Steve Rolfs - SVP, CFO Paul Manning - President, CEO.

Brett Hundley - BB&T Capital Markets Patrick Zellner - Piper Jaffray & Co. Garo Norian - Palisade Capital Management Curt Siegmeyer - KeyBanc Capital Markets.

Welcome to the Sensient Technologies Corporation 2015 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..

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 2015 third quarter financial results. I am joined this morning by Paul Manning, Sensient's President and Chief Executive Officer.

Yesterday, we released our 2015 third quarter financial results. A copy of the release is now available on our website at sensient.com.

Before we begin, I would like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the 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 will hear from Paul Manning..

Thanks, Steve. Good morning. Sensient reported adjusted earnings per share of $0.77 in the third quarter, compared to $0.78 in the comparable period last year. Foreign currency translation continued to have a significant impact on the company's results, reducing adjusted EPS by $0.06 in the quarter.

In local currency, third quarter adjusted EPS increased by $0.05 or 6.4%. Adjusted operating income was up about 2% in local currency, driven by strong performances from the flavors and fragrances group, the Asia-Pacific group and most of the business units in the color group.

Sensient's operating margin was 15.7% in the third quarter which is the same as last year's third quarter margin. The flavors and fragrances group has strong capabilities in sweet beverage and savory flavors, natural ingredients and fragrances.

We have realigned our commercial and technical activities around common product lines to better serve our customers and we're continuing our efforts to shift the Group's product mix from simple ingredients to the more complex flavors and flavor systems. We're making progress with our restructuring program and other efforts to lower costs.

The combination of upgrading our product mix and reducing our cost structure has improved the Group's operating margins and it will enable us to deliver sustainable profit growth. Flavors and fragrances group performed well in the third quarter, reporting higher revenue and operating income in local currency.

Removing the impact of exchange rates, revenue increased by 2.5% and operating income increased by 5.4%. The Group's operating margin improved to 15.1%, up 100 basis points from the third quarter of last year.

Many of the Group's businesses performed very well this quarter, with the North America beverage, North America sweet flavors, European sweet flavors and fragrance businesses each delivering solid profit growth. We expect the Group to show solid profit growth and higher operating margins again in the fourth quarter.

We continue to make progress with our restructuring activities. We stopped production at our flavor facility in Canada at the end of September and we're on schedule to consolidate two more of our flavor facilities in Europe by the end of the year. We will consolidate our last facility in 2016.

Our restructuring efforts are on track and our expectations for the timing of savings are consistent with what we communicated last quarter.

The flavors and fragrances group's third quarter performance is a strong indication that our restructuring actions and the strategy to shift the business to higher-margin products are making substantial progress. As I mentioned last quarter, some of our sales, technical and production resources need to be focused on restructuring in the short term.

Their efforts are facilitating the timely execution of the plan and minimizing disruption to our customers. As we near the completion of restructuring in the second half of next year, these resources will be fully focused on driving growth. There is more work to be done, but we're making significant progress.

We're looking forward to completing our restructuring activities and we're optimistic about the outlook for the fourth quarter of 2015 and for all of 2016. Most of the color group's businesses performed well in the third quarter, but the group's results were off due to the continuing challenges faced by the specialty inks business.

In local currency, the cosmetic, pharmaceutical and food color businesses each reported higher revenue and operating profit. Cosmetics reported double-digit revenue and operating profit growth in the third quarter and the pharmaceutical business reported double-digit profit growth.

Excluding the specialty inks business, the color group's third quarter revenue increased by approximately 3.5% and operating income increased by 7.5% in local currency.

We continue to see strong interest in natural colors for food and beverage applications and many of our customers are making public commitments to use natural colors in their products. We have made significant investments in our natural colors business and we're ready to assist our customers in making these conversions.

Our natural colors sales are showing strong growth, with our North American food color business reporting double-digit sales growth in the quarter. We had several wins in North America in both the second and third quarters and the value of our natural color projects has tripled in the last year.

Sensient is the market leader for food and beverage colors and we're well positioned to lead the conversions to natural colors over the next few years. The specialty inks business continues to be affected by the quality issue we mentioned last quarter, as well as by currency issues.

The quality issue has been resolved, but as I noted during the last call, we expect difficult comparisons to continue through the end of this year, but we expect significantly better results in 2016. The specialty inks business delivered strong growth during the past few years and we continue to see good long-term prospects in the inks market.

We improved our position in the market with the Xennia acquisition in June and we're rapidly integrating Xennia's personnel and products. Xennia strengthens our technical capabilities and broadens the product portfolio for our inks business. The shift from analog to digital printing is a major trend that is still in its very early stages.

This trend, along with a shift to natural food and beverage colors, has the potential to provide significant growth opportunities for our color group in the years to come. During the third quarter, we purchased approximately 600,000 shares and year to date we have purchased more than 2.5 million shares.

Including dividend payments, Sensient has returned almost $200 million to its shareholders in the first nine months of this year and almost $400 million since the beginning of 2014. We will continue to evaluate opportunistic share repurchases as part of our capital allocation strategy.

Foreign currency translation has had a significant impact on the company in 2015, reducing EPS by $0.06 in the third quarter and $0.18 for the year. In addition, we will continue to have challenges with the inks business in the fourth quarter.

The impact of these items is consistent with our expectations at the end of last quarter and we're maintaining our EPS guidance of $3 to $3.09. Sensient performed well in the third quarter. We continue to make progress on our new strategy and on our restructuring activities. Flavors and fragrances and Asia-Pacific groups each delivered solid growth.

The color group remained strong and most of its businesses performed very well in the quarter. We continue to be very optimistic about the future. Steve Rolfs will now provide you with additional details on the quarter..

Thank you, Paul. Sensient reported revenue of $344.5 million and operating income of $43.2 million in the third quarter. The reported results include $11 million of restructuring and other costs. Excluding these costs, operating income was $54.2 million.

Foreign currency translation reduced revenue by approximately 8% and adjusted operating income by 7%. Diluted earnings per share from continuing operations, as reported, were $0.61, compared to $0.47 in last year's third quarter. Restructuring and other costs reduced earnings per share by $0.17 in the quarter and by $0.31 in last year's third quarter.

Adjusted earnings per share were $0.77 in the third quarter, compared to $0.78 in the comparable period last year. Foreign currency translation had a significant impact on earnings per share, reducing EPS by 7.7% or $0.06 per share. In local currency, adjusted earnings per share grew by 6.4%.

For the first nine months of the year, diluted earnings per share from continuing operations were $1.89, compared to $1.13 for the same period last year. The reported EPS results include $0.45 of restructuring and other costs for the first nine months of this year and $1.18 of restructuring and other costs for the same period last year.

Adjusted earnings per share were $2.34 in the first nine months of 2015 and $2.31 for the comparable period in 2014. In local currency, adjusted earnings per share grew by 9% or $0.21 per share year to date, as foreign currency translation reduced EPS by $0.18 per share.

Cash flow from operating activities was $16.6 million in the third quarter and $93.5 million year to date. Third quarter cash flow was off last year's strong performance, due to a number of factors. We began to make significant improvements in working capital in last year's third quarter which affects the comparability of this year's results.

In this year's third quarter, cash flow was impacted by some restructuring activities and other one-time items. We remain focused on working-capital reductions and we expect our cash-flow performance to normalize over the next few quarters.

Capital expenditures were $18.5 million during the third quarter and, consistent with our previous comments, we expect capital expenditures to be approximately $85 million this year. Our balance sheet remains strong. Our debt currently stands at 2.4 times adjusted EBITDA.

We plan to keep debt levels in line with an investment-grade profile to maintain the flexibility for capital expenditures, dividend payments, share buybacks and acquisitions. Thank you very much for your time this morning. We will now open the call for questions..

[Operator Instructions]. Your first question comes from the line of Brett Hundley with BB&T Capital Markets..

I just wanted to ask you -- I thought you said, Paul, that your North American food color business was up double digits, so I just wanted to confirm that. And if so, I wanted to get an update on the global business there.

Just given the colors topline, ex currency, I was interested in what impact the specialty inks business had and then what your underlying food and beverage colors business is doing right now?.

Okay, sure. So to begin, we're tracking very closely natural colors' growth in North America since this is where the bulk of the conversion activities are taking place and not only for this quarter. This quarter, we were up double digits topline and that's also true on the year-to-date metrics for natural colors North America.

As you look across the global food colors piece of things, when you think about topline we're up mid-single digits topline globally on food colors specifically, so you have a combination of some of the more mature markets, say in Europe and then that's mixed with Brazil and Latin America and North America where we're doing quite well.

But that does not include the Asia-Pacific impact which we don't necessarily categorize in the color group as we do in the Asia-Pacific group. But I think you can use the mid-single topline growth that we have had year to date as a pretty good indication of where we're going with food colors..

And then on the specialty inks side, I am sorry if I missed this, but can you just recap? You talked about Q4, those issues continuing to linger.

Can you give us an idea of maybe when you start to see that business getting better from a topline standpoint and earnings returning to that business?.

Yes, Q1 is the short answer, I think, when you take in those factors, the one related to quality and the one related to FX. The Swiss Central Bank, that was in mid-January that they made their decision which was the principal transactional FX effect we have talked about, so we lap that one obviously in Q1, within a couple weeks of the start of Q1.

And then from a quality standpoint, on the basis of a comparison, you will start to see the significant improvement in the inks on a year-over-year basis beginning in Q1 and we expect that to accelerate on a sequential basis throughout 2016.

So in other words, we would expect Q2 to be better than Q1 and Q3 to be better than Q2 and so -- but, yes from a purely comparable basis, Q4 of this year will not compare very well to Q4 of last year in that business. We expect to continue to see very good growth in food, colors, pharma and cosmetics, but the inks will be a drag in Q4.

But as, again, we get into Q1, I think we're free and clear from a comparison standpoint and you will start to see that growth accelerating again there.

As I mentioned in the script, it is one of the two significant -- most significant macroeconomic events that are taking place right now, this conversion from analog to digital inks, that are affecting our business very positively; the second being, I believe, the conversion to natural colors. And so, it's a phenomenal market.

It's a great market to be in. We have built a really nice and diversified portfolio of products. We have a very nice innovation pipeline and as you know from our capital spending there over the last few years, we have made the necessary capital investments to be successful in this market.

This is one of the most exciting markets as I look at this company that we're going to be able to take advantage of in the coming years..

Okay and then last question for me, it was nice to see your flavors segment margin performance and I just wanted to get an update from you on how you would couch topline performance in that business during the quarter, relative to expectations. And the main reason I ask you this is just I am just curious to get an update on the competitive landscape.

We see some reports from some of your European competitors. Globally, some of these competitors are seeing a benefit from currency, whereas you guys are seeing headwinds this year. And I just wanted to get an update on the competitive landscape, given that dynamic and where flavors segment topline results came in relative to your expectation.

Thank you..

Sure, as we began the year, the expectations for flavors on the topline that I had indicated would be flat. That was related significantly to our culling activities that we were expecting to take this year. So as you can see, we're up about 2.5%. If you factor back in for culling, we were up more like about 3.5%, 3.6% on the topline.

So, a little bit better than we had anticipated. That's not to say that we're done with culling, but as I think I have referenced on these calls before, the timing of the culling is not necessarily always predictable.

And to the extent you may also be now internally utilizing some of those ingredients for flavors that may also affect the timing of that. So, a little bit better than we had thought is the short answer. I think with respect to your question involving competitors, sure, we have a number of competitors. Some we compete with very strongly.

Many of those aren't ones that you are necessarily tracking because they're private. But the ones that I think you are probably thinking about, we compete with them here and there.

Again, we have fairly different models and fairly different businesses at this point and so I think to the extent those in Europe, many of them are benefiting from currency, particularly the ones in the euro-zone and so, okay, it's a helpful piece for them, whereas it's not so helpful to us because most of our profit is right now in the U.S.

And the business is headquartered in the U.S., but a lot of the profit in Europe and Latin America we're translating back unfavorably into dollars. Who knows? Next year, maybe it is the opposite effect.

So I think in terms of how we're faring in the market with respect to competitors, I think I am feeling pretty good and better and better about how we're able to perform and execute. I think in terms of our innovation platform, I'm very pleased with the progress we're making.

I think it's a very big market, so we're not necessarily always crossing paths with some of the companies that you are thinking of. And, again, I think with the types of customers that we're going after, those market B and C customers, we don't necessarily interact as much.

And so, what I can point to is a lot of success that we're having, broad-based success. You have seen a nice turnaround in the sweet businesses. You probably recall in the first half of the year that was a real tough one for us, but we have made some improvements there.

Our beverage business continues to do well and so we're seeing broad-based evidence that our strategy of selling flavors, technology platforms embedded in those flavors and flavors that are incorporating our ingredients, I think you are seeing and we're seeing very strong signs that that strategy is real and it is one that we've been able to capitalize on..

And Paul, do you have an early quick read on Q4 culling and how that might be able to compare to Q3?.

You know, again, it's a little bit tricky. I think we're going to have a good Q4 in flavors. I think you're going to see some revenue growth. I think you're going to see profit growth. And I have committed to a mid-single digit OP growth in flavors for the year and I have said that on each of the calls and I will continue to say that for the year.

That's about where I think we're going to land. I think you're going to continue to see good improvement in the operating margin as well in Q4 and so that is consistent.

But I think with respect to culling, a lot of it is affected by order patterns, a lot of it is affected by timing and so I think that, could it be consistent with Q3? I think that might be a good consideration, maybe it is 1% to 2% revenue impact on the topline for Q4..

Your next question comes from the line of Mike Ritzenthaler with Piper Jaffray..

This is Patrick Zellner sitting in for Mike. Good morning, everyone.

So first question, can you walk us through the organic growth in both flavors and fragrances, excluding FX? And which end markets are performing the best and which ones need the most help?.

Sure, so the organic growth, so as I said, we had about 3.5%, 3.6% to be precise, when you factor back in the culling. Without that, it was about 2.5%. We had very, very good growth in a number of our businesses. Sweet in particular had very good topline and bottom-line growth globally.

Fragrances did quite well, double digit as well on the top and bottom. I think we saw pretty good growth in Europe. We were between about 4% and 5% on the topline there and the operating profit growth that we saw was very broad based and so some of it is market affected and some of it is internally affected.

So, clearly, we saw better growth in the businesses that are not undergoing restructuring than we did businesses that are undergoing restructuring. So that is an internal factor that has impacted where we're seeing more success than, say, other places.

I think the market as a whole, a lot of it depends on which customers you hitch your wagon to and we continue to hitch our wagon to a much broader base of customers and it is a model that we've used very effectively in the color group where we're dealing with not only large multinationals, but also a lot of smaller startup, what the market would maybe call B and C, customers.

So as we have expanded that principle to flavors, we're seeing in a lot of markets a lot of success with these B and C customers, who seem to be rather unflappable in the face of macroeconomic challenges. They continue to push forward with new product releases.

So, again, it is a broad answer, but I think what I can tell you in conclusion is that good success across the board by region and by segment and I think that -- and even by customer type, but clearly what the market would call these A customers, you read the headlines like I do and you can see that a lot of those businesses are very much struggling.

Many of them are in cost-cutting mode and I think flavors to the extent we're perhaps less represented there, it should have less of an impact on flavors. So that's the way I'm seeing that..

A follow-up question, there has been a lot of focus on growth in China and I know that's a relatively small business for you today.

But can you speak to what you are hearing from your customers there?.

Yes, certainly all of our businesses are represented in China, from pharma to flavors and colors, fragrances. We're doing very well in the personal care side of things. I can't say that the market for personal care is doing as well as we are, I think we're doing well in excess of market growth in that category.

I think that certainly there has been a slowdown in activity, a broad-based slowdown, on the food side of things, so that would affect colors and flavors. Less development, per se.

There was, I think, in the first half of the year perhaps a little bit of destocking going on, perhaps a little bit of a slowdown in customer activity, but we don't -- I think as we're getting into the second half of the year, we don't see that getting much worse than it was in the first half.

I think the customers are -- they're certainly a little bit more cautious than they were last year or certainly two years ago, but whatever initial shocks of China's growth slowing to whatever it is, 7%, a rate that we would obviously all kill for here in the U.S.

and Europe, they seem to have gotten over their initial concern with that and we seem to be largely on track again in China..

[Operator Instructions]. You’ve a question from Garo Norian with Palisade Capital..

I know you touched on this a little bit in the remarks, but can you just walk through a little bit more the working capital and particularly, I guess, the inventory side there? Is that preparation for some of these closures or what's going on?.

So on working capital and more specifically on cash flow, it was really the latter half of last year that we began to make progress on bringing working capital down and so really in the second half of last year and the first quarter of this year. So in looking at cash flow, there is really two things going on.

We have got a more difficult comparable because we got some one-time benefits as the inventory came down last year and then the thing you're asking about, this year we had a couple of one-time items.

So although inventory overall remains lower, we keep that discipline in place versus last year, in the quarter we had to build some inventory and it was because of the flavor restructurings. So in at least two instances where we're consolidating facilities, we have some inventory build there. So that's one of the main working-capital impacts.

There was also a little bit of a receivable timing issue. Some of that is related to just the resolution of some of the quality issues in the inks business. But both of those are temporary and will pass.

So we will continue to have a little bit of a difficult comparable for the next couple of quarters, but I don't think you'll see this degree of one-time items this year..

Yes, I think, Garo, if I can just add another couple points there and we have talked about this a little bit in the past, we certainly have opportunity to bring down the working-capital requirements within the company.

When you look at -- parts of our business benchmark quite well, so, for instance, our traditional flavors business, we're below 115 days of inventory. And in many of those businesses, we're well below 100 days of inventory.

Where we have got a fairly big opportunity is to bring down colors' inventory and as we look at that business, not only has inventory been coming down for the last two days, but we track internally a cash conversion. They have taken another 15 to 20 days out of that from a year ago, on a year-to-date basis.

So, still a lot of work to be done there, but I think we certainly have instituted the discipline. We incentivized management according to the expectations there, but we have got a lot of opportunity to continue to bring down working capital from the historical higher points that we have been operating at..

And then just from a modeling, what is the underlying tax rate expected for the full year?.

So first, just looking at the fourth quarter, it is usually a little lower in the fourth quarter, if you look historically. So I think our range has been about 27% to 29.5% through our first three quarters. I would expect it to be a little bit below that in the fourth quarter, but not probably as low as we were last year.

So that is going to take us around the 26% to 27.5% for the full year would be my expectation..

Your next question comes from the line of Curt Siegmeyer with KeyBanc..

Just a couple, one, I apologize if I missed it. I was a few minutes late jumping on the call. But just in terms of organic growth, how you think about it heading into next year.

I know you're not giving specific guidance, but on the flavors side, the culling, is that going to carry into next year? And if not, how should we think about that longer term? Any thoughts on that being behind us and then, what's more of a normalized rate there?.

Yes, so I will give you some guidance for 2016. Flavors, as we think about 2016 as a year on the revenue side, yes, so culling will continue to some degree. A lot of that will be affected by the timing with respect to customer pricing. In other cases, it may be affected by our ability to divest a certain product line from the company.

But barring any of the more dramatic events, we would expect culling to continue and to be largely and substantially completed by the end of 2016 which is consistent with where we have been on that one.

Now in terms of where that nets you from a growth standpoint, we would expect net of that, that is to say, well, including culling, next year we would be in the low and possibly mid single-digit topline growth.

But where we have guided on this one for 2016 is low single topline growth, but with a stronger growth profile and operating profit and a continuing and accelerating of the operating margin improvements.

And not only would we have that in flavors, but the expectation is, given as the inks is recovering in colors and as we continue with a very good growth profile of those non-ink businesses, we would also expect good topline growth in color and then, as well, an operating margin improvement consistent with that recovery in the inks business.

So, we're feeling really good about 2016. I think we got a lot of great things going on in the company. We're going to continue to get through this restructuring in flavors and execute on that strategy.

Colors, I think we're going to stick to our knitting in many of these businesses where we have been very effective and then, as well, we're going to have the benefit of recovering from our -- of our inks issues from this year. And then, with the expectation that currency stays where it is, we won't have as much of this FX translational.

But you know something else that oftentimes gets lost in these analysis is the impact of FX transactional. Translational is one thing. Transactional is something else and that's where you can potentially be losing money.

In some cases, you are gaining, but in others, you are losing and that was -- when you look at our quarter, we talk about $0.06 of translational this quarter, but there was another $0.02 of transactional and so, you can probably repeat those numbers for each of the quarters of this year to really get the impact of FX.

So, again, a lot of this is based on the assumption that FX rates will largely stay where they are today, particularly dollar/euro, dollar/Canadian dollar and dollar/peso which are three of the bigger impacts on the business. So assuming we're not talking about FX anymore, God willing, in Q1, we should be past that, too..

And then just the second one I had, you mentioned the restructuring.

Could you just remind us where we're in terms of the cost savings and when we should expect that full run-rate cost savings to be in place?.

Yes, so this year, 2015 we were projecting $7 million to $8 million for the year, about three quarters of that from flavor and the bulk from -- the other quarter from color, corporate and Asia-Pacific throughout the rest of the company.

2016, as we broke out on the last call, we're looking at about $9 million there, $9 million to $10 million and that would include as well -- this is -- I am kind of splitting hairs, but I want to make sure I am splitting hairs because this needs to have hair-splitting analysis done.

There is an FX impact from where we initially placed our savings estimates to where they will translate to at today's rates. And so what I am saying in plain English is that there is a need to institute price increases in certain markets to account for that FX impact on the savings so that we do stay in line with our estimated $30 million of savings.

So when that $9 million reflects not only the savings, but the pricing that is necessary to overcome that change in FX. So, again, to only the true hair-splitting accountants out there, this may be what is he talking about, but I think it is an important distinction that we need to make in the interest of full disclosure..

Are those price increases you would expect to take in line in terms of magnitude with historical price increases or would they need to be more aggressive than historically?.

I think your question is ultimately getting at can we get pricing and I think the answer is yes..

There are no further questions. I will now turn the conference back to the company for closing remarks..

Okay, if there are no further questions, we will wrap things up. Thank you very much for your time this morning. If anyone does have a follow-up question, feel free to contact the company. Thank you again. Goodbye..

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