Earnings Call Transcript - SXT Q1 2026

Operator, Operator

Good morning, and welcome to the Sensient Technologies Corporation 2026 First Quarter Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornehl. Please go ahead, sir.

Tobin Tornehl, Vice President and Chief Financial Officer

Great. Thank you. Good morning. Welcome to Sensient's earnings call for the first 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 first 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 improve 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 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 prior 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 5 of the deck. Now we'll hear from Paul.

Paul Manning, Chairman, President and Chief Executive Officer

Thanks, Tobin. Good morning, good afternoon. Earlier today, we reported our first quarter results. We've gotten off to a very strong start to 2026, delivering 7% local currency revenue growth, 10% local currency adjusted EBITDA growth and 14% local currency adjusted EPS growth. These results exceeded our early expectations and position us nicely for the year. We continue to have particularly strong results from the Color Group, which delivered 12.3% local currency revenue growth and 13.2% local currency operating profit growth. Commercial activity around natural color conversions continues to be very strong and the momentum is building. The Flavors & Extracts Group also had a solid quarter, delivering 1.7% local currency revenue growth and local currency operating profit growth of 5.1%. The Asia Pacific Group contributed local currency revenue growth of 4.7% and local currency operating profit growth of 14.5%. Each of our groups has had a nice start to the year. During the first quarter, we generated strong new sales wins across each of our groups and our sales pipelines continue to grow to support our revenue expectations. While we are seeing particularly high win rates in natural colors, our innovative product portfolio is also fueling success in each of our other businesses. Our customer service levels remain exceptionally high. And despite a sluggish overall food market in many geographies, we believe we are well positioned to continue our sales wins success. As I mentioned on previous calls, the preparations for the wholesale conversion of synthetic colors to natural colors in the United States remains our priority and current strategic focus. We are not seeing any slowdown in conversion activity and I will reaffirm what I previously stated that the U.S. conversion to natural colors is the single largest opportunity in Sensient's history. We are continuing investments around the world to increase our production capacity and to optimize our product portfolio. We also are continuing to build a resilient supply chain to provide the botanicals necessary to produce natural colors and to support the needs of our customers in alignment with their launch dates. These investments will support and position us for our $1 billion natural color sales goal. We continue to advance further with customers on application support, and they are also confirming that while natural colors may cost more than synthetic options, the cost impact remains manageable since natural colors are still a relatively small part of overall ingredient costs in most product categories. The first quarter had no shortage of newsworthy developments in trade, tariffs, and geopolitics. We are continually monitoring these situations, but I would like to provide some information around the conflict in Iran. We do not have any significant operations in the Middle East, and we are working to mitigate any potential supply chain risks that may result from the overall increase in fuel and certain commodity prices. In past circumstances like COVID and the invasion of Ukraine by Russia, we have proven our ability to adjust prices where necessary and to minimize our financial impact and any major disruptions to our customers. This continues to be my expectation with the war in Iran. Now turning to Slide 6 and our group results. The Color Group had an excellent first quarter, delivering 12.3% local currency revenue growth and 13.2% local currency operating profit growth. The group's first quarter adjusted EBITDA margin was 24.4%, flat to prior year despite our increased investments in support of the natural color conversion opportunity. The group continues to sell technically differentiated products, control its costs, execute on pricing strategy and deliver quality new wins. We are starting to see an uptick in customer orders for conversion of their synthetically colored products in the U.S., and the pipeline to $1 billion continues to look very promising. I now expect the Color Group to deliver double-digit local currency revenue growth in 2026. Previously, I expected high single to double-digit growth. I continue to expect the natural color conversion sales to build as the year progresses. As the sales build, I expect profit leverage to improve as well. Profit leverage in Q2 and Q3 for the Color Group will be similar to the relationship in Q1. Overall, the Color Group got off to a tremendous start to 2026 and remains on a great trajectory, and I'm very excited about the future ahead of us. Turning to Slide 7. The Flavors & Extracts Group saw local currency revenue growth in the first quarter of 1.7% and an increased local currency operating profit growth of 5.1%. The group's adjusted EBITDA margin was 17.2%, up 30 basis points versus the prior year's comparable quarter. The results exceeded our expectations in the first quarter. The group continues to optimize its cost and focus on new and defensible flavor wins, and these factors have fueled the favorable profit leverage. Overall, we expect Q2 to be similar to Q1 with strengthening revenue and profit performance as we move through 2026. Now turning to Slide 8. The Asia Pacific Group had a nice rebound in the first quarter, delivering 4.7% local currency revenue growth and 14.5% local currency operating profit growth. The group's adjusted EBITDA margin was 26.1%, up 220 basis points versus the prior year's first quarter. Overall, the Asia Pacific Group got off to a substantially faster start than we anticipated and is set up nicely for the future. The regional demand constraints that the group has experienced over the last few quarters improved in Q1. Plus, we generated strong new sales wins. Pending resolution of the Iran war, I continue to expect improvement throughout the year with greater sales and profit improvement in the back half of 2026. Now turning to Slide 9. Regarding our full year guidance, we are increasing our local currency ranges for the year. We now expect our local currency revenue to be up high single to double digits. Our previous guidance was for mid-single to double digits. We now expect local currency adjusted EBITDA and EPS to grow at high single to double-digit rates. Our previous guidance called for mid-single to double-digit local currency adjusted EBITDA growth and mid-single to high single-digit local currency adjusted EPS growth. On the capital allocation front, we still expect consolidated capital expenditures of $150 million to $170 million in 2026 to ensure that we are prepared for the forthcoming natural color conversion activity and that we can achieve our $1 billion sales goal. As I mentioned last quarter, we expect to spend between $225 million and $250 million on natural color capital over the next couple of years. We continue to anticipate an increase in our natural color working capital and maintain our goal of significantly improving our ROIC to the mid-teens over the next few years. 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 some information on a couple of our innovative technologies shown on Slide 10. Here is some information about two of our popular natural color platforms. Avalanche is a global portfolio of clean-label alternatives to titanium dioxide. We're also showing a range of extrusion stable natural colors that are ideal for use in production processes utilizing high heat or pressure. Titanium dioxide is a whitening agent commonly used in baked goods, frostings, confections and makeup applications. In recent years, there has been a growing demand from our customers to remove titanium dioxide from their products. This demand has been driven by brands and regulation changes across the globe. It's quite difficult to replace TiO2 due to its exceptional performance characteristics and cost effectiveness. Our Avalanche portfolio addresses the market need for white products and is designed to best match the performance of titanium dioxide. The portfolio is robust and continues to grow as new technical application challenges arise. Next, I'd like to highlight our extrusion stable natural color offerings. They have been developed for maximum stability and performance in high heat or pressure processes. For example, extrusion is commonly used to make breakfast cereals. Several large retailers and CPG companies have made announcements about their commitment to rapidly remove synthetic dyes from this category and therefore, this remains a priority for us. If you'd like more information on any of our natural color technologies, please visit our website. Since 2019, the company's local currency adjusted revenue compounded annual growth rate is approximately 6%. Our growth in the first quarter is above that historical rate, and I'm quite pleased with the trajectory we are on for 2026 and beyond. I'm excited about the growth opportunities within each of our groups. Our pipeline for natural color conversions continues to build, and I'm pleased with our progress toward our overall revenue goal. We believe long-term investors are well positioned to benefit substantially from our execution. We will continue to emphasize investment in research and development, production capacity and a resilient supply chain in order to be ready to support our customers. The growth we are experiencing is a direct result of the execution of our long-term strategy seizing the opportunities in the markets in which we operate. I remain optimistic about 2026 and the future of our business. Tobin will now provide you with additional details on the first quarter results.

Tobin Tornehl, Vice President and Chief Financial Officer

Thank you, Paul. In my comments this morning, I'll be explaining the differences between our GAAP results and our non-GAAP 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 first 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. Turning to Slide 12. Sensient's revenue was $435.8 million in the first quarter of 2026 compared to $392.3 million in last year's first quarter. Operating income was $66.7 million in the first quarter of 2026 compared to $53.5 million of income in the comparable period last year. Operating income in the first quarter of 2025 included $2.9 million, approximately $0.05 per share, of portfolio optimization plan costs. Excluding the cost of the portfolio optimization plan in the prior year, adjusted operating income was up 12.2% in local currency in the first quarter of 2026 compared to $56.4 million in the prior year period. Interest expense was $7.9 million in the first quarter of 2026, up from $7.3 million in the first quarter of 2025. The company's consolidated adjusted tax rate was 24.9% in the first quarter of 2026 compared to 25.3% in the comparable period of 2025. Local currency adjusted EBITDA was up 10.4% in the first quarter of 2026. Foreign currency translation had approximately a $0.06 benefit on EPS in the first quarter of 2026. Turning to Slide 13, cash flow used in operations was $14 million in the first quarter of 2026. Capital expenditures were $29 million in the first quarter and as Paul indicated, we continue to anticipate our capital expenditures to be between $150 million and $170 million for the full year of 2026. Our net debt to credit adjusted EBITDA is 2.4x as of March 31, 2026. As we communicated last quarter, we expect higher investments in inventory throughout the year to prepare for increased natural color conversion revenue. That is expected to increase further with our leverage ratio entering the upper 2s later in the year. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible acquisition opportunities and our long-standing dividend. As Paul indicated, we 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. Turning to Slide 14, revisiting our 2026 guidance. Based on our first quarter results, we now expect our local currency revenue to be up high single to double digits. Our previous guidance was for mid-single to double digits. We now expect local currency adjusted EBITDA and EPS to grow at a high single to double-digit rate. Our previous guidance called for mid-single to double-digit local currency adjusted EBITDA growth and mid-single to high single-digit local currency adjusted EPS growth. We continue to expect acceleration in revenue and EBITDA growth in the second half of the year. We expect our second quarter interest expense to be approximately $9 million and we expect our second quarter adjusted tax rate to be approximately 25%. Based on current exchange rates, we still expect the impact of currency on EPS to be immaterial for the year. Thank you for participating in the call today. We'll now open the call up for questions.

Operator, Operator

And the first question will come from Ghansham Panjabi with Baird.

Ghansham Panjabi, Analyst

Paul, it sounded like the first quarter came in better than you thought. Just maybe give us a bit more color on what drove that. Was there just faster conversions of customers? Was there a bigger contribution from load-in benefit as it relates to inventory build, et cetera? Just give us a bit more perspective on that.

Paul Manning, Chairman, President and Chief Executive Officer

The simple answer is we got more wins than we thought — not only natural color wins in the Color business, but also more natural color conversions than I had anticipated. We saw a nice set of wins out of Asia Pacific. In addition, we didn't see as much of the tariff distortions that I was somewhat concerned about on the last call. So that ultimately moderated a bit as well. And then in flavors, again, new wins were a driving factor there. Price was sort of on the low single-digit side of that 7% overall consolidated revenue that came in, in line with what I had anticipated. But yes, the short answer is wins.

Ghansham Panjabi, Analyst

And then as it relates to the cadence of growth in that segment as the year unfolds: obviously, you don't have full control in terms of business wins, et cetera, but presumably you have some view on backlog, et cetera. How should we think about the cadence of that as it relates to 2Q through 4Q specific to your overall guidance for that segment?

Paul Manning, Chairman, President and Chief Executive Officer

I think overall Q2 will look pretty similar to Q1 in each of the groups. I'd like to see a little bit more top line out of Flavor; you'll see that in Q2 and as we go through the year. On the Color Group side, barring some unforeseen larger conversions than I would tell you that I see right now, Q2 should look a lot like Q1 and then, of course, we would expect to see more and more of this building as we get into the back half of this year and certainly into 2027. Right now, many customers are in the phase of having done a lot of the reformulation work, if not all of it. Then it's a matter of getting the rest of their ducks in a row, whether it's consumer test marketing, regulatory reviews, aligning their production plans, scaling up these products, and preparing for their eventual production with natural colors. I think we're entering the phase where we may get a little more clarity from some on launch dates. But again, Q2 should look a lot like Q1. Q4 is where you'll perhaps see a more decided inflection point in natural colors. Ultimately, for the year, we feel really good about where we are for each of the groups in terms of what they should deliver.

Ghansham Panjabi, Analyst

And then just one final question: on the TiO2 opportunity set, can you frame that for us as it relates to how big that is in terms of the addressable market? Is that part of the $1 billion sales threshold that you're focused on in terms of natural colors, or is that separate?

Paul Manning, Chairman, President and Chief Executive Officer

That's a great question. I would tell you that titanium dioxide may be one of the single most challenging programs, but the irony is that titanium dioxide from a regulatory standpoint is actually treated differently in some jurisdictions. I hadn't contemplated TiO2 in the $1 billion target, but if I'm getting close to $980 million, I may count it in. So I haven't factored that in. I think this conversion is a bit more in its infancy compared to the broader natural color conversions. Europe was first in restricting titanium dioxide in food and personal care products, and then the U.S. has followed. We've been working on this for a number of years. It could be a nice add-on, but it's not part of the $1 billion at this time.

Operator, Operator

Next question will come from Joshua Spector with UBS.

Joshua Spector, Analyst

I wanted to follow up on the Color Group growth. I'd be curious where your confidence is today versus three months ago around the timeline. A lot of investors are concerned that things could slip because your customers will be facing cost pressures. So, although Q1 was good, the stuff you thought would convert and move in the second half — is that going faster or slower? Any details to help us understand the cadence would be helpful.

Paul Manning, Chairman, President and Chief Executive Officer

I follow the timeline closely at the macro level. There are two key dates the market has been moving toward: January 1, 2027, which is essentially the Walmart deadline for having natural colors in its private brands throughout its stores in the U.S., and January 1, 2028. Largely, customers remain on track with those dates. My confidence today versus three months ago is still very high. I speak to many customers across large, mid-sized and small companies, and I am not seeing signs of them backing off. A number of household names have pledged publicly they will do this. Now, predicting the exact monthly cadence is harder and possibly unknowable to a large degree. Many brands have dozens or more products they’re attempting to convert — it's a massive undertaking: new launches require new packaging, reformulation, production scale-up, regulatory reviews and in some cases, customer capital investment. So customers need to get this right, and that takes time. We should not expect massive conversion immediately; I think we're pacing at an expected rate and it should accelerate as we get closer to these deadlines. Overall, I remain very confident.

Joshua Spector, Analyst

I also wanted to ask on margins and colors. Last call you mentioned margins being down about 50 basis points for the year. You were flat in the first quarter. It sounds like from your comments you're thinking flattish in Q2 and Q3, and perhaps up in Q4. So are margins expected to be up there? And what does that mean in terms of the OpEx investments? Is that embedded in guidance through the year? If you can quantify those OpEx investments that would be helpful as well.

Paul Manning, Chairman, President and Chief Executive Officer

We were flat on EBITDA for the quarter, a bit better than I had anticipated. The moving parts are: capital expenditures — when equipment comes online and starts producing, depreciation begins, which is a variable; ongoing investments to ensure we have the right personnel, engineers, testing, R&D, applications and processing engineering required for conversions; and the inflow of revenue. If capital is in place before sizable revenue comes in, that can create a headwind on leverage. In some cases, customers may move launches forward or a bigger launch can offset expenditures and provide a tailwind to EBITDA margin. Net-net, I think for the year Color Group EBITDA will be flattish. I expect Asia and Flavor to be up for the year. The variance is timing-related. Being early on capital is acceptable; I'd be thrilled to be early on capital implementation and have production ramp into that capacity.

Operator, Operator

Our next question will come from Larry Solow with CJS Securities.

Lawrence Solow, Analyst

Paul, congrats on the quarter. The quarter was a little bit better across segments, and color was a little bit better on margin. It feels like you're adjusting your margins a bit. I think you expect flattish on color and a little bit of pressure relative to last quarter. Is the change basically that revenue is a little faster coming in, conversions are a little faster, but no change on the expected investment this year? Is that a good way to summarize what's happening in color for the year?

Paul Manning, Chairman, President and Chief Executive Officer

Yes, I think that's about right. Revenue was a little better than we thought and that went a long way. Timing plays a big role, and quarters may vary. We did better than expected, so EBITDA was more flat than I had thought. I think it's indicative of not only wins but high-quality wins. We pursue natural color opportunities that are strongly performance-based; these tend to be more positive on gross margin than more mundane applications. So mix is important and it was perhaps a bit better than I expected in Q1.

Lawrence Solow, Analyst

Thanks. On the longer-term timeline — you gave the January 1, 2027 and January 1, 2028 dates. I don't think you expect everybody to convert by those dates. Are companies getting more competitive, more anxious, and solidifying their plans sooner than others because there could be limited supply? Is it progressing in a way that suggests musical chairs in supply if the full supply chain isn't ready?

Paul Manning, Chairman, President and Chief Executive Officer

Most activity will be in 2027, but a significant amount is occurring in 2026. Timing of launches can be affected by various factors. There is also competitive behavior: when a competitor converts sooner, others may accelerate. Markets can have a tipping point — perhaps around 20% to 30% of a market — after which conversion can accelerate rapidly. We are preparing for the possibility of steady builds that then accelerate. Customers are forming metered launch plans across product categories, which helps avoid everyone trying to convert at once. We are investing heavily in capital, supply chain, and stress testing to be ready for the demand.

Lawrence Solow, Analyst

One more on the FDA: a couple of weeks ago there were delays on approvals, I think for some genetically engineered natural colors. Is the FDA becoming more involved with natural colors or is this normal? What's going on with FDA activity and the approval pipeline?

Paul Manning, Chairman, President and Chief Executive Officer

Colors are ingredients that typically have to be approved for use in food. The approval process can entail toxicology studies and other data — a lot of time and money. Many colors are already approved, but approvals can be application-specific; a color may be approved for use in soda but not in candy without additional testing. There is more petitioning to the FDA for new natural colors, so the FDA is naturally more active as a result. Sometimes approvals get challenged, and that can cause delays. It's not unusual: it's part of the normal regulatory process for colors. We actively submit raw materials for FDA review when appropriate and follow the public information in the FDA pipeline.

Operator, Operator

Our next question will come from Nicola Tang with BNP.

Nicola Tang, Analyst

First, a quick simple one. I was wondering if you could give us an update on the revenue related to the conversion of synthetic colors. Last quarter you were at about $5 million. Can you give an update as of this quarter?

Paul Manning, Chairman, President and Chief Executive Officer

Sure. To recap: we talk about our $1 billion sales goal, which is derived from about $100 million of synthetic colors that we think will convert at roughly 10 to 1. In the back half of last year, we invoiced about $5 million toward that natural color conversion goal. Taking that back half together with Q1 of this year, we've invoiced about $20 million or so toward that $1 billion natural color goal. Stated another way, Color Group growth was about 12%, and roughly half of that was base business strength while the other half was incremental from natural color conversions. So, order of magnitude over the last nine months, about $20 million invoiced in natural color conversions in the U.S.

Nicola Tang, Analyst

Second question: I wanted to ask about your reported EPS guidance. At the midpoint, you're upgrading EPS guidance by about $0.10. But the beat versus consensus in Q1 looks more like $0.20, so it looks like although you've upgraded guidance on the metrics, it might be an implied downgrade on the rest of the year. Are you assuming a pull-forward in Q1, or are you taking a more cautious outlook due to macro and Middle East uncertainty? Can you help us understand the new EPS guidance?

Paul Manning, Chairman, President and Chief Executive Officer

I'll give the first part of the answer and then turn it to Tobin for more detail. We prefer to start with revenue — we have a strong ability to predict revenue, then adjusted EBITDA. As you get below EBITDA, EPS can diverge due to interest, tax, FX and other below-the-line items. Interest has increased, and Tobin will expand on that. So revenue and EBITDA guidance were raised, and EPS is influenced by those below-EBITDA items.

Tobin Tornehl, Vice President and Chief Financial Officer

Through interest was up in the first quarter: $7.9 million versus $7.3 million last year. We expect interest expense to be higher this year given our investments in natural colors — both capital and investments in people, R&D and other items. We expect overall interest expense to be up about $6 million for the year and it will progress on a quarterly basis as we move forward. Our leverage ratio is about 2.4x now, and we expect it to climb into the higher 2s as debt increases through the year. Our tax rate was about 25% in Q1; we're guiding roughly 25% for Q2 and about 25% for the year. Currency provided about a $0.06 benefit in Q1, and exchange rates are volatile; in the back half of the year FX could be more of a headwind, though overall we expect FX to be roughly immaterial for the year. We did increase our EPS guidance compared to prior guidance; we are guiding to high single- to double-digit growth for EPS.

Nicola Tang, Analyst

To clarify, when you said $20 million invoiced, was that with reference to the $100 million synthetic revenue base or the $1 billion overall revenue opportunity?

Tobin Tornehl, Vice President and Chief Financial Officer

The $1 billion.

Nicola Tang, Analyst

Final question: on raw materials, you mentioned you don't have significant direct exposure to the Middle East, but input inflation might increase, particularly on the synthetic side. What are you expecting in terms of inputs this year? Are we mainly talking about synthetics, or should we be thinking about certain naturals within your supply chain that might be affected in cost or availability?

Paul Manning, Chairman, President and Chief Executive Officer

In short, we expect a sufficient amount of inflationary inputs that will require pricing actions to address, generally low single-digit in magnitude. As with past events, tariffs, wars and pandemics, we would anticipate taking pricing. The primary factors include logistical inflation largely driven by energy and petroleum, which affect packaging and transportation. Some synthetic colors use petroleum-derived inputs, so synthetics for food and personal care could see more inflation. Natural colors will experience cost pressure in fertilizers and other agricultural inputs; many of those costs are built into the next year's harvest. We see impacts across raw materials, but we can address them with modest price increases focused principally in synthetic colors for food and personal care and across logistics costs. Propylene glycol is another ingredient that has been heavily impacted recently. Even if the war were to stop, supply backlogs and other pressures mean inflation is present and we will need to address it.

Operator, Operator

The next question is a follow-up from Joshua Spector with UBS.

Joshua Spector, Analyst

Just a small follow-up related to what you were just talking about: as you look at your Q2 guide, are you baking in anything in terms of a negative impact from transport or logistics? Or are you assuming your pricing offsets that more or less in real time?

Paul Manning, Chairman, President and Chief Executive Officer

I'm not assuming either a negative or a positive impact specifically. I did not assume the inflation in Q2 because at this point it's fairly modest and some of it is deferred. I'm also not assuming any pricing in Q2 from a guidance standpoint.

Operator, Operator

And that concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tornehl for any closing remarks. Please go ahead.

Tobin Tornehl, Vice President and Chief Financial Officer

Okay. Thank you for your time today. That concludes our call. If you have any follow-up questions, please feel free to reach out to the company. Have a great weekend.

Operator, Operator

The conference has now concluded. You may now disconnect.