SENSIENT TECHNOLOGIES CORP Q1 FY2025 earnings call

• Started the year strong with 4% local currency revenue growth, 10% local currency adjusted EBITDA growth, and 11% local currency adjusted EPS growth.
• Bans on synthetic colors in the US present a significant revenue opportunity; US tariffs impact around $10M annually, addressed by price.
• Strong new sales wins across groups, particularly in natural colors and synthetic color conversion pipeline.
• Portfolio optimization plan on track, aiming for annual cost savings of $8M-$10M.
• Launched new natural color innovations: Marine Blue Capri for a low pH, light stable bright blue in beverages, and Sienna Fortis to replace Class III and IV caramel color.

The Color Group began 2025 with excellent first quarter results, delivering 8.2% local currency revenue growth and 13.5% local currency operating profit growth. The group's first quarter adjusted EBITDA margin improved to 24.4% from 23.2%. The Flavors & Extracts Group delivered 1.7% local currency revenue growth and 6.2% local currency operating profit growth in the quarter. The group's adjusted EBITDA margin was 16.9%, up 70 basis points versus the prior year's comparable quarter. The natural ingredients product line in Flavors & Extracts saw a sales decrease, but the business is optimizing its manufacturing process. The Asia Pacific Group had a solid first quarter, delivering 4.8% local currency revenue growth and 7% local currency operating profit growth. The group's adjusted EBITDA margin was 23.9%, up 50 basis points versus the prior year's comparable quarter.

• Consolidated 2025 local currency revenue expected to grow mid-single digits, local currency adjusted EBITDA mid to high single digits, and local currency adjusted EPS high single-digit to double digits.
• Revised capital expenditures to $80M-$90M for 2025, elevated for the next several years due to natural color investments.
• Focus on full-year guidance due to dynamic tariff situation, with interest expense expected slightly higher and adjusted tax rate ~25.5% for the year.

• Tariff uncertainty: Annual $10M impact on raw materials and finished goods, dynamic nature of tariffs.
• Regulatory execution challenges: Technical application complexities in natural color conversions, supply chain complexity, and lead times for scaling crops to support conversions.

Q: Hey, guys. Good morning, Paul, I just want to go back to your comment about the growth opportunity set as it relates to natural and the significance of that. The same would also be true, I guess, for your competitors and presumably, their competitive response from a capacity standpoint will be significant as well. So can you just lay out for us your specific moats for that product line and also your ability not only flex production on your end, but also manage the upstream supply chain to be able to support customer growth for what looks like a very long tail period.

A: Sure. So just to kind of frame it up and to reiterate a comment I made in the previous comments. The opportunity we're looking at here between the U.S. Sensient business and the Latin America Sensient business, we have about $110 million of revenue. So $110 million from synthetic. So the opportunity is to convert that. If you convert that at approximately 10 times the ratio, you would say 110 times 10. And then you'd obviously subtract out the $110 that was synthetic because, of course, that goes away. So in essence, you're cannibalizing your product line but at a substantially higher ratio. So I think just to kind of frame up the nature of the opportunity in the U.S. and parts of Latin America. So we have that to begin. Now one of the single biggest challenges in natural color conversions is the technical application side. Whereas one could squeeze a fruit into a glass and observe a change in color. That's not exactly how that works in an application. When you're dealing with an application, you have all sorts of other ingredients that could react inadvertently with a natural color. You have the natural color could provide different outcomes in that formula. You may have problems with the color retaining its shade because of a high heat situation. Natural colors are very, very sensitive to things like light and heat and acid or what we would call pH. Synthetic colors are not really susceptible to any of these factors. You add on to that, natural colors have a much more limited shelf life compared to synthetics. And so the technical challenge can be rather pronounced. And I think one of the things that has distinguished Sensient over the years and when folks ask me, well, what exactly makes Sensient colors different from its competition? I would tell you, first and foremost, it's our ability to formulate natural colors across a whole range of product applications and to deliver a whole range of shades across those applications. And within these applications, not only do you have the complexity of formulating that can of soda or whatever that product may be, but then somebody has to manufacture that. So the manufacturing process can be quite challenging. And so these are a lot of the challenges that our customers would face. So our ability to help them overcome those by formulating. So there's a part of this market where, yeah, you could go buy some natural botanical and buy it by the ton and sell it by the train carload and some customer may buy that. But that's not necessarily the biggest part of the market. The biggest part of the market is the market that has these formulation constraints and challenges, has these production constraints and challenges. And so it has been our ability to successfully help our customers through that process that has distinguished us probably most significantly. Now as you get these natural raw materials, so answering getting to the point about your supply chain, products are grown all over the world, all different parts of the world. And like a fine wine, there are differences. There are differences in the crops year after year, region across region. And these differences manifest themselves as shade differences, stability differences. And so there, again, it's our ability to standardize that process for our customers so that, that red is the same red year after year after year and regardless of where they may sell it and the storage conditions that they may have. So there, again, our integrated supply chain, our vast supply chain is a distinguishing feature for Sensient. But then probably the last piece here is as you take that product and you manufacture it. So as you take that botanical, whatever it may be, a fruit or vegetable, you extract the color from that and then you manufacture that for your customer, there's a lot of technology know-how, intellectual property, whatever you'd like to call it, associated with the manufacture of natural colors as well. So this is why we're calling for additional CapEx expenditures, so we can continue to invest very strongly there. But the ability to extract a color, okay, you can extract a product in a high school chemistry lab. I did it when I was 16. But that's not really what we're talking about here. The nature of this extraction is one of sequencing extraction, using the correct solvents, being able to retain a certain amount of color and then it's a lot of the physical manipulation of the product through proprietary manufacturing techniques that here, again, all those things come together to enable us to really help the customers' formula to be a great success on the store shelves. And so CapEx, we spoke to that. Supply chain, that is an ongoing. That is a big challenge. That is the single - I would tell you that number one challenge of natural color conversions is stemming from the complexity of the supply chain and the magnitude of the change that we're talking about. And so I think this is where our investments over time are going to play out quite well. So we've been talking about the conversion to natural colors for more than 15 years in this company. And so we're very, very excited about this because I think we've prepared really well. We spent tens of millions of dollars here and I think we're very, very excited, and I really like my chances against the rest of the competition in the market.

Q: Hi, every one. And maybe a very quick... A very quick first one following up on the tariffs. Just to check, is the $10 million solely related to raw materials? Or is it also related to tariffs on some of your finished goods?

A: Yeah, that relates to everything at this time. So - and that's across our total company. So exactly raw materials and finished goods.

Q: Good morning, Paul, I just want to go back to your comment about the growth opportunity set as it relates to natural and the significance of that. The same would also be true, I guess, for your competitors and presumably, their competitive response from a capacity standpoint will be significant as well. So can you just lay out for us your specific moats for that product line and also your ability not only flex production on your end, but also manage the upstream supply chain to be able to support customer growth for what looks like a very long tail period.

A: Sure. So just to kind of frame it up and to reiterate a comment I made in the previous comments. The opportunity we're looking at here between the U.S. Sensient business and the Latin America Sensient business, we have about $110 million of revenue. So $110 million from synthetic. So the opportunity is to convert that. If you convert that at approximately 10 times the ratio, you would say 110 times 10. And then you'd obviously subtract out the $110 that was synthetic because, of course, that goes away. So in essence, you're cannibalizing your product line but at a substantially higher ratio. So I think just to kind of frame up the nature of the opportunity in the U.S. and parts of Latin America. So we have that to begin. Now one of the single biggest challenges in natural color conversions is the technical application side. Whereas one could squeeze a fruit into a glass and observe a change in color. That's not exactly how that works in an application. When you're dealing with an application, you have all sorts of other ingredients that could react inadvertently with a natural color. You have the natural color could provide different outcomes in that formula. You may have problems with the color retaining its shade because of a high heat situation. Natural colors are very, very sensitive to things like light and heat and acid or what we would call pH. Synthetic colors are not really susceptible to any of these factors. You add on to that, natural colors have a much more limited shelf life compared to synthetics. And so the technical challenge can be rather pronounced. And I think one of the things that has distinguished Sensient over the years and when folks ask me, well, what exactly makes Sensient colors different from its competition? I would tell you, first and foremost, it's our ability to formulate natural colors across a whole range of product applications and to deliver a whole range of shades across those applications. And within these applications, not only do you have the complexity of formulating that can of soda or whatever that product may be, but then somebody has to manufacture that. So the manufacturing process can be quite challenging. And so these are a lot of the challenges that our customers would face. So our ability to help them overcome those by formulating. So there's a part of this market where, yeah, you could go buy some natural botanical and buy it by the ton and sell it by the train carload and some customer may buy that. But that's not necessarily the biggest part of the market. The biggest part of the market is the market that has these formulation constraints and challenges, has these production constraints and challenges. And so it has been our ability to successfully help our customers through that process that has distinguished us probably most significantly. Now as you get these natural raw materials, so answering getting to the point about your supply chain, products are grown all over the world, all different parts of the world. And like a fine wine, there are differences. There are differences in the crops year after year, region across region. And these differences manifest themselves as shade differences, stability differences. And so there, again, it's our ability to standardize that process for our customers so that, that red is the same red year after year after year and regardless of where they may sell it and the storage conditions that they may have. So there, again, our integrated supply chain, our vast supply chain is a distinguishing feature for Sensient. But then probably the last piece here is as you take that product and you manufacture it. So as you take that botanical, whatever it may be, a fruit or vegetable, you extract the color from that and then you manufacture that for your customer, there's a lot of technology know-how, intellectual property, whatever you'd like to call it, associated with the manufacture of natural colors as well. So this is why we're calling for additional CapEx expenditures, so we can continue to invest very strongly there. But the ability to extract a color, okay, you can extract a product in a high school chemistry lab. I did it when I was 16. But that's not really what we're talking about here. The nature of this extraction is one of sequencing extraction, using the correct solvents, being able to retain a certain amount of color and then it's a lot of the physical manipulation of the product through proprietary manufacturing techniques that here, again, all those things come together to enable us to really help the customers' formula to be a great success on the store shelves. And so CapEx, we spoke to that. Supply chain, that is an ongoing. That is a big challenge. That is the single - I would tell you that number one challenge of natural color conversions is stemming from the complexity of the supply chain and the magnitude of the change that we're talking about. And so I think this is where our investments over time are going to play out quite well. So we've been talking about the conversion to natural colors for more than 15 years in this company. And so we're very, very excited about this because我 think we've prepared really well. We spent tens of millions of dollars here and I think we're very, very excited, and I really like my chances against the rest of the competition in the market.

Q: Good morning, David. Just first question for me. Obviously, you talked about the initial slowdown at the beginning of the year where you said there just seemed to be a kind of air pocket and then an acceleration that started to come through in February and March. I just wondered if you could give us a feel for the sort of constant currency growth in terms of how that potentially progressed sort of January through to February and through to March and to give us a bit of a feel for the exit rate.

A: I - let me think about that one. So yeah, January started slow. And I guess February and March were big enough to net 4%. Maybe your question is about what was going on with customers and their mindset and why were they slower in January. I would tell you that, that's not an unusual phenomenon in any year. January is not necessarily indicative of much. You could have a bad January and a great year. You could have a great January and a not great year. And so there's a lot of things that go on behind the scenes of our customers, macroeconomic trends they may be looking at. They may be pausing some launches because of consumer feedback or economic reads that they have. And so that may defer some of the wins that we would have ordinarily had in any other month. But yeah, there's just a special sensitivity about January. I don't know if folks come out of Christmas and had a lot of cookies and cake and they're just kind of recovering a little bit. Or is there something more substantive going on in the market? It's a tougher one to kind of figure out. And so I think this January, you could certainly look to some of the commentary being made about tariffs, some of the commentary made about how production needs to shift. I think there was a lot of worry, rightfully so. There were a lot of questions rightfully so. Launching products is a risky proposition. And what a CPG doesn't want to do is take on unnecessary risks by forcing a launch date because that was what was on the calendar. So it's not unusual for them to sort of defer things a bit in light of some of that news. So perhaps that's what happened more broadly in January. But I think February and March, was able to overcome that dynamic and net where we got to at the mid-single digit.