Q4 2019 Earnings Call

Thursday

good morning, and welcome to the sentient Technologies Corporation 2019 fourth quarter and year-end earnings conference call. All participants will be in a listen-only mode. Should you need assistance. Please ignore a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two months. Please note. This event is being recorded. I would not like to turn the conference over to mister Steve Roth, please go ahead sir.

Good morning.

I'm Steve Ross senior vice president and chief financial and Technologies Corporation. I would like to welcome all of you to sentience conference call to discuss 2019 Dodge 3/4 Financial results. I'm joined this morning by Paul Manning since since chairman president and chief executive officer.

This morning. We released our 2019 fourth quarter Financial results copy of the release is now available on our website at.

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.

These non-gaap Financial measures remove the impact of currency movements depreciation and amortization non-cash stock-based compensation divestiture and other related wage the impact of the 2017 us tax legislation and other items 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 money is available on the investor information section of our website at and in our press release we encourage investors to review these reconciliations a 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

And 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 since the ins filings including our forthcoming 10K for a description of these factors. Please bear these factors in mind analyze our comments today now, we'll hear from Paul Manning. Thanks Steve. Good morning this morning. We released our fourth-quarter results during 2019. We had strong results in natural colors wage laborers and extracts in our pharmaceutical business. These results were offset by several market dynamics and by the impact of a number of underperforming businesses that we are in the process of divesting.

In 2019 since since business was impacted by a number of adverse Market factors. We saw uncertainty and higher costs tied to raw material availability tariffs and trade disputes. We also saw a changing consumer trends for cosmetic products particularly makeup that had an adverse effect on our sales for the second half of 2018. And for all of June 2019 food-related markets were impacted by changing consumer tastes that have challenged many of our larger customers as well as certain product lines in which we participate.

we have

implemented a number of actions in response to these challenges

I expect a much better year in 2020 as our actions deliver improve results. And as we focus on the strengths within our product portfolio.

As we enter 2020. I am pleased to report that a raw material costs and availability challenges have been substantially addressed.

Raw material inflation and availability. We're headwinds during 2019 in our food color cosmetic natural ingredients and fragrance businesses.

With respect to changing consumer Trends, you will recall that consumer spending on cosmetic makeup products began to decline in 2018 in most of our Geographic locations.

Our historical strength and cosmetics has been in cosmetic make-up and as a result of this change in consumer buying we saw lower sales throughout 2019.

Our business began to stabilize in the fourth quarter of 2019 and we have increased our efforts to sell to sell skin and hair care products.

We expect our cosmetic business to Rebound in 2020 the pace of the rebound will be driven by a resumption in the market demand in the Cosmetic makeup category plus continued growth in hair and skin care products Additionally, the the coronavirus will impact our cosmetic asia-pacific business and it could present significant factions there.

the situation continues to evolve

furthermore the fixed-cost takeout actions. We implemented in cosmetics throughout 2019 will help us to deliver improve profits as the year progresses and as sales continues to grow.

Our sales win rates across the company are high. We are winning new projects across all three groups. However, 2019 was a challenging year owing to a higher than normal level of product churn in the marketplace and declines in several Legacy flavor ingredient businesses.

Our customers have had to adapt to changing competitive Dynamics changing Channel and product preferences and often times intense and Consumer Price pressure.

These Dynamics created pricing headwinds and higher than normal attrition rates for many of our businesses.

This product remains high as our customers continue to pursue evolving end consumer preferences.

You also recall that some of our flavor ingredients sales were impacted by the decline and demand for yogurt and several prepared food categories. We have reacted to these Trends by reducing our fixed costs money and by focusing on retaining and winning business where our portfolio is strong.

We had made strategic decisions to exit certain product lines, including our inks fragrances and fruit yogurt fruit prep businesses.

I'm confident that by divesting these product lines will be able to focus in our key strategic markets namely food colors finish flavors and extracts cosmetic surgery Pharmaceuticals and natural ingredients. We can maximize our investments and efforts in these markets where we have better scale better technology and a much better competitive position.

The businesses we are divesting generated approximately $140 million dollars in revenue and approximately 2 million dollars in profit in 2019.

Our fourth quarter results included charges almost entirely non-cash related to these divestitures.

Going forward we expect this more focused business to deliver growth and 2020.

The outlook for the Color Group remains strong food colors cosmetics and pharmaceuticals will be our key strategic Focus areas for the group.

For food colors, we expect natural colors growth from continued wins and new product launches and as existing products convert to natural color Solutions.

In 2019 local currency sales in our natural colors business grew by approximately 4% in the fourth quarter and by approximately 8% for the full year.

Of our pharmaceutical business grew at high double-digit rates in 2019.

We anticipate that are cosmetic business will return to Top Line growth and 2020 as the Cosmetic makeup Market continues to normalize and as we continue to emphasize our sales efforts in the skin and hair care segments.

However, we are monitoring the development of the coronavirus and its potential impact to our cosmetic asia-pacific business.

We expect continued wins in each of these Color Group businesses and with an ongoing focus on our fixed cost structure and the testing of the inks business. I expect improve results from a group in 2020.

I expect the first half of the year to generate low to mid-single digit Revenue growth with mid-single digit Revenue growth in the second half of the year.

I expect profit to be lower in the first part of the year do to lower production volumes and mix effects with improving profit in the second half of the year.

both

Revenue and profit excluding the Yanks business should improve as the year progresses.

Turning to the flavor group are finished flavors and extracts business has performed. Well delivering approximately 8% local currency sales growth in the fourth quarter of 2019 and approximately 6% for the year.

But this performance has been overshadowed by challenges in our flavor ingredient portfolio. We're seeing improving Trends in the flavor group as we focus on winning new business and retaining existing business. We have positive growth in our Savory product lines in North America and Latin America, and we expect our sweet flavors business to Rebound in 2020.

We continue to focus on our commercial efforts across our portfolio are win rate for flavors and extracts continues to accelerate and our attrition and flavor ingredients is finally getting back to a more normal level.

That you will see our sales improved at 2:20 as 2020 progresses.

Divesting are fragrance and fruit prep business will be a real positive. As I said during our last call these product lines require substantial scale and capital investment banker in 2020. I expect the group to grow sales at a low to mid-single-digit rate, excluding the divested businesses.

With a continued reduction of our fixed costs and improving production volumes are profits should also return to growth as the year progresses.

Within our asia-pacific group, we're beginning to realize benefits from the Investments. We have made in this group over the last two years. We are seeing new wins in both flavors and natural colors and I expect the group up mid-single digits in revenue and profit in 2020.

As we refocused our businesses in 2019 and reduced our fixed cost base. We also focused on free cash flow over all our adjusted free cash flow increased by 11% in 2019.

We continue to remain.

Focused on improving our working capital specifically inventory which benefited our cash flow by approximately twenty-five million dollars in 2019.

We expect to maintain a disciplined approach to our Capital spending an inventory management and 2020 and continue to grow our free cash flow at a rate in excess of our jobs growth.

In 2019, we experienced a number of challenging market dynamics that have impacted our results despite these Market headwinds. I'm confident that the actions we are taking the focus we have on our key markets and our end customers and our customer-centric discipline will lead to improve results in 2020 excluding the businesses. We are divesting we expect Consolidated Revenue to grow at a low to mid-single-digit rate with growth and all three groups and our Consolidated adjusted ebitda to grow at a low to mid-single-digit rate. I expect our cosmetic business will return to growth and 2020 based on a normalization of demand and the consumer makeup Market. I also expect our natural juice and flavor and extract product lines to continue to achieve favourable growth throughout 2020.

Why expect sales?

Growth in the first quarter in all three of our groups. We will have some hangover in our profit performance during the first quarter as a result of the impact from the inventory reduction in 2019 product mix in cosmetics and the time necessary for our fixed costs takeout actions to realize their full run-rate.

Based on these impacts. We expect profit in the first quarter to be down on a year-over-year basis in both colors and flavors profit will improve after the first quarter off.

Steve will now provide you with additional details on the fourth quarter results. Thank you Paul in my comments this morning. I will be explaining the differences between our gaap results and our adjusted results be adjusted results for 2019 remove the impact of the divestiture related costs that were incurred during the fourth quarter when we discussed 2018 the adjusted results remove the impact of the 2017 tax legislation accounting that took place in 2018.

since

operating income was a loss of fourteen point five million in the fourth quarter of 2019 compared to forty five point three million of income in the comparable period last year

operating income in the fourth quarter of 2019 includes 45.9 million of divestiture related costs. These costs are almost entirely non-cash expenses in accounting terms. These costs primarily include non-cash impairment charges inventory charges and other divestiture related costs, excluding the wage adjusted operating income in the fourth quarter 2019 was 31.4 Million compared to forty five point three million in the fourth quarter of 2015 foreign currency translation had a minimal impact on both revenue and operating income in the fourth quarter of 2019.

Revenue for the flavors & fragrances group was 169.1 million in the fourth quarter of 2019 compared to 175.5 million in the fourth quarter of 2018. The lower Revenue was a result of lower flavor ingredient volumes, which included the yogurt food prep & fragrances product lines operating profit was fourteen point two million in the fourth quarter of 2019 compared to twenty two point three million in the fourth quarter of 2018.

the lower

Reading income was a result of lower production volumes consistent with our efforts to reduce inventory lower sales volumes costs associated with certain customer bankruptcy charges off and higher raw material costs primarily in our natural ingredients business.

Foreign currency translation had a minimal impact on both revenue and operating income in the quarter.

Revenue for the color group was 125.4 million in the fourth quarter of 2019 compared to a hundred twenty seven point four million in the fourth quarter of 2015. The lower Revenue was primarily a result more volumes and inks and in some other industrial product lines and to a lesser degree in cosmetics.

Operating profit with 19.7 million in the fourth quarter of 2019 compared to twenty one point nine million in the fourth quarter of 2018. The lower operating income was off of the lower sales and production volumes as well as some negative mix effects.

Currency translation decreased Revenue by approximately 1% and operating income by approximately 2% in the quarter.

Gap diluted earnings per share were a loss of $0.40 in the quarter compared to $0.78 in last year's fourth-quarter the diluted earnings per share in the fourth quarter of 2019 includes $1,000.02 per share of divestiture related costs. The diluted earnings per share in the fourth quarter of 2018 include $0.01 to tax expense related to finalize our estimate of the tax law change adjusted diluted earnings per share were $0.62 in the fourth quarter of 2019 compared to $0.79 in the fourth quarter 2018 foreign currency had a minimal impact on EPS this quarter.

Turning to the income tax line. This year's fourth-quarter rate includes approximately $0.16 of a net benefit related to a tax planning strategy and regulation changes off. The company's full year 2019 adjusted Consolidated tax rate is 14.7% compared to 2018 full-year adjusted rate of 17 per month.

Consolidated operating income as 121.1 million this year which includes 45.9 million of divestiture related costs and excluding these costs adjusted operating income was 167 million.

Gaap diluted earnings per share were a dollar ninety $4 in 2019 compared to $3.70 in 2018.

Gaap earnings per share in 2019 include the dollar two per share related to divestiture related costs.

2018 earnings-per-share includes $0.16 a benefit related to the finalization of the tax law changes removing the divestiture related cost in 2019 and the impact of the tax law changes in 2018 adjusted earnings per share in 2019 was $2.96 compared to $3.55 in 2018.

Cash flow from operations was 177.2 million in 2019 compared to adjusted cash flow from operations of 174.7 million and 2018 Capital expenditures with 39.1 million in 2019. Compared to Fifty Point seven million in 2018 are adjusted free cash flow increased 11% in 2000 to 138.1 million.

Total debt was 619.1 Million as of December 31st, 2019 compared to 709.6 million as of December 31st 2018 off a decrease of 90 million.

We will continue to be diligent in allocating capital in 2020 at this time. We expect 2020 Capital expenditures to be between forty and fifty million.

Excluding the charges related to the divestitures and the Opera operational results of these businesses. We expect positive revenue and profit growth from our flame color and Asia segments in 2020.

An adjusted basis are Consolidated operating income and earnings may be flat to lower in 2020. However, because of the level of non-cash performance-based equity that may be deducted in 2020 based on our results in a normal year. We would expect non-cash performance-based Equity to be about six million or about $0.12 of eps earnings comparisons between 2020 and 2019 will also be impacted by our tax rate which was low in 2019 as a result of planning opportunities.

Our adjusted tax rates in 2019 was 14.7%

and a more normal rate of 22% in 2020 would create a headwind of about 26 cents per share.

In considering our reported gaap earnings per share in 2020. The comparison items previous previously mentioned must be factored into any estimates.

On the non-cash performance-based equity and tax headwinds discussed We Believe are reported EPS will be within a range of a dollar eighty five to two dollars fifteen cents per share in comparison to sentience reported EPS in 2019 of a dollar Ninety Four.

These figures include the results of operations of the the vested businesses and a current estimate for additional divestiture related expense of approximately $65 to $0.75 in 2020, which is primarily non-cash.

On an adjusted basis excluding these divestiture costs and the results of the businesses. We are seeking to divest our EPS is expected to be within a range of $2.00 to $2.80 as compared to our adjusted 2019 EPS of $2.96 per share our thoughts.

currently

We do not expect exchange rates to have a material impact on results.

As a result of these complex factors affecting our comparisons We Believe an important measure of our success in 2020 will be the growth in our Revenue excluding are divested businesses and the growth in our adjusted ebitda, excluding are non-cash performance-based Equity Awards. We expect each of these metrics to grow at a low to mid-single-digit in 2020.

These expectations applied to full-year results in 2020 growth in our results should improve as the year progresses. It's volumes are increasing across the company and not overall cost structure is improving. We expect the first quarter to be challenging, but we expect Improvement throughout the year. Thank you for your time this morning. We will now open the call for questions. Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press star them to at this time. We will pause momentarily to assemble our roster.

The first question will come from Brett Hundley with Seaport Global, please go ahead.

Hey, thank you and good morning guys morning Brett, Steve or Paul. So are you guys booking the full million dollar performance equity in your guidance for 2020? I'm calculating that's about a 3% headwind to ebitda growth. And if so, how long were these were these performance hurdles amended or or changed in in any way heading into twenty-twenty?

Well, first off within the range there is there is the full amount, you know, obviously it flexes if our if our ebitda growth is not off at the mid single-digit rate we talked about there would be less which would you know buffer mitigate the results but within that range there is the full amount off and then could you just repeat your question on the where the amended? Yeah sure. So you just mentioned which I think for at least two years. Now, a lot of that performance has been tied to ebitda it could be wrong, but I thought it had changed a couple of years ago and I was wondering if heading into twenty-twenty. Did you change how those performance comp is is paid out based on certain metrics. So heading into twenty-twenty the structure is very similar to what it was last year, which you might be thinking of.

is

A few years ago, we were incentivised on EPS. So so for instance, you know changes in the tax rate could have an effect. We are not incentivised on off on going forward. So it is it's easy but its Revenue cash flow and then return on invested Capital but from last year no significant changes I and and part of this bread has to do with the the performance-based metrics around it. Right? So all of our Equity warrants are one hundred percent a performance-based. There's no participation trophy of any kind. So when we don't deliver, like what happened in 2019, there is essentially no equity payout. So it it certainly is fully one hundred percent align to shareholder interests.

But what you have though can be a more dramatic swing like what we're experiencing now. So we had a a underperforming 2019 we expect to perform in 2020 and I've given the nature of that's a hundred percent performance-based. You can have a a large swing which would then represent a headwind and non-cash headwind but a swing no less money. You know, you you have a good year in 2020. And then as you get into twenty Twenty-One, the these are significantly moderated but it is in fact the very nature and our philosophy around pay-for-performance that essentially creates this this financial Dynamic that we have here. Okay. Thanks for those comments to the extent that you guys can comment on the divestitures. Can I get an update on the divestiture activity you guys obviously recognize the number of cost during the quarter, but I haven't seen any notable headlines yet. So I just wanted to talk about

You know.

Potential interest in timing given that we are talking about a lot of these businesses coming out for full 20 20, or at least that's how it modeling it.

So I I think this we certainly have interested buyers for each of the three businesses. I think that we're both actively engaged with those individuals. So I I can't necessarily get into details as those discussions are are certainly governed by a non-disclosure, but I would tell them that it's certainly Our intention to sell these businesses the buyers and in these cases each have much greater scale and and effectively Capital footprint in the market. I think it makes very good sense with them, but we're going to do them, right we're going to get a fair price for them and and we're going to do that on a time frame that that's consistent with that philosophy. So certainly we'd like to sell them as soon as we can reasonably sell them, but we're not going to do anything stupid birth.

And so to that end.

Sure, I would be very optimistic to have these things done as soon as possible. But we want to get them done. Right we want to make sure we have the right buyer and that we get a fair outcome for Arthur's holders. Okay. Okay. That's as we yeah, I mean certainly as we affect the signing in a closing we would make that publicly consistent with expectations down on that front, but I would tell you that there is at this stage interest in the three and and I expect that we can get this done. Okay, and and if this is a situation where maybe this stretches into summer or Beyond and and I'm sorry if I missed this in your prepared remarks Steve, but with these be reported as she continued table storing 20/20.

So they do not meet the required.

Doing that and that is one that we continue to be very committed to and then as you saw in 2019, we we spend a lot of of our free cash flow on on paying back money. We paid up approximately ninety million down of debt, which we thought was a a good and prudent thing for us to do at this point. We we want to continue to pay down debt. We we like the debt to ebitda to be somewhere in that 2 and 1/2 to 3 times that that seems to work pretty well for us enabling us to either do as you suggest a fax or certain m&a activity and so as we look at twenty twenty

It's those are the three moving parts right by back. Is there an m&a opportunity or would we pay more debt? And I think as we see it right now here on February 14th. Our focus is is to take down some more debt, but we're always looking for m&a opportunities. And should there be a unusual event in the stock that creates a a rather obvious buying opportunity. We would not be opposed to doing something along those lines. So I I won't give you a more precise answer because things do change and and we want to be very very flexible there, but you got kind of the guide rails and and in terms of our thinking on on each of those pieces,

That's great. Thanks Paul.

Okay. Thanks Brett. The next question comes from Mitre Ram. Gopal with sidoti, please. Go ahead. Yes. Hi. Good morning. Thanks for taking the questions. Just want to start off with the guidance. I know you had mentioned the coronavirus. Do you think obviously could have an impact and it's just too early to sort of determine the extent of that wage assuming that's not factored into the initial guidance, but I just wondering if it's already having an impact in terms of you manufacturing operations in Asia.

So it is for those businesses that that produce in in China most specifically are cosmetic business in the color group and our food colors business in age group in general in this company. We manufacture where we sell so there's very little that we manufacture in China. That is Joseph Lee sent outside of China. Certainly. I can't think of anything off the top of my head that is destined for the Americas or Europe. There are some items made in China that we would send to another Asian country. But that tends to be a very small part of what they do in in one sense. That should tell you that the impact from China from a manufacturing standpoint is is substantially isolated to China cuz we do manufacturer in other countries where we are seeing an impact now is you know initially, yep.

Coronavirus happened right during Chinese New Year's. So, uh, you know during Chinese New Year sales drop very little activity going on in in China and throughout many Asian countries. So the fact that the coronavirus happened essentially right in the midst of Chinese New Year. It's very very difficult to see right. Now what the potential economic and financial impact would be I could tell you this right now from raw materials that we would Source in China at this point. We've not had a significant disruptions there has been in my estimation no significant concern around product safety. In other words romance channels that are made in China as sent to the US or Europe would not present a food safety challenge to food producers or cosmetic producers. In other words. The food would not be tainted with the virus dead.

So we we don't see a raw material problem. But where where we are seeing the problem is

Really in in terms of accessing customers. So this becomes on the sales side of the transaction for a business like our cosmetic business. This becomes a little bit of a problem because if they're if our we have technical People based in China who may travel throughout the region we have technical people in Singapore who may trade throughout the region just the other day. Here's a little anecdote which might you might find very interesting. We had a technical individual in Singapore who was destined for a customer in Korea and the Korean a customer would not see him because he was coming from outside of Korea.

So it's these types of dynamics that are at play. We have sales people who are still confined to their homes in China. So there's very little movement on the commercial side of the business and cosmetics and and so that could have and that was the the point in my prepared comments. That would be the headwind at this point. It's really real life difficult for us to estimate what that headwind would be and what that impact could be information on this virus is coming out by the our countries are restricting the access in and out on a daily basis this Dynamic changes so I can tell you there will be an impact on our Cosmetics Asia business that is indisputable. We're seeing that but where it goes from there, I I can't predict that right now what my crystal ball is telling me is that this is going to be here for the next Thursday.

real months at least

Until any sort of resolution or or or or clear guidance is made very publicly available in in China. Now, that's my opinion and you may get a different perspective from others, but I think the biggest impact for us you'll feel it in the color group with our Cosmetics Asia business.

Okay. Yeah, no that thanks. I really appreciate the color of the Insight on that and actually just staying on the international front for a month while I know I don't know if you can give us a sense what the Tariff impact was for you in 2019. It seems like that should be less of a headwind for you in 2020. And I was just wondering if you guys had anything fact that they're into the guidance also.

Sure, so actually on the raw material front that you know, we we believe we have that under control. And as of right now that looks pretty good. So going back to 2019. You had not only the the tariffs but she also had some regulatory actions that happened earlier in China. They made it difficult to get certain raw materials. We've been pretty successful at moving our sourcing outside of China for those items that were impacted. So the you know the at the end of the day that the Tariff impact, you know, and the and the trade uncertainty impact appears to have stabilized, you know X this Virus issue that Paul talked about

Okay, okay.

And now that I know brexit also had an impact for you in 2019, and I was just wondering now that that's sort of official again. That's if anything be a plus for you this year. I I would imagine yeah, I think Clarity creates stability in the market and create stability in our business and for our customers, and I'm now that there's much greater Clarity around brexit. I I would say that yeah, we should not see any sort of incremental up or down versus prior or impacts as a result of brexit and and that being implemented.

Okay, and then on the flavors fragrance is segment. I know you know one of the areas of opportunities for you was it, you know, the bionutrients biotech a kids and I just wondering if you're seeing any additional attraction there and if you can maybe address potential new products that you might be looking to bring to them wage. That's good be a nice cat for you. Sure. Yeah. So for for the folks on the line who may be kind of curious about the nature of bionutrients. This is a a portion of our flavor group that is essentially based on modifying protein sources some of which we sell into the food industry modifying them for different types of applications in this case mostly live cultures. So what that means in English is that essentially we make protein

That feeds bacteria.

For example things you'd see in probiotics are prebiotics animal nutrition things of this nature. And so certainly the live culture fermentation probiotics markets slowed in 2019. I think that's been pretty well publicized now, they didn't go into decline those markets. They went from say a seven or eight percent to maybe like a three or four percent growth rate lot of new entrants into that field a lot of capacity for fermentation in that area. And so we think it's a very very good Market what we like about it. Is that a very technically driven Market. It's all about improving the efficacy and yield of bacteria and these types of applications. And so that fits very well into our wheelhouse of innovative driven products applications driven customer service and then being able to deliver products consistently and on Thursday.

I'm in the high quality.

So it's a very very good Market Insurance slowed down in 2019, but I think the prospects continued to be quite good and it's also rather expansive in terms of the areas that you can get into. I'm not sure there's there's quite a bit of talk about probiotics declining or moderating its growth but the areas of animal nutrition are still quite large the areas of fermented ingredients are still quite large and and and quite fragmented at least from A supplier standpoint. So still a very good market and and we would expect them to have a a a Goodyear here in 2020.

Okay. No, thanks and under your color group. I know you you touched on the customer's transitioning from the lower the synthetic oil or natural formulations, and I just trying to get a sense as to how early or how far along are. We in terms of that transition that you're seeing.

in your

We're in the eighth inning. It's probably I don't know where they just finished the top of the case on that one in the Americas and an asia-pacific. We're in about the third inning. So nobody's quite gone to get a hotdog yet. But right there thinking about it. So we're maybe about a third of the way through this thing which is to say about 30 to 35% of the products on the market right now contain a natural color solution, or I could say even more broadly a non-synthetic colored solution. We do not expect any sort of legislative change date from any jurisdictions outside of Europe, which is to say this will continue to be a long burn it'll continue to be a consumer-driven trend rather than a government-mandated law as we saw in Europe. So I think the prospects are quite good we had an outstanding year natural colors. We were up 8% We we won many of the key off.

conversions

But with are very very strong number one presents and food colors, we have access to a great many customers not only those big multinationals but also a lot of these 50 customers who are very very aggressive about utilizing natural colors and and their Solutions. And so that's going to continue to be a real nice growth engine for us. But even in the fourth quarter where there was a lot of slow down a number of markets we were still up 4% So we have a very very good business platform. They're very technically driven. There's still a lot of activity around replacing titanium. Dioxide the good folks of California are trying to outlaw caramel and many applications. In fact, they they actually have and Proposition 65 so there's lots of opportunities for us to replace caramel. So very very good friends there for our business.

And we we think as I said that's going to be a real hit for us and continued. It's it's been a real hit for us and it's going to continue to be that way one other Trend. I would note in Europe. You'll hear this long-term coloring foodstuffs. Just think of that as kind of a more natural version of natural colors. We can some other time we can get into the regulatory nuances of what I mean by that but that would be the next wave that we see in Europe and and that's really been under way for several years, but that continues to pick up speed so that that means they're still very good growth prospects for Europe, even though Europe's in the 8th and half inning on on natural colors. They're probably like

they just sort of

In the national anthem and they're sitting down for the first Inning on coloring foodstuffs. I would say. Okay. No, thanks for the color on that. I appreciate it and finding the uh, Steve. I know the DS came in quite a bit at the end of the year or just wondering, um, how we should think about that going forward.

So a couple of things to point out on the on the balance sheet so for you know, a couple of the businesses that were seeking to the vet from an accounting standpoint, they've moved to a classification known as assets held-for-sale. So when you look at our balance sheet dollars, you know, some of the receivables inventory some of the other lines there's an amount that was reclassified onto this assets held-for-sale what I would point out. However is if you particularly on the inventory line, if you normalize that, you know, we as Paul mentioned I think in his comments we did a good job of bringing inventory down in the year. And so I think we took out about on a normalized basis as we took out about twelve or fourteen days of of inventory, but it's just looking at the balance sheet. It's it's difficult because some of those items are being reclast, but but if you adjust for that we did make that Improvement in inventory.

Okay, sounds good. Thanks again.

If they can a questions, thank you. Sure. Thanks Metro. Again is a reminder. If you'd like to ask a question, please press * then 1.

The next question will come from Heidi Western in with BNP. Paribus, please go ahead I did morning. Hi question. Is it possible for you to tell us what the growth rate of the group was excluding the businesses that are being sold? You said natural colors, I think was up 8% right for the month. You could even go business by business. Could you share that with us? Thank you. That's the first question.

Sure, so highly on the on the business has to be divested. You know, first off. I think Paul did a good job of talking about the Strategic rationale for that. You know, it'll just bring more Focus off to parts of the business where we have more differentiation. We lack scale there and and and most cases that those businesses had limited Synergy with the other parts of our business. But if you look back to this past year 2019 the 140 million of Revenue that we're testing depending on the quarter. It was probably down high single-digits to low double-digit sell. For instance. If you were to take the fourth quarter where a Consolidated Revenue was down one and half percent we would have been flat if we had not factored in these divested businesses so she could have a you know, between a 1 and 2% negative impact on the overall Revenue.

And so then pairing that with the rest of the businesses, I mentioned the natural colors was up 8% power flavors and extracts was up 6% for the month and 8% for the fourth quarter. So we were very pleased with that one our pharmaceutical business. We're we're selling flavors and natural colors and extracts that took up almost 20% It's a small business but it's a very strong growth engine for us the s&i business the natural ingredients business was up about a percentage point. We think that would be up much more than that in 2020. When you look at Cosmetics Cosmetics was down about 7% of the Year going to all these factors. We've talked about not only the terrorists but really this this moderating of demand and the makeup Market that that's really kind of been playing out over the last 18 months.

Uh, so those are some of the the highlights from the other parts of the business the flavor ingredients business. This is the one to sort of piggyback on on some of what's wrong. You said that's the part of the portfolio that was down down more than 10% Now, we think part of what gives me confidence that we will grow Revenue in flavors. This year's not only the quality of our wins. We're winning in flavors were winning and extracts those products that rely much more on technology application support good customer service is a good technical sales people, but we're finding ways to moderate the loss of some of these flavor ingredients and and I think that's going to be really really important as we move forward, but that's that's kind of some of the highlights of the businesses which when you kind of put them all together in that pot comes out to to where we came out and the quarter down about a percentage and a half dead.

Thank you. And then the next question is you said that you're quite optimistic on the Sni business. We saw that Indian onion prices are spiking. Does that impact them anyway?

You know that there's always the these products are always considered should be considered market products. However, India hath additionally been more of a domestic Market you recall from a couple of years ago. They're moved to introduce product into the was at the scale that they did was somewhat unprecedented nevertheless nevertheless onion raw material costs are up. I think that's been pretty well publicized in in the US and even China and and certainly do your point about India. And so I think that that is one of the factors that kind of hit us a little bit in Q4 because there is a lag between when you get off and when you can take price at times and so I think our our products continued to be very very competitive there and and I think that you would see us in a position wage

to grow Revenue

Not only in the onion category, but in garlic based on new wins based on pricing for sure. So there there's also some opportunities and and garlic as well, but I think yeah, it says a general statement. I would say sure you could say that bodes well for us.

So that's in terms of top-line and and your profits I guess will improve its improve in that segment because the prices will catch up with the inputs. Is that is that what you meant? Yeah. Oh Q4 to q1. Yes, I think as you think about Sni for the year, we would expect them to be certainly at the average and perhaps even a little bit above the average for the flavor group in general on Revenue, but there are higher costs that that we're seeing in the raw material of things. So we don't necessarily get into all the profit levers there within Sni, but we we should expect to see low-to-mid maybe even mid-single digit top-line growth in in the S and I which as you know is is about 30% of the flavor group.

Thank you. And then the last question I think in your earlier remarks. So actually it was in response to another question. You talked about new entrants and probiotics. Is this a relatively new trend as I thought you were customer base. There was quite Consolidated and in which regions are you seeing these new entrants? Emerge? Thank you.

So you're right. It is a very Consolidated industry. There's there's kind of three names that you know pretty well that that constitute the the majority of this Market nevertheless. There are many many startups many of them are ex from some of those top brands that that I've just referenced, uh, vying for a a position in the market. There's a lot of bacterial strains that have been developed in that are being used in the marketplace. So, you know, you you may see a fairly steady group of of backed up in in many probiotic products, but given the interest the end consumer interest in these and in live cultures in general there are literally hundreds of bacterial strains that can be developed for probiotics. And so I think it is on that.

concept

That you see many startups many a little bit more established brands vying for positions in the market in the US market for sure in the European market for sure. Those are really kind of our key Focus areas that we we pay attention to and really is where our business is today.

Thank you.

The next question is a follow-up from Brett Hundley with Seaport Global, please go ahead.

Hey, thank you for taking these. I just had two quick ones. You guys have given us a lot of good detail on the on the near-term and twenty twenty and thinking about the model, but I wanted to maybe have a quick higher-level discussion on Flavor margins real quick. Just given the commentary that we've had over the last five years. I think it'd be helpful to to revisit that and off, you know, if I exclude divestitures, can you just maybe address utilizations across your footprint and talk about what type of of OI margins might be possible for for this flavors business over the next two years or or five years as as investors reset kind of you know, what's possible for a business.

Yes.

So today flavors and extracts is about 40% of the flavor group.

About another thirty percent is s&i about another thirty percent of these flavor ingredients. That's kind of a broad breakdown of them flavors are certainly the most technically drink the ones that require the most Innovation application support customer support in general and and very very very high service levels suck now, certainly the high service levels and other features are are are clear in the s&i business, perhaps less. So in the flavor ingredients business given that you should expect and we do experience higher price points and higher gross margins in that flavor category. So those have been on a nice upward swing the revenue growth and and that's we're going to continue to push for is that mid and maybe even as you saw in the fourth quarter High single-digit flavor and extract growth

We think the extract.

Market is much more fragmented than the flavors market. And and this is an area that's not encumbered by course listings and other in my estimation factors that that limit competition in a particular field of specialty ingredients. So that said that's going to continue to be the focus area Sni continues to be a very very profitable business as well on the operating profit margin line. And so I think the the growth there we should expect to see a fair amount within America's much of that growth is being driven in the Americas right now. We still see good opportunities within Europe and we see very good opportunities within Asia for flavors of or extracts now,

What makes this what has been diluting that effort and I mentioned this in in the prepared comments, is these flavor ingredients. So if you can imagine a production plant that makes flavors by the kilo and makes flavor ingredients by the ton therein lies a little bit of the challenge of managing those two parts of the portfolio, which is why in part we we made the decision to digest to divest some of those flavor ingredient products. So as we do that and as demand reduces in Iraq for some of those flavor ingredient products, we've been reducing our fixed costs substantially to accommodate for lower demand and the market and and lower portion of our portfolio dedicated a flavor of a Guardians those well as you utilize your plant better lend itself to enhancing not only the flavor ingredient gross margin, but by virtue of a better utilized plant the flame

An extract gross margin as well. So that has been substantial.

Clouded and as much as we were losing flavor ingredient business and we're taking out fixed costs on the heels of that. This is why we have a little bit of this overhang here in q1, right despite the fact that we we we believe we're going to be up on Revenue in flavors in q1. We would still have a little bit of that overhang from the lower plant utilization on account principally of these flavor ingredients. So the name of the game is to continue to shrink that flavor ingredient production footprint so that we have better utilized plants off lending itself to much more per unit gross margin improvements across flavors and flavor ingredients. So getting to the real Crux of your question, can we still get to a 20% operating profit margin in the flavor group will certainly we can and certainly when you look at the flavor part of that portfolio?

That is nearer about where we are actually able to achieve and so as we continue to moderate the effects of these flavor ingredients, I think that's going to be quite helpful to get us there. So first things first, let's be up on Revenue profit will follow so we expect profit to follow as we get later into the years and then because we've taken out these fixed costs because we've moderated in our sg&a, we would expect that the operating profit leverage that we get from any incremental Revenue dollar of Revenue would be would be very very strong. So we we expect a very good back half of the year for that reason and I think that you would begin to see a significant Improvement in the ebit margin of the flavor group.

The long answer but I think I got where you were going after their you definitely did and it was very good color at least for me. So I appreciate it. And then just in the interest of time just one quick follow-up. I have faith mentioned yesterday that they saw an inflection point mid Q4 with regards to flavor sales to large MNC customers. Are you guys known noticing any of this either in food and beverage colors or any other parts of your portfolio?

Well, I think perhaps one of the things that so I guess maybe not really, you know, we don't necessarily sell flavors to a lot of multinationals to begin with. We really focus more on those B's and C's and and as you can see it was really the driving factor in our our flavors growth, I think on the color side, but I would tell you that there's certainly been some activity amongst the big multinationals. They they were a couple of key conversions from synthetic to to Natural last year in 2019 in June nineteen, but I would still say them that the drivers are these B&C these local and regionals for sure, you know as we look at Nielsen data off for a lot of these markets, you know, I look at yogurt still down by 4% still a market that's kind of dominated by larger players ice-creams down.

Is down cereals down and these are all.

Volume declines I think in some cases the the multinationals maybe up on sales but they're down on volume. So I I don't know I you know as I think about our business, I didn't see anything that was significant in in in in call and and which case I could call it an inflection point so it's a maybe it's a matter of perspective. But yeah. Yeah, I I hope he's right know for sure and and you guys do operate a different business. I was just curious if you had seen some of that elsewhere, but I think there are other drivers on on the color side for you. So I appreciate the comments and and thanks for the follow-up and one other thing on that bread and and this could be inferred from what many companies are saying but products churn was quite significant in 2019. And and the definition that I have for product churn would be products get launched and they get killed off.

continued in three months

Or it's a limited-time offering it was only intended to be out there six months or a year. The rate of attrition was significant last year the highest I've seen in in many many years it perhaps even ever now some of this is the when you get B&C customers. They are quicker to launch in general and they are launching more and and even more unusual products in my opinion in in many of these markets. So the failure rates can tend to be very very high. So in order to cover that significant efficient rate, you gotta have big wins. Our win rate was quite strong in the company last year. But what was happening was there was a lot of Market churn so that would be a key factor. I think you you want to be looking for in twenty-twenty has Market churn of products subsided or is it still remaining rather elevated and I could give you more color on that wage.

The year goes on one other thing, too.

Just to clarify an earlier comment. I made less died create any sort of consternation that Proposition 65 in California with respect to the use of caramel colors principally in colas and other products. Technically The Proposition 65 is just a warning on the product page. It does not Outlaw caramel for those products. So I just wanted to clarify that one, but nevertheless a warning made Drive many customers to to want to replace caramel in their products. And and that is something from an innovation standpoint. We spent many years refining and developing. So just wanted to offer to make that clarification.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

Okay that will conclude our call. I thank everybody for participating today. And if you have any follow-up questions, we can handle those after the call. So, thank you.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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