Steve Rolfs - Chief Financial Officer, Senior Vice President Paul Manning - President, Chief Executive Officer, Director.

Mike Sison - KeyBanc Michael Ritzenthaler - Piper Jaffray Christopher Butler - Sidoti Garo Norian - Palisade Capital.

Good morning, everyone. Welcome to the Sensient Technologies Corporation 2014 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..

Good morning. I am 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 2014 fourth quarter and full year financial results. I am joined this morning by Paul Manning, Sensient's President and Chief Executive Officer.

Yesterday, we released our 2014 fourth quarter and full year 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 will hear from Paul Manning..

Thanks, Steve. Good morning. Sensient reported fourth quarter adjusted earnings per share of $0.71, an 11% increase over the $0.64 reported in last year’s fourth quarter. Operating profit increased by more than 8% in the quarter, driven by Color Group and Asia Pacific as well as lower corporate expenses.

Consolidated operating margins improved to 14%, up 130 basis points from 12.7% reported in the fourth quarter of 2013. For the year, adjusted earnings per share were $3.02, an increase of 11% from $2.73 reported in 2013. Consolidated operating profit increased by 8% and operating margins improved 120 basis points to 15.3%.

Each of our operating groups improved their margins during 2014. Cash flows from operations increased by more than 70% in the fourth quarter to $62.1 million, driven by solid earnings and significant reductions in working capital. Excluding the impact of currency, inventories decreased by $15 million in the fourth quarter.

For the full year, operating cash flows were $189 million, a 23% increase over last year. In addition, free cash flow more than doubled to $110 million. Shareholders directly benefitted from this outstanding performance as the company returned $185 million via share buybacks and dividend payments in 2014.

The strong results, our restructuring actions and lower capital expenditures, also drove an improvement in return on invested capital, which increased 50 basis points to 10.2%. Sensient's Color Group is the global leader for beverage colors and we have the unique ability to provide both, synthetic and natural color solutions to our customers.

We are also a global leader for industrial inks and cosmetic ingredients and we have strong capabilities in pharmaceutical excipients and industrial colors. The group performed very well in the fourth quarter, despite challenging economic conditions.

In local currency terms, fourth quarter revenue grew by more than 4% and operating income increased 8.5%. The industrial inks and U.S. food pellet business units were the strongest performers driving the group's operating profit margin to 21.5% in the quarter.

For the full-year, local currency growth was approximately 4% on the top-line and more than 7% for operating income. Operating margins for the year improved 80 basis points to 22.6%. Our Flavors & Fragrances Group has strong capabilities and sweet beverage and savory flavors, natural ingredients and fragrances.

We have aligned our commercial and technical activities around common product lines and will continue to shift the group's product mix from simple ingredients to more complex flavors and flavor systems. We are also progressing with the restructuring program and other efforts to lower costs.

Once completed, the combination of improving our product mix and reducing our cost structure will increase the group's financial returns and enable them to deliver more consistent results. We are making progress in the flavor and fragrances group.

Several of the group's business units delivered operating profit growth and higher margins during the year, and the group's operating margin improved 40 basis points to 14.1%. The group's results were impacted by soft economic conditions in the fourth quarter.

Operating income for the group was up 10% in local currency as many of our customers reduced their production levels, delayed product launches and otherwise managed their inventory. The changes that we are making in the Flavors & Fragrances Group will make the business stronger and allow it to produce more consistent results.

We are making progress, but we still have work to do. The Corporate & Other segment, which includes our operations in Asia Pacific, reported improved results in both, the fourth quarter and full year periods. Revenue for this segment grew by approximately 3% in local currency in the fourth quarter and the group also reported higher operating income.

Most of the businesses in the Asia-Pacific region reported double-digit profit growth in local currency. Corporate expenses were lower in the fourth quarter. We have reduced the size of our staff and we have made several changes to executive compensation, which lowered costs and strengthened the length between pay and performance.

These savings reflect structural changes in our costs and they are sustainable. 2014 was a successful year for Sensient. The Color Group delivered another strong performance and we implemented unprecedented changes in the Flavors & Fragrances Group, and expect improved results for this group in 2015.

Looking to the future, recent movements in the currency markets, including a strong dollar and the recent strengthening of the Swiss Franc have had a significant impact on our outlook for 2015. For example, Color Group has production based in Switzerland, and almost all this product is sold in Euros or dollars.

Stronger Swiss Franc relative to the Euro and dollar has reduced our local currency operating profit expectations for the Color Group by approximately $0.05 to $0.08 per share. In addition, the U.S. dollar has strengthened against most other currencies.

The combined impact of the Swiss Franc change and the strong dollar will be $0.23 to $0.28 per share based on current exchange rates. In summary, our current earnings per share guidance for 2015, accounting for the currency impact and excluding restructuring costs, is a range of $3.02 to $3.12.

Early in 2014, Sensient announced a four-part plan to enhance shareholder value that included restructuring savings, governance improvements, a dividend increase and share repurchases. Let me give you an update on each of these items.

The objective of our restructuring efforts is to lower costs and improve operating efficiencies by eliminating underperforming operations and consolidating manufacturing facilities. These actions are on schedule.

We are executing our plan to ensure that we effectively transfer our production capabilities while minimizing the disruption of both, business and our customers. We still expect to incur pre-tax charges of approximately $120 million to $130 million and generate annual cost savings of approximately $30 million upon completion of the program.

Most of these actions will be completed by the end of this year. We made a number of changes to our governance and compensation policies in 2014. We adopted a majority voting standard for uncontested board elections, appointed a lead director and added two new independent directors. We remain committed to ongoing board refreshment.

We also adopted several changes to our compensation policies in 2014, strengthening the length between pay and performance. In the first quarter 2014, the Board of Directors increased the company's quarterly dividend by 9% to $0.25 or $1 per share on an annualized basis. Sensient has increased its quarterly dividend by 40% over the last six years.

Last March, the company committed to repurchasing 2 million shares of its stock over the following 12 months and we completed that commitment in the second quarter. In July, the board approved a new share repurchase authorization, allowing the company to purchase an additional 5 million shares.

We purchased 500,000 shares in the fourth quarter, bringing the total for the year to 2.5 million shares. We expect free cash flow to be strong in 2015, and we will continue to evaluate share repurchases on an opportunistic basis. Our strategy is working.

In 2014, we delivered operating profit growth, improved margins, strong cash flows and returned $185 million to stockholders. Sensient's stock generated total shareholder return of 27% last year, which was significantly higher than the 15% generated by the S&P 400 Specialty Chemicals index.

I am very pleased with the company's performance in 2014 and we remain committed to delivering sustainable, long-term value to our shareholders. Steve Rolfs will now provide you the details for the quarterly and annual results..

Thank you, Paul. Sensient reported revenue of $342.8 million for the quarter and operating income was $36.2 million. The reported results included $11.8 million of restructuring costs in 2014 and $5.7 million of restructuring costs in 2013. Excluding these costs, operating income increased 7.6% in the fourth quarter.

In local currency, fourth quarter revenue and adjusted operating income increased 1.8% and 11.4%, respectively. Our adjusted operating margin increased 130 basis points to 14% in the quarter. Diluted earnings per share as reported were $0.55 in the fourth quarter compared to $0.57 in the fourth quarter of 2013.

Adjusted earnings per share increased 10.9% to $0.71 per share as reported and by 15.6% in local currency. For the full year, revenue was effectively flat relative to 2013, as we reported approximately $1.45 billion in both years.

We have continued our strategy of shifting to value-added and technology-driven products in each of our groups while rationalizing non-strategic and low-margin business. Removing this effect, revenue grew by 2.5% in local currency for the year. Full year operating income was $130.7 million in 2014 compared to $173.8 million in 2013.

The 2014 results include $90.6 million of restructuring and other costs compared to $31.7 million of restructuring costs in 2013. Adjusted operating income increased 7.6% to $221.2 million in 2014, which is 8.7% growth in local currency. The company's adjusted operating margin increased 120 basis points to 15.3%.

Earnings per share were $1.67 in 2014 and $2.29 in 2013. Adjusted earnings per share increased 10.6% to $3.02 in 2014, which is an 11.7% increase in local currency.

Sensient's cash from operating activities increased by more than 70% in the fourth quarter and 23.2% for the full year, we implemented initiatives in 2014 to reduce our working capital levels and achieve significant inventory reductions in the second half of the year.

Our inventory days decreased by approximately eight days during 2014, and we expect to see a further reduction in 2015. Free cash flow increased by more than 100% and the strong performance allowed us to repurchase 2.5 million shares of company stock during 2014. As Paul stated, we will continue to evaluate opportunities to repurchase shares.

Capital expenditures were $79.4 million in 2014, down almost 25% from last year's level. Looking forward to next year, we expect capital expenditures to be in the range of $75 million to $85 million. We have been focused on improving both, free cash flow and return on invested capital and delivered solid improvements in both areas last year.

We expect to achieve further improvements in 2015. Now, I will briefly review the results of our operating groups. For the quarter, the Color Group's revenue and operating profit increased by 4.3% and 8.5%, respectively, in local currency. The group's fourth quarter operating margins improved 70 basis points to 21.5%.

For the full-year, local currency revenue and operating profit increased by 3.7% and 7.3%, respectively. The groups operating margin improved 80 basis points to 22.6% in 2014. The Flavors & Fragrances Group's revenue was flat in local currency in the quarter.

Operating income decreased approximately 10% in local currency as the group was affected by soft markets. For the year, the group's revenue was up 2.7% in local currency, due to the impact of strategic revenue actions. Operating income was flat in local currency for the year and the group's operating margin improved 40 basis points to 14.1%.

We are seeing encouraging signs of progress in the Flavors & Fragrances Group, but efforts continue to reposition the business.

Revenue in the Corporate & Other segment, which includes the company's operations in the Asia-Pacific region and certain flavor operations in Central and South America, was $36.2 million in the fourth quarter and $146.7 million for the year. In local currency, revenue increased 2.8% for the fourth quarter and 4.2% for the full year.

The adjusted operating expense in the, Corporate & Other segment, improved by approximately $10 million in 2014. This improvement was driven by improved profitability in the Asia-Pacific region and a reduction in corporate expenses. Thank you very much for your time this morning. We will now open the call for questions..

[Operator Instructions] Your first question comes from Mike Sison with KeyBanc..

Good morning, Mike..

Hey, good morning, guys. Paul when you think about 2015, can you maybe walk us through the type of growth you thinks Flavors & Fragrances should be able to generate new products and all that good stuff.

Then help us try to bridge the gap between the cost savings that should be a nice boost to operating income growth and then fortunately maybe the negatives from the foreign currency as we look to model out '15..

Sure. Yes. Let me start, I think this may help to the group to understand the impact of the currency issues. As we looked at the year, we finished at $3.02, so as we made our projections for 2015 before considering the impact of currency we essentially came up with a range of $3.25 to $3.35 for EPS.

After we factored in the translational impacts of dollar-peso, dollar-euro and dollar-Canadian dollar and took into account the Swiss Franc to Euro kind of transactional piece, we effectively lowered the guidance by between $0.23 $0.28 that was the impact of those FX affects had with which brings us to where we are today, the $3.02 to $3.12.

Now, that's based on where we anticipate that that is effectively where the FX is today. That may change, that may not change, but again I think if you start with an idea of $3.25 to $3.35 is the underlining performance of the business that gives you a pretty good sense of how we think we will do.

To the other part of your question may be more specific to the Operating Groups and Flavor in particular, as we look at this, and if I were to make some projections for the year, certainly, we have talked about flavors and our efforts with respect to culling alike, so we are projecting flat revenue for flavors in 2015, but I definitely see mid single op and quite frankly I could see a path to high single op growth in the flavor business for the year, along with 100-basis point to 200-basis point improvements in each of gross margin operating margin.

I think, yes, I am not very happy with the Flavor performance in Q4, but we are very much on track and I have a lot of confidence that we will perform in '15. As we go to the other businesses, I think Asia Pacific will have another very strong year and I would project double-digit op growth out of that group.

Color, we had the very profound impact of the Swiss Franc to Euro change. Obviously, that came suddenly and without warning to the entire market, so the impact of that will be felt in the Color Group, because that is where the manufacturing for many of our European products takes place.

With the impact of that currency move, we would anticipate low single-digit op growth out of the Color Group, and I would anticipate a 100-basis point or more basis point decline in operating margins. Again, there has nothing changed in the underlying performance of the business.

This was purely a currency move, which directly affected the Color Group. We don't see that impacts at least the Swiss component in the Flavor Group at this point..

Got it. Then, when you think about some of your input cost, not a lot of it is petro-related, but oil is down and some of the derivatives will be coming down.

Is that going to be a benefit to you as the year unfolds, and maybe can you talk about your value pricing initiatives and such?.

Yes. I think with respect to oil, I want to say energy, natural gas is about 8%, 9% of our COGS, so we would anticipate some relief there as we move forward in the year.

I think some of the raw materials are derived from petroleum sources, so we may also see some benefit to that as we move forward in the year, but you know here again no one raw material represents any more than, say, about 2% or 3% of our total costs, so I would not expect a real profound impact from the change in oil.

What I would say is as, we look at 2015 and the pricing actions we took, we certainly accounted for any inflation in raw materials with our pricing.

Again, our goal and our expectation of the business is that we maintain our gross margin and not just simply cover the costs of those inputs, so I think we were quite successful with our pricing actions for 2015..

Great. Then you have done a nice job buying back your stock.

Can you maybe talk about other uses? Are there any good acquisitions that potentially you can add to continue to improve the portfolio?.

Yes. There are certainly gaps in the portfolio that an acquisition could fit very nicely with, so certainly that would be the principal use of some of that free cash, but absent a suitable acquisition which could be either suitable from a technical standpoint or suitable from a price standpoint.

Absent that, we see buybacks as a very good use of free cash at this point. Then of course, as has been our practice over the years, we certainly have an eye towards increasing our dividend consistent with sort of that mid-30% payout that we have targeted.

I think the acquisition market, that there is a lot of different types of companies and typically our approach has been smaller technically driven candidates and we watch this clip market very closely and we evaluate a lot of opportunities, so that will very much be a big factor in terms of driving our decisions around buybacks in 2015..

Great. Thanks guys..

Thanks. Mike..

Your next question comes from Michael Ritzenthaler with Piper Jaffray..

Good morning, Mike..

Hi, Mike..

Yes. Good morning. Just a couple of questions it was really helpful to have you guys walk through some of the FX impacts.

I am just wondering about as we go through 2015, are there any rules of thumb to sort of gauge the reasonableness and maybe how guidance might move? I think our bias is to think about it in terms of the $3.25 to $3.35, and then just kind of tweaking it from there as currencies move, but I do not know as things fluctuate around in currencies just kind of any rules of thumb that could help us out?.

Yes. I think at this point the best rule of thumb I can give you is just kind of given you our underlining performance in U.S. dollars.

We certainly would anticipate giving our shareholders and our analysts a very thorough review at the end of each quarter to tell you where exactly we came out with respect to our estimates, but I think at this point, currency is anybody's guess in a lot of ways.

There are some mitigating actions we can as a business take that there is some selective pricing opportunities, which certainly would apply to any situation where we have transactional impact from FX, so that is one lever.

There are some other opportunities in terms of where we could source some of our raw materials, although that one is a little bit more difficult to change at this phase, but the other piece that oftentimes people would ask is can you just change your production, where you are producing this stuff and I think that would be the most complicated thing to try to do, because again as we continue with this restructuring and for those of you who know the company very well, these plants are very specialized plants, so the ability to make a product in multiple plants is oftentimes not there.

Between customer approvals and the process of transferring a product that could take three months to four months in some cases and you maybe switching it back just as soon as you switched it in light of another currency change. Mike, I think probably the best we can do is just continue to update you on these calls about where the FX is going.

Again, I highlighted really the four that are the biggest impact to our business at this stage..

Okay. That is fair enough. A bit of a higher level question on the Flavors business as it transition to, transitions to more of a systems or complement flavors.

Are there any end product categories that you have been particularly happy with in terms of adoption rates and winning new business?.

Yes. I would tell you that, as we look at our Flavors business just to frame this out for everybody, we think in terms of beverages savory sweet, we have a natural ingredients business and then we have our fragrance business.

We talk about the strategy of evolving this product line, focusing on flavors, focusing on flavors that can utilize some of our existing building blocks and other enabling technologies.

In terms of the hierarchy of those businesses that are being most successful at that, we were definitely seeing the strongest improvement in our beverage businesses, not only in terms of their ability to execute on the strategy and generate new wins with the types of customers we are targeting, but also generate the type of profit margins, which we believe are achievable across the larger flavor group.

At this phase better than half of our Flavor Group businesses are at that margin, that 20% operating margin that we have targeted as an organization and that is an improvement, obviously, versus prior year and certainly from two years ago. Beverage is quite far along.

I think that the sweet flavors businesses; sweet has been a category we have historically focused in the dairy area of the world, yogurt and ice cream. As most of you folks know these are industries that have been very hard-hit over the last few years. In fact in 2014, the yogurt was a declining market from a volume standpoint.

There may have been growth based on some of our customers taking pricing, but volume declined in each of the quarters of 2014 and that obviously had a very strong impact on our business, so the name of the game was Sweet has been expanding our view of the market to include a broader definition.

Things like bakery, things like confectionery customers and applications. Then our other groups, our natural ingredients, they had a very good year. We in our savory business, again, in terms of that hierarchy of who is farthest along and who is still making progress, I would tell you that savory is probably in that more of a making progress stage.

That business was most heavily oriented towards some of these building blocks that I have referenced before. Some of what we saw in Q4 was, we had some cost issues in a number of these businesses that we have now subsequently addressed with our 2015 pricing, and I think we will see a very different picture of that.

We had a lot of opportunity to continue to improve there. As far as our last group, our Fragrance Group, I think here again not unlike some of our savory businesses, where there was a decline in many of our, I would say, our building block products.

We have diversified that portfolio enough and have entered different markets and different focus areas that we are now seeing the progress that we need to in Fragrance to have a successful 2015, so hopefully that gives you kind of sense of how I would rank them within the Flavor Group..

Okay. Definitely helpful. Thank you very much..

Thanks Mike..

Thanks Mike..

Your next question comes from Christopher Butler with Sidoti..

Hi, Chris..

Hi. Good morning, everyone..

Good morning, Chris..

culling there is going to be in this group and it sounds like with your forecast that you expect that to be made up with the new product successes?.

That is right. I would tell you that we from a culling standpoint, very broadly, I would not anticipate as much culling in 2015 as I had seen in '14. Some of our early culling within our beverage segments and our savory segments much of that we completed in the year.

As we look forward to 2015, that there will be less than 2014, but there certainly still will be, there is more work to be done particularly in our fragrance area of the business.

Nonetheless, I see a lot of new wins in these flavor areas, these higher margin more technically sophisticated products with largely an underserved part of the market, and I think that is a little bit of the key to the success we are seeing in a number of these businesses.

I think between removing a low margin and replacing with the high margin win, I think the net-net of that I am saying flat on revenue. Could there be an upside? Sure.

There could be, but I don't want to lead you astray in terms of where I think we are really going to be, so I would tell you then again I would reaffirm that I see a definite mid-single op, but a definite path towards even high single-digit op out of the flavor group..

After a challenging fourth quarter, you have got a month under your belt here in the first quarter.

Have you seen demand snapback? Was this just year-end inventory de-stocking that you ran into? Then with the launches are those new product launches from customers, have those picked up again as well?.

Yes. I think, overall, certainly there it is very different picture in the first quarter than we saw on the fourth quarter. I think, there is a fair amount of seasonality that we see in the fourth quarter.

A lot of customers, while their business may not be down, they do very closely manage their stocks, their inventory in general, and so in a number of our businesses we saw that immediately pick up those orders and that type of volume, so I would tell you that the Q4 results was very much an anomaly.

I am very unhappy with it, but I will tell right now that is not going to happen again..

I am sorry if I missed it, but how much of the savings from the restructuring in Flavors were you expecting in 2015?.

In 2015, we have been saying about 20%, so roughly call it $6 million of the $30 million is what we believe we are going to achieve this year. If I can just give you an update a little bit on the restructuring, as I mentioned in the commentary, we are running on track. No real big surprises.

Much of the most challenging, and quite frankly riskiest portion of that is just obtaining the severance agreements with many the local organizing agencies or organizing unions, if you like, and we have passed that threshold at this point.

The formula transfers are underway and in earnest, so I think there are few that I want to get a little bit further ahead. There are a few that are very well far ahead and I think net-net, we are on track and again no real surprises and I would confirm that the $6 million estimate for 2015..

All right. I appreciate your time..

Thanks, Chris..

Your next question comes from Garo Norian with Palisade Capital..

Good morning, Garo..

Hi, Garo..

Hi. How are you? Just want to make sure I understand completely as completely as possible the impact of the Swiss Franc change from a competitive standpoint.

Does that in any way or in what ways does it kind of make it more challenging from a business competition standpoint?.

Well, it certainly limits our ability to address the change with any sort of pricing, and I think that is first and foremost the biggest impact. I think, again, in terms of our ability to transfer production that is real limited, so I think for those two reasons it is going to affect from a profit standpoint.

Again, I think our ability to provide a high-quality technically sophisticated product, which has been the hallmark of that business, that has not changed, but obviously what we saw here is a one-time essentially loss in several cents of profit out of those products.

I think it is a bit of once you lap it, you are in the better situation again, but I think because again if you are not adjusting your prices, it doesn't really change our competitive position in terms of gaining new business with customers, but obviously it does have this one-time impact on your costs..

Okay.

It is not like some other competitors that has been trying to get the business that is based someplace else now all of a sudden has better leverage?.

Well, they are produced in Switzerland, they would have the same predicament as us, but I guess if they produce somewhere else and they could make the logistics work I suppose in theory that puts them in a little bit at different cost position.

Again, this is a business that is really built on the technical sophistication of the product itself and it is ability to perform and really sophisticated manufacturing operations..

Okay. That is great.

Then just a couple of kind of the specific questions on the color business that was moved to discontinued operations, was that in this quarter or which quarter was that they actually have moved out into discontinued?.

That was in the third quarter..

Third quarter. Okay.

Total debt for the year, what was that at the end of the year?.

Total debt at the end of the year was $466.9 million..

Okay.

Then as far as the 2015 outlook, what kind of tax rate and share count are you guys assuming?.

In terms of the tax rate, our base rate is about 30% plus or minus. That is before any discrete items, so it could be from 29% to 31% if you factor those things in. In terms of the share count, we finished the year at $48 million..

Great. Thanks so much..

Okay. Thanks Garo..

As there are no further questions, I will not turn the conference back over to the company for closing remarks..

Okay. Thank you very much for your time this morning. If anyone has any follow-up questions, I would encourage you to call us at the company. Thank you again..