Sensient Technologies Corp (SXT) 2015 Q1 法說會逐字稿

Good morning everyone, and welcome to the Sensient Technologies Corporation 2015 first-quarter conference call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Mr. Steve Rolfs. Please go ahead.

Good morning. I'm Steve Rolfs, Senior Vice President and Chief Financial Officer of Sensient Technologies Corporation. I would like to welcome all of you to Sensient's conference call to discuss 2015 first-quarter financial results. I'm joined this morning by Paul Manning, Sensient's President and Chief Executive Officer. Yesterday, we released our 2015 first-quarter financial results. A copy of the release is now available on our website at sensient.com.

Before we began, 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 adjusted earnings per share of $0.76, an increase of 7%, compared to the $0.71 reported in last year's first-quarter. Foreign currency translation had a significant impact on the quarter, and in local currency, earnings per share increased by $0.10, or 14%. Operating income increased by 4.5% on local currency, and operating margins improved 60 basis points, to 15.5%. Cash flow from operating activities increased by more than 50%, to $30.6 million in the quarter. Our strong cash flow performance was driven by strong earnings and substantial inventory reduction. We reduced inventory by approximately $23 million in the first-quarter, which follows a $15 million reduction in last year's fourth-quarter. Working capital reduction will continue to be an area of focus.

Sensient's Color Group is the global leader for food and beverage colors. We have the unique ability to provide both synthetic and natural colors solutions to our customers. We are also the global leader for digital inks and cosmetic ingredients, and we have strong capabilities in pharmaceutical excipients and industrial colors. The Color Group's revenue is off 9%, and operating income was down 12% in the first-quarter. Foreign currency translation reduced both revenue and operating income by approximately 9%. In addition, operating income was further reduced by the impact of foreign currency transaction effects, most notably due to the Swiss franc. But the group was also impacted by the weaker euro, British pound, Mexican peso, and Canadian dollar.

Many of the Color Group's businesses reported positive local currency results in the quarter. Food and beverage colors business reported mid-single digit growth for both revenue and operating income, driven by strong results in the US and Latin America. The pharmaceutical business reported mid to high single-digit growth in sales and profits. And the global cosmetic business grew operating income almost 10%, despite a difficult revenue comparable.

The technical color segment was impacted by the strong Swiss franc and by soft demand in Europe and the Middle East. This unit reported lower revenue and operating income in the quarter, and we expect demand in its markets to be challenging for the remainder of the year. This business, as reported solid growth over the past few years and we continue to see good long-term opportunities in this market. The Flavors & Fragrances Group has strong capabilities in sweet, beverage and savory flavors, natural ingredients and fragrances. We have realigned our commercial and technical activities around common product line to better serve our customers, and we are continuing our efforts to shift the group's product mix from simple ingredients to more complex flavors and flavor systems. We are progressing with the restructuring program and other efforts to lower costs. A combination of upgrading our product mix and reducing our cost structure will make the Flavors & Fragrances Group more competitive.

Flavors & Fragrances Group reported higher revenue and operating income in local currency, and improved its operating margin in the first-quarter. Excluding the impact of currency, the group's revenue increased 3% and its operating income grew by 4%. Operating margins for the group increased 70 basis points, to 14.8%. Foreign currency translation reduced revenue by approximately 7% and operating profit by about 3% in the quarter. Our actions and strategies to improve the business and increase operating margins are on track. Several of the businesses are making this transition and are already delivering improved local currency results. The natural ingredients, North American beverage, European sweet and Latin American businesses each reported solid revenue increases and double-digit profit growth in the quarter. Within the fragrance business, revenue from fragrance compounds grew by more than 30%, as we continue to shift our focus from lower margin aroma chemicals to higher value fragrances. We are moving forward, but we have more work to do.

The Corporate & Other segment, which includes our operations in Asia Pacific, reported improved results in the quarter. Both revenue and operating income increased in local currency terms. Operating income for Asia Pacific increased by more than 10% in the first-quarter, and we also reported lower corporate expenses. During the 4th quarter earnings call, we explained that foreign currency would have a significant impact on the 2015 results. The combined impact of the strong dollar and the foreign currency transactional effect was $0.07 in the first-quarter.

Since the February 2015 conference call, the dollar has continued to strengthen against many foreign currencies, including the euro. Our initial adjusted EPS projections for 2015, before currency impact was between $3.25 and $3.35. From this base estimate, we removed the combined impact from foreign currency translation and transaction affects of approximately $0.23 per share to arrive at our previously announced guidance. With the continued strengthening of the dollar, we now expect a full year currency impact to be approximately $0.29 per share, or $0.06 greater than what we projected earlier this year. While the outlook for the Company's outlook performance has not changed, Sensient is revising its adjusted earnings per share guidance to a range of $3.00 to $3.09 due to the increased currency impact. The previous guidance was $3.02 to $3.12.

Last year, we implemented several actions to enhance shareholder value. In total, these actions improved the Company's cost structure, returned significant cash to shareholders, and demonstrated our commitment to best-in-class governance and compensation practices. One of these actions was to implement a restructuring plan to lower cost and to improve operating efficiencies by eliminating underperforming operations and consolidating manufacturing facilities, principally in the Flavors & Fragrances Group. Our efforts are on track, and we expect most of the activities to be completed by the end of this year. We expect to incur pretax charges of approximately $130 million, and we will generate annual savings of about $30 million, upon completion of the program.

The Company continued to repurchase shares on an opportunistic basis in the fourth-quarter. Over the past 12 months, Sensient has generated $130 million -- $35 million of free cash flow. We have used that cash to fund share repurchases and dividends, and in total, we have returned approximately $240 million to shareholders in the last 12 months.

Our strategy is working, and the Company has a very promising future. Despite currency headwinds and difficult market conditions, particularly in Europe, we're delivering earnings growth, higher margins and strong cash flows. I was pleased with the first-quarter results, and the Company is well-positioned for future growth. Steve will now provide you with additional details on the quarter.

Thank you, Paul. Sensient reported revenue of $346.2 million and operating income of $46.4 million in the first-quarter. The reported results include $7.1 million of restructuring costs in the quarter, compared to $46.2 million of restructuring costs in the first-quarter of 2014. Excluding these costs, operating income was $53.6 million in the quarter, which is an increase of 4.5% in local currency. Our adjusted operating margin increased 60 basis points, to 15.5% in the quarter.

Diluted earnings per share, as reported, were $0.65 in the quarter, compared to $0.05 in the first-quarter of 2014. Restructuring costs reduced reported earnings per share by $0.12 in this year's first-quarter, and by $0.66 in last year's first-quarter. Adjusted earnings per share increased 7% to $0.76 per share, which is an increase of 14% in local currency. Foreign currency translation had a significant impact on both revenue and operating income, reducing both by approximately 7% during the quarter. We are continuing our efforts to shift to technology-driven and value-added products, while rationalizing non-strategic and low-margin business. Most of this impact was in the Flavors & Fragrances Group.

Removing the effect of the rationalized business, consolidated revenue increased 2.1%, and the Flavors & Fragrances Group revenue increased 4.1% in local currency terms. Sensient's cash from operating activities increased by 54% in the current quarter. The cash flow improvement was driven by strong earnings and lower inventories, as we continue to focus on reducing working capital levels. Capital expenditures were $13.4 million during the quarter, and for the full year, we expect capital expenditures to be in the range of $75 million to $85 million. Free cash flow increased to more than $29 million in the first-quarter, which includes $12.6 million from the sale of two facilities. The strong cash flow performance allowed the company to repurchase approximately 950,000 shares of stock during the quarter, and we will consider further share repurchases on an opportunistic basis. Our balance sheet remains strong. Our debt to EBITDA ratio is 1.9, and we will keep debt levels in line with an investment-grade profile to maintain the flexibility for capital expenditures, dividend payments, share buybacks, and acquisitions.

Now, I will briefly review the results of our operating groups. The Color Group's revenue and operating income were $120.5 million and $26.1 million, respectively, in the first-quarter. In local currency, revenue and operating income decreased by approximately 1% and 3%, respectively. In addition to the effect of foreign currency translation, the Group's business in Switzerland was impacted by the stronger Swiss franc. This business sells most of its product in euro or dollars, and the stronger franc has reduced its local currency results. The Group's operating margin was 21.7% in the current quarter. The Group has consistently delivered strong results in the food and beverage, cosmetics and pharmaceutical businesses, performed well in the quarter.

Flavors & Fragrances Group revenue and operating income were $206 million and $30.5 million, respectively. In local currency, revenue increased by approximately 3%, and operating income increased by about 4% in the quarter. The Group's operating margin increased 70 basis points, to 14.8%. We are encouraged by the first-quarter results, and we remain optimistic about the potential for the flavors and fragrances business.

Revenue in the Corporate & Other segment, which includes the Company's operations in the Asia Pacific region, was $31.6 million in the quarter, an increase of approximately 2% in local currency. The adjusted operating expense in the Corporate & Other segment improved by approximately $2 million in the quarter. This improvement was driven by stronger profitability in Asia Pacific and a reduction in corporate expenses.

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

(Operator Instructions)

Mike Ritzenthaler, Piper Jaffray.

Yes, good morning. My first question is around, Paul, around the shifts and realignment within Flavors & Fragrances. I would be interested in how you are thinking about the changing culture within the sales organization and in selling systems. And is that a big shift, first of all? And secondly, how would you gauge progress versus your expectations on the sales front?

I would say this. Broadly speaking, it is not terribly dissimilar from what we did in the Color Group, and what we continue to do in the Color Group over the last several years. I think, first of all, it begins with how we measure ourselves: people. I think certainly, we align their incentive programs, we align their training to executing on those kinds of sales. The kinds of sales that involve flavors and technology platforms that we have had, and that we continue to develop. I think as well, there is a fairly good foundation in most of the businesses. I think--certainly, we have had success in many of these areas.

I talk about a number of our businesses that have a very good portfolio, operate at very good profit levels today. So it is not as though we are starting from zero. The cupboard was not by any means empty, but it just needed stronger emphasis: more training, additional salespeople.

And salespeople that I think have more of a technical background to them. The notion of a salesperson executing a sale because the purchasing agent or the technical person likes them, I think is a little bit of a thing of the past. I think today, it is more along the lines of, what is a salesperson? What is Sensient as a supplier? What kind of value are we creating for our customers? So I think that is an important piece, as well.

To the point you raised about how do you measure the progress, I think certainly gross margin and operating margin are very good metrics. We spend a lot of time with those, because those are very good indications of the improvements in our mix. I think that new wins are always key, with many customers not really generating much in the way of organic growth. It is certainly at a big multinational level, that is.

A lot of the growth has to come from new wins. New wins at big companies, and new wins at regional and smaller companies as well. That is another factor that we look at closely, at how many wins can regenerate? And again, according to the customer's timeline, how quickly can we get those new wins?

So I think gross margin and new wins are two of the bigger metrics that I look at to measure that progress. To that point, I would say that we continue to make those improvements, and I see that progress. You see the operating margin improvement. I think you will continue to see that. What I guided in the first call of the year is we would--we are working toward a 100 to 200 basis point improvement in operating margins for the flavor group for the year. That is a real manifestation of this strategy.

Yes, that is good color. Thank you. Thank you for elaborating on that more. With free cash up significantly year-over-year, can you elaborate a little more on the puts and takes within cash from ops and working capital? I think in your prepared comments, (technical difficulty) I can't remember, it was on inventories, how much more runway does Sensient have on that particular metric? And are we set up for the middle of the year, pacing ahead of last year as well, in your opinion?

I will say this. We introduced this concept about a year ago. That we felt as if the Company was very high in certain parts on inventory levels. We felt that with better management, better sourcing and certainly better production techniques, that we could -- there was a lot we could do to bring down those inventory levels. Inventory doesn't necessarily move on a dime. What you have seen though over the last six months, a realization of this program that we instituted about a year ago. And to that end, if you look at the balance sheet at the end of September, the value of inventory is about $475 million. If you look at the balance sheet at the end of March, it was about $410 million.

Now, part of that was currency. But the bigger part, the much bigger part, was actual physical reductions in the inventory that we had in the business. I think there is certainly more of that. We certainly--when you start this program, you always get bigger removals of inventory, then say you may get a year or two down the line.

But certainly I think we are seeing that nice benefit. I think we're going to continue to see a nice benefit throughout the year. But even beyond what we have done in this sort of initial approach, there is more opportunity for us to operate in a much more lean manufacturing type environment. So I would say, there continues to be upside.

Would you say that 60 days is a reasonable target or sustainable target? Or is it more like 50, 55, something like that?

The industry's benchmark that we look at, essentially where our competitors and much of the Company--many of the companies in the specialty chemical arena would be, is about 110 to 120 days. Somewhere in that range. And we think then--we have many businesses that operate well below that. But I would say that sure, there are some businesses that could operate. And some in fact today that we have that operate in 60 days.

But I would say it is a broad-based measure, when you take we have an agricultural business. We have other businesses with a very broad product line. It is fundamentally a specialty chemical company. I would say that that range of 115--let's say 115 days is kind of industry standard. I think over time, we can do better than that.

Okay. Outstanding. Thank you very much for your help.

Yes. Thank you, Mike.

Brett Hundley, BB&T Capital Markets.

Hey, good morning, gentlemen.

Hey, Brett.

Morning, Brett.

Thank you for taking the questions.

I wanted to follow on Mike's line of questioning on margin performance in Flavors & Fragrances. Clearly, a focus. Given talk of push over time, up towards higher levels--and Paul, you have talked about 100 to 200 basis points, as you have mentioned, as far as improvement. When I adjust your margin in flavors, I get something closer to a 14.3% margin, when I adjust for currency. Certainly, it is an improvement, year-on-year, but I think we would like to see more of that towards the 100 to 200 basis point level.

And so, I'm wondering if you can talk a little bit about this step function there, and when that improvement seems to come: if you can attach some timing expectations. I know you also have potentially greater cost savings realization in 2016, but if you can lead us through the rest of 2015, that would be really helpful.

Yes. I will have to get back to you on your 14.3%. But for the time being, for the purposes of the call, let me just give a broad sweep on conceptually how we generate this margin. And I will give you a sense to the specifics of your question about what happens this year. Broadly speaking, we will get this operating margin improvement through some key actions.

Noteworthy, number one would be mix. Again, how do we sell more of the flavors? Fewer of the individual ingredients? Because the differences in gross margin between those outcomes can be somewhat substantial. So mix, first and foremost. Emphasizing that more sophisticated portion of our portfolio--not abandoning what we sell today, but elevating it in many cases, is priority number one.

Certainly, cost factors into this, as well. The restructuring is a big part of that. And we will get the biggest portion of our benefit in the gross margin line because again, it is production costs that we are taking out at this phase, rather than SG&A costs. So I think the restructuring will have a big part of this as well, with our goals on that front.

To a certain degree, there are products and product lines for which price may be an element upon which we improve the gross margin. I don't want to get into that specifically for obvious reasons. But clearly there are some products that we sell that have a competitive advantage. A very strong one. So to the extent that would be practical, that is also something that we would consider.

So broadly speaking, those are the same elements. When you consider what we did in the Color Group, that was principally and very strongly linked to a mix improvement. Far less--in fact, very insignificant part of that improvement was related to cost. So as we look at Flavors & Fragrances as we go about the year, I think why I believe that 100 to 200 basis points is achievable is because number one, it is more time to continue to execute on our strategy and selling the types of products that we believe create value for our customers. That is the mix piece.

Number two, as the restructuring savings begins to accelerate and to improve, that is also going to add to this. You noted that we sold two of our facilities, here, in the 1st quarter. Once you process through your inventory now, you start generating the full brunt of those savings in your business. And that is why I would see that accelerating over the course of the year.

So again principally, those are the two areas. As we continue to move through the year and continue to sell that end of the portfolio, I think that is where you will see the manifestation of these higher gross margins.

I appreciate the comments. I wanted to rotate over to Asia. Your top line has been a little bit mixed there. But you saw nice growth in Q1, and we can back-end with some pretty nice adjusted margins there as well.

Can you take me through your performance in that area of the world? And can this top line continue to gain momentum there? And I just want to ask a follow-up to that question.

Yes. So top line, yes. I think there is a lot more we can do in Asia Pac, so that would be the first answer. In terms of where we are, we really started Asia Pac as a trading business many, many years ago, and we have built it to where it is today. We need it, and we will continue to make more investments in the region for local production, as well as effectively integrating many of their activities with the rest of the Color Group and the Flavor group. Certainly a lot of synergies there between the business units that can be achieved.

I think that we have done quite well, but there are certainly more opportunities, not only to expand on our existing business, but to grow certain product lines into countries that perhaps we don't have as strong of an emphasis today. Whether that is in color, cosmetics or even flavor sales. There are certain countries for which our penetration has been not as strong as it is going to be, moving forward.

So I think there is a lot of opportunity there, because in my opinion, we are really just skimming the surface and there is tremendous growth. We have products that are very well-received by our customers. For many of our customers having other choices, particularly from suppliers that are local, is very compelling. And so, I think that has explains a lot of our success to date, and that will accelerate and will explain our success, moving forward.

And if I dig into that answer a little bit further, I was focused on Colors in Asia, but honestly, feel free to talk broader portfolio if you want. But can you dig into maybe some of the broader talking points or timetables on your strategy there? Do you--is it assets? Do you need a partner? Are there certain dynamics that need to change competitively? Can you maybe dig in a little bit on that?

You know, some of it is going to depend on the product line we're talking about. When we talk about our food color business, I talk in terms of Sensient colors being the leader in food colors. So when you are the leader in a particular market, that certainly gives you access to many of the companies that you would like to have access to.

I think when you consider some of our other businesses--take our inks business. Digital inks has not been as strong of a market trend in Asia Pacific. Certainly compared to Europe and the Middle East, it has not been. That would be another area for which we could provide a very compelling product line, which is generally not widely available in many of the markets in that region.

I think this is--it is more than just simply selling your products that you sell in the US and Europe to that market. Certainly that could be part of this. But it is also what products do we have across this very wide portfolio for which we have opportunities to really introduce those countries to a particular technology or a particular market trend that we may be doing very well in another part of the world, like Europe or the Middle East.

Thank you for your time, Paul.

Yes. Thank you, Brett.

Mike Sison, KeyBanc.

Hello. Nice start to the year.

Thank you, Mike.

Paul, just a question for you. Kraft: it looks like they are going similar of to Nestle, Hershey and Frito-Lay. They announced recently that they want to replace some of their nat--synthetic colors with natural colors. I think in macaroni and cheese, for what it's worth.

How big of an opportunity is this trend for you, near-term and maybe longer-term? I remember the beverage side. That was a big plus for you. Any process generally on how much of food is synthetic these days? And what the evolution of moving to naturals could be?

As you look at different geographies, there is a different answer for each one of them. If you consider Europe, which is many, many years ahead of the rest of the world in terms of converting from synthetic to natural colors, you could see that the majority -- well above the majority of that market and the market sales that we generate there are coming from natural colors, or what is also a different product line called coloring food stuffs, but we don't need to get into the technicalities here.

Let's just say natural colors is predominant in Europe. When you come to the US, it is not nearly as large. There has not been a commensurate legislative change, which would effectively obligate our customers to make that conversion, much like occurred in Europe.

So in short, the trajectory in the US has been slower. Not nearly as much of the market has converted to natural colors. But clearly, with the article you referenced, there is an increasing trend and increasing interest from many of the customers, and that is really being driven by the end consumer, who wants more natural products, whether that is color or flavor, or otherwise.

And so, we are very interested in the trend. We certainly see it as an opportunity. We have the ability to not only do the natural side, but the synthetic side, and many customers are not going to make a full-fledged conversion.

You referenced Kraft, and they are talking about a product line. That is the way many of these companies will convert. They will select a product line or two, as opposed to converting everything all at once. So I would see the conversion taking place over many years, which would be pretty much expected in Latin America and for other parts of Asia as well. I think would be a fair summary of that. But no. It has certainly gotten an enhanced interest as of late.

The health and wellness trend, as it is described, has had a huge impact, and I think the impact continues to grow. As many of the large multinationals struggle to get any sort of revenue from volume -- most of the revenue is coming from price at this point -- finding ways to really take a lot of the core brands and make them different or better has been a -- there is some momentum building there. But how do they differentiate their products? And natural, simple labels, healthy claims -- it is growing. It is of growing interest. And large multinationals -- I think they are seeing this as a necessary step to take to really get their businesses growing again.

So we see it as a positive. Again, whether they stay natural or synthetic, we can certainly accommodate either request. But there are a lot of economic benefits to natural colors, obviously. If no other reason than the volume necessary to achieve the same shades versus synthetic could make for a compelling economic case. But either way, we think it is a good market.

The last point I will make here--Mike, I am going on here, but I know you are interested in this point. When you consider the new development launches -- and let's just take the US for right now -- the majority of the launches contain natural colors or natural ingredients. So as the pace of new product introductions improves over the future, you can expect to see a more accelerated transition to natural colors, to natural flavors and other ingredients.

Okay, great. And then as 2Q through 4Q unfolds, this foreign currency issue is, unfortunately, hurting the reporting results for sales. Could you walk us through, on a constant currency basis, what you expect Color should be able to do in the remaining quarters, as well as Flavors & Fragrances, understanding there is some product rationalization there? But I just want to make sure I understand what the growth potential is for the next couple of quarters, x currency, as the year goes.

Sure. I will start with Flavors. I think certainly I will stick to the guidance that I provided on the last call. I would see a mid, and then perhaps even mid to high single-digit operating profit growth. I mentioned once again, 100 to 200 basis point improvement in operating margin. And I said flat revenue. I think flat, but perhaps slightly positive would be a reasonable guidance, with respect to revenue.

The culling--you look at Q1, we had 3% top line and then 4% with the culling. The culling is not necessarily a steady straight line. You may generate more in one quarter than you would in the next. You may be looking to sell a product line, which could accelerate it. So different factors may come into play. And so, it is not -- we didn't cull as much as I had anticipated we would, for several of those reasons. But that aside, I think flat revenue to perhaps slightly positive would be appropriate for Flavors.

For Colors, as I mentioned on the last call, and I will emphasize that again, we would guide low single-digit OP. But a lot of that, when you say FX, it is principally translational. But what we have in Colors -- not as much in Flavors, but more in Colors -- we have talked about Switzerland, but it applies to other currencies, as well. The transactional effect of the currency has had a much larger impact on the Color Group than the Flavor Group. So as you break down Colors -- food and pharma, and cosmetics as we reported had very nice quarters in Q1--I think those rates can continue for the rest of the year. That mid to high single-digit revenue and operating profit growth on each one of them.

I think our challenge is principally in the technical colors area. And so, that, it all -- some of this depends on that market and the transactional impact, but I think the low single-digit OP is what we are anticipating, as well as that decline in operating margin. Again, owing to this transactional loss on the FX front. And then Asia-Pac, double-digit at least in operating profit. And then Corporate, we continue to expect to take costs out, and I think you will see those benefits for the rest of the year, as well.

Great. Thank you.

Yes. Thank you, Mike.

Christopher Butler, Sidoti.

Good morning, everyone.

Hey Chris.

Just jumping into something that you said as you look at the $0.29 hit from currency this year. Could you break that out, transaction versus translation?

Yes. I think we had originally said that the transaction I think would be $0.05 to $0.07. That is largely unchanged. I would say most of the change has come from the translation element. So most of the $0.06 change, I would attribute to the translation.

And getting back to big picture strategy, as we look at the flavors group, could you give us a sense of how much of that revenue is ingredients versus the complex flavors? And any sort of general sense on the growth in those two sub-segments? I would have to imagine the ingredients are being hurt by culling, but more interested in signs of success on the complex flavors side.

Yes. Certainly we look first with--our first bellweather is our pipeline. And our pipelines within the Flavor Group are strongly oriented towards those types of projects. Those are the ones we're spending our time, and dedicating sales and technical resources to, to execute. So the pipeline certainly speaks to that.

Now it may depend a bit, whether you are talking savory, sweet, beverage, fragrance, SNI -- they all differ a bit. But I think you can certainly across the board say that the shift in the pipelines has really been well underway and that continues to be the case. I think our growth rates in certainly the majority of our businesses--we references a few of them in the call here--has been--the way we were able to get the double-digit operating profit was through those new wins in those--say projects that are much closer to our strategy.

I think in some of our businesses though, when you consider our savory business, for instance, where we have had a very long history of selling many of the ingredients, that is, as I've reference on the previous call, and maybe even previous calls, that is the area of biggest challenge for us is how do we shift and continue to shift that product line towards the more sophisticated end product?

But I would tell you that overall, we are very much on track. Nothing ever moves as fast as I want it to, as you know, Chris. But I think that certainly we're making the right progress. And I think that our beverage and sweet have made very good--fragrances as well, as we noted in the growth we're seeing there on the compounds versus the aroma chemicals.

But it is a tough number to measure explicitly, in as much as some of these ingredients, you may not be using in that finished, more sophisticated product line. In other cases, you might have culled it out. In other cases, you may have intended to cull it, but somebody accepted your price increase. So you didn't cull it becomes the outcome there.

So there is a lot of moving parts in it. And again, we look very closely at the gross margin and the operating margin. If I were to say this, about 60% or 70% of the Flavors businesses are becoming either in the window I want, that 40% and 20%, or very close to it. And now it is about how do we move those last remaining business units to those levels of profit? That is ultimately going to bring us, the overall group to that 40% gross margin, 20% operating margin benchmark that we think is achievable.

And as we look at SG&A, you have done a good job of bringing that down, here, over the past year. I know it is about a year ago now that you had gone through some restructuring cost savings there. As we think about 2015, is $64 million, adjusted $64 million, what we can expect for the quarters, going though the year?

You know, I don't have a SG&A projection, per se. I would say this, that I would tell you that there is certainly a stronger emphasis on controlling the SG&A. So from that basis, yes. I think Q1 should be fairly consistent with the other quarters. Many of our open positions that we have been working on have been filled.

As with any organization, there are always openings, but I don't anticipate a great increase in SG&A. Certainly as we continue to upgrade the organization and add more capabilities, we will do that. But a lot of that is being offset by the cost reductions that we made previously. So we have talked about how we have added technical people and salespeople to Flavors, so that we get still a slight increase, but much of that was offset by the actions we took last year and the previous year, in anticipation of these moves that your seeing right now in 2015.

And just finally, the reporting change that you made with the Flavors & Fragrances, could you give us what the number would have been? Or what the, it looks like about $1 million that you moved in there of revenue from South America and Central America?

Yes. That sounds about right. The concept there is as these businesses reach a level of maturity, at which time they could be absorbed into another business unit. That is what controls that decision. But yes, you are about right. It is about $1 million that was transferred over.

And it looks like last year that the operating profit was almost $0.5 million. So it looks like it is good profitable business for you.

Yes. I don't have that exact figure, but our -- yes. Our businesses there are profitable. I would agree.

I appreciate your time.

Okay. Thank you, Chris.

Richard O Reilly, Revere Associates.

Hello. Good morning. Thank you. You raised--you increased the currency impact by $0.06, but you lowered your guidance by only $0.02 to $0.03, while you raised the top end of your pre-currency impact. Yet your statement was that there was no change in the operational outlook. Can you just -- without fine-tuning this, can you give an idea why you raised the upper end?

Sure. What we wanted to communicate when we said no change in the operational part of the business is that we were not changing our guidance to reflect some gap in sales or costs, or something like that. That the change was specific to FX. So just that point to begin.

I think as we continue to move forward and we continue to execute on our plans, I want to make sure I deliver. And we want to make sure that, as an organization, we are pushing the organization and we are doing well by our shareholders. I think that is maybe what drove it.

Okay. So you basically, you do see a better year than you had thought back in January by a few pennies, for whatever reason?

Sure. From the standpoint that we were $0.76. That certainly lends some credence.

Correct. You beat the consensus by a few pennies there.

Yes.

Okay. And then maybe the number of shares outstanding is fewer than what you might have thought, going into the year? Does that make a difference?

Well, we--no, would be the first part. I think that we build a range. We built our guidance. If we buy back, that may move us closer to the upper end of the guidance. But no, I didn't necessarily do the math on that before we initiated the buyback, so much as--

Okay.

I saw it as an opportunistic time to buy the stock.

Okay, good. Thank you a lot.

Okay. Thank you, Richard.

At this time, there are no further questions. I will now turn the conference back to the Company for closing remarks.

Okay, thank you again for your time this morning. That will conclude our call. If anyone has any follow-up questions after the call, by all means, feel free to contact the Company. Thank you.