Sensient Technology Corporation 2026 Q3 Earnings Call

Welcome to Sensient's earnings call for the third quarter of 2026. I'm Tobin Tornehl, 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, cost 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.

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 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 & 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%. Each of 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're 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 de-stocking 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 six and our group results. Color Group had excellent third quarter results, delivering 17% local currency revenue growth and 21% local currency operating profit growth. The group's 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 are seeing acceleration in customer orders for conversions of their synthetically colored products in the U.S. The 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 a great sales trajectory. Turning to slide seven. Flavors & 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 align 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 a favorable profit leverage that we expect to continue into 2027.

Overall, for the Flavors & Extracts Group, we expect local currency revenue growth of mid-single digits for the year. Now, turning to slide eight. The Asia Pacific Group had an outstanding third quarter, delivering 15% local currency revenue growth and 32% local currency operating profit growth. The group's adjusted EBITDA margin was 27.5%, up 330 basis points versus the prior year's third quarter. The Asia Pacific Group continued 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 nine. 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, but we do not anticipate any share buybacks in the near term. Before I turn the call over to Tobin, I would 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 from 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.