products that were somewhat problematic for us over the last year due to availability or some other factors. But in general, raw material inflation was very, very reasonable really across the board on an overall impact to us. And so therefore, the growth in 2021 for us is going to be more of a volume game than a pricing game. Certainly we may take some surgical pricing here and there, but it's not say a broad based initiative for us as a revenue contribution in 2021. So if I had to project, I would say probably 80%, 90% of our growth will come from volume and the balance would come from price. On your question about plant-based, yeah, that's a real booming market right now. Lot of companies getting involved with that one. It's a really good technical challenge and what's nice about it is that most of the producers of these products, it's an open market. There are no such things as core listings and all these other constraints on trade that in my opinion you see in other parts of the market. This is a, whoever has the best technical solution wins. So we like competing there. We've actually done quite well there in particular with our natural color solutions. So we like that market. I think there's some real continued potential in that market for a number of years to come. But it's one that really requires a lot of technology to get it right. Let me, let me go back to that raw material one on S&I Steve, if you want to say something there.

Sure. So, S&I, or Sensient Natural Ingredients for everybody's benefit. This is a product line within the flavor and extract group. It's our dehydrated onion, garlic, chili peppers, other types of products like that. And Paul had mentioned in his prepared comments that it's done very well this year, on the top line. So looking at the supply chain and the cost for that into next year, parts of the crop look a little better, other parts of the crop look about the same. So no big change in the cost structure there. And I think we also have gone out with pricing to recapture whatever we needed to. So no big change on the cost front there. And we expect that product line to perform, uh, well into 2021 as it did in 2020.

And then your third question, Heidi, on sensible acquisitions. So, with a much more focused portfolio, these are really portfolios that we want to continue to invest in. I would tell you that any one of our product lines could constitute good avenues to acquire. So whether we're talking about food colors, pharmaceutical excipients, personal care ingredients of which there are many, everything ranging from soluble lasers to surface treated pigments. Any one of these things could potentially be in the mix for us. And so it's an interesting market, right? I mean, there's a lot of startup companies out there. There's a lot of more established companies out there, and we insist on being able to acquire and earn a return for our shareholders. And so when I say sensible, I'm talking about our ability to implement, to generate the returns that would be, I think something in the interest of our shareholders. And so maybe there are fewer of those, but these things sort of tend to move in cycles. And so we can be very, very patient on some product segments, but I'm optimistic that there may be something kind of interest in 2021. But I would not anticipate you're going to see us make some sort of blockbuster acquisition in 2021. I think we want to be very, very prudent, but hey, you never know something bigger could come along too. And so we're very, very open to a lot of range of possibilities there, but we got to make sure we're, we're paying and earning a return on that acquisition.

Thank you.

Okay. Thanks Heidi.

Excuse me, the next question is from Mitra Ramgopal with Sidoti. Please go ahead.

Yes, hi, good morning. Thanks for taking the questions. First, I just wanted to -- as you look back at 2020 and I know it's a little subjective, but if you can give us a sense as to what you think the impact of COVID was on in terms of the bottom line?

Well, as Steve mentioned, it was very much -- it was a net negative to the company. Leading that net negative was clearly our personal care and more specifically our makeup portion of that business. With people not going out, it just took a real toll. Just go over to food and beverage, it was also somewhat mixed, right. Food service was hit very, very hard in the first half less so in the second half, but still a headwind. Candy does a comment, Mark mentioned -- asked earlier, that was a problem though, or that was a headwind. Ice cream was sort of a headwind, but then it wasn't. And so it's a real mixed bag, but I suppose in conclusion, it was very much a net negative for us. Now, what was a net positive for us is we really took this as an opportunity to invest in parts of our business, and to really, really focus commercially on our customers and just to service the hell out of them. And then I think we really accomplished that mission in a very meaningful way. And I think that really was instrumental in helping us to win a lot of business in this market. So we reviewed as being very reliable in a lot of fronts, whether it was delivering samples or delivering shipments, people knew Sensient was open for business, and we took our mission very, very seriously. So I think that was certainly a benefit from COVID. But as we go into 2021, I think everybody's optimistic that the second half is going to improve and we do see incremental improvements with respect to product launches and customer activity. So we're optimistic that we can achieve our mid-single-digit growth rate for the year.

Okay. Now that sounds great. And then as it relates to the operating plan improvement, that seems you're about halfway through that I'm assuming the guidance is also baking in some contribution from those initiatives?

Yeah. This is -- when you think about what we've done in the past, this is a fraction on the order of magnitude scale, which is to say we're really talking about a couple of facilities, not a huge economic impact from a charge off, most of that being non-cash. And so we're speaking in terms of millions rather than say tens of millions. But, those are progressing quite nicely. We have a lot of experience born of restructuring and so I feel very confident that we'll get that done and we'll get that done correctly. But that will be really a kind of a first half event is where we'll conduct a lot of that activity. And then we should expect to see some of those benefits. Again, fairly nominal benefits, second half of the year and then probably more like 2022 is where you'll see the full impact of that. And that would be really in the color group in the personal care segment is where you'd see that.

Okay. No, thanks. And with the divestitures coming to a close with one more to go, I was just curious as you look at now with the revamped product offering, if you're very comfortable with -- I know you always could add something here or there, but in terms of just the existing business, how comfortable are you with that going forward now in terms of being able to really get some nice growth?

Well, I like it. I like our odds there. We've demonstrated a really nice track record in certainly our food colors and I think personal care right before COVID had done quite well over the years. So I like our chances there, great markets. I think we have very strong strategies there. I think we have very good portfolios. I think our innovation programs are really, really good, and we have great leaders. And what drives a lot of the success around here is we insist on having leaders who are really smart and really tough, and they operate with a high degree of integrity. And we have that there and ditto for the Flavors & Extract group, right. Same type of leaders and the same types of expectations and markets with really good underlining trends and growth, whether it's converting to extracts from a natural flavor, or having a much more desirable label for a customer, lot of great opportunities continue in my estimation and Flavors & Extracts for sure. And then of course our S&I business, with trends towards more local production, with trends towards real food, I think it is also similarly well-suited to have a successful year and a successful future. And then again, to the acquisition point where we can layer on, fill a gap in the portfolio, maybe open up a market that we're not in, those could be real good reasons to add something on top of that. But the portfolio I think is, is, is really, really strong. It's really good. I think, the businesses that we sold, as I said once before, fundamentally good businesses, but unless you're willing to invest a lot more in them, they probably make sense in the arms of a much larger organization that can cultivate them in a way that either we couldn't, or we were not interested in based on our preference for these other segments.

Okay. Thanks. And then finally, if you can just give some color on the Yat-Sun collaboration, is that a way of really sort of having a local partnership, gain more traction within the China market or is that meant -- the platform to just expand globally still?

Well certainly it goes a long way in China, and it does -- this is a global partnership. And so we see really good opportunities. China's a very good cosmetic market for us. And, we're optimistic that that market fully recovers and we go back and resume our very strong and high growth rates. And this partnership with the Yatsan I think is indicative of the types of things that we are working on with our customers. And so in that case, a lot of co-development and a lot of insight sharing, and I think they recognize that we recognize a good collaboration potential to grow not only within the Asian market, but beyond. So we're quite excited about that and again, I think we've got great opportunities in that cosmetic business in Asia Pacific for sure.

Okay. Thanks for taking the questions.

Okay, thanks Mitra.

The next question is from David Green with Boldhaven. Please go ahead. Mr. Green, your line is open.

Hi Steve, hi Paul. Hi, Amy if you're there.

Hello, David.

Can you hear me?

Yeah, sure.

Hey, how are you doing. . I hope you're well.

Yes, we are.

We beat you in London is there --? A couple of quick questions, please. When you talk about better sales execution, what does that actually mean in practice and what are you actually doing about the hair. Just on the flavors business specifically, obviously very, very strong. Are there any specific end markets that are driving that? And then two final questions if I may, one is a net promoter school. I don't know if that's an internal benchmark that you have, but whether you could give us some color on it. And finally, just there seems to be a trend in the industry towards, uh, full service end to end offering. Just wanted to get your thoughts on that and how well placed you are?

Okay. So on the first one, sales execution, what does that mean? It's a good question, right because it sounds very, very simple. And in principle and concept, it is. It's about the basics of being very responsive to your customer, a good understanding of what his or her expectations are versus what you're willing to do. A lot of the distinctions or the problem with customer interactions is the expectations are very, very different. Some customers may be expecting these eight things, we are only one to give them three. Others expect two, and you give them eight. And, and so I think it's a lot about gaining alignment between you and the customer. And so a lot of our commercial strategy has been built around it. You got to pick the right customers and you got to pick the ones where we can successfully compete, and we can successfully deliver things that make them better and help them make money. And so I think our focus on serving our customers and making their lives better, making their business better, helping them make more money, that's how we think about sales. And so then it manifests itself, obviously in a very close contact and very good focus on the fundamentals of selling very close management and collaboration with our sales people and fundamentally good support. I want our salespeople to get as much bonus as they possibly can. And so in order to do that, they have to execute on their job, but the organization has to support very strongly what they're doing as well. And so these are our cultural aspects of our business that I think continue to improve, but like everything around here, we got a lot of areas we want to continue to work on and get better at. And that certainly no exception. Your second question, I think I heard you say net promoter score, and I don't know what that is. What does that mean, David?

It's basically a school where you are generally at school but your customers are giving you in terms of the feedback of how well you think, but I guess not all companies will have it?

Yeah. And we don't, and there's no that I'm aware of. No, necessarily indisputable benchmark for the markets that we're serving in on that metric. So yes, we do to answer the question more conceptually, we do take and ask for a lot of feedback from our customers, and we do ask them to compare us with others. But I don't have that quantified in this net promoter score matrix, but it sounds kind of interesting. I'll take a look at that. On your third one though, the full service. And I think some folks would describe this as integrated selling or offering a basket of goods or being a one-stop shop or any one of those descriptions, in my estimation and I think the opinion of most folks in this company that is something that is dependent on the customer. I don't believe that that is a broad based approach because at the end of the day, you got to ask yourself, what does the customer get from that? Yeah, you may get something for that, but what is your customer get, why does he care. And a lot of times they don't. In fact, they don't want it at all. They want you to deal with them independently, depending on the ingredient. But in other cases, it could be quite helpful and helpful to the customer. So we tend to take a rather surgical view or at least surgical execution of that concept in the market. And I think that's the right way to approach it.

And then apologies on the -- any specific end markets driving the flavors business?

Oh, yeah. I'm sorry. Yeah, I think that the growth was pretty broad based, despite even some of the headwinds that you heard me describe. I mean, certainly we did quite well in savory, our sweetened beverage business, our S&I business, each of these businesses performed very, very well. And, for a lot of the reasons we talked about. Now, there were headwinds, food services, a big headwind in a number of our businesses, as was the ones that I mentioned before candy and ice cream, certain beverages were as well hit pretty hard during the pandemic gum really was wiped out. In a lot of ways, in a lot of markets, it was down 30%, 40%. So the growth that we experienced was really acquisition of a lot of new customers, growing with the B&C customers that continue to launch products. And then again, focusing on our service model, which I think enabled us to win a lot of business across the -- really across each of these segments. And I would be -- these are not just comments for the Americas. These are comments that I think are applicable in Europe and in Asia as well.

I'm sorry, one quick one on that. So if we take the end markets where there was more of a headwind say QSR candy, gum as well that you mentioned, how much would they be as a percentage of flavors in terms of end market.

I guess, small enough that we could overcome them in some of these markets, I don't have that specific breakdown in front of me, but there was a lot of -- there was a lot of headwinds in some of these markets. There were tailwinds in others, and our distribution worked in our favor I suppose is the conclusion that we would offer.

Right, many thanks.

Okay. Thanks, David.

There are no further questions at this time. I'll turn the conference back to the company for any closing remarks.

Okay. Thank you everyone for your time this morning, that will conclude our call and thank you again for tuning in to hear about the results.

The conference has concluded. You may now disconnect.