Sensient Technologies Corp (SXT) 2014 Q2 法說會逐字稿

Good morning, everyone, and welcome to Sensient Technologies Corporation 2014 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.

Good morning, I'm Steve Rolfs, Senior Vice President Administration of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2014's second-quarter financial results. I am joined this morning by Paul Manning, Sensient's President and Chief Executive Officer, and Dick Hobbs, Sensient's Senior Vice President and Chief Financial Officer.

Yesterday we released our 2014 second-quarter financial results. A copy of the release is now available on our website at www.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 Paul Manning.

Thanks, Steve. Good morning. Sensient reported second-quarter diluted earnings per share of $0.81 excluding the impact of restructuring costs and other items. This is an increase of 9.5% over last year's second quarter excluding restructuring costs. We continue to see strong profit growth and improving margins in each of our operating groups.

Overall, adjusted operating income increased by 10.6% and adjusted operating margins improved 170 basis points to 16.3% in the second quarter. Cash flow from operations was also strong improving by 11.6% to approximately $50 million in the quarter.

Revenue was effectively flat in the quarter as we continued to shift to value-added and technology-driven products while actively rationalizing non strategic and low margin business. Excluding the impact of these efforts, revenue would have increased by approximately 1%.

This rationalization process is substantially completed in the Color Group where the impact was approximately 1% in the quarter. The Flavors and Fragrances Group is in an earlier stage of the process and the impact was more prominent, about 3% in the quarter.

Sensient's Color Group is the global leader for food and beverage colors and we have the unique ability to provide both synthetic and natural color solutions to our customers. We're also the global leader for digital links and cosmetic ingredients and have strong capabilities in pharmaceutical excipients and industrial colors.

The group delivered outstanding results in the second quarter reporting higher revenue, solid profit growth and stronger operating margins. Operating income increased 8.5% and operating margins increased 100 basis points to 23.2% driven by strong results from the digital inks and the food and beverage color businesses.

The Flavors and Fragrances Group also had a strong quarter as we continued to see benefits from the changes in strategy we have been implementing. We aligned our commercial and technical activities around common product lines and we have added sales and technical talent to better serve the needs of our customers. We will continue to transform and strengthen our product mix and we are also reducing costs.

As a result of these efforts, operating income increased by approximately 5% in the second quarter and operating margins improved 140 basis points to 15.5%. Several of the businesses delivered double-digit profit growth including the natural ingredients, North American beverage, North American savory and the European beverage and the European sweet flavor businesses.

We still have significant work to do but we are very optimistic about the opportunities to grow each of the groups' businesses. We are on track with our guidance to achieve operating margins in the Flavor Group in the high teens within the next few years.

As I mentioned earlier, cash flow increased almost 12% of the quarter. The increase in cash flow from operations was driven by our strong earnings. While we are pleased with this result, our working capital levels are too high. We expect to see additional improvements in cash flow for the second half as we focus on reducing inventories and receivables.

The Company has delivered solid results in the first half of the year and I'm confident in our expectations for the remainder of 2014. Therefore we are increasing our adjusted EPS guidance to be in the range of $2.95 to $3.02. Our previous guidance was $2.92 to $3 per share.

Sensient is committed to providing value to our shareholders. Earlier this year we announced several plans to enhance shareholder value including a restructuring program, plan to repurchase shares, a dividend increase and governance improvements. Let me provide an update on each of those items.

We have begun implementing some parts of our restructuring program to eliminate underperforming operations and consolidate manufacturing facilities which will improve efficiencies within the Company. We have identified the operations that would be affected by this program and are quickly moving forward in those areas where the transition is achievable in the near term.

Other elements of the restructuring program are more complex and we are carefully working through our plans in these areas. We're being very deliberate to ensure that we are effectively transferring our capabilities and minimizing disruption to the business and to our customers. We have identified additional opportunities to streamline operations and as a result, we have expanded the number of facilities to be consolidated. We now expect to incur pretax charges between $120 million of $130 million and generate annual savings of approximately $30 million upon completion of the program. We still expect all significant activities to be completed by the end of next year.

The restructuring program will create benefits beyond cost savings and one of those benefits will be lower capital expenditures for 2014 and beyond. We will achieve this reduction by focusing our investments on fewer facilities. We are reducing our guidance on CapEx to a range of $75 million to $85 million for 2014 which is down from our previous guidance of between $80 million and $100 million. The lower capital expenditures, along with reduced inventories and receivables, will provide incremental benefits in our continuing efforts to improve return on invested capital.

During the first quarter we committed to repurchase up to 2 million shares of the Company's stock over a 12-month period. I'm very pleased to report that we completed this effort in the second quarter. Yesterday, the Board of Directors also approved a new share repurchase authorization allowing the Company to purchase an additional 5 billion shares. We will consider using this authorization if we generate cash in excess of our needs for capital investments, dividend increases and acquisitions.

The Board also increased the quarterly dividend to $0.25 per share in March and the first payment of the higher dividend was made on June 2. Including the share repurchases, Sensient will return approximately $155 million to shareholders in 2014.

The Board recently recommended changes that will provide for a majority voting standard in uncontested elections replacing the Company's current voting standard and Director resignation policy. This change is in addition to recent changes including the appointment of Dr. Wedral as independent lead director and other significant enhancements that are noted in our press release. We have also made significant progress in our evaluation of potential candidates for the Board of Directors which will allow us to add new perspectives as we continue to refresh our Board.

Strategy is working, we have continued to deliver both operating profit growth and improved margins and recent actions demonstrate our ongoing commitment to provide sustainable long-term value to our shareholders. Dick Hobbs will now provide you with the details for the quarter.

Good morning. Sensient's revenue was $374.7 million for the second quarter of 2014 compared to $378.8 million reported in the second quarter of 2013. Operating income as reported was $48.2 million compared to $48.7 million in last year's second quarter. The second quarter operating results include $13 million of restructuring and other costs this year compared to $6.6 million of restructuring costs recorded in the second quarter of 2013. These costs are reported in the corporate and other segment.

Excluding the restructuring costs, operating income was $61.2 million, an increase of 10.6%. Interest expense was $3.7 million, down 7.2% from $4 million reported last year. The tax rates, excluding the restructuring impact in both periods, were 30.8% in the current quarter and 27.9% last year's second quarter.

Diluted earnings per share as reported was $0.59 per share compared to $0.65 last year. Excluding the restructuring impact in both periods, earnings per share was $0.81 in the current quarter compared to $0.74 in last year's second quarter, an increase of 9.5%. Foreign currency translation increased revenue and operating profit by less than 1% in the current quarter.

For the first six months of 2014, revenue was $742.8 million compared to $744.4 million last year. Operating income as reported was $49.8 million for the first six months of 2014 compared to $85 million last year. Excluding the restructuring impact, operating income grew by 10.6% to $115.5 million in the first six months of 2014.

Interest expense was $7.8 million for the six months ended June 30, 2014, a decrease of 5.1% from $8.3 million reported in the comparable period last year. The tax rates, excluding restructuring, were 30.2% and 29.5% in the first six months of 2014 and 2013 respectively. Diluted earnings per share as reported was $0.55 per share in the first six months of 2014 and $1.80 per share in the comparable period 2013.

Excluding the impact of restructuring costs in both years, year-to-date earnings per share increased 11.8% to $1.52. Sensient's cash from operating activities for the first six months of 2014 was $69.4 million which is in line with the $70 million reported in last year's comparable period.

Total debt as of June 30, 2014 was $495 million compared to $373 million as of June 30, 2013. The increase is mainly due to the Company's share repurchase program. As a result of the debt increase, debt to EBITDA increased to 1.8% as of June 30, 2014 compared to 1.5% as of June 30, 2013. Our strong cash flow and balance sheet enable us to grow the business and return cash to shareholders.

I'll now take a brief look at the results of our operating groups. Sensient' Color Group revenue increased 3.9% to $133.2 million from the second quarter of 2014 from $128.2 million in last year's second quarter. The Color Group reported record second-quarter operating income of $30.9 million, an increase of 8.5% from the 28.4% reported in last year's second quarter.

Operating margins increased 100 basis points to 23.2% in the second quarter of 2014 from 22.2% in the comparable period in 2013. Strong performances in digital inks and the food and beverage colors businesses drove the improvement. Foreign currency translation increased revenue by approximately 1% in the quarter and operating income by 1.5%.

Revenue for the Color Group was $266.9 million and $257.7 million in the six months ended June 30, 2014 and 2013 respectively. Operating income was up 9.3% to $60.3 million in the first half of 2014 compared to $55.1 million in 2013. Foreign currency translation did not have a significant impact on revenue or operating income in the first half of 2014.

The Favors and Fragrances Group reported revenue of $216.2 million in the second quarter of 2014 compared to $226.6 million reported in the second quarter of 2013. Operating income increased 4.9% to $33.6 million over $32 million recorded in last year's second quarter. In local currency, operating profit increased by 5.3%.

Operate margins increased 140 basis points to 15.5% in the second quarter of 2014. The natural ingredients, North American savory, North American beverage and European beverage and sweet businesses all reported double-digit profit growth in the quarter.

Revenue for the Flavors and Fragrances Group was $429.6 million for the first six months of 2014 compared to $442.5 million in the first half of 2013. Operating income was $63.5 million, an increase of 5.1% from the $60.4 million reported in the first six months of 2013. Foreign currency translation did not significantly impact revenue or operating income in the second quarter or first half of 2014.

Revenue in the corporate and other segment, which includes the Company's operations in the Asia Pacific region and certain flavor operations in Central and South America, was up 3.6% to $39 million in the second quarter of 2014 compared to $37.7 million in the prior year. In local currency revenue grew by approximately 7%.

For the first six months ended June 30, 2014, revenue was $74.3 million up 2.5% from the $72.5 million reported in 2013. Revenue growth for the first half was also up 7% in local currency as sales were strong throughout the Asia-Pacific region.

As Paul stated, Sensient now expects 2014 diluted earnings per share, excluding the impact of restructuring charges, to be between $2.95 and $3.02. Previously this range was $2.92 to $3. Thank you very much for your time this morning, we will now open the call for questions.

(Operator Instructions)

Mike Sison, KeyBanc.

Hey, guys, nice quarter.

Thanks, Mike, good morning.

Paul, in terms of the manufacturing rationalization, can you remind us roughly how many plants you have now and then ultimately where you'll end up over the next year or so?

We've got about 40 today. I think net of this change will be in the low 30s, we were looking at about eight plants as part of this part two. From part one of last year, for lack of better description, we would have been in the mid 40s. So when you take the two restructurings together, we're taking out and consolidating between production and some other offices and the like, 14, 15 sites.

Great, great. And then in the increased savings from I think $25 million to $30, million was that primarily adding a couple of the facilities to the mix or is there more headcount reductions that are associated with that?

It is a little bit of both. The bigger impact in the first range of $20 million to $25 million and then really bringing it up closer to $30 million, I think it is additional sites was the big impact. But there were a few incremental headcount reductions that we identified.

Okay, great. And then in Flavors and Fragrances, really nice progress there on the margin front, but can you talk about some of the areas there maybe are growing, it's hard to see with the product rationalization maybe some of the areas that could gain some momentum as we head into the next year or so?

Sure, I think as a general statement, as we looked at those businesses a year ago and even further back in time, think broadly speaking it was that focus on ingredients which was really capping us from a margin standpoint and from a growth standpoint. And so as I stated from a strategic standpoint, it's about how do you take these ingredients, identify opportunities to utilize that production knowledge to make better ultimate [end] flavors.

And so to more directly answer your question, I think we're seeing quite a bit of progress in our beverage flavor businesses. We see lot of very broad based customer group, lot of startup type customers, a lot of customers that are developing new products, looking for technical advances and they're willing to move fairly quickly relatively speaking to some of say the other larger beverage companies. So we're seeing a lot of very good progress there.

We're seeing very good progress in our natural ingredients business, the more agricultural-based area. We've improved our inventory positions considerably in that business, which as you probably can attest to from the past, if you have the inventory you can sell it, if you don't, you're waiting until next crop. So I think that's been as much of a supply chain improvement as anything else.

But we're also seeing very good progress in our savory flavors business where we have historically focused on that yeast extract and hydrolyzed vegetable protein part of the market. And we're taking that knowledge and that expertise and we're leveraging that to make in very simple terms, better savory flavors. So I think that's where we're going to continue to see some improving momentum, generating new wins there.

And sweet flavors which had traditionally been very strongly oriented perhaps even exclusively oriented in some markets on dairy products, we've brought in our view of the world there to include other segments such as bakery and confectionery, bakery be the larger of those two, to generate the improvements there. Because there are a lot of challenges in the dairy market as you know now. And so I think the need to diversify is apparent from that standpoint. But there's also tremendous opportunities. And here again to the extent we could leverage the success we've had in our Color Group in those segments, if we can leverage that in the Flavor Group I think we have some very good opportunities there also.

Great, thanks, guys.

Edward Yang, Oppenheimer.

Paul it's really nice to see the continued better efficiency in the CapEx spending side. The new outlook for $75 million to $80 million versus previously you were at $80 million to $100 million, that's a pretty significant cut. At one point I think you were looking for peak spending a couple years back maybe getting up to $140 million, although you never really approached those levels. So it's nice to see that improvement on a free cash flow and the returns and invested capital side but maybe talk us through with some more granularity in terms of where are you finding these opportunities to cut, what are some marginal opportunities that you might have pursued before but thought better of from a return standpoint to get that CapEx level down?

Sure, I would say we're now in the $75 million to $85 million from the $80 million to $100 million. One of the big items there was the fact that we have expanded our restructuring program. And one of the goals of that restructuring program is to simplify the production footprint so that we can be much more focused in our CapEx. We can also simplify the operation, we could remove a lot of inefficiencies.

So I think fewer sites that lends itself to less capital spending, I would say that would be point number one. I would also say, and I mentioned this on some previous calls and let me be a little bit more explicit than perhaps I was in the past. A lot of the CapEx from the previous say three to five years was really oriented towards raising the level of standards in our facilities, making the investments that perhaps we had not, not only to be market leaders from a product safety and a GMP standpoint, in other words quality in our plants. Because I think there's a lot of value there, not only risk mitigation but in terms of marketing your brand and your business.

So we put a lot of money into these plants over the last few years to really in my words raise the standards. And I think a lot of that work is what really elevated that spend to as we had last year just over $100 million. That was really a peak year.

And so once you've made those investments, you've made those adjustments and you've recalibrated standards, I think you now reach a point where you settle into a much lower level. Which is why I trended towards the $80 million to $100 million. And then again with the additional sites we've identified, I can lower that further not only for 2014 but I feel like at this point, in 2015 I think $75 million to $85 million is a good range to be working with.

Thank you for that. Going forward, $75 million to $80 million is that a level that you think levels out from here? Because actually going back to the [$96 million] up until the 2010 years, your CapEx spending was actually more stable around the $40 million to $50 million level. So is $75 million to $80 million a good sustainable run rate or will you find some additional areas to get efficiencies?

Well I think this, I think we're going to continue to find efficiencies. We're finding more and more synergies between Flavors and Colors. For instance we're in the process of opening up a facility in South Africa which was really built from the ground up to be a combined Color, Flavor operation. We did that in Brazil and we're identifying other opportunities to do that throughout the business as part of the ongoing restructuring. So I think that's going to really enable us to be even more efficient with the spend.

Now I think to me, that's always first and foremost where want to use our cash is internal investment. And we continue to have very good opportunities, ROI style investment opportunities, which as you look at the experience in the Color Group, really drove our ability to grow the margins, to grow the operating profit because we introduced a much higher level of sophistication into some of those businesses.

I think there was an analogy there in Flavors. However, that's not to tell you that we're going to go to $100 million again, but that's to tell you that I think as we move forward more and more of the CapEx is going to be ROI related. And to me, if I continue to have very good ROI projects, $75 million, $85 million if they're a much higher ratio of ROI, I think we'd all be happy as shareholders with that.

But we're going to be very, very thoughtful, we do need to deliver on the capital we've made investments in already, and so that is first and foremost. We built bonuses around that, we built operations around that, we built a strategy around more efficient capital use. And so yes, I think we'll continue to trend out.

Will we level out to $40 million to $50 million? I guess I would say, I hope not because perhaps that would suggest that we would have a lower level of ROI projects that we've introduced into the business. But it's a fair question, I think as we continue to provide guidance, I'll continue to share where we are with respect to ROI style projects over say brick-and-mortar and quality GMP style projects.

And Mike noted the improvement in his question on Flavors and Fragrances margin, it's nice to see that third consecutive quarter of year-over-year margin increase. Can you segment out the improvement in terms of I know in the past, and you probably still do have a pretty big margin differential between North America and Europe.

Yes, I would certainly say that we're really closing the gap on that today. When I talk about the overall margins for the Flavor group, where our goals are, we talk in terms of a 40% plus gross margin and a 20% operating margin as our internal expectation. And certainly the expectation you as shareholders and others should have for us for this business because it's very achievable.

And so I would tell you, we've come up with 40% and 20% because it's the experience that we have today in many of our businesses. Many of our businesses, particularly in North America, are already operating at that level of operating margin. Europe is where the opportunity is and I have no doubt that we have all of the infrastructure and the technology and the people to achieve that goal in Europe.

So yes, Europe is definitely the opportunity, but we have shown very good progress there. We continue to show good progress, we reorganized that geography based on a broader geography and a customer segment rather than the country manager approach which we had before. And we're starting to see and we continue to see some real advantages there, again in terms of optimizing the operation, the supply chain, the customer relationships, the MPD. So I'm feeling good about our prospects for continuing improvement in Europe.

Okay and finally for me, Paul, maybe share your thoughts on industry consolidation. You saw earlier this month ADM bought Wild Flavors, they paid a pretty high multiple for it to get into that naturals business. In the past, you actually saw conglomerates sell off flavors and flavors businesses, now they may be diversifying into it, so do you see that trend continuing? And more relevant to Sensient, are you interested in further bolstering your naturals flavor, naturals exposures through acquisitions? And those multiple seem to be fairly high in the mid teens, are those worthwhile investments to look at?

Yes, I think that's the perfect question. I'm not going to speak specifically about ADM's actions, because that wouldn't be appropriate for me to do that. But I would say it is quite possible to really overpay for a company nowadays. And whether we're using ratios to EBITDA as our benchmark, I think in some cases the concern I would have would be the company's ability to ever pay for that acquisition.

While we could talk about synergies, we could talk about a new market, I think for business of our size, and as I look at some of our segments, I think we can achieve technical bolt-ons, some synergies of cost. But really what I'm looking at is opportunities to take maybe something a little bit smaller than what we see in the mainstream. And yes, you're going to have to pay a higher multiple but at least given the magnitude of it you can pay it back and at least take advantage of some of the synergies you can generate with your existing businesses.

So as you look at our portfolio, certainly Fragrances and cosmetics those could be potential avenues for us. Certainly Flavors, but when I think about flavors as one shareholder said to me, he said, I think fix the storefront first and then think about adding an extension. I think there's a lot of good practical sense in that and I think that's where we are with Flavors. Let's get the right foundation and infrastructure and then we'll start thinking about putting out something else in there.

But yes we're going to be -- we're in the market but we're going to be very thoughtful because I'm concerned with some of the multiples that I see from time to time that the payback may be like about 15 or 20 years and that may not be such a good use of our cash.

All right, thank you for your time.

(Operator Instructions)

Okay, Moderator, if there are no further questions -- are there any further questions?

Christopher Butler, Sidoti & Company.

Looking at the announced add on to the restructuring, a little surprised that we're seeing lower CapEx this year as this transition takes place. Could you talk to the sales from the closed facilities? Is that part of the culling process, are those going to be shifted over to existing facilities and are there no investments needed in the existing facilities to prepare for that?

Sure, so let me say this, I would say that because we are -- we had needs, capital needs in some of those sites, by virtue of consolidating them we no longer have those capital needs. So that would be point number one.

With respect to transferring the business, that is certainly the intent in nearly every case. Obviously there are opportunities here to cull, there are some overly complex non strategic low margin, low volume type products that may simply not make much economic sense to continue with. So that will be done along with the restructuring.

And so as we move forward and we talk about the $75 million to $85 million next year, that does take into account the incremental CapEx that would be associated with consolidating the sites. I think in many cases, we are changing, we are consolidating one site into multiple sites which again adds to the complexity but certainly mitigates the need for incremental CapEx. And it also helps to drive the efficiencies within those existing plants today.

So I'm comfortable with the figures, I'm comfortable with the idea that we would have incremental CapEx in a number of these facilities. But I think in a number of these cases the incremental CapEx by consolidating say two facilities into one is fairly nominal which is again why I feel comfortable with that range we've given.

And as we look at the first restructuring that you announced, how much of that savings have you seen in the second quarter year over year?

Well we would -- I would say that broadly speaking, restructuring part one where we forecasted [$10 million] to [$12 million], we were at about between [$11.5 million] and [$12 million] on the actual savings. Some of that was in Q1, some of that was in Q2. It was a little bit north of about $1 million say in Q2, between $1 million and $1.5 million I would say would be the right number for Q2.

And then the savings for this restructuring part two would begin really in Q3 of this year. There were some savings in Q2 but really the lion's share for this year will begin in Q3 and Q4. And again a lot of it has to do with the lead time associated with closing a site or announcing the closure of a site.

So I think one other note if I could and I know you'll find this of interest. As you look at that overall charge of between $120 million of $130 million about $40 million of that is cash. And so from that standpoint as we talk about approximately $30 million in savings, to generate that we're taking about a $40 million charge cash. The other piece we -- or the other much larger component we would consider to be non-cash. So another comment on that restructuring piece.

And finally, the demand environment on the Flavor side overall still seems fairly sluggish, could you speak to any improvements that you might be seeing there? And in general new product introductions by your food customers, have those picked up at all?

Sure well I would say this, that the pace of new product introductions amongst the customers we work with on our beverage flavors business is certainly -- has certainly stabilized and perhaps even improved from prior year.

I would say on the savory flavor side, it's a little bit of a mix. I would say for our business, this may not reflect the macroeconomic environment, but for our business, we see the pace of a product release on savory flavors in Europe improving.

I would tell you that macroeconomically and certainly closer to our business, the dairy industry is really having a hard time right now. Some of that has to do with raw material costs driving unsustainable price points in some cases. But I think overall, demand in a number of these customers and a number of these areas say for instance ice cream is fundamentally down. It's been down and on a declining slope for a few years.

And so of the (inaudible), the segments that we're dealing in I would tell you that dairy would be really far and away that area of most largest reduction in demand, fewest number of new product introductions. Now when you look at something like yogurt, greek and otherwise, I think we're certainly seeing some activity there, particularly on the greek side. But then again there are some customers who are more oriented towards traditional yogurt which in some regions is suffering declines or even steady markets with limited product releases.

And with the repurchase, could you talk to the decision to make the repurchase a second-quarter event and not spread it out over the course of the year and give us a little more detail on your thoughts on the renewed authorization and how you might apply that for the rest of the year?

Well I think number one on a purely practical basis, we're obviously limited with how many shares we can truly buy back on any given day. So that's point number one. So at a minimum it was going to take us a few months even if we wanted to go as fast as we wanted to.

I offered that it would take a year because you're not necessarily always clear on what the macroeconomic environment maybe at any one time, and I certainly wouldn't want to disappoint you or any of the other investors on this phone. And so I think in the interest of being conservative, I offered a year but we saw continued opportunity. I thought the stock prices was a bargain because I think the stocks going to be $100, so from my standpoint, buy it up.

Now that being said, we requested authorization for an additional 5 million shares and that was granted. So we have the ability to continue this program and as I've committed to previously, I look at four areas and in this order. Number one, where our CapEx needs. Number two, what are we doing with the dividend. Number three, what acquisitions are looming on the horizon. And then number four, given one, two and three what does it make sense to do on stock repurchase.

So I continue to have that model in my mind and so I would anticipate that possibility exists. Obviously I wouldn't have asked for the additional $5 million authorization if we weren't interested in using it at some point in the future. So I think that will continue to be a very much a part of our discussions about capital allocation and the Company.

I appreciate your time.

Rick D'Auteuil, Columbia Management.

To follow up on Chris's delving into the F&F side of the business, so earlier on in your call you mentioned the culling impacting, culling low margin product impacting growth by 3%. Overall F&F was down 4.6%. How much of that is dairy and how much more culling, what inning are we in on the culling of the low margin product? And also, tolling was an issue I think we've anniversaried that, was that -- that shouldn't have had any year-over-year impact on this quarter, right?

Yes, so let me take the first part there in Flavors. The declines we saw were principally in the dairy area of the business. A lot of that due again to the macroeconomic picture there.

In terms of the inning in Flavors, I would say we're probably in the bottom of the third. And then with respect to the Color Group, I -- and that doesn't necessarily assume extra innings, Rick, that would be a conventional nine inning game on that one.

But then on Color, yes you're right, that was a big piece of the last culling arrangement and as I've indicated previously, after Q1 we weren't really going to talk about it. I think it was only about 1%, we were up about 4% and I think if you were to add back that we would be at 5.1% or so. But I promised I wouldn't talk about that anymore, so this is a comment there.

As you look at Color on a year-to-date basis, when you take out this culling impacting, they're up nearly 7% on top line which I feel is -- we're getting into the realm of reasonably good there. So yes, you're going to continue to see there's really -- the culling evolution, we're in the bottom of the ninth I think the home team just is not going to step up to the plate on that one because we've already accomplished that.

Okay, so when you say third inning on F&F, does that mean you think that will largely be behind you this fiscal year or is that going to carry over into next year?

No, I think that'll carry over into next year as I think this restructuring is providing an opportunity I think in many cases to cull out some of those products which again would be either non strategic or low margin or overly complex low volume type products, the tail perhaps in other words.

So I think our efforts will continue not only this year but into next year. I think that very much like our model in Color, where we went through this process, we're were continuing to grow profit operating and improving the margins. And as we came out of that, we said we would see the top line growth and I think that's what you're seeing in Color right now.

I think that dynamic is very similar to flavors and so far as you'll see that very flat and perhaps in some quarters negative revenue. But mid operating -- mid single operating profit growth is what I had communicated in February and I'll continue to communicate that for the rest of this year with improvements on that in 2015 regardless of what's happening with revenue. And independent of the restructuring program. So I think as we get into then 2016 and even at the tail end of 2015 is where you'd start to see less and less culling coming out of the Flavor Group.

Could that mean growth for 2016 in Flavors or you're still looking for that to be more of an operating income story and not a revenue story?

That's -- I think 2016 is where that should become more of a revenue story. I think there's still going to be impact of culling but I think that's a bit of the inflection point.

Okay and what is dairy -- is dairy a big part of the mix there?

Dairy is, I would probably tell you out of the Flavor business one of our larger segments that we historically dealt with, which is why it's impact is a bit stronger.

Okay and then unrelated but post the restructuring and the plant reduction to 32, where would you estimate -- and post all the culling that you're talking about, where would you estimate utilization would be in that scenario? So I guess that's steady state FY17 or 2016, right?

Yes, I think I would say probably 70% to 80%.

Okay, and that's up from -- is that 10% up or so?

I think yes, you'd be looking at 10% or better. Yes.

Okay, that's all I have, thanks.

Matt McGeary, Eagle Management.

It was good to hear, as a shareholder, hear your comments about thinking a lot about capital efficiency and not only as it pertains to your business but also thinking about potential multiples you might pay. I guess it begs the question, if you're -- if someone comes to you and offers a mid-teens EBITDA multiple, is that a conversation that you've had with the Board or is that something you would consider being on the other side of the transaction given your -- now you've got some size and a nice franchise that someone's willing to come along and pay you a rich multiple. Is that something that you've talked about or would consider?

Well we're a public corporation, I guess that would be comment number one. So we're in -- our business is to drive shareholder value and to provide shareholders with the strongest return possible, and I think that's probably a good answer.

Is your business structures so that you could potentially -- if someone just wanted to either the Flavors or the Colors business and not the other, is it structured in such a way that that's even a possibility or no?

No, these are pretty intertwined on a lot of different dimensions and that's only improving quite frankly. Not only are they intertwined in production and a customer standpoint but there's also a lot of technical overlap, R&D overlap. So I think that relationship is good and that's only improving because we see that as a real internal synergy that we should be taking more and more advantage of.

Got you, okay. Good job on execution, guys. Thanks for your time, appreciate it.

There are no further questions at this time. I will turn the conference back over to the Company for closing remarks.

Okay, thank you, everyone, for your time this morning. That concludes our comments today. If anybody has any follow-up questions, but all means you may contact the Company after the call. Thank you and goodbye.

Thank you this concludes today's conference call. You may now disconnect.