Sensient Technologies Corporation

Good morning and welcome to the Sensient Technologies Corporation 2025 Third 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 remarks, 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.

Good morning. Welcome to Censian's earnings call for the third quarter of 2025. I'm Tobin Tornell, Vice President and Chief Financial Officer of Censian Technologies Corporation. I'm joined today by Paul Manning, Censian's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2025 third quarter results. A copy of the earnings release and the slides we will be using during today's call are available on the investor relations section of our website at sentient.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, 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 an 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 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 Sentient'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 Manning. Thanks, Tobin.

Good morning, good afternoon. Good afternoon. Earlier today, we reported our third quarter results. I'm pleased that we continued to build on our strong first half of the year and delivered 14% local currency-adjusted EBITDA growth and 18% local currency-adjusted EPS growth. Local currency revenue grew 3.5% during the quarter. We continued to have particularly strong results from the color group, delivering 8% local currency revenue growth and 24% local currency operating profit growth. Flavors, extracts, and flavor ingredients product lines within our flavors and extracts group also had a nice quarter, delivering 4.5% local currency revenue growth and significantly contributing to the group's local currency adjusted operating profit growth of 7.8%. These results align with our expectations and position us for a strong finish to the year. We are also increasing several elements of our full-year guidance for 2025. Previously, we indicated local currency-adjusted growth of high single digits for EBITDA and high single digits to double digits for EPS. We now expect double-digit local currency-adjusted growth for both EBITDA and EPS. The major storyline for sensing in the industry continues to be the conversion of synthetic colors to natural colors in the U.S. This activity remains at the forefront of our current strategic focus and continues to accelerate as we work with our customers to prepare them for this change. As I said before, the U.S. conversion to natural colors is the single largest opportunity in the company's history. Over the years, we have invested significantly around the world to increase our production capacity and to optimize our product portfolio. We are also working to build a resilient supply chain to provide the botanicals necessary to produce natural colors. Aside from our work to support these anticipated conversions, our emphasis on sales execution, customer service, and commercialization of new technology continues to drive our current performance. During the third quarter, we continue to generate strong new sales wins across each of our groups. These sales wins are a result of our innovative product portfolio across our food and pharmaceutical and personal care product lines. These new sales wins in our pricing discipline are not only driving our revenue growth, but are also the main reasons for the margin strength we are seeing across each group. We remain focused on collaborating with our customers to support their development requirements, and our sales pipelines remain robust in each of our regions. We continue to win new business across the company despite a flat overall consumer market. Growth in the North American and European food and beverage sector has been stagnant for the last several years. New product launch activity continues to be down across many categories in the Americas and Europe, and Q3 was a continuation of this trend. Also, as I mentioned during our last several calls, the current trade and tariff landscape has introduced additional complexity and uncertainty to our businesses. While we have already taken price to offset the impacts of the initial wave of tariffs and will continue to take these pricing actions into next year, we have witnessed some demand and volume disruptions in some areas of our business due to this uncertainty, particularly in Asia Pacific. We will continue to position our supply chain organization to minimize any disruptions to our customers and to optimize the flow of goods. Now, turning to slide six in our group results. Color Group had excellent third quarter results, delivering 7.9% local currency revenue growth and 23.8% local currency operating profit growth. The group's third quarter adjusted EBITDA margin improved to 24.7% from 22.2%, an increase of 250 basis points versus the prior year. This margin improvement is a testament to our efforts to sell technically differentiated products, control costs, execute on our pricing strategy, and deliver quality new wins. In the third quarter, the group saw strong new sales wins. While these wins were particularly impressive in natural colors, let me clarify that the wins recognized in the third quarter are not yet the result of any significant conversions of existing products in the U.S. The color group remains on a great trajectory, and I couldn't be more excited about the future ahead of us. Turning to slide 7, the flavors and extracts group saw local currency revenue decline in the third quarter by 1.2%, but increased local currency operating profit by 7.8%. The group's adjusted EBITDA margin was 17.7%, up 130 basis points versus the prior year's comparable quarter. The flavors, extracts, and flavor ingredients product lines reported 4.5% 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, and Latin America. Turning to our natural ingredients business, we have renamed that business to Sentient Agricultural Ingredients. Agricultural Ingredients consists of dehydrated onion, garlic, capsicums, and other vegetables. To this point in the year, the business has been impacted by lower sales volumes and significantly higher crop costs. We expect improvements to begin in Q4 2025. Despite these dynamics in the agricultural 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 saw volume headwinds in the third quarter, delivering flat local currency revenue and local currency operating profit. The group's adjusted EBITDA margin was 24.2%, up 40 basis points versus the prior year's third quarter. The flat revenue is a result of lower volumes within certain selling regions that we expect to persist through the end of this year. The Asia-Pacific Group is equipped with strong leadership and operations, and the group's New Sales Wins momentum sets it up nicely for 2026 and the future. Turning to slide 9, regarding our full-year guidance, we now expect our local currency-adjusted EBITDA and EPS to grow at a double-digit rate. Our previous guidance called for high single-digit local currency-adjusted EBITDA growth and high single-digit to double-digit local currency-adjusted EPS growth. We are maintaining our consolidated full-year local currency revenue guidance of mid- to no-digit growth. On the capital allocation front, last quarter we increased our capital expenditure guidance to be around $100 million to ensure that we are prepared for the forthcoming natural color conversion activity. The increased investments we are making in natural colors is a great use of our cash, and over the next couple of years we anticipate elevated capital expenditures. We will give more guidance on our 2026 capital estimate in February. However, as of now, we anticipate our total capital expenditures in 2026 to be at least $150 million as we continue to invest in our natural color capabilities as well as across our flavors and extracts in Asia-Pacific groups. Beyond capital expenditures, we will continually evaluate sensible acquisition opportunities but we do not anticipate any share 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, along with a few of our innovative technologies. Turning to slide 10, the regulatory environment and effective legislation has not seen much change since the last time we spoke. West Virginia became the first and still the only state to pass legislation that prohibits the sale of food products that contain synthetic colors. There has been no change on timing, and 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, effective 2027. As I've stated, the main effect of these state actions is the conversion to natural colors at the national level. Across the country, companies are stepping up and committing to converting their existing products and setting conversion timelines to meet that January 2028 deadline. Today, we have approximately $100 million of synthetic color revenue that has the potential to be converted to natural colors. Previously, we had valued this opportunity at about $110 million. However, it appears less likely that we will see wholesale conversions in the pet food and over-the-counter pharmaceutical spaces. As I had said previously, the conversion to natural colors results in revenue multiples of approximately 10 to 1 on average. Turning to slide 11. The FDA is now maintaining a master tracking list on their website of commitments within the industry and progress made towards those commitments. Under the parent companies currently recognized as of today, more than 50 brands have pledged replacement of FD&C synthetic colors. These include some very well-known and highly colored products. We've also recently seen Walmart announce that it will eliminate synthetic dyes in all of its private label products by the beginning of 2027. This change was noted by Walmart to be a direct response to end consumer demand. Turning to slide 12, I'd now like to take a moment to highlight CertiShore, our product safety program for natural colors. This internal standard has been in place for years and guarantees customers a high level of product safety and quality. Raw materials go through rigorous screening for pesticides, heavy metals, microbiological adulteration, and unauthorized solvents. We hope this program will become the market standard for all suppliers and are working with the FDA to support the development of a national testing protocol as we enter a more natural world of color. As we have done for the last several quarters, I would now like to highlight some of our innovative technologies. Currently shown on the slide, is some information about one of our most successful natural color products, Pure S Orange. This novel paprika-based solution is a clear testament to the efficacy of the CertiSure program. Paprika is a widely popular source of color solutions with usage across a variety of categories, but it is also a high-risk raw material. Around 60% of paprika raw material lots fail sentient CertiSure screening. These failures are often due to exceeding levels of pesticides and adulteration. While our CertiSure program prevents the use of contaminated raw materials, it appears that other companies may not have such stringent standards as we frequently see our failed lots of paprika go back into the open market for others to procure. Only batches that pass our CertiSure process are used to make innovative color technologies like Pure S Orange. Pure S Orange leverages a clean purification technology to achieve the industry's brightest and clearest natural orange. While there are other great natural orange options like Amato, Beta-Carotene, and Carrot Juice, none of them compares to Pure S's stability and clear, vivid orange in beverages. 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. It is our goal to help our customers succeed and to preserve their brands through this transition. Turning to slide 13, next I want to highlight some exciting technologies from our flavors and extracts group that can play an important role as companies open up formulas and perform some of the necessary reformulation work that will support the conversion to natural colors. First is BioSymphony, a signature innovation that elevates the flavor profile for a number of different product categories. BioSymphony gives developers the flexibility to elevate the taste perception of their products and to enhance the overall taste experience. Second is PureMask technology. It includes a range of products that are ideal for balancing taste and neutralizing off-notes that could originate from various ingredients in a customer's product. This portfolio is effective in addressing a wide variety of taste issues from bitterness relating to high protein ingredients or potential off-notes from the incorporation of natural colors. In summary, our R&D and supply chain efforts are centered around providing safe and consistent products. If you'd like more information on our natural color or taste modulation technologies, please visit our website. Overall, I'm pleased with our financial performance in the third quarter. We are on track to deliver a strong performance for 2025. I'm excited about the growth opportunities within each of our groups. Our pipeline for natural color conversions continues to build. Customers continue to refine their launch timelines so we can provide more definitive guidance on revenue timing going forward. Looking ahead to 2026, we will get more detailed guidance during our conference call this coming February. However, we continue to expect our long-term performance consolidated local currency revenue to grow at a mid-to-no-digit rate. We would expect any potential acceleration in natural color conversions to be incremental to this growth rate. As I mentioned earlier, we anticipate our capital expenditures to be north of $150 million in 2026 to support our natural color conversion preparation activities. Growth we are experiencing is a direct result of the execution of our strategy and seizing the opportunities in the markets in which we operate. I remain optimistic about 2025 and the future of our business. So, we will now provide you with additional details on the third quarter results.