Sensient Technologies Corporation (SXT) Earnings Call Transcript & Summary

Good morning and welcome to the Sensient Technologies Corporation 2026 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Gorne. Please go ahead, sir.

Good morning. Welcome to Sensient's earnings call for the third quarter of 2026. I'm Tobin Gorne, Vice President and Chief Financial Officer of Sensient Technologies Corporation. I'm joined today by Paul Manning, Sensient's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2026 third quarter results. A copy of the earnings release and the slides we'll be using during today's call are available on the investor relations section of our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which remove the impact of currency movements, costs of the company's portfolio optimization plan from our 2025 results, and other items as noted in the company's filings. We believe the removal of these items provides investors with additional information to evaluate the company's performance and improves the comparability of results between reporting periods. It also reflects how management reviews and evaluates the company's operations and performance. Non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with GAAP. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release and slides. We encourage investors to review these reconciliations in connection with the comments we make today. I'd also like to remind everyone that comments made during this call, including responses to your questions, may include forward-looking statements. Our actual results may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings. We urge you to read Sensient's previous SEC filings, including our 10-K and our forthcoming 10-Q for a description of additional factors that could potentially impact our financial results. Please keep these factors in mind when you analyze our comments today. We'll start the presentation on slide 5. Now we'll hear from Paul.

Thanks, Tobin. Good morning and good afternoon. Before I begin, I would tell you that given that we're joining you today from Milwaukee, Wisconsin, I'd like to open by congratulating the Milwaukee Brewers on their first ever World Series championship on Wednesday evening. It was a truly dominant October run for the hometown team. Earlier today, we reported our third quarter results. We delivered 10% local currency revenue growth, 15% local currency adjusted EBITDA growth, and 18% local currency adjusted EPS growth in the third quarter. These results build on our excellent first half and set us up for a strong finish to 2026. Color Group continues to deliver exceptional results with 17% local currency revenue growth and 21% local currency operating profit growth. We remain focused on supporting our customers through their natural color conversion, and the momentum continues to build as they approach their conversion launch dates. Flavors and Extracts Group also had a solid quarter, delivering 3% local currency revenue growth and 9% local currency operating profit growth. The Asia Pacific Group had an outstanding quarter with local currency revenue growth of 15% and local currency operating profit growth of 32%. All our groups delivered strong results in the first half and continued on that trajectory in the third quarter. During the third quarter, we continued to generate strong new sales wins across each of our groups. These sales wins are a direct result of our innovative product portfolio, exceptional service levels, and focus on customer collaboration. We are delivering particularly high win rates in natural colors as we see strong conversion activity and newly converted natural color products continue to enter the market. In fact, 85% of all new launches in the U.S. in the third quarter were naturally colored. We expect that figure to keep growing. At the same time, customers are actively working to convert their existing products to natural colors. And our sales pipeline continues to grow as we push towards our $1 billion conversion sales target. We are leveraging our outstanding technical and commercial teams along with the substantial R&D, capital, and supply chain investments we have made over the last 15-plus years. The conversion momentum continues to build, and there has been nearly a 10% decline in total FDA synthetic color certifications over the last 12 months. This is a truly noteworthy indication of the natural color conversion progress. Customers are destocking synthetic colors and replacing them in earnest across their portfolios. I would anticipate a continued decline in synthetic colors going forward. Eventually, nearly all of our synthetic colors produced in the United States will be directed at Latin America and Asia Pacific customers. During the third quarter, the Color Group recognized approximately $30 million of new natural color conversion revenue. This $30 million is in addition to the $45 million of natural color conversion revenue that we cumulatively recognized through the second quarter. We expect a substantial number of conversions in 2027. This expectation is based on wins already achieved, plus our customers' projected natural color conversion launch dates. We also estimate the conversion activity to continue into 2028, such that we approach our incremental $1 billion run rate as we exit 2028. While our business focus remains substantially on natural color conversions, we continue to generate strong win rates across the globe in our other food, personal care, and pharmaceutical product lines. Now, turning to slide 6 in our group results, Color Group had excellent third quarter results, delivering 17% local currency revenue growth and 21% local currency operating profit growth. Third quarter adjusted EBITDA margin was 25.1%, up 40 basis points compared to the prior year. The group continues to make progress on its investments in natural colors, primarily in production capacity, working capital, and R&D. We expect these investments to continue into the foreseeable future. We are aggressively pursuing these initiatives to achieve our $1 billion natural color conversion sales target. The group remains focused on selling technically differentiated natural color products, controlling costs, executing pricing where necessary, and most importantly, delivering quality new wins. We're seeing acceleration in customer orders for conversions of their synthetically colored products in the U.S. Conversion is happening. As we approach the final quarter of the year, I continue to expect the Color Group to deliver local currency revenue growth in the high teens for 2026. Overall, the Color Group is having a fantastic year and remains on track for a great, remains on a great sales trajectory. Turning to slide 7, Flavors and Extracts Group saw local currency revenue growth in the third quarter of 3% and local currency operating profit growth of 9%. The agricultural ingredients business in particular had nice volume growth in the quarter. The group's adjusted EBITDA margin was 18.5%, up 80 basis points versus the prior year's comparable quarter. The results aligned with our expectations for the third quarter. The group continues to focus on new and technically differentiated flavor wins and optimizing its costs. These factors have fueled the favorable profit leverage that we expect to continue into 2027. Overall, for the Flavors and Extracts Group, we expect local currency revenue growth of mid-single digits for the year. Now turning to slide 8, the Asia Pacific Group had an outstanding third quarter delivering 15% local currency revenue growth and 32% local currency operating profit growth. Group's adjusted EBITDA margin was 27.5%, up 330 basis points versus the prior year's third quarter. Asia Pacific Group continues to generate strong new color and flavor sales wins across all geographies. I now expect the group to deliver low double-digit revenue growth for the full year. Turning to slide 9, regarding our full-year guidance, our growth expectations remain consistent with our previous guidance. We continue to expect our local currency revenue to be up high single to low double digits and our local currency adjusted EBITDA and EPS growth in the mid to high teens for the year. On the capital allocation front, we expect consolidated capital expenditures to be around $160 million for the year. We continue to expect to spend around $250 million for natural color capital, with the majority in 2026 and 2027. We also continue to anticipate an increase in our natural color working capital requirements as we build our supply chain. We are absolutely committed to delivering $1 billion in incremental natural color sales. We are fully engaged on this multi-year plan to add the necessary capacity and allow for further potential growth in the future. Beyond capital expenditures, we will evaluate sensible acquisition opportunities, and we do not anticipate any share buybacks in the near term. Now, before I turn the call over to Tobin, I'd like to profile some of the consumer research that our Color Group has conducted to reinforce the value of color. This is shown beginning on slide 10. To provide a little background, Sensient's Value of Color series is a large-scale research initiative spanning several years. It quantifies how food color drives consumer perception, preference, and purchasing behavior. To date, this multi-phase research has engaged over 12,000 consumers in the United States, testing more than 70 consumer products across seven major food, beverage, and pet food categories to help deliver actionable color insights for our customers. Turning to slide 11, you can see an example of some of the findings from the research specifically focused on breakfast cereal. Color has a powerful influence on how people perceive the taste of food, and there is a clear linkage between color vibrancy and variety and the consumer's perception of flavor intensity. The critical point of this research is that color has a powerful influence on how people perceive the taste of food. As a result, when considering the impacts for natural color conversions, it is imperative that food and beverage brands maintain as much consistency in the appearance of their products to minimize the risk of a perceived change in flavors. In other words, for brands to win, they should match the synthetic color to drive taste and quality expectations. Analyzing our pipeline, the vast majority of our customers are striving to match the synthetic colors. There are very few instances where customers plan to remove color or use a dull, less vibrant color match. Another insight which became apparent through the data gathered was that consumers are willing to pay more for natural colors within the cereal category. They also associate quality with the visual appearance in their bowl. Additionally, we concluded that natural color use continues to increase purchase intent across all categories. This research has reinforced much of what I had said before regarding the importance of maintaining color consistency, quality, and vibrancy. Our R&D efforts continue to be focused on removing performance gaps that exist between synthetic and natural colors. If you'd like more information on any of our natural color technologies, please visit our website. Overall, I'm very pleased with our financial performance in the third quarter. I'm excited about the growth opportunities within each of our groups, and I'm looking forward to the continued progression towards our natural color sales target. The growth we are experiencing is the result of our execution of our long-range strategy, and I remain optimistic about the rest of 2026, and I expect 2027 and 2028 to be outstanding years for our business. Tobin will now provide you with additional details on the third quarter results.

Thank you, Paul. In my comments this morning, I'll be explaining the difference between our GAAP results and our non-GAAP or adjusted results. The adjusted results for 2025 remove the cost of the Portfolio Optimization Plan. While we do not have any portfolio optimization plan costs in our 2026 third quarter results, we believe that the removal of these prior year costs produces a clear comparative picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance. We'll start on slide 13. Sensient's revenue was $455.8 million in the third quarter of 2026 compared to $412.1 million in last year's third quarter. Operating income was $72.4 million in the third quarter of 2026 compared to $57.7 million in the comparable period last year. Operating income in the third quarter of 2025 included $3.3 million, approximately $0.09 per share of portfolio optimization plan costs. Excluding the costs of the portfolio optimization plan in the prior year, adjusted operating income was up 18.6% in local currency in the third quarter of 2026 compared to $61 million in the prior year period. Interest expense was $8.3 million in the third quarter of 2026, up from $7.3 million in the third quarter of 2025. The company's consolidated adjusted tax rate was 24.6% in the third quarter of 2026 compared to 23.8% in the comparable period of 2025. Local currency adjusted EBITDA was up 15.4% in the third quarter of 2026. Foreign currency translation had no impact on the EPS in the third quarter of 2026. Turning to slide 14, cash flow from operations was $40 million in the third quarter of 2026. Capital expenditures were $38 million in the third quarter of 2026, and as Paul indicated, we anticipate our capital expenditures to be around $160 million for the full year. Our net debt to credit-adjusted EBITDA is 2.3x as of September 30, 2026. As we communicated the last couple of quarters, we also expect higher investment in inventory throughout the year to support the increased natural color conversion revenue. Debt is expected to continue to increase further with our leverage ratio remaining around its current level. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible acquisition opportunities, and our longstanding dividends. As Paul indicated, we will continue to invest in our natural color production capabilities and capacity. These investments will remain elevated for the next few years, and we expect to drive favorable volume and profit growth for years to come. We maintain our goal of pushing our ROIC to the mid-teens over the next few years as we look ahead to peak natural color conversion activity. We will evaluate sensible acquisition opportunities where there is a strategic advantage on the technology supply chain or geography front. Turning to slide 15, reiterating our 2026 guidance, we continue to expect our local currency revenue to be up high single to low double digits and our local currency adjusted EBITDA and EPS to grow at a mid to high teen growth rate. Based on current exchange rates, we expect the impact on currency on EPS to be immaterial in the fourth quarter. We expect our full-year interest expense to be around $34 million and our tax rate for the year to be around 25%. We expect our full-year corporate expense to be approximately $66 million, with the increase driven by higher performance-based compensation. We are increasing the low end of our GAAP EPS range to $4.15 from $4.10 and narrowing the GAAP EPS range to $4.15 to $4.20. We still expect EBITDA margins for the Color Group and Asia Pacific Group to be in the mid-20s for the year, and EBITDA margins for the Flavors and Extracts Group will be in the high teens for the year. We will now open the call up for questions.

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Ghansham Panjabi with Baird. Please go ahead.

Good morning, everybody. I hear there's a big parade in town.

I know our team's excited. Morning, Ghansham. Morning. Excellent. Well, I'm looking over my shoulder and I'm realizing I'm sitting up here while they're down there. There's a lot of people walking the streets right now.

Congrats again to the Brewers. So Paul, in the past, you've given us invoice sales by quarter for the natural color sales specific to the conversion from existing synthetic. But, of course, that could include load-ins and so on and so forth. So, after $100 million in synthetic color sales that feed into the billion opportunity for natural color, over time, where do you think you'll be from a conversion standpoint by the end of 2026?

Yes, so I think as we've tried to make it, a couple of factors here. So we like to just speak in actual revenue rather than projected revenue. So if you look at our actual revenue, which we've been profiling each quarter, one could probably infer from that that the annualized value of that would be north of $160 million, and that would probably be a pretty good guess. So that's comment #1. When you look at kind of the pace of the launches, we've talked about there's, there's a fair amount of activity in '26 leading up to many of the milestones set by Walmart and some other retailers, January 1, 2027 being their deadline. As we get into 2027, most customers are still working towards a January 1st, 2028 deadline. But there are others working towards the July 1st, 2028 deadline. And as we said, the run rate would probably be towards the end of 2028, the run rate of the $1 billion. You know, is it about 20% by the end of 2026? That's probably about right. And then another chunk in 2027 and the balance of it in 2028 is largely what we expect. And the reason I can tell you that is, you know, we're the largest food color company in the world. We are essentially talking to every single customer brand out there. So we have a very broad perspective. And from that perspective, and given our years as the incumbent color supplier, we have a great deal of collaboration with our customers. We have, in particular in this case, what are their plans? So as we look ahead to 2027, we see kind of how our bigger customers have planned, plan their launches for the 2027 year, plan their launches for 2028 year. We have very good visibility. Now, do these things slip? Of course they do. Multinational launch dates will slip in normal times. Now we're in an instance where they may be converting hundreds of products from synthetic to natural. So not only do you have the complexity of the reformulation with the natural color, you have to repackage, you have to make sure you can produce. You don't produce products the same way with a natural colors you would with a synthetic. There's consumer testing. There's aligning on the supply chain. So there's a lot of moving parts, and this is a very aggressive timeline that most folks are working towards, most customers are working towards. So we've seen some movements to the left, but we've seen more movements to the right. I think ultimately about 20% for the end of this year is probably about right, and the balance coming in '27 and '28.

Okay, that's very helpful. And then for the color segment, you know, it looks like 3 key incremental margins, roughly 26%. I know you're obviously layering in cost to support the growth there. You've communicated that prior. But is that the ballpark for how we should model operating leverage for Q onwards? Or will there be some lumpiness associated costs as you ramp up the investment to support that?

Well, I would say this. I think many of the or much of the SG&A has been added over the last 1 year-plus. That's not to say that there will not be more. I think what will change moving forward is that the equipment comes online and we start layering depreciation. You know, you would see the impact of that now as things, you know, as the little green light goes on on the equipment, as I like to say. That may create moderate lumpiness. By moderate, you could see mild shifting in that 25% EBITDA. But, you know, our projections for the year on EBITDA for color, we feel very good about this 25%. I think we feel very good about this 25% next year. Might there be some movements quarter to quarter? Yes. Is it indicative of anything more than the timing of depreciation? No. I think we continue to see some movements quarter to quarter. We continue to win sales with technically differentiated products. So we like to deal on the more advanced part of this market, which commands a more defensible position with higher margins in general. So, no, listen, I look at our pipeline and I look at the opportunities, and 25%, I feel really, really good about that. '27 regardless really of depreciation. So you're not going to see some big movement down in that 25% in any one quarter, but could there be shifting of 30 basis points, plus or minus? Sure. Does that mean anything? Like I said, it does not. When we start selling low margin commodity junk, then you would see that. But since we're not going to do that, you shouldn't see much shift off that 25%.

Okay, very clear. Thank you. And the next question comes from Joshua Spector with UBS. Please go ahead.

Yes, hi, good morning. Just on your comments on the exit rate, hey, I just wanted to ask, I mean, that 20%, obviously the simple math is maybe your natural color conversion will be about $50 million in fourth quarter. Yes, that triangulates with your guidance. Is that what you're expecting at this point based on the visibility of orders in hand?

Well, so let me let me just be clear here, right? So when you get a win from a customer, right, they're going to give you a PO. They're not going to give you a PO for the full value of that project, right, because they're going to give you some fraction of the annualized volume. In a normal product launch, and new to the world of product, you'd get 25% to 30% of the volume. So let's just say you win a $1 million sale of an LTO or just a line extension of an existing customer, new product to the market. He would probably give you about $250,000 to $300,000 on his first order, right? As he's loading up the channels, as he's putting enough product out there for consumers to try this new product. And then, you know, in the next quarter you may get another 25% and so forth. What we are seeing on the natural color front is a little bit different. Think of this as more of a packaging change pace. So initially, when natural colors came along and West Virginia passed its law and the customers started looking at that, the law originally said, to the best of my recollection, hey, you have to have all of your synthetic colors off the shelf on January 1st, 2028. This later came to be understood as July 1st, 2028, everything off, but nothing new after January 1st. So long story short, first POs in the Q3 sales wins and even late Q2 were more along the lines of 10% of the annualized value, right? So in other words, instead of $250,000, $100,000 first PO and that million-dollar win you might get like about $100,000 because because he's replacing the old with the new as he sells the old. So that's a little bit of a change. So when I talk about 20%, that means 20% of these things have been closed. They're not necessarily running at a full run rate. And so if you look at what would close, we would expect about 20% towards our goal to close, it may close on December 23rd, right? You get your first PO, but you're not going to get your full annualized value. So it's a little bit of a change based on what we saw in Q3 and late Q2 in terms of how the POs are coming to us. And I think, again, this is just as customers have begun to interpret expectations a little bit differently, there's not this need to clear the shelf of all products with synthetic colors. They are metering in the newly developed products with the natural colors off the synthetic and then they get to a normal ordering pace.

Okay, I think I understand all that. I'll probably follow up a bit more offline, but kind of related with this, it seems like there's maybe some nuance with how you're framing the target now. I think your comments were approaching a billion and exiting 2028. I guess, is that a shift in your prior messaging at all? Is that a little bit later? Or would you frame that as higher confidence that now you're putting in more specific timelines, I suppose?

Yes, I think what we're trying to do, what I'm trying to do is tell you the exit rate is to, based on the pipeline and the launch dates, that is our, we've always felt like 2028, everybody's going to convert by sometime in 2028. Initially, it was the beginning, as the understanding of those state laws changed, it became mid to late 2028. And so it's an indication that the vast majority of these conversions will be completed in 2028. It may be later in 2028, maybe early in 2028, but we feel very confident based on our knowledge and our understanding of each of these customers and their launch plans that by the end of 2028, we would be at that $1 billion incremental run rate as a business.

Okay, thank you. And the next question comes from Lawrence Solow with CJS Securities. Please go ahead.

It's Gary, but Larry works too. Hey Larry, no, that was still.

Hey Larry, you didn't change your name though. I will still call you Larry.

Congrats to you as well, Paul, and the Brewers. You got the, you got the Brewers in 1 hand and the Jets in the other. So you should definitely go for the Lions. Yes. Yes. I lost that other hand. Packers 1 last time. Packers 1 last time. Yes, absolutely. Question, just on the margin profile, and I realize it's, you know, last quarter was a little bit of an aberration up, and now you're back down on the collar side. Just curious, still early stages, but how is it shaking out? I know we were kind of looking for a little bit of a lower gross margin. And then eventually, you know, when you get some leverage up at a higher rate, maybe operating income would be about flat. But it sounds like if your SG&A expenses are already up front, mostly paid, as you look out over the next few years, would you expect to actually get some margin improvement on the color side?

I think it's possible. I want to give you guys a number you can really rely upon, and I think 25% is that number. But you bring up an interesting point, right? The timing of the SG&A, the timing of the depreciation, it may not line up that this is a pure every quarter. Quarter is 25.0. Again, it's just really nothing more to do than the timing of when equipment comes online. But I would tell you this, the majority of the SG&A expense we anticipated adding to the business, much of that has already taken place. But the depreciation, the majority of that has not yet taken place. And so whereas we may be having less SG&A, we may have more depreciation as we, you know, move forward into 2027. So net-net, you know, that's, that's why it's very easy for me to say, as I look at our modeling, 25% is a really good number. Is it 25% every quarter, every month, every week, and every day of the year? No, but I think, again, that's just more to do with the timing and the shifting. So whereas we may have a higher gross margin and that's offset by some SG&A, we then get a lower gross margin from the depreciation, but then we have less SG&A. But I would say this too, right? I mean, the SG&A, a lot of that is driven by adding new folks to the business, technical, commercial, and otherwise. But there's also a fair amount of R&D underway, right? One of the things that we've talked about is this first version of the conversion to natural colors is generally from conventionally grown crops. These crops are being now grown at a scale that is rather unprecedented. So as we get into '27 and '28, as farming techniques improve, as efficiencies grow, as more suppliers enter the market, that in theory drives down the raw material costs for us, all really good things. As we continue to optimize, customized with our customers, kind of version 2 of a natural color. We think there's costs and optimization that can take place. And so, yeah, we've got a lot of things in mind that can help us to continue to really maintain and, hey, in our wildest dreams, even grow off that 25. But I think in terms of your modeling, let's stick with 25. As some of these things come to fruition, you'll certainly see that in the figures. But no, I think we feel really, really good about maintaining that. You also saw in Asia, they hit 27.5. I wouldn't necessarily model that. But again, it just shows you that in any given quarter through a product mix or one product, wins than you had anticipated. These types of factors can really give you a nice uplift in any 1 quarter, but I don't want folks to necessarily overreact or underreact to that. We give 25% because, again, that's what I think we can consistently deliver for you folks as you're modeling out the returns you can get here.

Okay, and the ratio, at least on volume and relative to price, has been hanging close to that? I realize it's still early, but high singles close to 10, I mean, that's still something you're comfortable with?

In terms of revenue. You mean in the multiple, Larry, the conversion multiple? Yeah, yeah, no, we...