Operator: Good morning, everyone, and welcome to the Sensient Technologies Corporation 2012 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.

Stephen Rolfs: Good morning. I'm Steve Rolfs, Vice President, Administration of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2012 second quarter financial results.

I'm joined this morning by Mr. Kenneth P. Manning, Sensient's Chairman, President and Chief Executive Officer; and Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer. Also with us today are Paul Manning, President of the Color Group; and Jim McCarthy, President of the Flavors & Fragrances Group. Earlier today, we released our 2012 second quarter financial results. A copy of the release is now available on our website at sensient.com.

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

Kenneth Manning: Thank you, Steve. Good morning. Sensient delivered a solid performance in the second quarter 2012, establishing an all-time quarterly high for earnings per share. As reported, net earnings per share was $0.70, an increase of 4.5% from $0.67 reported in the last year's second quarter. The impact of foreign currency reduced second quarter net earnings by approximately $0.04 per share. The second quarter results also include a onetime legal costs of $0.02 per share related to the company's effort to recover some of its costs from a previously settled environmental claim. Excluding the impact of foreign currency and the legal costs, earnings per share increased by 12% in the quarter.

The Color Group delivered another strong performance in the second quarter, reaching an all-time high for operating income. Local currency revenue growth was 2.5% in the second quarter, and operating income increased 11.2% in local currency terms. The Color Group achieved an operating margin of 20.3% in the second quarter, up 170 basis points from the 18.6% reported in the last year's second quarter. All of the group's businesses are focused on strong profit growth opportunities.

We expect to deliver mid- to high-single-digit growth in local currency, and we believe that the operating margins achieved this quarter are sustainable. The Flavor & Fragrance Group reported local currency revenue growth of 1.3% from the second quarter. Operating income was slightly lower due to soft markets in Europe and higher raw material costs. We expect the Flavor & Fragrance Group to achieve mid-single-digit revenue growth in local currency in the second half of 2012.

The Corporate & Other segment reported a local currency revenue increase of approximately 7% in the quarter, driven by strong performances from Thailand and the Philippines. Cash flow from operations was $40.1 million in the second quarter, an increase of 4.5% over last year's results. The current economic conditions are challenging, but our balance sheet is strong. Our strong financial condition allows us to reinvest in the business and return value to our shareholders.

We invested almost $50 million into capital projects in the first half of the year, and we expect this expenditure level to continue. In the past few years, we have invested heavily in our facilities, incorporating new technologies. We will continue to identify investment opportunities within our existing businesses.

We are also considering acquisition opportunities. We made 2 acquisitions in 2011, allowing us to gain full control of operations in key strategic markets. We continue to look for opportunities to improve our commercial technologies, product offerings and access to markets.

Increasing our sales coverage has been one of the key drivers of Sensient's success over the past few years. We have added more than 90 sales positions across the company since 2009, and we will continue to expand our sales force. We have returned value to shareholders by increasing our dividend and repurchasing shares. In April, we increased our quarterly dividend to $0.22 per share. This is the sixth increase of our quarterly dividend in the past 6 years, representing a 47% increase. We have also repurchased 460,000 shares this year, including 50,000 shares in the second quarter. We will consider additional share repurchases based on market conditions.

Our investment in the company will continue to drive our earnings growth, and I am very optimistic about the company's future. We are maintaining our earnings guidance, which is in the range between $2.50 and $2.59 per share in 2012. Dick Hobbs our CFO, will now provide you with the details for the quarter.

Richard Hobbs: Good morning. Sensient reported revenue of $367.8 million in the second quarter of 2012, compared with $377 million in the second quarter of 2011. Operating income was $54.3 million for both the 2012 and 2011 second quarters. Foreign currency translation significantly reduced both revenue and operating income in the quarter. Stated in local currency, revenue and operating income increased 2% and 5%, respectively, from last year's second quarter.

The second quarter earnings include legal costs of $0.02 per share incurred in the suit against one of our former law firms. The action related to significant environmental claims arising out of a 1988 transaction in which the law firm was the company's legal advisor. The company did not receive an award as a result of this action and has concluded its efforts to recover its costs in this matter. The underlying environmental claims were settled in 2009.

Interest expense was down 15.3% to $4.3 million for the second quarter of 2012 from $5.1 million in last year's quarter. The tax rates were 30.1% and 31.9% for the quarters ended June 30, 2012 and 2011, respectively. The tax rates for both quarters reflect changes in estimates associated with the finalization of prior year items and other minor adjustments. The 2012 rate also includes a change in the estimate of the current year effective tax rate. The tax rate for the remainder of 2012 is expected to be between 32% and 33%. Discrete items will be recorded in the period in which they occur.

Diluted earnings per share, as reported, were $0.70, an increase of $0.03 or 4.5% from last year's second quarter. Second quarter earnings, as stated in local currency, will be $0.04 per share higher than reported earnings. Excluding the impact of foreign exchange rates and the costs related to the legal action, operating income and earnings per share were up 6.9% and 11.9%, respectively, in the quarter.

For the first half of 2012, revenue as reported, was $733.4 million compared to $726.7 million last year. Operating income, as reported, was up 2.9% to $100.8 million from $97.9 million reported in the first 6 months of 2011. Foreign currency translation reduced revenue and operating income in the first 6 months of 2012 by approximately 3% and 4%, respectively. Stated in local currency, revenue and operating income increased 4% and 7%, respectively, in the first 6 months.

Interest expense was $8.8 million for the 6 months ended June 30, 2012, a decrease of 12.3% from $10 million reported in 2011. Diluted earnings per share, as reported, were $1.28, an increase of 6.7% from $1.20 reported in the first half of 2011. Year-to-date earnings as stated in local currency would be $0.05 per share higher than reported earnings.

Sensient's cash from operating activities for the second quarter of 2012 was $40.1 million, an increase of 4.5% from the prior year second quarter. The improvement was due to a lower use of cash for working capital needs in the second quarter of 2012, as compared to the prior year's quarter.

As previously mentioned, Sensient had several capital projects in progress to expand capabilities and improve efficiencies. Capital expenditures in the second quarter of 2012 were $30.9 million, compared to $13.6 million in the 2011 comparable quarter. For the 6 months, capital expenditures were $47.8 million in 2012 and $23.8 million in 2011. The company also repurchased $17.1 million of its stock in 2012 primarily in the first quarter. As a result of these items, debt increased to $357.8 million at June 30, 2012, from $331.4 million, 1 year ago. The debt-to-capital ratio was 25% at June 30, 2012, and debt-to-EBITDA was 1.5. Sensient's balance sheet remains very strong.

I will now take a brief look at the results of our operating groups. Revenue, as reported, in Sensient's Color Group was $127.9 million and $132.4 million in the quarters ended June 30, 2012 and 2011, respectively. The group reported all-time high operating income of $25.9 million, an increase of 5.3% from $24.6 million reported in last year's second quarter. Foreign currency translation decreased revenue and operating profit in the quarter by approximately 6%. Stated in local currency, revenue and operating income increased 2.5% and 11.2%, respectively.

Second quarter operating margins increased 170 basis points to 20.3%, marking the first time since 2003 that the margins have exceeded 20%. For the 6 months -- first 6 months of 2012 and 2011, Color Group revenue, as reported, was $259.2 million and $258.1 million, respectively. First half operating income, as reported, increased 9.5% to $51.5 million from $47 million reported last year. Foreign currency translation reduced both revenue and operating income by approximately 4%. Stated in local currency, revenue and operating income increased 4.6% and 13.8%, respectively, in the first 6 months of this year.

The considerable improvement in margins for the group was primarily attributable to an improved product mix, as the group focuses on higher value products and divest margin business. These results are particularly strong in the global food colors and inks businesses.

Revenue, as reported, for the Flavors & Fragrances Group was $218.9 million in the second quarter of 2012, compared to $225.8 million 1 year ago. Operating income, as reported, for the second quarter was $33.5 million in 2012 and $35.9 million in 2011. Foreign currency translation decreased revenue and operating income in the second quarter of 2012 by approximately 4% and 3%, respectively.

For the first 6 months, revenue, as reported, for the Flavors & Fragrances Group was $433.6 million and $431.8 million in 2012 and 2011, respectively. Operating income, as reported, was $62.5 million and $64.5 million for the 6 months ended June 30, 2012 and 2011, respectively. Foreign currency translation reduced the 6 month revenue and operating income by approximately 3% and 2%, respectively. The group saw softness in certain European markets in both the quarter and 6 months ended June 30, 2012. In addition, inventory destocking by key customers and higher raw material costs contributed to the reduction in operating income.

Revenue in the Corporate & Other segment was up 6.1% to $38.5 million in the second quarter of 2012, compared to $36.3 million in the prior year. For the 6 months ended June 30, 2012, revenue increased 6.7% to $75.7 million compared to $70.9 million last year. This segment includes the company's operations in Asia Pacific and China. The company's Flavors operations in Central and South America are also there. Growth in the segment was driven by the Philippines and Thailand. We are maintaining our guidance for 2012 diluted earnings per share to be between $2.50 and $2.59.

Stephen Rolfs: Thank you very much for your time this morning. We will now open the call for questions.

Operator: [Operator Instructions] Your first question comes from the line of Christopher Butler, Sidoti & Company.

Christopher Butler: Just to start with, as we look to the second half of the year, could you touch on any kind of impact that you would face from a challenging harvest with the drought conditions here in the U.S.?

Richard Hobbs: We're not directly affected by that in our businesses because where we do have operations, where we're controlling the farming activities is all irrigated. And we don't anticipate any issue there.

Kenneth Manning: And the third quarter is looking good so far. So I know that's going to affect people, but it doesn't seem to be affecting us, Chris.

Christopher Butler: And you're not worried it could affect your customers who then purchase less from you...

Richard Hobbs: We have some hedging on things like corn syrup through the end of the year.

Kenneth Manning: But this is not a big issue for us at all.

Christopher Butler: And with the gross margin improvement that we've seen, you did mention product mix being a big component of that, and we've definitely seen that over time. But if we look at the improvement on a sequential basis, I can't see that -- I can't imagine that there's a big change in product mix from the first quarter to the second quarter. Could you give us some detail there?

Kenneth Manning: Paul, why don't you take that?

Paul Manning: Sure. I think the change in product mix as you can imagine is kind of an evolutionary process. And we are very strongly directing each of the businesses, pharma and food, cosmetics, et cetera, towards this expectation and towards the sale of products that are very consistent with our strategy, and therefore are value proposition. So I think you will continue to see continued improvement for the rest of this year and certainly into 2013 and beyond.

Christopher Butler: And to what do you attribute then the 110 basis point improvement sequentially on gross margin for the company?

Richard Hobbs: Looking at the total company, there's no question that the Color Group was a big factor in that improvement. And that was the biggest driver in -- as Paul just mentioned, that is expected to continue going forward and we're feeling good about the third quarter, it's looking good as we start out. Things are going strongly for us and so ...

Kenneth Manning: Yes. Chris, I think the term was used we're divesting ourselves of low margin business. And I think that says it all.

Christopher Butler: All right. Now I see. And can you talk about the softness that you spoke to and the destocking, give us a little bit more color on that front?

Richard Hobbs: Yes. Certainly, we did have had some softness within the Flavor Group with some of those -- the product lines within the Flavor Group. But again, we do feel a lot of that is behind us and we're feeling good about the rest of the year.

Kenneth Manning: Yes, we are.

Operator: Your next question comes from the line of Edward Yang, Oppenheimer.

Edward Yang: Just piggybacking on the prior question on the gross margin improvements sequentially, isn't some of that attributable just to seasonality? It seems like the last couple of years, you always seem to have stronger margins in the second quarter relative to the first quarter.

Richard Hobbs: Yes. Certainly, there is -- the second quarter, Ed, is the strongest quarter. There's no question about that. And so that does have a positive impact, a positive sequential impact. Certainly, that is something that is a factor.

Kenneth Manning: But the bigger factor is clearly that we're not taking a low margin business. That's the big factor. That is a strategic environment that we're following.

Richard Hobbs: But clearly, going back and looking at last year in the quarter, and that's a good comparison to compare a year-to-year, we are up 50 basis points for the whole company.

Edward Yang: Okay. And you expect the Color operating margins to remain above 20%?

Richard Hobbs: No. I just got -- I correct it, we're up 150 basis points in the last year.

Kenneth Manning: Yes. Well, Paul, why don't you take that last question?

Paul Manning: Yes. I think that we've demonstrated now some continuity in the higher operating margins. I would tell you that we would certainly in -- be in the vicinity of 20% moving forward. I think this is -- the second quarter is now the eighth quarter in a row of double-digit operating profit growth in the Color Group. So I think between our ongoing sales efforts, we've expended tremendous amounts with respect to capital. And I think what these really communicate is we see huge opportunities in the marketplace. Now those opportunities don't necessarily develop this week or even next quarter, but they do develop. And I think we're seeing that with respect to our food colors and our inks, which are up very, very strongly on operating income due to new sales and also, again, improvement in the mix. And really focusing on those parts of the market for which we have a very strong position to our customers and certainly with respect to the competition.

Edward Yang: And on Flavors, that was -- that saw some decline year-over-year and you mentioned Europe and raw materials and destocking. Within Europe, how has that impacted the margin in that business? I know your margins in North America are pretty impressive, but that's been an area that's been lagging. Has that taken a step down with some of the macro pressures?

Kenneth Manning: Yes. If you look at Flavors, Flavors had a much tougher time in Europe. Colors seem to do well worldwide. We were -- that's been our superstar. But Flavors, we are running into some headwinds in Europe.

Richard Hobbs: We are, Ed. As we look at Q3, we look at the Q3, we are expecting -- certainly, as Paul mentioned, the margins are going to be up again in Color, and we expect to maintain our margins in roughly that 15-or-so percent range.

Edward Yang: Okay. Got it, Dick. And just on the top line comments that you had, are you expecting the mid-single-digits organic revenue growth both for -- in the second half for both Flavors and Color and what would account for that acceleration?

Richard Hobbs: What we're expecting in local currency, of course, we're expecting growth certainly for the Flavor Group to be in that mid-single-digit area for the rest of the year. We're expecting an increase in the Color Group, actually, mid- to high-single digits in -- with looking at the profit by itself, probably double-digits are possible.

Edward Yang: And again, what would account for the acceleration? Is it just easier comps or less destocking or economic pick up?

Richard Hobbs: Well, specifically in the case of color, as I said in my prepared comments, there has been a very concerted effort to remove low-margin products and move into higher margin products. And Paul may want to ...

Kenneth Manning: Paul, do you want to add anything to that?

Paul Manning: Yes. I think, certainly, that reduces your total revenue output. The way we think about this is we want to drive operating profit. So yes, at some point you've divested the lowest of your low margin and less interesting business, and then you stop taking away from the top line growth that you are still generating. And I think that's why you're going to see the change. Again, there's only so much low margin that you're going to process through and then you start to really benefit from your ongoing business closings.

Edward Yang: And similar dynamic in Flavors as well?

Richard Hobbs: Certainly, in Flavor, we've moved technology within the group and ...

Kenneth Manning: Maybe Jim would like to comment on that.

Richard Hobbs: Yes, Jim. You want to comment on that?

James McCarthy: Sure, Dick. I think that we continue to look at new products and developments are. We have a strong pipeline going into the second half of the year. And we think that based on our new product development program that we're going to see improved results moving forward.

Operator: [Operator Instructions] Your next question comes from the line of Summit Roshan, KeyBanc.

Summit Roshan: Just going back to the Colors business. On the top line, I'm glad to see some color that you'll be kind of reaccelerating on the top line growth there on the back half of the year. Just wanted to get a little bit more color on what happened this quarter and more specifically, the delta in growth from -- what's changed, really, from the first quarter coming into the second ...

Kenneth Manning: Paul, why don't you take that?

Paul Manning: Well, I guess I would be consistent with some of the previous concepts we've introduced and discussed here. There is generating operating profit and there is generating revenue. And from our standpoint, we have done a fairly good job of generating the operating profit through new sales. I think, once again, when you start divesting yourself of business, you're losing revenue. You're not necessarily losing a whole lot of operating profit, but you are losing revenue. And we are comfortable with how we are managing this process. We're comfortable with the operating profit growth that we're seeing. We believe these results are sustainable. And I think, similar to my previous response, as you start to clean out that lower end of your portfolio, then you start seeing the acceleration of the top line growth. But the top line growth must come at a profitable level. And that is very much the way we think about this process. We're not just going to generate revenue to generate revenue.

Summit Roshan: Sure. Over the past few quarters, the product rationalization, I think that's been a topic that's come up, I mean did that accelerate at all going to the second quarter or maybe some of those product lines that you divested were just seasonally stronger in the second quarter?

Paul Manning: Yes. I think you're exactly right. It's really both of those factors. There was some acceleration. There is some seasonality of certain products. And so I think, yes, you're absolutely right. I think that's really what made Q2 a little bit different from Q1 but certainly, conceptually, the same thing.

Summit Roshan: Okay. So I mean, quantitatively, would that be something to the effect of the 1% to 2% impact on the revenue line in the second quarter, if we've excluded those divested businesses?

Paul Manning: No. It would be more than that. It would be several multiples. I would have to give you a specific number. I'll get back to you about a specific number, but it's several multiples.

Summit Roshan: Okay. Great. And just some clarification on the guidance range, $2.50 to $2.59. Does that include that $0.02 legal charge or do we need to back that out to compare that on an apples-to-apples basis?

Richard Hobbs: Well, we have certainly used our as reported number in our range. And so that number is in that range of -- for the guidance for the year.

Summit Roshan: Okay. And then, I mean also kind of relating to the guidance here, foreign exchange has been -- seemed to gotten a little bit worst here heading into the year, while guidance has remained about the same. Is that speaking to your confidence, maybe, on underlying business growth?

Kenneth Manning: Yes. I would say it is. The business has really never been stronger. Yes, we're going to have a headwind with foreign exchange and no one can say where that's going to go ultimately. But at the end of the day, we're very confident about that guidance range. Very, very confident.

Richard Hobbs: Fortunately, as we look at the year and we look at where the currencies are right now, that difference, that hit we're getting narrows as we get towards the end of the year and we get closer to lapping the currency amounts. And it's anyone's guess, for example, where the euro is going to go. It was down a little bit more today. But we really can't predict it, it's based on a lot of events in Europe. But certainly, certainly this year, we have, like most companies, have been particularly hit by it. But it will narrow and we will lap it as we get to the end of the year.

Kenneth Manning: But we will make our guidance.

Operator: [Operator Instructions] As there are no further questions, I would now like to turn the conference back to the company for closing remarks.

Stephen Rolfs: If anyone has a follow-up call -- or question after the call, please call the company. I'd like to thank everyone for participating this morning, and that will conclude our call. Thank you.

Operator: That concludes today's conference call. You may now disconnect.