Stephen Rolfs - Senior Vice President and Chief Financial Officer Paul Manning - Chairman, President and Chief Executive Officer.

Brett Hundley - Vertical Group Curt Siegmeyer - KeyBanc Capital Markets Francesco Pellegrino - Sidoti & Company Andrew Lane - Morningstar Garo Norian - Telese Capital Management Michael Sison - KeyBanc Capital Markets Christopher Perrella - Bloomberg Intelligence.

Good morning everyone and welcome to the Sensient Technologies Corporation 2017 Second Quarter Conference Call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to Mr. Steve Rolfs. Please go ahead, sir..

Thanks. Good morning. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2017 second quarter financial results. I'm joined this morning by Paul Manning, Sensient's Chairman, President and Chief Executive Officer.

Yesterday we released our 2017 second quarter financial results. A copy of the release is now available on our website at sensient.com.

During our call today, we will reference certain non-GAAP financial measures, which we believe provide investors with additional information to evaluate the Company's performance and improve the comparability of results between reporting periods.

These non-GAAP financial measures remove the impact of restructuring costs, currency movements and other costs as noted in the Company's filings. Non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with GAAP.

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available on the Investor Information section of our website at sensient.com and in our press release. We encourage investors to review these reconciliations in connection with the comments we make this morning.

I would also like to remind everyone that comments made this morning, including responses to your questions, may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Our statements may be affected by certain factors, including risks and uncertainties, which are discussed in detail in the Company's filings with the Securities and Exchange Commission. We urge you to read Sensient's filings for a description of these factors. Please bear these factors in mind when you analyze our comments today.

Now, we'll hear from Paul Manning..

Thanks Steve. Good morning. Sensient reported adjusted earnings per share of $0.87 in the quarter, compared to last year’s second quarter results of $0.84. Foreign currency translation reduced adjusted EPS by $0.01 in the first quarter.

As I noted in prior calls, last year’s result included a $0.04 benefit for these Flavors and Fragrances Group from a one-time sales import rights. And in this year’s second quarter we realized a tax benefit of $0.07.

Removing the impact of these items in both years, this year’s second quarter adjusted EPS is essentially even with the prior year results. Obviously this performance does not meet my expectations. Color had a good quarter, but we had a number of operational issues in Flavors and Fragrances and soft results in Asia-Pacific.

Flavors and Fragrances had a disappointing quarter, much of which related to winding down of restructuring activities. Operating income was down by 19%, recall that last year’s second quarter included a $2.7 million benefit from the sales of an import rights, but the most significant issues this quarter was the impact of restructuring.

While we completed our restructuring related production moves in June, the impact of this transition had a substantial effect on the Group’s performance this quarter. We experienced production and shipping backlogs which shifted a significant amount of orders into the third quarter.

We have been reducing the value of the order backlog and we expect to be caught up this quarter.

As a result of the restructuring delays, we also had higher production and logistics costs including overtime, temporary labor, expedited shipping and additional warehousing costs, we will continue to see higher production cost in the short-term, but we expect that plant costs will normalize by the end of the year.

In addition to the significant restructuring related issues, Flavors and Fragrances also been impacted by other unusual items in the quarter including higher production costs at an additional site, lower pricing and lower volumes in aroma chemicals, a working capital adjustment and lower volumes from one of our customers in Asia.

I'll add more detail on the Asia customers in a few minutes. It was a very challenging quarter for Flavors and Fragrances, but we still have high expectations for the Group. We have completed the restructuring program which has been a significant distraction for the last three plus years.

In addition to the restructuring changes, we completed the sale of two businesses earlier this year. The divestitures removed operations that did not align with our strategy, we are diluted at the Group's operating profit margin and increased working capital balances.

These actions have already improved the Group's mix which is reflected in a 120 basis points improvement in the second quarter gross profit margin. And furthermore these changes allow the Group to focus on new product development and other initiatives that will drive growth, improve the Group's product mix and generate higher operating margin.

Asia Pacific also had a challenging quarter; and local currency revenue was up 3.7%, and operating income was down significantly. On the last call, I mentioned that the Group's first quarter performance was impacted by order timing and product mix and those issues have continued longer than we originally expected.

One of our larger customers in the region is implementing a change in its distribution network, which has affected their sales and consequently their requirements for our products. These lower volumes represent a significant portion of the income variance compared to last year's second quarter.

We expect volumes to normalize once our customer resolves this issue. We still see good long-term opportunities for our businesses in Asia Pacific.

We have made significant investments in both personnel and facilities in the region to increase our technical capabilities, allowing us to work more closely with customers and to sell products that are aligned with the strategies and colors and flavors.

We recently opened a new production facility and expanded manufacturing capabilities at another site in the region to reduce cost and to shorten lead times. Expanding our presence in Asia Pacific is a significant part of our growth strategy and we remain very optimistic about the opportunities in this region.

Color had a good quarter driven by strong results from the cosmetics and North American Food Colors businesses, for the Group revenue is up just over 1% and operating income increased 4% in local currency. The Group's operating profit margin increased 50 basis points to 21.9% in the quarter.

The cosmetics business continues to perform well with strong growth for both revenue and operating income. The Food Colors business in North America reported solid profit growth driven by natural colors.

Our results in Latin America were down but we think this is an anomaly, because there is a strong interest in natural colors and clean label ingredients. Our Cosmetics business continues to see strong demand for makeup, lipstick and other personal care products.

The end markets for cosmetics have been very strong and we have a robust innovation program which allows us to develop solutions for a wide range of applications including makeup, skin and hair care. Our success in cosmetics remain broad based with growth in every region.

In the food and beverage markets, we expect to see the strong interest in natural colors continue to for some time. In the second quarter, approximately 80% of all new product launches in the U.S. features natural colors and this figure is about 75% globally.

Many of the world's largest food companies, including some of the largest food retailers, have announced their intention to use natural colors in their products. We expect these conversions to take place over the next few years. But to the near-term conversion activity has been driven by local and regional manufacturers or private-label brands.

Sensient is the market leader for food and beverage colors and we have developed proprietary technologies that allow our customers to offer natural products without compromising on the appearance or affecting the taste.

We are uniquely positioned to lead the conversion to natural colors because of our investments in new technologies and our applications expertise. Earlier, in my comments about Flavors and Fragrances, I noted that we had completed our restructuring activities.

We stopped production at the last facility in June, now we have closed or sold nine major production sites in the last three plus years. Those facilities were not core to our ongoing strategy. By rationalizing our facilities, we have lowered our cost structure and reduced our ongoing capital expenditure requirements.

This very necessary restructuring has been a serious distraction for several years. As Flavors and Fragrances moves on from restructuring, we will be able apply more resources to initiatives that will drive growth including new product development.

We will have some residual restructuring comps for the remainder of the year, but they would not be significant. With many challenges in the second quarter and while I’m not satisfied with our results, I remain confident in our expectations for the businesses for this year and beyond.

Color had another strong quarter and we continue to see strong demand for cosmetic products and natural food colors. My expectations for colors has not changed and I still expect color to deliver mid to high single-digit revenue growth and high single-digit profit growth for the year.

Flavor and Fragrances has been improving its product mix and will move on from restructuring. I expect them to deliver low single-digit profit growth with more than 100 basis points of margin improvement.

I have revised my earlier expectations for Flavors and Fragrances, because of the restructuring related issues and the other unusual one-time items that happened in this quarter. We are having a temporary setback in Asia, largely driven by issues at one of our larger customers, but we are optimistic about our ability to grow in this region.

We are revising our adjusted EPS guidance to be between $3.40 and $3.45 for the year, which represents mid to high single-digit growth in local currency terms. Our previous guidance was $3.35 to $3.45. I remain very optimistic about the Company’s future. Steve will now provide you with additional details on the second quarter results..

Thank you, Paul. Sensient’s operating income was $44.4 million in the quarter compared to $43.7 million in last year’s second quarter. The operating income results include restructuring and other costs of 7.9 million in the quarter and 13.6 million in the comparable period last year.

Excluding the restructuring and other costs adjusted operating income was 52.3 million and 57.2 million in the second quarters of 2017 and 2016 respectively. Foreign currency translation reduced both revenue and adjusted operating income by approximately 1% in the quarter.

Diluted earnings per share from continuing operations were $0.69 in the quarter compared to $0.55 in the comparable period last year. Restructuring and other costs reduced earnings per share by $0.17 in this year's second quarter and by $0.29 in last year's second quarter.

Adjusted earnings per share were $0.87 in the quarter and $0.84 in the comparable period last year. Foreign currency translation reduced adjusted EPS by $0.01 per share in the quarter. The second quarter results included a $0.07 tax benefit, which was primarily due to a planning opportunity that was available to us this year.

We expect the full-year tax rate to be consistent with last year's tax rate. Corporate costs were down 3.1 million in the quarter primarily due to lower performance based compensation and lower professional fees. Operating income was 68.4 million in the first six months of this year and 91.2 million in the first six months of 2016.

The operating income results include 39.2 million and 16.9 million of restructuring and other costs in the first half of the 2017 and 2016 respectively. So, moving the impact of restructuring and other costs adjusted operating income was a 107.6 million in the first half of this year and 108.1 million in the first six months of 2016.

Adjusted diluted earnings per share from continuing operations was a $0.69 in the first six months of 2017, compared to a $0.59 in the comparable period last year. Foreign currency translation reduced revenue, adjusted operating income and adjusted diluted earnings per share by approximately 1% in the first half of this year.

Cash flow from operations was 25.2 million in the quarter compared to 54.7 million in last year's comparable period. The second quarter cash flow was reduced by higher working capital balances and higher income tax payments compared to last year's result.

Capital expenditures were approximately $10 million in the quarter and we still expect capital expenditures to be between 60 million and 70 million for the year. We repurchased approximately 180,000 shares during the second quarter. Our balance sheet remains strong, adjusted debt to adjusted EBITDA was 2.5 at the end of the quarter.

We plan to keep debt levels in line with an investment grade profile to maintain the flexibility for capital expenditures, dividend payments, share repurchases and acquisitions.

We will continue to take a balanced, prudent and long-term approach to our capital allocation strategy which includes evaluating share repurchases and acquisitions on an opportunistic basis. Thank you very much for your time this morning. We will now open the call for questions..

Today's question-and-answer session will be conducted electronically. [Operator Instructions] Our first question comes from Brett Hundley from Vertical Group..

Thank you, good morning guys. Paul you threw a lot at us on the Flavor and Fragrance side, as an explanation and for why results didn’t come in as you had expected and maybe you can go into a little bit more detail on some of those issues.

I guess at its core what I’m ultimately going to be trying to get at is where do you think Flavors and Fragrance growth could have been ex some of these items, where do you think that segment margins could have been ex some of these items, because without the individual details on the things that you brought up, I look at your segment performance and I kind of back out what I think is a calling effect, I back out what I think is a [ForEx] (Ph) impact, or what you gave us as a ForEx impact.

And that kind of implies flat organic growth at best for your Flavors, Fragrance division.

And then when I look at your margin for the division, clearly it was about flat sequentially flat year-on-year when you make some adjustments and you have been talking about this kind of 100 basis points plus improvement in segment margins for the course of this year and it sounds like your moderating that somewhat because of the issues that you brought up.

So that said its heart what I’m trying to get out and I was wondering if you could just go into more detail on the issues that you brought up and when we might be able to see some of them clear up?.

Okay, sure. Let me go through those items for you Brett. So getting right to it, I would tell you that if we were to get at the heart of your question, what were the results without these items. I would tell you that if I would add up the profit impact of these one-time items that I featured in the opening monologue there.

We would had been up about mid single-digit profit growth, essentially consistent with where I thought we were going to be each quarter of this year. Revenue was obviously also impacted by the back order situation as well as the FX pieces, this is only about a percentage this quarter.

and then you got a couple of percentages related to the divestiture of those other businesses. So, net- net assuming none of these factors that I addressed in the opening monologue had been in play, we would have expected the operating profit to be up certainly mid single-digit and perhaps to say in the range of say 5% to 6%.

Revenue would have been a lot closer to flat and then the operating profit margin would have also been up obviously in excess of that 100 basis points that I had guided to in the beginning of the year. So if you kind of separate what are we doing externally versus what is happening internally.

When I gave the guidance for Flavors and colors in Asia for 2017 it was based on what we felt we could win in the market, what cost we were going to take out and so that was why we certainly formulated the original guidance to you and as we talk specifically now about Flavors it was mid single-digit and perhaps even high single-digit on profit to with flat on revenue owing to the culling in some of the FX, but that was where we were guiding.

As you look at the second half that guidance still applies, that is ultimately what we believe we are still able to achieve externally. Now I think you would anticipate Q3, or Q4, let's just say the back half has being sequentially much better than Q2 for flavors and much more consistent with the results that you saw in Q1.

So, I think we would get back on track with the OP margin growth being 100 plus basis points for the back half, I think you will see revenue closer to that flat that we had suggested - where I suggested was the forecast for the year and I think we would be back in that ballpark of certainly mid single-digit growth on OP for the back half for flavors.

So, kind of underlining all of this is I think the nature of these things, I emphasize that there is a difference between what is happening internally, what is happening externally.

I think externally this restructuring issue aside we continue to make very good progress on our program, on our strategy throughout much of the Flavors and Fragrances Group.

I think putting this restructuring behind us is going to be a tremendous benefit as you can imagine after three plus years of this, this gets a little bit tiring to everybody, but obviously we didn't execute in Q2, and I'm very disappointed with that, but I would tell you that the nature of it was very much internal rather than external factors, which would suggest that either we couldn't compete, or we couldn't overcome obstacles in the market and that's not the case..

I appreciate that. I mean this question, maybe a little late or it may not even have much relevance at this point, but looking back do you think that you guys would have benefited from maybe more outside help as it relates to going through the restructuring and even the aftermath of the restructuring.

I know this is in your first rodeo as it relates to these things, but was this one more complex than you thought and even as you look forward are there lingering issues potentially where having some outside help to manage your way through and allowing the senior managers of the company to focus on areas of growth, strategy et cetera makes more sense?.

Well I would say at this point it's somewhat academic and as much as restructuring is done from the standpoint of consolidating plants and moving products, these are not easy things and fortunately I haven't really had to talk much about the interworking of restructuring. We have been able to overcome, many of these things, but came at the very end.

Why this one? Because I think you said it very well, this is a far more complex move to some degree, that's why it was held towards the end.

But I think in general as we move forward I don't really need to use the word restructuring, because from an operational standpoint we have now closed that last plant and it's just a matter of when we sell that facility it's gone forever, but we have effectively sold every other facility at this point, we are out of them, and we are really talking about growing beyond this.

Some of the other regions where we also restructured and again it's never easy, it's not like consolidating two widget plants into the one widget plant, you just continue to build, it's certainly been far more complex than that, but we have shown and demonstrated in these other regions that have sort of moved past restructuring that once we get to that phase.

it's a very different game and we can compete very effectively in the marketplace, and we are generating wins where we believe we can and I think you will expect and you should expect to see much of the same coming out these two U.S. businesses that were affected by restructuring here..

Just two others for me. On colors the margin was very solid again and exceeded my expectation.

The top line performance was a little bit disappointing to me when I just think about the backdrop for a number of difference business lines that you have there and even one of your competitors has continue to put up pretty good results on tough comparisons and so the growth that you guys saw in that business was a little bit disappointing to me.

You mentioned Latam as a potential effect there, but I was wondering if you could just talk about that business a little bit more and the expectations you have internally, do you believe that you are seeing any share of degradation in certain areas, just a bit more help there, would be helpful?.

Sure, so our guidance for color at the start of the year was mid single-digit top line high single-digit OP, but it’s still the guidance with the color Group for the year.

Part of that guidance is also could there be some uplift in operating profit margin, yes, but I didn’t commit to some significant movement in that because as you we already noted its quite good.

If I were to breakdown those businesses in general, I think cosmetics had an outstanding quarter, again this is continuing in their program over the last couple of years a very strong results, top line and bottom line.

Pharma business had very good top line growth as well, I think ultimately getting to with natural colors, natural colors has been a significant uplift in this business for the last several years and our results continue to be good.

Now something that was somewhat relevant to the second quarter was essentially the pace of new product launches in the U.S. and North America in particular. But even on a global basis, if you look at kind of year-to-date 2017 new product development launches are down 22% in the North American market, globally its down 7% to 8%.

So that certainly can have an impact, but certainly that affects us and a lot of other people in this market. Think when you look at some of our core business, where we have a lot of synthetic color business, that’s one picture, but when you look at the natural color business that’ s very different picture.

Clearly synthetic colors by design are going to be flat and perhaps even on the decline as we convert customers to natural colors. But to get to your real point, are we winning in this market, I would tell you that indeed we are.

When you consider the various spectrums of products in the market from the innovative and the very sophisticated products to the more mundane building blocks, we certainly win and have an outsize advantage I would argue on the more innovative products that provide much more closer to synthetic color matches than you are seeing right now in the market on some of these building blocks.

And an important thing to think about is natural colors. Companies that can convert to natural colors there is two ways to do this in my opinion. Correctly, or incorrectly. The correct way would define the closest match to a synthetic.

And for those companies that have done so, we have very detailed IRI data that tell you that those brands are growing those categories are growing.

For those who would elect to take the building block kind of the more muted, not good matches to synthetic colors; those brands are being negatively impacted from that, so not only they have the negative impact to the economics by converting to synthetic to natural, but they also have been negative because they didn't do it on a like-for-like basis and consumers are rejecting these products that don't offer a comparable visual appearance to the synthetic alternative.

So we continue to focus on that part of the market, we continue to focus on those opportunities and I feel very good about that natural color business and colors in general; right now we are up about mid-single, a little bit lower end of that for top line for the year, but I feel very good about maintaining that guidance and that expectation for the year.

Certainly to get to that natural colors would have to be above that expectation, because we have the big synthetic business that is essentially below that expectation. So, I don't if all that makes sense, but I just wanted to give you that kind of color to the whole thing..

It does. I appreciate the thoughts and I’ll stop there and leave the floor. Thank you..

Okay. Thanks Brett..

And our next question comes from the line of Curt Siegmeyer from KeyBanc Capital Markets..

Just a follow-up on flavors, you mentioned low single-digit up income expectations for the full-year and given where we are sort of year-to-date kind of down high single-digit range, it seems to imply obviously up high single-digit in the second half and I know there would be a point or two of that FX in there.

But I guess the question is just how confident are you that sort of how the second half will unfold and do you expect any lingering effects in the third quarter now that the restructuring is behind you or do you anticipate a pretty rapid improvement in terms of sort of volumes and some of the inefficiencies kind of going away that you have been dealing with?.

So, to begin your math is about right, and I would tell you that number two I'm very confident and I'm very confident because I'm already seeing what we are selling in July and I'm seeing what our orders in August look like, and it's a picture that allows us to achieve those financial results that I just alluded to.

I think with respect to these residual costs, I don't want to get into accounting romance here, but obviously some of these things bleed over into a quarter, which is obviously dependent on your inventory levels.

But needless to say some of those costs will bleed into Q3, but I believe we can rapidly remove and continue to remove those costs post in this post restructuring phase that we are in. So, in short I feel very comfortable about this.

The reason that I felt comfortable with our guidance is again because I see the path we are on and I see the results and I see the Q2 event effectively being an internal issue and an internal issue that we now address and have overcome and in some cases because they were one-time, they are not repeating, I feel very good about the prospects in Q3 and Q4..

Okay great.

And then just one on the guidance, given that you kept your Colors outlook roughly the same and maybe tweak down Flavors a little bit given what you have already seen over the first six months the low end of EPS guidance raised $0.05, is it all due to less FX headwind, is there a little bit of a benefit from maybe a lower tax rate for the full-year or maybe if you can just sort of talk about that..

So I’ll answer the second part of your questions first. We expect tax to be about the same as it was in 2016 as it will be in 2017. So think about tax in essence as a timing issue.

With respect to your FX comment, yes, I think in the beginning of the year we anticipated and we had projected FX will be about $0.10 impact, we are looking more like it’s about half that and depending as my crystal ball here tells me that maybe about right for the year, but we will continue and potentially revise again if rates would move and provide more of a tailwind for us.

But yes I think FX had a big part of raising the lower end of that guidance..

Great, thanks a lot Paul..

Okay, thanks Curt..

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

Good morning guys. So just to understand the Flavors and Fragrances topic and to be honest with you, I think it all sort of like boils down to.

How big are these back orders that are sort of going to be in this third quarter, because you talked a lot about higher costs sort of persisting into the third quarter, but I would think you would have a gotten a little bit more operating leverage, in this second half of the year these back orders are of any significant size.

I was just wondering if you could give a little bit of color in the Flavors and Fragrances segment on that end?.

Sure, I’ll say this. So number one, when we close the other facility a whole bunch of costs come out as a result of that. So I think that’s already as we declared in my opening monologue that happen in June.

I think a lot of the other costs associated with expediting orders and making sure that production levels are correct and that things are working more seamlessly. This is something that - again much of this happens and will continue to happen right now and as we continue into three and in the fourth quarter as well.

So I think these costs are very much in our control to take them out, because again they were precipitated at the onset of restructuring, prior to that this was actually a very well run efficient lower costs plant in the whole company.

So I have got a lot of confidence that with the new products that we have introduced an the new volumes that we have introduced that that’s going to be something very much in our control to take those costs out and continue to commit to the savings that we had pledged with respected to the restructuring savings.

We haven’t necessarily talked about those on this call, but we have certainly more nominal savings for 2017, but those savings we expect to generate are still there and they will be something that we work towards internally and communicate externally as we get into the tail end of 2017 and more like into 2018, those savings are still well with the rest of the generating from the closure of this site.

Backlog again I think as I look at our progress there certainly we see the end is very much insight and it’s in Q3 and I just want to certainly be very clear about that.

But I think the longer your operating this facility the more efficient you become, the more successful you become and this is essentially what I have been seeing, it gives me a lot of confidence that we address these issues, get through this backlog and move on..

Okay. Let me ask you maybe the same question in a different way just to help us with some - how the sale sites are really you are thinking about maybe next year as well I know you are a couple of quarters away from giving 2018 guidance.

So I'll approach this very carefully, when we think about just the strong margin profile that we are probably going to be seeing in the Flavors and Fragrances in the second half, I'm a little bit concerned about how I should sort of take the second half and view what should be happening in 2018, how sustainable is the line of the margin growth that's going to be happening in the second half of 2017 and then sort of rolling that into 2018 giving just all a different moving pieces that we have been seeing so far?.

Well listen, I pledged to our shareholders that we are on the road to 20% operating profit margin in flavors and so that is very much still within our sights, we still have a significant number of our businesses that have demonstrated tremendous improvement and operating profit margin.

Prior to this quarter we have been talking about that for about the last year and a half the very strong progress we have made on operating profit margin.

So I think that continues to be a very realistic goal for us and you throw out the rest of these costs post restructuring, we continue to emphasize selling the products consistent with our strategy, continuing to focus on moving away from the lower margin less competitive products, and so I think these still provide us with a path to the eventual of 20% OP margin that I would anticipate communicating here and our progress towards that throughout 2018 and 2019.

So the upside is there, and ultimately once we get past cost then really the uplift will come principally from product mix, and I think those are very consistent with where we have suggested from the very beginning with a three or four pillars as to how we get to that 20% OP margin..

Okay.

In each of the segments I know for Flavors and Fragrances in Asia Pacific, you cited the decline in bonds, is there a way to sort of quantify the volume declines in each of the segments just so we can sort of like better understand what is happening with pricing in the segments while also obviously being cognizant of on shift in the product mix, I don't know if you have those numbers handy?.

So, Francisco generally I would say, since we have been moving price up in the flavor business, so pricing would be a matter of favorable and volume would account for a little bit more than the reported revenue change then. In Asia most of the decline you see would be volume related I would say..

Okay.

And let me push back a little bit, if Colors Group was basically flat year-over-year and price point for Color on a per unit basis are higher, are volume sales in the Color Group lower? A little lower than the same quarter?.

So, the comment that I just gave around flavor in Asia..

Right, so, I guess just digging a little bit into the Color Group then..

So, in terms of Color, we would have seen favorable volume growth on food and beverage colors, primarily our natural colors offset slightly by synthetic colors. Cosmetic was very strong on volume and those would be the key drivers in the quarter..

Okay, that make sense. And so I guess maybe just looking at it a different way, and this is my last question. in regards to your EPS growth is there may be a way to sort of quantify what you guys might be looking for on a consolidated basis for operating income growth.

So we can sort of just like back out from some of the moving pieces like share buybacks, the tax rate?.

So are you talking for 2017 or 2018 Francesco?.

2017. It seems your guidance imply for operating income growth guidance..

So it would implied mid to mid single-digit growth..

Okay, mid single-digit. Okay perfect, that’s it for me. Thanks again..

Okay, thanks..

And our next question comes from the line Andrew Lane from Morningstar..

Hi, good morning. So with the restructuring program now completed, I wanted to ask you to take a step back and comment on some key takeaways from a bigger picture prospective.

So when reorganizing and combining your operational footprint, were there any aspects that you didn’t anticipate that perhaps by surprise ended up being highly valuable and it maybe led to improved efficiency for your ongoing facilities?.

Well I suppose one day I would. I guess with restructuring it’s the very nature of the program, you anticipate a lot of things, you plan for a lot of things, but they are very challenging and like I said, I can’t tell you how excited I am about restructuring being over.

But I think you can’t underestimate despite the fact that you make a product in one production facility when you move it, it doesn’t necessarily do to same things that it did in the last facility. Why? any number of factors might have changed. The operating environment, the utility support all of these factors could come into play.

I think that when you are talking about a specialty chemical versus the fine chemical. There can often be a lot of variability in raw materials and variability in operating conditions, but again lend itself to a very complex transition of a product.

You are talking about transferring individuals or training new individuals as well can certainly ad to the complexity and then as you are doing this, you are also in some cases trying to rationalize into improved formulations to take out costs formulations to simplify the supply chain requirements for any given product.

So there is a whole host of things that can go right and things that can go wrong. A lot obviously did not go right in this last one. But a lot has gone right in the earlier ones because again I haven’t really been talking about this kind of stuff until now.

So yes, if I can get into my time machine and go back sure there are some things that I would do differently here to affect the outcome and to improve the outcome, but I think at this point, it’s really a matter of how do we expedite the removal of these costs and these plants and work on improving throughput and other efficiencies in these, so that we can get to where we really wanted to go.

Restructuring was an absolutely essential and necessary step that the flavor needed to take to not only take out cost, but to take out complexity. Operating a lot of plants, becomes a very complex game to go and trying to [staph] (Ph) all those plants.

The capital expenditures requirements grow considerably when you have more plants, and so these things are all very essential and I think long-term we are going to be very-very pleased that we went through this painful process of restructuring..

All right, fantastic, thanks. Changing gears to your R&D spend. I wanted to touch base on that quickly here. It was up a bit to about 3% as a percent of sales in 2016 after kind of being a 2% to 2.5% over the last decade.

Some of your larger competitors have high single-digit R&D spend as a percent of sales, particularly now with restructuring in the rear view mirror do you have a specific target for sensing it into the future on this line item?.

Yes my target is about measuring outcome, not measuring effort and so from that standpoint each of the businesses is evaluated on their ability or their top line growth that’s generated from new product development. So that would be comment number one.

Certainly for some of our businesses, we assign a 7%, 8%, 10% top line growth expectation out of new product development with the assumption that you have some products out in the market that go away or the customer cant [indiscernible] and you have some that you are also adding that are not considered new products as there are more standard products, so I would say that's comment number one.

Number two, a lot of this depends on how you define R&D, we don't necessarily say anybody wearing a white lab coat constitutes R&D spend, we are fairly purist when it comes to who is actually doing real R&D rather than who is just in a lab.

So I can't speak to my competitors, because I'm not necessarily intimately familiar with their process for measuring this, but I can tell you for our process we are very strict and very rigid with how we measure the actual spend.

But ultimately your question is driving at are we spending enough in this area? I think in the majority of our businesses we are, but there is certainly more opportunities particularly in Asia Pacific to continue to enhance our investments there that we can drive the better outcome from new products, but there is always opportunity in every business and so a lot of this is about picking the right products too.

There is a lot of blue sky stuff that a company could do, but sometimes you got to focus on what customers actually want and they are going to buy and they will talk to you about being committed to buying. So those are some of the metrics that we look at very closely on that one..

All right. I appreciate the insight. Thanks, I’ll turn it back over..

Sure..

And our next question comes from Garo Norian from Telese Capital Management..

Hey guys. First question I had just on the Asia situation that customer there, I guess you went through the Flavor and Fragrances side, and kind of got a lot more confident that that was internal and more shorter term lives.

I mean what is the right way of thinking about how Asia is likely to play out over the next couple of quarters?.

Well I'll be a little bit deductive in my answer here, well actually let me be inductive first. Asia is going to have a very good 2018, so that is a longer term answer.

I think right now it's just a matter of timing on some of what I mentioned in the monologue, I think as you look at those Asia Pacific region-by-region, I think we feel very good about a number of our regions like the Oceania region, we feel very good, we feel very good about parts of North Asia, we feel very good about part of Southeast Asia.

But I think each one of these areas has different challenges associated with them and some of our challenges right now are what I had mentioned there, but a lot of this too is how do you continue to identify the opportunities. I mean Asia in general is a far more fragmented market than you are going to see in the U.S. or Europe.

So there is a lot more players, there is a lot more opportunities for a company like Sensient to be successful, there is not as much of the strangle hold on the market that you see in some of the other parts of the world that we are dealing in.

So the opportunities are there and certainly the focus is there and I have very strong expectations for Asia-Pacific certain in 2018, 2017 is harder to break, I got to be completely frankly beyond that one because it’s not necessarily within my control.

Nevertheless, I think that it’s a good market, it’s a good market for our products and there is a growing interest in our products whether they are cosmetics, or inks, or Flavors, or fruit colors, lot of the same trends we are seeing in the Americas and Europe, whether its natural colors, or extracts, or digital inks, or very sophisticated cosmetic products.

That entire market is a prime opportunity for Sensient..

Got it, great.

And then related to some of that you had mentioned earlier on the color side, it’s sort of these customers that might have switch to natural with what is color a lower quality task, has any of them already started to come around and talked about going to the higher quality way of doing things?.

Yes, is the short answer there. I think, there is a little bit of a different model at play. In general you would see products in Europe tend to not have the same level of vividness as a U.S. based products. But in the U.S. market it is never been demonstrated that that type of what I call white wash color on some products works with the consumer.

Particularly consumer who has been acclimated to products that are very bright and vivid and in that person’s mind can act very strongly what the flavor of that products.

And what tends to happen interestingly enough and what often times will drive customers to make these changes in their colors, is the end consumer has decided that the product no longer taste the same, it used to be really red now it’s like light red, well they taste different, like I they like the taste any more.

And on one level you could say well of course it taste the same, but there is a such a strong connection between the visual color and the flavor outcome that this is what has driven many of these customers who are experimenting with the non-matching solutions driven them to rethink that solution, but I can’t speak for every customer out there..

Got it, thanks. And some more technical questions.

working capital through the second half of the year I mean obviously there was a big use in the first half what is expectation for the second half?.

Sure, so in the first half there were really two theme on working capital. The cosmetic business which has been very strong performing very well, we see higher inventories and receivables there and that has extracted.

Then on the flavor side, some of the impacts for restructuring have impacted working capital and so we saw a negative usage there, and we would expect that to work its way out in the second half of the year. The only other thing would be in our natural ingredients business, we have seen some higher inventories there, but that's somewhat by design.

Every few years you wind up with a crop issue and so we would rather be long and have the product to sell there. So I think the restructuring items should begin to work their way out in the second half..

Okay.

So just I'm thinking about things for the full-year I mean we shouldn't be going higher than what we have used up already through the first half, is that kind of a logical way of thinking?.

Yes, I think that's right..

Okay.

And then just lastly, my model for the tax rate last year was about 25.5, is that where we are ball parking?.

For the second half of the year, yes, that's about right..

No, for the full-year?.

For the full-year?.

Yes, so both of those statements are right. so it will be about 25.5 for the second half and that will bring us to that rate for the year..

Got it. Perfect. Thanks so much..

Thanks Garo..

Our next question comes from the line of Mike Sison from KeyBanc..

Hey guys.

Paul when you think about flavors, you spent a couple of years now trying to transition this portfolio into more solution type of applications versus ingredients, and could you maybe just update us on the progress by sub-segment meaning the savory there is dairy, if you think each of the segments are you almost where you want to be in terms of what you are offering to your clients as you head into 2018, 2019, 2020?.

As you look at the spectrum by segment you could say that where we are closest to that and where we are furthest from that. Closest I would tell you is beverage and fragrances, furthest from that would be savory flavors and in the middle would be sweet flavors and I think some of that is the size of the legacy business.

So in other words savory had a lot of ingredient sales, sweet flavors had a lot of ingredient sales and by that I mean fruit preps, beverage had fewer of those, so it was a little bit more of a historical model that kind of I think set the trajectory moving forward, but I would tell you that in each case and we are making very good progress on this, just a little bit of a further [put] (Ph) on some of them and then again when you have core business that makes it a little bit longer term in terms of actually moving the OP margin in those individual business units.

But I think certainly overall, we see the opportunities to sell these products, they are far more defensible and I think again it goes back to the types of customers we are focusing on in the market.

Nobody has asked this question, but certainly there is some big companies out there that have had some not particularly good Q2 results as they have mentioned publicly already.

But you will notice that in the business like color where we have really set out for several years now to diversify our customer base, we can handle those types of declines and still grow the business. I think flavor is because it wasn't necessarily strongly aligned with those really big customers on flavors.

But the outset of all this is going to be a very good position as we continue the pursuit of these B and C customers, because fundamentally those are the folks who are growing, those are the folks who are launching products and they are not necessarily holding back on that front.

So I think we are aligned with more and more the right customers and that’s going to certainly be a key part of this as well..

Right, and then in terms of the areas that you know you are not as advanced as the others, are there opportunities even if you have to pay a little bit more of a premium in acquisitions to sort of jump start that move to more solutions?.

Yes, I leave with a one word to answer Mike. Yes..

Okay, great. Thank you..

Okay, thanks..

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

Good morning, a quick question on cadences of earnings in the second half for the year, with the hangover pause into the third quarter, should EPS being more balanced across the two quarters in the back half for the year than you have seen in the past?.

To some degree there is obviously seasonality in the business, our stronger quarters tend to be Q2 and Q3, which as you see last year we are pretty consistent with one another. And of course Q4 and Q1 sometimes in fact typically Q4 is a little bit bigger than Q1, but that has historically not always been the case.

So I would tell you that in general as you look at the business historically Q2 and Q3 tend to mere each other or be very close to each other. Now, I mentioned a lot of these one-time items in Q2, so make sure you are taking that into account. But Q4 would be certainly not as strong as Q2 or Q3 and a lot closer to say Q1 outcome..

Okay and then the gross margin, how should I think about raw material cost pressure and your ability to offset that with new products or with some pricing?.

So we have generally been very successful at offsetting that with pricing. The other thing to keep in mind is that we have so many different raw materials that there are always things moving in different directions. So you might hear about pressure on one particular ingredient, but then we are going to have others that are going in the other way.

So there aren’t necessarily any trends out there right now that I think are going to be a problem for us. It should be a fairly stable environment, in terms of our ability to offsetting anything that happens..

Okay. That was it just for me. Thank you very much..

Thank you Chris..

Yes, thanks Chris..

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

Okay, thank you very much this morning for attending the call. That we will conclude our remarks and as the moderator said, if anybody has any follow-up questions please feel free to call us. Thank you..