Sensient Technologies Corporation

Good morning and welcome to the Sensient Technologies Corporation 2025 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornell. Please go ahead, sir.

Good morning. Welcome to Sensient's Earnings Call for the Second Quarter of 2025. I'm Tobin Tornell, 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 2025 Second 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, cost of the company's portfolio optimization plan, 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. This 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 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 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 on slide five. Now we'll hear from Paul.

Thanks, Joe. Good morning and good afternoon. Earlier today we reported our second quarter results. I'm pleased that we continued to build on our strong first quarter results and delivered 14% local currency-adjusted EBITDA growth and 21% local currency-adjusted EPS growth. Local currency revenue grew low single digits during the quarter. We had particularly strong revenue performance from the color group, delivering .6% local currency growth. The Asia Pacific group delivered .6% local currency revenue growth and the flavors, extracts, and flavor ingredients product lines within our flavors and extracts group delivered .6% local currency revenue growth. These results aligned with our expectations and positioned us to deliver on our full-year local currency-adjusted revenue guidance for revenue, EBITDA, and EPS. Our emphasis on sales execution, customer service, and commercialization of new technologies continue to drive our performance. We're seeing significant activity at customers as they prepare for the conversion of synthetic colors to natural colors in the United States. As I've said before, the U.S. conversion to natural colors is the single largest revenue opportunity in sentience history. We made a strategic shift to natural colors more than 15 years ago, investing internally and through acquisitions in technologies, production capabilities, and supply chain. We believe that the conversion to natural colors was inevitable given the broader market conversion to more natural food products. We have invested heavily in capital for natural colors, building and expanding production facilities around the world, and we will continue to invest in our facilities in the immediate future and for years to come. We have invested considerably in research and development for natural colors, and we will continue to emphasize this for the foreseeable future to ensure we continue to optimize our portfolio. We have also worked to build a resilient supply chain to provide the botanicals necessary to produce natural colors. Currently, our commercial, technical, engineering, and supply chain teams are busier than ever preparing and supporting our customers for these conversions. During the second quarter, we continue to generate strong new sales wins across each of our groups, and our sales pipelines remain robust in each of our regions. These sales wins are a result of our innovative product portfolio across our food, personal care, and pharmaceutical product lines. Each of our groups remain focused on collaborating with our customers to support their development requirements, and our customer service levels remain strong. In short, we're well positioned to capitalize on the market trends we see across our portfolio. As I mentioned on our last call, the current trade and tariff landscape has introduced additional complexity and certainty to our businesses. This situation continues to fluctuate, and based on current information, we expect the annual impact of tariffs to be slightly less than the $10 million we communicated previously. We've already taken price to offset the impact of the initial wave of tariffs. We will continue to position our supply chain organization to minimize any disruptions to our customers and to optimize the flow of goods. Also, as we turn to the second half of the year, our portfolio optimization plan continues to remain on track for an end of the year completion. Turning to slide six, and our group results. Color Group had excellent second quarter results, delivering .6% local currency revenue growth and .1% local currency operating profit growth. The group's second quarter adjusted EBITDA margin improved to .1% from 22.2%, an increase of 290 basis points versus the prior year. In the second quarter, the group saw strong new sales wins, particularly in natural colors. I should note these wins are not yet the result of any significant natural color conversions. I will touch on our estimated timing of these later in our discussion. Color Group is progressing nicely and I'm very excited about the future ahead of us. Turning to slide seven, the flavors and extracts group saw local currency revenue decline in the second quarter by .2% but increased local currency operating profit by 8.6%. The group's adjusted EBITDA margin was .8% up 160 basis points versus the prior year's comparable quarter. The flavors, extracts, and flavor ingredient product lines reported .6% local currency revenue growth and significant local currency operating profit growth. The growth in these product lines is a result of our innovative flavor technologies and our focus on new and defensible flavor wins across North America, Europe, Latin America, and the Asia Pacific. As discussed during our last quarterly call, our natural ingredients business, which consists of dehydrated onion, garlic, capsicums, and other vegetables, continues to be impacted by lower sales volumes and higher costs, which we anticipate to persist until the end of this year. On a positive note, currently we anticipate the crop that is being harvested this year, and that will be sold mainly next year, will be at an improved cost position compared to the current year. Despite these dynamics in the natural ingredients business, I still expect the flavors and extracts group to deliver solid results for the year. Now turning to slide eight, the Asia Pacific group had a solid second quarter delivering .6% local currency revenue growth and 8% local currency operating profit growth. The group suggested EBITDA margin was .3% of 30 basis points versus the prior year's second quarter. The group continues to achieve growth in almost all regions, primarily driven by new sales wins and flavors and natural colors. The Asia Pacific group continues on its multi-year success, and we expect more of the same in the future. Turning to slide nine, we remain committed to our guidance for the year. As we previously communicated, we expect consolidated annual local currency revenue to grow at a mid single digit rate. We originally communicated a mid to high single digit local currency adjusted EBITDA growth expectation, but we are now raising our guidance to high single digit local currency adjusted EBITDA growth. This should result in high single digit to double digit local currency adjusted EPS growth of the year. On the capital allocation front, while we increased our capital expenditure guidance last quarter to be between 80 and 90 million, we now feel as a result of the accelerated natural color conversion activity in preparation for expanding our production capacity, we can expand further and achieve around 100 million or slightly more for the year. This is a very positive development that will help us to more readily win new natural color projects and to help accelerate our customers' conversions. The increased investments we are making in natural colors is a great use of our cash, and we anticipate our capital expenditures will remain above 100 million next year as we continue to invest in our natural color capabilities as well as across our flavors and extracts group and Asia Pacific group. Beyond capital expenditures, we will continually evaluate sensible acquisition opportunities, but we do not anticipate any share of buybacks at this time. Now before I turn the call over to Tobin, I'd like to provide more information on the current state of the synthetic color regulation and natural color conversion activity. Turning to slide 10, the regulatory environment continues to evolve almost weekly. More than half the states in the United States have some form of legislative activity for synthetic food products. West Virginia became the first and thus far the only state to pass legislation that prohibits the sale of food products that contain synthetic colors. That law goes into effect in January 2028. Additionally, Texas has passed legislation requiring food manufacturers to place warning labels on packaged food products that contain certain ingredients including synthetic colors and titanium dioxide with an effectiveness in 2027. The main effect of these state actions is the conversion to natural colors at the national level. Turning to slide 11, so far this year we've seen a total of 112 color-related bills introduced across U.S. state legislatures. A significant number of leading branded food companies have recently announced plans to transition from synthetic to natural colors with many publicly targeting the end of 2027 as a deadline. While we continue to believe in the safety of all synthetic food colors, Sentient is engaged with a substantial number of brands to support their transition to natural colors. It's clear to us that the majority of consumers want natural colors in their foods and beverages. Turning to slide 12, I would now like to take a moment to highlight two key technologies that are enabling our customers to successfully move from synthetic to natural colors without sacrificing the vibrancy and stability that their customers expect. As we have discussed and as experience in the market has shown, converting to vibrant natural colors is critical for brands conducting the transition of their products. Choosing less vibrant colors or eliminating color altogether has repeatedly led to poor outcomes in the market. More often than not, consumers' flavor perception changes as a result of modifying a product's synthetic vibrancy. Whether it's an iconic soft drink or breakfast cereal, using inferior natural colors has caused such launches to fall flat in the market. It is our goal to help our customers succeed and build their brand to this transition. The first technology I want to highlight is our microfin range, which is arguably the single most successful natural color technology we have ever launched. Microfines are natural colors used extensively in salty snacks to impart bright reds and yellows and other colors. Salty snacks are a very large category and the popularity of spicy varieties has increased demand for our microfines substantially over the last few years. Now with the full transition to naturals, we are uniquely positioned to help our customers maintain the color performance essential to their products. Microfines are also used extensively in bakery and confectionery applications. They have a significant performance advantage over most standard natural color options in the market. Second, I want to highlight Sensian's Butterfide Pea Flower Extract, which was first approved by the FDA in 2021 for beverages and many other product categories. More recently, FDA approval was extended to include cereals, crackers, and snack categories. This expansion allows our customers to achieve vibrant blue and green colors in a wide array of products. Butterfide Pea Flower Extract also provides bold, brilliant purple shades for many beverages. Sensian not only discovered the novel color source but stabilized the color application and created a reliable supply chain that makes it an appealing option for customers today. As I said, the key to a successful natural color transition for food and beverage brands is to maintain the color vibrancy and variety that consumers are used to seeing in synthetic colors. Our R&D efforts are dedicated to removing any gaps that exist between synthetic and natural color performance. Like more information on natural color technologies, please visit our website. Overall, I'm pleased with our financial performance in the second quarter. We're on track to deliver on our full-year guidance. I'm excited about the growth opportunities within each of our groups. Given the synthetic to natural color regulatory timeline I just outlined, we anticipate Sensian's natural color revenue to increase more significantly beginning in 2027 to ensure our customer's synthetic color products are off store shelves starting January 2028. The growth we're experiencing is a direct result of the execution of our strategy and seizing the opportunities in our markets. I remain optimistic about 2025 and the future of our business. Tobol will now provide you with additional details on the second quarter results.

Thank you, Paul. In my comments this morning, I'll be explaining the difference between our gap results and our non-gap or adjusted results. The adjusted results for 2025 and 2024 removed the cost of the portfolio optimization plan. We believe the removal of these costs produced a clearer picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance. Starting in slide 14, Sensian's revenue was $414.2 million in the second quarter of 2025 compared to $403.5 million in last year's second quarter. Operating income was $57.7 million in the second quarter of 2025 compared to $49.7 million of income in the comparable period last year. Operating income in the second quarter of 2025 includes $3.3 million, approximately six cents per share, of portfolio optimization plan costs. Operating income in the second quarter of 2024 included $1.8 million, approximately four cents per share, of portfolio optimization plan costs. Excluding these costs of the portfolio optimization plan, adjusted operating income was $61 million in the second quarter of 2025 compared to $51.4 million in the prior year period, an increase of .9% in local currency. Interest expense was $7.4 million in the second quarter of 2025, down from $7.7 million in the second quarter of 2024. The company's consolidated adjusted tax rate was $25.2 in the second quarter of 2025 compared to .8% in the comparable period of 2024. Local currency adjusted EBITDA was up 14% in the second quarter of 2025. Foreign currency translation had minimal impact in the second quarter of 2025. Turning to slide 15, cash flow from operations was $48 million in the second quarter of 2025, up .2% compared to last year's comparable period. This improvement is primarily due to improved earnings and working capital management. Capital expenditures were $21 million in the second quarter of 2025, and as Paul indicated, we now anticipate our capital expenditures to be around $100 million for the full year. Our net debt credit adjusted EBITDA is 2.4 times as of June 30, 2025. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible acquisition opportunities, and our long-standing dividends. As Paul indicated, we'll continue to invest in our natural color capabilities. These investments will increase in the next few years, which we expect to drive favorable volume and profit growth in years to come, and we believe will be beneficial to our return on invested capital. Turning to slide 16, revisiting our 2025 guidance, we continue to expect our consolidated 2025 local currency revenue to be up mid-single digits. We have now raised our local currency adjusted EBITDA to high single digits. Previously, our range was mid to high single digits. We expect our local currency adjusted EPS to be up high to double digits in 2025. We still expect our interest expense to be slightly higher than the $28.8 million of interest expense recorded in 2024, and we expect our adjusted tax rate to be approximately 25%. Both our interest expense and tax rate will fluctuate quarter to quarter, and as a result, we continue to believe our local currency adjusted EBITDA growth is an important measure of our performance. For the third quarter, we expect our interest expense to be approximately $7.7 million, and our third quarter tax rate to be around 24%. Based on current exchange rates, we now expect the impact of currency on the EPS to be a slight tailwind for the year. As a reminder, we guide in both GAAP and local currency for EPS. This is important to understand as our reported GAAP results include the translational impact of foreign exchange rates, which has generally been unfavorable as a result of strong U.S. dollar in recent years. Considering our GAAP earnings per share in 2025, we expect approximately 20 cents of portfolio optimization plan costs. We expect our GAAP EPS in 2025 to be between $3.13 and $3.23 per share compared to our 2024 GAAP EPS of $2.94. As you have all seen daily, the tariff situation remains dynamic. As Paul mentioned, we are mitigating the impacts of tariffs with price. When and if any tariff changes come into effect, we'll report on that effect after the fact. Thank you for participating in the call today. We'll now open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And your first question comes from Larry Solo with CJS Securities. Please go ahead.

Great. Thanks. Good morning, everybody. Thank you, Larry. First question would be, Paul, lots of moving parts and positive things on the color side. As you mentioned, we've seen a lot of positive headlines, a lot of the larger CPGs committed to switching within the next couple of years. Just curious in the background what's going on. It's only been a few months, obviously, but supply chain, things like that, advancement, planning, just logistics and stuff like that, because obviously it's going to be somewhat of an effort to make that transition. Any color or just lay the land you can give us on that side of the equation?

Well, supply chain is perhaps, well, arguably the single biggest factor here in this conversion. You've heard me say this publicly many times, and I'll say it again. If the United States wanted to convert tomorrow, they couldn't because there's simply not enough material available to fulfill the type of demand and need we're talking about here. Like any agricultural product, there's a lead time associated with that. Of course, naturally, a lot of planning goes into that process. That's point number one. Point number two, I think one of the first things that we, as we embarked on this natural color strategy 15, 16 years ago was it's about the supply chain, stupid, because if you don't have enough sources and a variety of those sources and you're not cultivating new ones and novel ones, that's going to be the real limitation. You could have great technology and great capacity and wonderful salespeople and a terrific website, but if you don't have botanicals, the train stops. I think very early on, we identified that as perhaps the single most critical factor in this whole conversion activity. For us, this is year 16, 17 or more working in earnest on this supply chain and how we can have enough, mitigate as much of the risk as possible through diversification and identification of new sources, selective vertical integration. You've seen us buy a couple of businesses over the years focused in this area, but I think you're hitting on a profoundly important point, and that is the supply chain. Yeah, there's a lot of other factors too, but yeah, this is one that we have worked and continue to work very, very diligently to ensure that we have it when the time comes.

Gotcha. In the outlook for them for 2027, it doesn't sound like you'll get some incremental in 2026, but it sounds like 2027 will be the year where we should kind of see maybe not an inflection point, but a lot greater increase on the natural color side.

Yeah, I think that's a fair assumption. With January 1st, 2028, now the regulations for West Virginia states that you will not have items on the shelves on January 1st, 2028 that contain synthetic colors, so that one could rather easily assume then that natural colors need to start coming out in earnest at some point in 2027. So if for no other reason, the West Virginia law provides a bit of the guide rail there, yeah, I think you're about right on the 2027. And what's noteworthy about the color's continued success as we mentioned in the comments there, those results, that great revenue growth, that great profit growth, there is no major conversion or even minor conversion that I could speak to associated with those numbers. So that makes that result all the more impressive, and it also gives you a little sense of what is the real opportunity available here as these conversions begin in earnest, and when that may be, I don't want to say it's anybody's guess because there is a deadline here, but yeah, I think 2027 in short, that's probably the, that's going to be the single biggest year I think we could all agree in this time frame. Got it.

If I could just squeeze one more for Tobin, just the quarter, nice earnings growth on somewhat more modest sales growth, obviously nice margin improvement, and it looks like it was mostly gross margin or it is mostly all gross margin driven. Is that pricing? Is that mixed? What's kind of driving that nice improvement in gross margin?

Yeah, no, margins are up across the board, especially our EBITDA margins across all three groups. So we did see a good movement there. Pricing is really a material for us, so low single digits, so volume growth, mix, which is a result of a lot of the new wins that we're experiencing across all three of our groups. So that's really what's driving it as well as we've got our eye on our costs, making sure that we're maintaining our SG&A base and being able to leverage that, and I think you're seeing that in our margin performance. Great. Thanks. I appreciate it.

Okay, Larry. Thanks.

Your next question comes from Gansham, Punjabi with Baird. Please go ahead.

Hey, guys. Good morning. Hey, Gansham. Congratulations on your progress. Morning, Paul. So I guess first off on the 110 of synthetic colors that you currently have exposure towards, how would you have us think about the activity at this point in terms of converting towards natural? I mean, obviously it's a process with reformulations, qualifications, et cetera, and if you could break that out in terms of which specific categories within food and beverage are sort of seeing the highest initial momentum, that would be helpful as well.

Yeah, so I think the opportunity as we see it, so that's the number, the 110, that's not only the US, but there's a component of that associated with Latin America, and so while this conversion is a US conversion, there are certainly manufacturers outside the US who would export to the US who will also be subject to these requirements, and so therefore it provides opportunities outside of the US too for our business. So I think that's really an important piece. In terms of which products and which customers, big or small, I would tell you that there's no real obvious and predictable set of behaviors. I think we've seen very, very small companies exceedingly eager, want to go, want to go first, want perfect matches. We've seen very large companies, customers who say, hey, we want to go, we want to go first, we want to have great matches, and then you see, of course, everything in the middle, but as we look at this, there has always been work in natural colors. Natural colors is by no means new to the US or certainly any other part of the world. Our activity would suggest in the US market prior to these announcements that 80% of new product launches that had a color, that color was a natural color, so it's something that our customers are familiar with. Now, it's a little bit less familiar in certain applications than others. So for example, natural color use became pretty widely used in beverages, not all beverages, but many beverages, which is an exceedingly difficult formulation environment, oftentimes to add a natural color versus a synthetic color. Can you get the same vibrancy? Can you avoid taste changes associated with a higher concentration of color in that formulation? And so beverage has always been a strong user, but it's also been very challenging to put natural colors in many of those products. As you go through the other types of product segments, there are those that are far more challenging than others, processes that involve a lot of heat, like extrusion or baking. You can imagine that chair in your family room at home, right? If it's tan, and then if it just keeps going, the color entirely goes out of that. And so you see a very similar phenomenon when you have even higher temperatures and exposure to light and colors. And so there's very, very challenging manufacturing environments that our customers produce their products in. And so

these

are a lot of the things that we've been working on with our customers, but most of our customers too had some level of contingency over the years. Maybe 10 years ago, hey, I might have to convert this one day. So I'd kind of like to have the answers to what that would be. And so there's been some of that work, but because our technologies have enhanced and improved substantially over that time period, in many cases we're redoing a lot of that reformulation work. But I think the advice we give to our customers and all the data that we have observed around the world would suggest that if you're a customer using synthetic colors and you want natural colors, your goal should be to match that synthetic color. You might not get it exactly the synthetic color match, but you have to have a very vibrant, attractive color. Nature is vibrant and attractive. And so when folks get cute and they decide, well, it's natural, so it should look ugly and faded and pitted and no, wrong answer. And I think that that is probably the most important guiding principle and the one that we share with the majority of our customers. They want to get that match. They want their products to look attractive. They want natural colors to be a source of opportunity in their category. Many customers want to go first so that they can be leader of their category and see natural colors as a mechanism to potentially grow their share in that category. And they believe that doing that with the right matches is going to be the most critical factor or certainly among the most critical factors. And so yeah, the momentum is very, very strong. I think our customers are very, very engaged in this. In fact, we even see somewhat of a reduction in launches at customers because of the focus and attention that they are providing to natural colors. They're taking folks from around their labs and having them work on this natural color reformulation has in some cases actually slowed launch activity in other parts of the market for them. So big effort, but very, very exciting. And we feel really, really good that we've got a lot of great technology to share with the customers here.

Okay, thanks for that. And then for the color segment specific to 2Q and the incrementals were north of 60%, it was 40% in the first quarter. I know there's variability just depending on timing and so on and so forth, but was there anything unique that drove that sort of improvement in 2Q? Going back to the earlier question on margin expansion. Thanks.

Yeah, no, I mean, Gansum just the color group reported really nice EBITDA margin north of 25%. So there was nothing real specific. I mean, really, really the new wins that Paul has alluded to and we've been talking about for the last several years has really been driving that growth. And then our focus on costs over the years and making sure that our cost basis, especially in energy, SG&A that we're able to leverage that has been a focus not only in the color group, but flavor in Asia and corporate as well. So I think you're starting to see that not only in the color group, but flavor in Asia as well.

Okay, then just last question, maybe a two-parter. So first off, on natural ingredients, what do you think is the realistic timeline for volumes to inflect higher? Obviously, 2Q was at least below our forecast. And then second, in terms of capex, I mean, it's rare for a company of your size to raise capex so quickly during the course of the year, two quarters in a row and so on. What exactly are you spending on in terms of capacity? And then how should we think about capex needs for 2026? I realize lots going on and so on, but the opportunity sets big. So I'm just trying to get a sense as to how much of an uptick we keep in the back of our minds for next year.

Okay, so the timeline on SNI, this is essentially, I think you'll see the inflection point late Q4. And the inflection point will be not only on revenue, but perhaps more importantly, on the cost profile of that product line. Right now, we're dealing with a very heavy cost crop, stemming from a number of factors, not least of which was downy mildew. Well, I guess you'd call it a blight last year in the number of our growing regions. And so I think you'll see a nice turnaround in SNI for 2026. But also, as you can see, we more than overcame whatever reductions in SNI we had to face from a headwind standpoint. And flavors really delivered nice mid single digit top line growth and remarkably good leverage. And again, going back to Tobin's point on the heels of really, really good product mix, really, really tight cost control. And let's not forget, we used to have a hell of a lot more plants and flavors and now we don't. So we've got continued and substantially better optimization and utilization of our plants, which really, really feeds nicely into that leverage. On the CapEx front, yeah, that's right. We raised CapEx last quarter, we're doing it again. And I would do it more if I could. But my constraint right now is how quickly I can get equipment and how quickly I can get little green lights to turn on in facilities around the world. So the faster we have CapEx in place, this equipment, and again, this is all that 10 million raised, essentially 100% of it was with respect to natural colors. We want to win and we want to win substantially. And we're going to put our money towards our strategy as we have for the last 15 plus years. And so I only wish I could have added more to the guidance in 2025, quite frankly. So we're feeling good with where we are. We've got a lot of capacity, but we're going to have a lot more capacity as this conversion heats up. And we want to enable customers to go faster if they want with this conversion. And having that supply chain squared away and having the capacity available are big in that discussion. And so we gave a little bit of a hint about 2026, it would be, I'll tell you right now, it's going to be north of 100 million. Depending on the timing and other factors, we'll refine that as we move forward. But I think we're going to be very, very happy that we did this. And it's going to enable us to really win a good share of these conversion opportunities.

Okay, very helpful. Thank you.

Okay, thanks, Gansum. Thanks, Gansum.

And your next question comes from Nicola Tang with BNP Paribas. Please go ahead.

Hi, everyone. Hey, Nicola. Hello. Hey, thanks for the questions. First, I guess a follow up on the CAPEX point. You mentioned that you already have a lot of capacity, but you want to enable customers to grow faster. Based on your current capacity, do you feel comfortable in terms of the conversion of the 110 million of existing synthetics revenues that we were referring to or does the CAPEX investment that we're talking about also help to, I suppose, fund or support the capacity for the conversion of existing customers as well? Just trying to understand how much incremental growth opportunity there is on top of just the conversion with existing customers.

Yeah. So today's manufacturing footprint would be insufficient to convert that 110 now. Could it get us halfway there? I don't know. I hadn't necessarily thought about that question, but it could certainly get us a fraction of the way there. And so this incremental spend is really essential to the longer term opportunity.

Do you also see an opportunity to take more share to beyond just converting the 110 or that's really what you're thinking about in terms of this CAPEX step up for the next few years?

Well, I always think about growing the business. And if I have something that somebody else doesn't have, good for us. And so, yeah, I think that this puts us in a very, very good position to capture our existing share of synthetic. But you don't necessarily win every single opportunity. So we want to ensure the odds of that grow and grow. And capital is one of those levers we have to ensure we capture our share and we're always going for more. But remember, too, there's slices of the natural color market that we're not particularly interested in. They're not as defensible, much more basic applications, stability, formulation, applications expertise are not really considerable factors in winning those types of products. So selling buckets of something or other to somebody who's going to buy it this year and give it to somebody else next year, we largely tend to stay away from that sort of transaction. And there's definitely an element of that in natural colors as there is with every market, I think.

Okay. And the second question was more around pricing or the relative pricing of natural and synthetics and how this could develop over time. I think today you talk about, you know, to exactly color match, you talk a little about the importance of this, you know, kind of average one to 10 conversion, synthetics to naturals. I was wondering, given what you said about the challenges around supply chain, around physical availability of products, but also the increase in technology or more complex technology that we're seeing, whether actually the price, the relative cost or the relative price point of naturals could actually be higher than the 10 to 1 going forward or do you think it will come down?

Well, the sort of the 10 to 1 or 8 to 10, depending on who you talk to, that's an average case. So if you just think of a normal distribution of data, that's probably kind of right down the middle. There are some applications that it might be 15 or 20 times and then there are other applications that may be three or four times. So there's a lot of possibilities within that. So as this begins in earnest, this conversion, you could imagine that there'll be a lot of folks who want to enter from a supply standpoint, the growing of these botanicals, the processing of these botanicals. And so I think that would be fundamentally a good long-term program. When you think about the FAC, fully absorbed cost of a natural color to be produced, the vast majority of that cost is raw materials, maybe even 60, 70 percent in some cases. So every lever one could have to reduce that raw material cost, you really want to pull it. I mean, it's certainly our expectation. We want to optimize the economics for our customers as much as possible. We want them to be successful. We want them to be eager to do this. And so, yeah, finding those additional supplies and just having more supply available as we proceed, I think that's going to be a real positive for us and for the industry so that we can continue to bring that 10x down to, you know, 8x and 7x and whatever that may be. And our continued efforts around R&D, development of better solutions, you go back 15 years, it wasn't 10x, it was probably like 35x. And so over time through technology, the development work we've done in this space and perhaps even others, I think, really gone a long way to reducing it to where we are today. So I still think there's opportunities in the future to do that. But again, it's all in the interest of helping our customers to really be successful with their product categories and then these spaces.

Okay, great. And then a final question just on the flavors and extracts division. I mean, packaged food volumes from an industry perspective have been pretty lackluster for quite a long time. I was wondering if you could talk a little bit about, you know, your outlook both in terms of the industry but also what you're seeing in terms of new win activity and what your outlooks are gross here.

So the market data I look at for Q2 would suggest that the volume of goods sold in the United States, food packaged goods, not the revenue, but the volume was actually down in Q2. Europe was up modestly. And again, those are averages. So there were some categories that did quite well, energy drinks, I contribute substantially to that market. But there are others that are sort of less interesting to folks. And so net-net, the volume was down in the US, up slightly in Europe. There are nice patches in Asia. As much as folks talk about China and, oh, you know, they're still up four or five percent in most of the markets that we're serving there. With respect to launch activities, you know, to me it's a little bit more of the same, pretty flat, not a lot of movement from Q1. Yeah, line extensions, yeah, repackaging. And so I think continued sort of fewer to the world product, new to the world products. And I think that's on the heels of a lot of uncertainty with respect to interest rates, tariffs, and perhaps an unwillingness for certain brands to really take big bets on products that may not do so well in the marketplace. So we see kind of a continued, maybe slow launch activity. But hey, listen, I mean, Natural Colors is an enormous launch activity. And so whereas, yeah, maybe there's products over here that aren't generating a lot of launch activity, and at the macro level it's not, Natural Colors will certainly provide the enormous uptick that we would hope is going to help drive our business longer term. So I think the fact that we pick Natural Colors, that we've been very focused on Natural Colors, I think we're going to be rewarded for that in the market launches and the growth opportunities that are there. So yeah, the macro level is one thing, but the markets and the segments that we've really been emphasizing is another. And this is why you go back to 2019, our year over year average revenue growth rate is north of 6% in local currency. So I think we picked the right segments, and I think we're going to continue to execute pretty well on these.

All right, thank you.

Okay, thanks Nicola.

Again, if you have a question, please press star and one. Your next question comes from David Green with Boldhaven. Please go ahead.

Hi Paul, Hi Sabin. Hey David. Hey there. Yeah, first quick question. You've raised the the local currency adjusted EBITDA guide from mid to high single to high single, but you haven't changed the local currency adjusted from the high single digit to double digit. I just wondered what the moving parts were there.

Well, you're right, we raised EBITDA and we retained, we maintained revenue. EPS is still high to double digit. And so, you know, I think you're probably doing the math and you're saying, well, if they got mid single digit revenue and high EBITDA, how the heck do they not get double digit EPS? Well, we can, and I think that's certainly within the range. But, you know, EPS is oftentimes a rather perfect metric, most notably since, as you know, it doesn't account for local currency and it doesn't take into account foreign exchange, which is why if you look back over the last 10 years, people say since the EPS is flat, because it doesn't take into account local currency results. So, it was an interesting metric in the, you know, in a time where folks only sold domestically, but in an international world, it's a little bit less relevant at times. But I think on the basis of local currency, as we like to think about EPS, yeah, high digit, single digit to double digit, double digit is very much potentially in play. But I think we like to leave wiggle room in as much as tax could change, interest could change, the Fed can do things that we can't predict and nobody can. And so, they're moving parts kind of below the EBITDA line that could impact that. But I think we just want to make sure, David, that we just never disappoint you.

David Morgan Yeah. And just maybe to F&E and to the cost headwinds in SNI, is there any way you can kind of give us a feel for what kind of headwind to top line those costs, those elevated costs from crop are having?

David Morgan Well, the top line is really a function of a number of things. So, number one, we had a really good last year, and maybe a little bit too good, and maybe we won some business that now we don't have. So, you could almost call it, there was a little bit of culling there. But I think first of all, they had a really good Q2. So, comparing that was rather challenging. And then there's a bit of culling. There's a lot of tariff distortion. Where we've seen the most distortion in our results stemming from tariffs is SNI. The market in the United States, while we grow domestically, there's a lot of imported products coming from Asia. And many of the agents and customers and others stocked up on these products in the first half of the year. And so, in as much as we have a strong share in a lot of these accounts, and we expect to see a little bit of an improvement sequentially in the half of the year. But these tariffs and the very long shelf life of these products kind of contributed to some of the headwind that we're seeing right now. So, yeah, I think on the cost, probably perhaps arguably the single biggest cost is the actual crop cost and the yield stemming from that. And some of these matters I mentioned before with Downey Mildew, there's which contributes a lot to operational costs. So, I think much of that has been resolved. Much of that is still to be resolved. But I think the crop that is coming in now, it actually looks really good. And it's going to be at this point to predict it. We think it's going to be really, really good for the duration of the harvest season, which will go for a few more months. So, I think we'll be in a very nice position in 2026 on SNI, not only on revenue, but on profit. But I think you'll see some sequential improvements as we get into Q3 and Q4 of 2025 as well. But not every product line is always hitting on all thrusters at the same time. But the big picture here is flavors are still up almost 9% in EBITDA. And we feel really, good about that. And I think that as we get SNI firing on all thrusters, I think we have a really nice 2026 to follow up a really, really nice long run here in the flavors group.

And just I know there's been a few questions around the really positive operating leverage in both Carlos and Anthony. And I think you had mentioned a mix as one of the drivers. When you say mix within those respective businesses, what does that mean specifically?

So, mixed in flavors, for example, is selling more flavors. In the universe of flavors, there are things, flavors, like, you know, I love grape flavor, for example, so bad. But there's also components of flavor systems. We call those flavor ingredients. And so, I think certain products in certain applications generate and command higher gross margins, given the technical sophistication of those products. And I think our ability to execute on that in particular would be what I would argue is one of the single biggest components in mix that has contributed to the really positive outcomes there you see in flavors. Colors, similar dynamic, right? You've heard me talk about there are different parts of the natural color market. Colors that are very precise and they have to be synthetic color matches. Much more technically driven products versus, you know, what you might call a belly wash natural color. Just some, you know, really not all that interesting, not all that profitable, not all that defensive. And so, when you sell more of the former and less of the latter, you have a really nice uplift stemming from mix. So, those are a couple of examples that I'd speak to to explain the mix and the operating leverage.

Great. I guess one more final question. It's not necessarily a huge part of the business, but when I look at personal care specifically within colors, it still looks a bit soft. Is there anything driving that or any expectations to when that might improve?

No, yeah, it is a little bit soft. Really in Europe is the big one. Soft in North America as well. Quite nice growth in Asia Pacific and Latam. So, yeah, it was a little bit soft, but it's softly very profitable business for us. And so, I think this is one industry where there's a lot of change but whoever thought anybody was going to buy cosmetic products on e-commerce platforms, whoever thought there was going to be such a push to selling certain products across different generational divides. And so, there's been a lot of shift in the market. There's been a lot of movement towards third-party manufacturers, manufacturing products. So, the world of going to a department store and buying from a household brand name, yes, there's still a lot of that, but there's also a lot of influencers, folks who don't even know how to, they don't have the ability to manufacture products, they don't know how to develop the products, but they go to those who can manufacture for them and develop for them. And it's the influence that we've seen through a lot of these startup brands and personal care space that's really, really shaken that market substantially. And so, a couple years ago it was all about skin, now it's all about fragrance, and a couple years from now it's not going to be about either of those, or maybe it'll be about both, or maybe it'll be about makeup. And so, our game here has been to continue to diversify our platform, which historically has been color cosmetics, makeup principally, body care. And so, I think the long-term prospects are going to be most promising as this segment begins to convert to natural colors. So, as you look at sentient for the next 10 to 15 years, you'd say, okay, a lot of natural colors in food and beverage for the next, call it four or five years. And then, it'll be very interesting to see how the technology evolves there for the next wave of natural colors. And then, I think alongside that, you're going to see as technology improves a much broader use of natural colors in personal care applications. And that will be an enormous opportunity for sentient as well. So, again, we play the long game around here, and that's another long game we're playing, and we would predict that there's, as we did with food, there is an inevitable conversion to natural colors that you will see in personal care in the coming years. So, hey, they might add a little bit of a soft quarter. I'm okay with that. I guess the long game, that's going to be even more profitable and successful business than it's already been for us.

Great. Many thanks.

Okay. Thanks, David.

There are no further questions at this time. I will turn the conference back to the company and Tobin Tornell for any closing remarks.

Thank you again for your time today. Before we conclude, I'd just like to reiterate some of the comments on our estimates for Q3. Currently, we expect our interest expense to be about flat with prior year, around 7.7 million for the quarter. We expect our tax rate to be around 24% in Q3. And given the current exchange rates, we expect the overall impact in the quarter to be immaterial. That concludes our call today. If you have any follow-up questions, please contact the company. Thank you.

The conference has concluded. You may now disconnect.