Sensient Technologies Corporation Aktie

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

Great. Thank you. Good morning. Welcome to Sensient's earnings call for the first quarter of 2026. The 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 evaluate 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 find 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 5 of the deck. Now we'll hear from Paul.

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. Flavors & Extracts Group also had a solid quarter, delivering 1.7% low currency revenue growth and local currency operating profit growth of 5.1%. 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 Sensing's history. We are continuing investments around the world to increase our production capacity and to optimize our product portfolio. We also are building, 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 advance further with customers on application support, 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. First quarter had no shortage of newsworthy developments in trade, tariffs, and geopolitics. We are continually monitoring these situations, but 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 the Russians, 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. [indiscernible] had an excellent first quarter, delivering 12.3% local currency revenue growth and 13.2% in 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. 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. 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 digit 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 is some information about 2 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 oxide 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 bands or 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 process. 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 dies from this category and therefore, remains a priority for us.

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 in the future of our business. Tobin will now provide you with additional details on the first quarter results.

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 cost 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 does 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 in 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 Instructions] And the first question will come from Ghansham Panjabi with Baird.

Paul, it sounded like the first quarter came in, but then you thought. Just maybe give us a bit more color upon intended, I guess. And 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.

Well, the simple answer is we got more wins than we thought. -- not only natural color wins in the general business, the base business, but also more natural color conversions than I had anticipated. So that would be one. I think we saw a nice set of wins out of Asia Pacific. And in addition to that, we didn't see as much of that tariff distortions that I was sort of concerned about on the last call. So that ultimately moderated a bit as well. And then in flavors, again, new wins, I think was the driving factor there. I mean price is 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.

And then it relates to the cadence of growth in that segment as the year unfolds. I mean, obviously, a very strong start to 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?

Well, I think overall, Q2 will look pretty similar to in fact, 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. But yes, I think there'll be some on the Color Group side of things. 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 as we get into 2027. I think right now, with customers, many of them are getting into the phase of, okay, they've done a lot of the reformulation work, if not all of the reformulation work.

And 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, preparing for their eventual production of the natural colors. I think now we're getting into the phase where we may get a little bit more clarity from some on launch dates. But I think here, again, the short answer Q2 will look a lot like Q1. Q2 will look fairly similar to Q2 and Q1, but I think Q4 is where you'll see perhaps a more decided inflection point in natural colors. But I think ultimately, for the year, yes, we feel really good about where we are for each of the groups in terms of what they should deliver.

And then just 1 final one. On the TiO2 opportunity set, can you sort of frame that for us as it relates to how big that is in terms of the addressable market, et cetera? And is that part of the $1 billion sales threshold that you're focused on in terms of natural colors? Or is that separate from that?

Yes, that's a great question, I would tell you that, that may be the single most challenging program, but the irony of that is titanium dioxide from a regulatory standpoint is actually considered natural colors. So I hadn't contemplated that in the $1 billion, but if I'm getting the $980 million, I need a little push over the edge, I may count that on, but I'll let you know about that. But no, I think this is 1 of those that -- and you'll see more and more of this, too, right? As you convert to natural colors, there will be the next wave of regulatory expectations, right? So titanium dioxide is 1 of them.

We've been working on this for a number of years. This came out really, Europe was first in sort of decrying the use of titanium dioxide, not only in food products, but also personal care products. And then the U.S. has sort of followed in the wake of that. It's I would say it's a conversion that's a little bit more in its infancy compared to the broader based natural color conversion -- but no, I think this could be a nice add-on, but I have not factored that into the $1 billion.

Next question will come from Josh Spector with UBS. .

I wanted to follow up just on just on the COLORZ growth, I'd just be curious, where is your confidence at today versus 3 months ago around the time line I mean a lot of investors are concerned that things could slip because your customers will be facing a lot of cost pressures in different areas. So obviously, 1Q was good. You're talking about new wins, but the stuff you thought would convert and move in the second half -- is that going faster or slower? Like any details there to help us understand the cadence would be helpful.

Josh, I pay attention to the time line very much the macro level, right? The expectation -- there are 2 really key dates here that I think the market has been moving towards January 1, 2027, which is essentially the Walmart deadline for having natural colors in its brand names throughout its stores in the U.S. And then the other noteworthy time frame that folks have been honing in on a January 1, 2028. So I think largely, customers remain on track with those. I'm very exceedingly confident. I think my confidence where with versus 3 months ago, I'm still very confident. I don't see -- I talked to a lot of customers.

We're dealing with just about any customer you've heard of, you could say, -- we've got a vast pipeline across big customers, middle-sized customers and small ones. And so we can say this with a great deal of authority, there is no slowdown at any of these customers. And there is no deviation from, well, maybe I won't do this, maybe I will, said by no 1 that I've interacted with in the last 6 months. And so I think that the organizations are committed. You can go to the FDA website. I think there's a couple of dozen household names that have pledged this already on the FDA and to the American public that they will do this. So yes, I continue to remain very confident.

Now what is the precise distribution of do we get 5% this month and 8% in the next month. Yes, that one's a little bit harder and quite frankly, possibly even unknowable to a large degree. But I think that customers are honing in on their launch date. Bear in mind that some of these brands have dozens, if not more than 100 products that they're attempting to convert that's a massive undertaking. These are all new launches. They require new packaging. They require new formulation, production scale-up. In some cases, customers need to implement capital in their plants to process it differently. So a lot of moving parts. So customers aren't being reluctant and they're not well. Maybe I'm not going to do this. No, they need to do it right and that takes time.

And so we should not expect some massive conversion in these very early days. I think we're pacing very much at the pace that I would expect, and it's one that would accelerate as we get, again, closer to these deadlines because every customer that I have evaluated and spoken to, and there's a lot of them, they're very committed to this.

I did want to ask on margins and colors. I mean if I go back to last call, you were talking about the year margins being down about 50 basis points. You were flat in first quarter. It sounds like from your comments earlier, you're thinking you're maybe flattish in 2Q, 3Q, corrective if I'm wrong, and you sound like you're up in fourth quarter. So are margins up there? And just what does that mean in terms of the OpEx investments? Is that embedded in there through the year? Is that slower and I'll throw 1 more if you're able to quantify what those OpEx investments are that you're going to grow into next year, that would be helpful as well.

Yes. So EBITDA we were flat for the quarter. As I noted in the comments, that's a bit better than I had anticipated. Really the moving parts here are you mentioned it, the capital expenditures -- and when, as I like to say, metaphorically, the little green light goes on, which is to say the equipment is up and running and producing product, and now you're depreciating it. So that is a variable. And then you're balancing that variable with you've got ongoing investments to ensure that we have the right personnel in place and we have the right engineers and we're doing the right testing and a lot of the other R&D and applications and processing engineering that goes into these conversions, right? So we made a lot of those investments. So that's a second factor.

And then you're balancing that with the inflow of revenue. And so if the capital is done before the sizable revenue comes in, which I'm not particularly -- that I don't have a problem with that. I'm okay with being early on capital. So that's where you may see a little bit of a headwind on that leverage. But in instances, our customers maybe move a launch to the left or a bigger launch happens, then that would balance a lot of that expenditure out and therefore, provide a little bit of a tailwind to the EBITDA margin. So I think net-net for the year will be flattish on the EBITDA in the Color Group. I would expect us to be up in Asia. I would expect us to be up in flavor for the year.

But color -- you got the variables, you're exactly right. And it's just a matter of how does the revenue flow and how do we progress along with our investments. And again, it may be a quarter or so that were early by. And I would consider I would be thrilled I was early on capital implementation, I had a bunch of folks sitting around waiting for products to come in. I can't think of anything more exciting in this moment than something like that.

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

Paul, congrats to the year. So I guess, just kind of set the way I just ask those questions another way. Obviously, the quarter was a little bit better across segments, but in college to and the margin was a little bit better. It feels like and I think you're adjusting your margins a little bit. I guess, flattish on color side, you expect a little bit of a pressure, I think, last quarter. So is the change, basically, it sounds like revenue is a little bit faster coming in conversions are a little bit faster. No change on the expected investment this year. Is that kind of a good way to summarize what's happening in collars just for the year?

Yes, I think that's about right. Yes, revenue was a little bit better than we thought, and I think that -- and that went a long way. I think that going back to the previous question, yes, I think some of this is it's all about the timing. And so again, you may have a quarter where it's not such a smooth slope on some of these variables. But yes, you're absolutely right. I think we did better than we thought. And so therefore, the EBITDA was not down as I had thought it might be. It was more flat.

And yes, I think that's a real positive outcome. I think it's indicative of a couple of things, though, too, right? not only wins, but it's high quality wins. And I think one of the things that I've talked about over the years, the point among many that distinguishes Sensient's is that we really pursue those natural color opportunities that are very strongly performance-based applications. Natural colors are exceedingly challenging in most formulations. But in others, it's a little bit more mundane, and then those are the ones that we tend to perhaps spend a little bit less time with.

And so when you focus on the more technically challenging, those tend to be I suppose, more positive on the gross margin front than, of course, the more mundane. So I think the mix is going to continue to play a good factor here. And I think perhaps in my own mind, the mix was a bit better than I thought it would be right out of the gate in Q1.

I appreciate that. And just like on the more kind of hard to call it long term because it's only a couple of year outlook, right, where you give -- you have the January 1, 27 and more importantly, that's for Walmart, which I know is a nice percentage of just products in the United States. But January 28, obviously, is the kind of deadline or soft deadline. Clearly, I don't think you expect everybody to be able to convert, right, just impossible. So I'm just curious, are companies getting more competitive, more maybe not anxious, but just trying to solidify their plans sooner than the next guy because it feels like it's going to be a little bit of a game of musical chairs in terms of if the full supply chain is not ready for the conversion. Maybe only some could convert. I'm just trying to get any kind of color on tenant on just how that's progressing as you get kind of closer to these dates.

Yes. I would tell you that the bulk of the activity is going to be in 2027, but a significant amount of the activity, as you just saw here in Q1 is going to be here in 2026. So I gave you some of the factors that may impact the timing of these launches. But there's also the phenomenon of competitors, right? So if a competitor in this category converts to natural colors, and he does it sooner than his competitor would. You could expect that is competitor may want to more rapidly move in that direction as well.

There is ultimately in markets, what I like to refer to and you can read about this one, too, there is a tipping point. There's a critical, critical mass of activity maybe it's 20%, maybe it's 30% of a market that it moves in this direction and then it moves very rapidly towards the end of -- and so part of what we're preparing for is that possibility that it may start off where you get 10% and 15% is converted and then you get up to about 20% and then it moves very rapidly in that direction. Now whether you want to call that a tipping point or just folks all pursuing the similar deadlines, one way or the other, I think everybody gets there.

But yes, you're right. This is a matter of guiding your customers like, hey, folks, you can't all convert in Q4 2027, and you don't want to either -- so I looked at a customer's launch plan just the other day, and they had it all kind of metered out over the course of the year, this product category here and this product there and right? So I think customers are really forming these plans up very, very, very nicely. And they've got a lot of risk in terms of their timing, they need to achieve their deadlines as well.

So Yes. I think the more we go into this direction, I mean, eventually, it just has to happen by virtue of the expectation of the market. But I think you may -- you could see more dramatic conversions sooner than we had thought because of some of that competitive activity when your competitors do it, and you're not, that's not a good thing for you and being a CPC competitor. So that remains to be seen. That's a bit of an uncharted territory, but then again, that's why we're like -- we're hitting it hard, Larry, on capital. We're hitting it hard on the supply chain. We are hitting it hard on stress testing this business, right? So I think we're going to be ready.

Great. Now I could just slip one more. Just I think a few weeks ago, I think just my question is more on the FDA and just their activity or their involvement. I know a couple of weeks ago, think they delayed some approvals of -- I think they were more genetically engineered natural colors. So potentially, these were competing products that you probably wouldn't want to be approved either but -- and I guess there engineered is maybe not "natural" -- but I guess my question is, is the FDA just getting more involved putting on with the natural and the involvement of the evolvement of natural colors or is it still more just -- I know they put out these recommendations and at all last year. I'm just curious if that was more of the -- just curious what's going on the FDA side and the supply chain. .

Yes. So Colors is -- let me start with 100,000 feet, and I'll tell a little story here, just to give everybody on a line a little bit of background. At 100,000 feet, colors are ingredients that have to be approved for use in food. So you may have heard other terms like grass. This is under a lot of controversy right now and in some corners, but Colors actually had to go through a full throttle, full throated, whatever you'd like to say, approval process with the FDA. And this approval process could entail tox studies, it could entail any number of tests, lots of data, ultimately a lot of time and money to get a color approved in the United States.

Now -- what has happened over the years is many have been approved. There are many approved, but there will be more and more that will get approved in the future. Now sometimes these approvals it may be the use of this natural red, and I'm going to get it approved for use in soda, but it's not approved for use in candy. That may be a separate set of testing and evaluation by the FDA. So -- when you look at these approvals, you have to note what applications in food that they are approved for -- and so it's a very, very interesting process. It's very unique. It's very unique, and I would almost argue exclusive to colors that every 1 of these has to be approved by the FDA.

So along the line, right, and you're seeing a lot more activity. So to your question, is the FDA more involved, yes, because there's a lot more, what they call, petitioning to use a new natural color in the market. And so from time to time, or at least maybe the one you're referring to, there was a beat route that was being challenged. -- sometimes entities may challenge the use of that natural color in a segment or they may challenge the name of that natural color that may challenge some other facet of the approval at the FDA. I wouldn't consider this to be unusual to any great degree. Long story short, there's a lot of natural colors that are approved.

We've got a good toolbox that we can work from. But it's not a complete toolbox -- and so we very much get involved with the FDA on submitting raw materials that we could use for Colors as well. So very much a very active process right now for sure. And that's all public information. So if you ever wanted to go and check that out, you could see what's actually in the FDA's funnel on natural colors.

[Operator Instructions] Our next question will come from Nicola Tang with BNP.

First one is a quick simple one. I was wondering if you could give us an update on the revenue related to the conversion of synthetic colors, I think [indiscernible] quarter, you're at about $5 million. Just wondering if you hear an update as of this quarter.

Sure. So yes, just to recap for everybody else on the line here. So couple of numbers we talk about, right? We talk about our $1 billion sales goal and that's derived from -- we have about $100 million of synthetic colors, and we think that will convert at about 10 to 1. So there's $1 billion is what we're chasing. The back half of last year, we invoiced specific towards that goal, this natural color conversion, about $5 million. That was what was invoiced. Now when you take that back half and you take Q1 of this year, now we've invoiced about $20 million or so towards that goal of natural colors.

So stated in a different way, you look at the colors growth was about 12%. You can do the math here, but about half of that was the base business just continue to do really well. And the other half was this incremental derived from these natural color conversions. But order of magnitude over the last 9 months, it's been about $20 million of invoiced in natural color conversions in the U.S.

That's great. Second question, I just wanted to ask a bit more about the reported EPS guidance. Just thinking more in absolute numbers. So at the midpoint, you're upgrading your EPS guide by about $0.10. But the beep actually, when I look at Q1 versus certainly consensus expectations is more like $0.20 -- so actually, to me, it looks like although you've upgraded your guidance or of the metrics, it's actually an implied downgrade on the rest of the year. So I was wondering if you could help me, am I misunderstanding or are there reasons why your maybe there was some pull forward in Q1 or maybe you're taking a more cautious outlook been just general macro in the Middle East, as you mentioned. Just wondering if you could help me understand the new EPS finance.

Okay. Let me -- I'll give the first part of SAB, and then I'll turn it over to Tobin. He loves this question. So EPS -- so yes, we raised our guidance. And I always like to start with revenue, we've got a very strong ability to control that figure, right? -- customers may delay a launch or move a launch or they may do this or that. But in general, across an organization, this large -- we like to think we have a strong control over revenue, and we can predict that fairly well. [indiscernible] EBITDA. And so you see a nice raise on each one of those. As you get below EBITDA, that's where you then start to have to factor in things like interest and tax and then things we don't control like FX and other potential below the EBITDA line factors.

And so that's where the EPS figure can get somewhat separated from the net leverage that you see between revenue and EBITDA that you therefore expect on EPS. So I think in short, interest is up substantially, and I'm going to let Toby answer that. But there's a couple of other factors in there, too. You can.

Yes. I think -- and we kind of talked about it a little bit in our prepared comments, but through interest was up in the first quarter of $7.9 million versus $7.3 million last year. And we expect that to continue throughout the year, given the investments that we're making in natural colors. From the capital. And then as Paul mentioned, from people and R&D and everything. So we expect our overall interest expense to be up about $6 million throughout this year and that will progress on a quarterly basis as we kind of move forward. So you have that increasing.

Our leverage ratio right now is about 2.4. In our comments, I mentioned, we expect that to climb as well as our debt increases throughout the year. So we'll be in the higher 2s from that point. tax rate, we're about 25% in the first quarter. We're guiding for 25% this next quarter and roughly about 25% for the year. So you have those components was a benefit. As I mentioned in the prepared comments, about $0.06 in this first quarter. Exchange rates are all over the place right now given what's going on in the world. I would say that in the back half of the year, that would become more of a headwind.

But overall, FX should be about immaterial when you look at it for the year. So -- when you look at it, we did increase our EPS guidance from where we were in Q1. So right now, we're at high single-digit growth and double-digit growth. So that's kind of where we are at this point.

And then just going back on the previous -- you answered the previous question, I was just reflecting on it. When you said 20 million invoiced -- is that with reference to the EUR 100 million revenue synthetic revenue or the EUR 1 billion overall revenue opportunity?

The $1 billion. .

And then the final question would be just around raw materials. You mentioned you don't have significant direct exposure to Middle East, but I think there's a general view that input inflation there may be more input inflation, particularly on the synthetic side. I was wondering what you're expecting in terms of inputs this year? And are we mainly talking about synthetics? Or should we be thinking about certain naturals within your supply chain, which are either sourced I don't know from the Middle East or from Asia or something where there might be a potential disruption either in terms of cost availability?

So in short, we believe that there is a sufficient amount of inflationary inputs that we're going to need to take pricing to address that. This would be sort of low single-digit magnitude. So not unlike again, where we've done this in other instances of tariffs and wars and pandemics and the like. We would anticipate taking pricing there. The biggest factors here, there's certainly the logistical inflation substantially derived from energy and petroleum more specifically. So we face that. .

There's an impact of packaging as many of those raw materials have petroleum-based in inputs. And then of course, as many in the media are fond of saying, petroleum-based synthetic colors, of course, therefore, you realize that a couple of those synthetic colors are indeed derived. Of course, then again, many things in nature are derived from that as well.

But that aside, we would expect to see more on the raw material side of synthetic colors for food and for personal care that we would need to address. For natural colors, it would come sort of fertilizers and other input costs we see rising. So those would have an impact on natural colors. But a lot of these costs for harvest are built into the next year's harvest often time. You hear me talk about that with our raw materials or with our agricultural business. So in short, there's many of these different factors, but I think we can address this, and we will address this with a modest amount of price increase that we would expect to give principally focused in synthetic colors for food and personal care, but also anything related to logistics, which is effectively all in down and outbound freight.

And then, of course, a couple of other -- you'll hear propylene glycol is another one that's been heavily impacted by the war. So that's how we kind of see it playing out right now. And even if the war were to stop, there's still a sufficient enough backlog in other sources of a nurture here that the inflation is coming if it hasn't already, and so we're going to need to address that.

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

Just a small follow-up and actually related to what you were just talking about, is just as you look at your 2Q guide, are you baking in anything in terms of a negative impact from transport logistics loss, et cetera? Or are you assuming your pricing offsets that more or less in real time?

I'm not assuming any bad, and I'm not assuming any good. So I didn't assume the inflation because at this point, it's fairly modest and some of it is, quite frankly, deferred. But I'm also not assuming any pricing in Q2. either from a guidance standpoint.

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.

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.

The conference has now concluded. You may now disconnect.

Good morning, and welcome to the Sensient Technologies Corporation 2025 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Tobin Tornehl. Please go ahead.

Good morning and good afternoon. Welcome to Sensient's Earnings Call for the Fourth Quarter and Full Year of 2025. 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 2025 fourth quarter and full year 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 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 SEC filings, including our 10-K to be filed later today 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. Now we'll hear from Paul.

Thanks, Tobin. Good morning and good afternoon. Earlier today, we reported our fourth quarter and full year 2025 results. I'm very pleased to report for the full year of 2025, we delivered 3% local currency revenue growth, 10% local currency adjusted EBITDA growth and 15% local currency adjusted EPS growth. Each of our groups had adjusted local currency operating profit growth during the year and improved their EBITDA margins. The company also improved our overall adjusted EBITDA margin by 100 basis points. Our operating and financial performance in 2025 continues to build on our multiyear strong financial performance. While some tariff-induced customer supply chain disruptions and unforeseen weather events negatively impacted our fourth quarter results, we still reported 2% local currency revenue growth and flat adjusted local currency operating profit in the fourth quarter.

Color Group had another exceptional quarter and the natural color conversion momentum continues to be very strong and building. Our performance this year is a direct result of our focus on sales execution and customer service as well as our broad product portfolio. We continue to prove that we are a technical leader in the specialty ingredient space, a reliable supplier to our customers. And as a result, we continue to achieve new sales wins at customers across each of our groups.

Our innovative natural colors, flavors and Personal Care products continue to position us for future growth and capitalize on opportunities in the markets that we operate in. This is paying off in our results. Since 2019, the company's local currency adjusted revenue compounded annual growth rate is approximately 6%. With regard to the natural colors conversion momentum that I just mentioned, the industry continues to push forward aggressively on this activity in the United States, Canada and parts of Latin America.

I will repeat what I've stated before. This conversion to natural colors is the single largest opportunity in the company's history, and we continue our preparations to capture a substantial portion of the commercial opportunities. Over the last 15 years, we have invested considerably around the world, and we have pioneered many of the industry's leading natural color technologies. We have also invested substantially in production and supply chain capacity, quality control and our commercial organizations. I feel very good about our sales pipeline, and we will continue to aggressively pursue the natural color conversion opportunities as they unfold over the next 2 years.

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 throughout this conversion process.

Now turning to Slide 7 and our group results. The Color Group had excellent results in 2025, delivering 7.4% local currency revenue growth and 16.9% local currency operating profit growth for the year. The group's adjusted EBITDA margin improved to 23.7% from 22.1%, an increase of 160 basis points versus the prior year. This margin improvement clearly speaks to our efforts to sell technically differentiated products, control costs, execute on our pricing strategy and deliver quality new wins.

In the fourth quarter, the group saw record new sales wins and delivered 7% local currency revenue growth, but we are still only in the early stages of natural color conversions. The group also delivered adjusted local currency operating profit growth of 7.2% in the final quarter of 2025. The Color Group remains in a great position for the future, and I'm very pleased with the progress we are making in our sales pipeline, along with the ongoing and substantial R&D and capital investments.

We expect the Color Group to get off to a strong start to the year in terms of revenue growth, but profit leverage will be challenged due to the investments in natural colors we are making to position ourselves for our $1 billion sales goal.

Turning to Slide 9. The Flavors & Extracts Group saw a local currency revenue decline for 2025 of 1.3%, but a 3.4% increase in local currency operating profit. The group's adjusted EBITDA margin was 16.7%, up 60 basis points versus the prior year. Flavors, extracts and flavor ingredient product lines reported 3.4% local currency revenue growth and significant local currency operating profit growth for the year. The growth in these product lines continues to be the result of our innovative flavor technologies and our emphasis on new and defensible flavor wins across North America, Europe and Latin America. The future continues to look very bright for Flavors growth in each of our regions.

Focusing on the fourth quarter, the Flavors & Extracts Group reported a revenue decline of 2.4% and adjusted local currency operating profit decline of 11.6%. The fourth quarter results were negatively impacted by severe rains in California late in the year, including what is described as an unprecedented atmospheric river events. These rains severely disrupted the harvesting activities for our agricultural ingredients business. These weather-related impacts further compounded some disruptions to our plant. Together, these issues led to a onetime inventory loss at agricultural ingredients of approximately $3 million in the quarter.

Aside from these weather and production impacts, as we stated throughout the year, our agricultural ingredients business, which consists of dehydrated onion, garlic, capsicums and other vegetables, was also impacted by lower sales volumes and significantly higher crop costs throughout 2025. As expected, we have now reached our revenue inflection point and expect a much improved top line for agricultural ingredients in 2026. Overall, we expect a slower start to the year for the Flavors & Extracts Group with strengthening revenue and profit performance as we move through 2026.

Now turning to Slide 11. The Asia Pacific Group delivered local currency revenue growth of 2.4% in 2025 and adjusted local currency operating profit growth of 3.8% in the year. In the fourth quarter, local currency revenue was down 1.9% and local currency operating profit was flat, primarily due to supply chain disruptions caused by significant tariff activities. The group's adjusted EBITDA margin was 22.6% for the quarter, up 90 basis points versus the prior year's fourth quarter. Asia Pacific Group is equipped to bounce back from some of the regional demand disruptions that it experienced in 2025. We expect this bounce back to be heavily weighted towards the back half of '26 as some of these disruptions linger into the first quarter, where we still expect flat revenue versus the first quarter of 2025.

Turning to Slide 12. I'm very pleased with the trajectory we have been on over the last 6 years. As we begin 2026, I expect consolidated annual local currency revenue to grow at a mid- to double-digit rate. Significant natural color conversion sales activity will drive us to the top end of this range. The Color Group local currency revenue growth should be in the high single-digit to double-digit range. The Flavors & Extracts and Asia Pacific groups should both be in line to deliver mid-single to high single-digit revenue growth in 2026. Both Flavors & Extracts in Asia Pacific will start out with flat revenue and profit in the first quarter and will accelerate in the second quarter into the back half of the year. Based on those revenue expectations, I expect adjusted EBITDA for the company to grow at a mid-single-digit to double-digit rate and our adjusted EPS to grow at a mid-single-digit to high single-digit rate.

Overall, our profit leverage for the company will be challenged in the first half of 2026 as we forge ahead with the necessary investments in research and development, expansion of our production capacity and supply chain investments to position us to maximize our natural color conversion opportunities.

We do anticipate our natural color conversion revenue to increase substantially in Q3 and Q4. Consequently, for the company, we anticipate low single-digit to mid-single-digit consolidated local currency adjusted EBITDA growth in the first half, which will turn to high single-digit to double-digit growth in the second half.

On the investment front, we are currently planning for consolidated capital expenditures of $150 million to $170 million in 2026. We expect to be north of $125 million again in 2027. Our total natural color conversion-related capital expenditures are expected to be between $225 million and $250 million between 2025 and 2028, which will position us to capture the $1 billion sales goal.

Beyond capital expenditures, we will continually evaluate sensible acquisition opportunities, but we do not anticipate any share buybacks during the year. We also anticipate that we will see a ramp-up in our natural color inventory throughout 2026 and into 2027 as well. Our focus is to capitalize on the natural color opportunity with a goal to significantly improve our ROIC to the mid-teens. As I've stated before, we have approximately $100 million of synthetic color revenue today that has the potential to be converted to natural colors. These conversions to natural colors result in revenue multiples of approximately 10:1 on average to achieve similar color shade.

Turning to Slide 13. As we've done for the last several quarters, I would like to now highlight some of our innovative technologies. Currently shown on this slide is some information about 2 of our most successful natural color platforms, UberBeet and our advanced emulsion technology, or AET. UberBeet is a global platform of high-performance heat stable beet solutions. These products allow food and beverage manufacturers across multiple segments to attain vivid red 40 synthetic light color by using natural ingredients. This platform can be utilized to achieve a variety of shades from light pink to dark red velvet and can withstand baking or high heat processing. Like many of our natural color solutions, we can provide UberBeet products in many different formats from liquids to powders and customers appreciate the performance attributes while meeting their cost and use targets for conversion.

Next, I'd like to talk about our advanced emulsion technology or AET. This is a platform that utilizes uniquely proprietary technology to deliver vibrant, consistent natural colors and outstanding performance across numerous applications. What makes these products unique is the ability to maintain the shade across various pH, heat and light conditions as well as to provide a degree of formulation stability that is unmatched in the industry. The need for strong performance across various conditions is where converting from synthetic colors to natural colors can be the most complex. Our technical and application teams are incredibly knowledgeable in assisting our customers in finding the right solution to meet their needs in the most demanding applications.

In summary, our products, R&D activities and supply chain development are centered around providing safe, consistent and high-performing products that can be tailored to meet the needs of each customer across multiple applications. If you like more information on our natural color technologies, please visit our website.

Overall, I'm pleased with our financial performance in 2025. I'm excited about the growth opportunities within each of our groups. Our pipeline for natural color conversions continue to build, and I grow more confident each day in our ability to achieve our sales goal. As customers continue to refine their launch time lines, we will provide updates throughout the year in our quarterly calls. Our growth is a direct result of the execution of our strategy and seizing the opportunities in the markets in which we operate. Our product portfolio is strong, and we remain focused on our key segments within the Food, Pharmaceutical and Personal Care segments.

Tobin will now provide you with additional details on the fourth quarter results.

Thank you, Paul. In my comments this morning, I'll be explaining the differences between our GAAP results and our non-GAAP or adjusted results. The adjusted results for 2025 and 2024 remove the cost of the portfolio optimization plan. We believe that the removal of these costs produces a clearer picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance.

Turning to Slide 15. Sensient's revenue was $393.4 million in the fourth quarter of 2025 compared to $376.4 million in last year's fourth quarter. Operating income was $38.2 million in the fourth quarter of 2025 compared to $42 million of income in the comparable period last year. Operating income in the fourth quarter of 2025 includes $6.3 million, approximately $0.12 per share of portfolio optimization plan costs. Operating income in the fourth quarter of '24 included $0.9 million or approximately $0.06 per share of portfolio optimization plan costs.

Excluding the cost of the portfolio optimization plan, adjusted operating income was $44.5 million in the fourth quarter of 2025 compared to $42.9 million in the prior year period. In local currency, adjusted operating income was flat in the quarter. Interest expense was $7.5 million in the fourth quarter of 2025, up from $6.4 million in the fourth quarter of 2024. The company's consolidated adjusted tax rate was 17.1% in the fourth quarter of 2025 compared to 24.9% in the comparable period of '24. Local currency adjusted EBITDA was flat in the fourth quarter of 2025. Foreign currency translation had minimal impact in the fourth quarter of 2025.

Turning to Slide 16. Cash flow from operations was $45 million in the fourth quarter of 2025, up from $21 million in the fourth quarter of 2024. Capital expenditures were $32 million in the fourth quarter of 2025 and $89 million for the full year. Our net debt to credit adjusted EBITDA is 2.3x as of December 31, 2025. Overall, our balance sheet remains well positioned to support our increased capital expenditures, sensible acquisition opportunities and our long-standing dividend. As Paul indicated, we'll continue to invest in our natural color production capabilities and capacities. These investments will remain elevated for the next few years, and we expect to drive favorable volume and profit growth for years to come with an eye on improving our ROIC.

Turning to Slide 17. To repeat our 2026 guidance, we expect our consolidated full year local currency revenue growth to be mid-single digit to double digits. In the first half of the year, we expect mid- to high single-digit growth. And in the second half, we expect high to double-digit growth. We expect our local currency adjusted EBITDA to also be up mid-single to double digits for the year with a breakdown of low single digit in the first half and double digits in the second half. We expect our local currency adjusted EPS to be up mid- to high single digits in 2026, with low single-digit growth in the first half and high to double-digit growth in the second half.

With the natural color investments Paul outlined earlier, we anticipate our debt position to increase in 2026, resulting in our interest expense for the year to be around $36 million. We expect our tax rate to be approximately 25% for the year. The natural color investments will lead to a short-term decrease in profit leverage in the first half of the year as we make these investments prior to the full realization of the natural conversion revenue.

For the first quarter of 2026, we estimate that local currency adjusted EBITDA will grow at a low single-digit rate. Interest expense will be around prior year's interest expense of approximately $7.3 million, and our consolidated tax rate will be approximately 25%.

Thank you for participating in the call today. We'll now open the call up for questions.

[Operator Instructions] Our first question comes from Ghansham Panjabi with Baird.

Obviously, a lot going on. Maybe we could start off on that $100 million conversion opportunity you've outlined for the past several quarters at this point. How much of that, if any, converted in 2025? And what are you embedding for 2026? I'm just trying to get a sense as to what the pipeline looks like. Obviously, they'll be layering in as the year unfolds as you outlined.

So for the 2025, we would have invoiced on the order of about $5 million in Q3 and Q4. So that's just invoiced values. So pretty modest impact to the top line right now. There's a huge level of activity in the pipeline across a whole range of customers. And so we expect, obviously, some conversions here in Q1, Q2. I would anticipate an acceleration in those in Q3 and Q4 as the deadline and as customers self-imposed deadlines to come to get a little bit closer by the end of this year.

So to give you a little context of what drives that time line, to reformulate with the natural colors, it's essentially -- it's a new product launch. So if you think about a large CPG or even not such a large CPG, a midsized company, there's a lot that goes into formulating a product. And so in many instances, you take a CPG who's working on a product that might be on a store shelf for the last 40 or 50 years. So the idea that you would then go and change that formula presents a considerable risk to that big brand to that big company. And so naturally, there's a lot of testing. There's a lot of formulation work that goes into this. Converting from synthetic colors to natural colors is a very complex technical evolution, requires a lot of testing. Some of this may also require consumer testing. The brands want to ensure that the stability of the product is very good. So there may also be 6- to 12-month stability testing of the product.

So you net all those things together and you say great. But then at the same time, there's a lot of compliance questions. How do we want to label this? We have to redo our packaging. Many consumer product good companies, when they redo packaging, that could be a 6- to 12-month evolution unto itself. And so there's an awful lot of complexity that goes into these launches. And then, of course, when you're doing this across your entire portfolio that uses synthetic colors, this is an enormous undertaking. We have observed customers where this is the -- this is the work that is happening with all the folks wearing white lab coats.

And so it's an enormous undertaking. It's very complex. They have to get it right. If you're a brand owner and you don't formulate this thing properly and your color looks wrong or your stability is off or there's some taste or smell associated with the product, that can have a hugely detrimental impact to your business and to your brand. So there's a lot of care that goes into these launches.

And so that's what's largely impacting the time line. And therefore, that's why I would tell you that there'll be some activity in Q1 and Q2 for the Color group. More activity in the back half for sure and then even more as we roll into 2027. Nevertheless, you're going to see really, really nice top line growth out of the Color Group. We feel very, very good. You'll see that right out of the gate here in Q1. I think you'll be very, very happy with the top line.

So these -- what we can expect for 2026, I think we can certainly expect to see double digit out of the Color Group. We may be surprised. Maybe there are more launches, but we don't want to disappoint folks. And so I don't want to give you an overly aggressive expectation because to some degree, I don't always control that when a CPG is redoing packaging, there's not a lot I can do to move that time line. And so we want to be very, very thoughtful about what we're projecting for you. But I think you'll be very, very happy with the Color Group top line right out of the gate.

Now I do want to say something else about the operating leverage there, but I'll let you go on with question two, Ghansham, before I take all the airtime here.

Yes. That's great. I'm looking forward to being very happy. I could use that. So the FDA changed the new artificial color designation. How does that change the cadence in terms of conversion, if at all? And then just as you teed up, just the operating leverage associated with the investments, where exactly the investments go? And can you quantify to any material extent that we can adjust our models and keep the actual operating leverage in mind disaggregating between the incremental expense?

Sure. So I think, first of all, the FDA coming out with some guidance on the labeling. I don't think that, in my opinion, that's not really going to modify the timing of any brands that may provide a bit of clarity perhaps in some instances. So -- but I don't think that's a material change in any of the time line or launch dates.

To your second question about operating leverage, I'm glad you asked that one because some folks are looking at Q4 and they're saying, well, color was up 7%, but only 7% of profit. Well, we've made considerable investments throughout 2025. In order to get to the type of $1 billion sales goal I've delivered publicly and in this company, you need more technical people to work on all these projects, folks working on the formulations, the applications, troubleshooting with customers, helping customers scale these products up. Many customers have to make investments in their production plants. They have to modify their current production, which is geared towards synthetic colors and therefore, having a technical person, a process engineer as well available to customers to help them scale up is an important consideration here. So we've made lots of investments there. We've made investments in our commercial organization. We've made and we've accelerated a lot of our R&D.

Now remember, up until about a year ago, even less than that, natural color conversion was sort of like it was happening, but there was no real defined time frame. So you sort of manage your R&D according to that type of market. But when there's now an imposed time frame for conversions, that suddenly puts us in a position to accelerate a lot of our R&D activity. And I think throughout this year, you're going to see us talking about some very, very interesting new technologies that we're introducing to the market that will be very, very exciting, certainly long term for the business, but even in the short term.

So it's these types of investments that we made, and this is a principal reason why you don't see that same beautiful leverage that you saw throughout most of the year for color. You certainly saw it on the year. I mean we were still up about 17% on profit. But in Q4, you saw a little bit of that deleverage. You're going to see that again here in Q1, a little bit less in Q2, a lot less in Q3 and like a lot, lot less in Q4. So the investments continue, but the revenue continues to grow very, very nicely.

And I made it very clear to the team. We are going to invest very, very strongly. We are not going to be late. We are going to capture the vast majority of these conversion activities. And so I made the choice. I'm going to invest and I'm going to show you 7% revenue and 7% profit. I could have not invested and showed you 7% revenue and probably 20% profit or so. I don't have the exact number. But I think everybody is going to be exceedingly happy that we did make these investments, and I think it's going to pay off and really allow us to execute very smartly. So all very intentional, all very acceptable from my standpoint, and I think it's going to pave the way for a really, really good '26 and '27 for the Color Group.

Now I think that pretty much got up your two. Is there anything else there, Ghansham, that we wanted to go through?

Just a clarification, and then I'll turn it over. So the investments you're making, just to give us some perspective, obviously, you're ramping up spending to align with the growth opportunity, et cetera, and '26 we'll see part of that, especially in the first half, as you outlined. Will '27 be more normalized based on what you know at this point? Or will there be flow-through into '27 as well in terms of investments?

Well, I would think it would be better than normalized. I think it would be hyper leverage and revenue growth in '27. But I would tell you that even I'm looking here at a forecast and you look -- you start to see this leverage unfolding as we go through the year. But you're going to see very, very strong revenue growth throughout. That's a strong indication that you want to be seeing that we're capitalizing on these conversions. But you start to see that leverage again in the back half beginning in Q3, but it really picks up considerably in Q4. So I would fully expect that leverage to build even beyond that as we get into '27 and 2028.

And the next question comes from Larry Solow with CJS Securities.

Can you give us a sense -- I know you spoke about increasing confidence in terms of the $100 million converting. Could you just give us a sense of -- it sounds like the majority of that is going to happen, it feels like in '27. So I guess from a high level, it looks like '26 is really that cost year with a little bit of revenue coming in, but your costs are -- sound like they're going to outweigh that benefit. And then at some point, we'll hit an inflection point, either late this year or early next year, where the revenue starts to increase and your actual margin will go up. So it feels like your margin in Colors will actually be down this year, right? Is that fair to say year-over-year and then we'll start to come back up and perhaps rapidly next year? Is that a good way to look at it?

Kind of. So I would tell you that you'll probably see EBITDA margin down the first half, maybe 100 basis points or so, something like that. Nothing to worry about. Again, it really stems from these investments. As you get into the second half, right, you would start to see the EBITDA margin improve versus prior year. We finished last year at an EBITDA margin here...

23.7%.

Yes, 23.7%. So I think you'd probably see us in that 23% or so. So we may be down 50 to 100 basis points for the year. But again, with the revenue growth we're showing, and then there could be -- it could be more flattish. But I think what we've said is on the quest to get that $1 billion, we're going to be in this range, the sort of 23% to 25% range throughout. You may see some, again, a little bit of a dip here in the first half, but I think the dip becomes not a dip in the second half. But we kind of remain in that ballpark 24% or so, maybe 25%, maybe as low as 23% at times type EBITDA margin. But nothing to be alarmed of and certainly a very, very healthy trend overall.

Okay. And I'm just curious, so it sounds like the demand side of the equation, you have not lost any confidence in. On the cost side and the supply side, it sounds like clearly, you're investing a lot company specific. I'm curious just how the -- on a macro level, has the industry been trying to adapt? Like are we seeing more crops being put out in the field? Can you give us any kind of update or any color on that side of the equation?

Yes. No, for sure. I mean, certainly, I'm not the only one who sees these headlines in the industry. So there's a lot of folks out there growing products, not only that we work very closely with. And of course, we've expanded what they would be growing. But certainly, there's a number of additional players who've entered the crop growing part of this industry. And that's a really positive thing. I think I've mentioned this once before. When you look at the fully absorbed cost of a natural color, raw materials can be a considerable portion of that. And you know that because you see us manufacturing in the U.S. and Europe and places like that. And nevertheless, we remain very, very profitable. So that tells you to some degree that raw materials can be a big part of the cost. So the more growers there are, the more competition that creates, the more efficiencies that creates, the better scenario that you have.

And so I would tell you that we certainly see that. We absolutely see customers have a very much better grasp on the supply chain, I think, now than certainly 9, 10 months ago. But they also understand that the supply chain is not just the raw material. That's great if you have truckloads of black carat showing up, but what are you going to do with it? And so that's the capital side of the equation, too, that we -- I just gave you some numbers there, $225 million to $250 million to really capture this $1 billion opportunity. And so a lot of investment there, Larry, and it's really very much within the Americas, but there's also activity within Europe. And so the capital piece is, I would tell you, every bit is important as securing the raw materials. And so that's just another dimension to keep in mind.

Got you. And just last question, perhaps just for Tobin. So I see your guide on interest expense somewhat higher than we had thought actually increasing like $5 million, $6 million year-over-year. We actually had it coming down on an improved cash flow, but obviously, the investments are offsetting that. So I guess can you just sort of walk us through that? Is the increased interest and higher debt? It's mostly related to the CapEx, I guess, but it does sound like you're going to have some working capital usage as well.

Yes. Yes. Overall, our leverage ratio right now is about 2.3. We're guiding to about $36 million in interest, which is up $6 million, as you said, year-over-year, really due to the investments that Paul just outlined and the working capital investments. So you'll see our debt increase this year. But overall, our leverage ratio should be below 3 by the end of the year in the high 2s, I would say. But you'll see that increase, and it's primarily due to the investments. And that's also what's impacting our EPS, which we're guiding mid- to high is because of that increased interest.

[Operator Instructions] Our next question comes from Nicola Tang with BNP Paribas.

A couple of questions. Firstly, sticking on the Color side. We previously -- or you previously referred to the legislation in West Virginia as a kind of important signpost in terms of triggering conversion in the industry. It seems like there's a lawsuit so that it might be -- end up being a bit delayed, it seems. Have you seen any change in sort of discussions with your customers around the timing of converting given this potential delay in West Virginia? That's the first one.

I would say as a general statement, Nicola, our customers are very committed to this conversion. And it's not because necessarily of any particular law or any other particular legislation. It's really fundamentally driven now more and more by this is what the end consumer in the U.S. and Canada wants. And so I think the brands are responding very strongly to that. Obviously, what initiated this whole thing back a year ago was the West Virginia legislation, along with a lot of the changes in laws around school lunch programs in several states. And so I would tell you, if you go to the FDA website, that's a very interesting summary of many of the brands, by no means all of them, but many of the brands that are committing publicly to we are going to convert and they're racing towards a January 1, 2028 deadline according to what they have said.

So no, I have not seen a whole lot of wavering on that. And I think if anything, you saw that Walmart has indicated that they want to convert even sooner than that. And so that has created a lot of activity in the market that, if anything, perhaps has moved some of those conversions to the left. And then as much as Walmart may be converting their brand sooner, that may, therefore, inspire brand managers at CPGs to attempt to move to the left as well so that they can be competitive with their brands.

So no, in short, I think every customer that I have visibility to and certainly have discussed is very committed to this, very committed to this time line. It does remain to be seen how some of them plan to roll this out. Do they start with flagship products? Do they start with perhaps not flagship products? Do they do a lot? And then that is a little bit more of, again, why it's difficult for me to tell you precisely what a forecast would be. But as you're looking at the big picture here, you look at '26 and '27, I think you're going to see the vast majority of these things happen.

And so that's the really exciting part. So I don't want folks to get particularly, hey, this quarter, the leverage this or oh, this interest that. I need people to pay attention to the big picture. Pay attention to what's going to happen in 2026. 2026 is going to be a fantastic year. Show me another food ingredients business that's going to grow like we're growing. And show me another food ingredients business that has the opportunity that we are presenting here and that we're being very clear about the opportunities for. And I think if you look at that for '26 and you look at that for '27 and into '28, that's the story. It's very, very exciting. This is not some opaque. Well, maybe they'll convert. No, they're converting. -- and isn't that exciting.

And so I think that's really the message here. And so don't get -- again, don't get particularly troubled by any one change of an interest rate or a leverage for one. I think the big picture for this year is it's going to be a really, really great year.

That's clear. On that point, I just wanted to clarify your comments on Colors top line growth. I think you mentioned an answer to Ghansham's question, double digits. Did I hear you correct? Because I think in the prepared remarks, you said high single to double digits.

Yes. No. I think double digits, that sounds really good to me, too, Nicola. That's exactly what we want you to take away here.

And double digits in your mind means 10% because you talked about the guidance...

That's right. 2 digits before the decimal. That's right. So 10% or better, exactly.

Right. But this year, when you -- or last year in 2025, when you guided to double-digit growth in local currency EBITDA in the end, you delivered 15%. So I was just trying to understand the double digits you mean...

Yes. I think color we did 17%, which is technically correct. That is double digits. I suppose I can get a little bit more granular on the double digits, but that tends to be what analysts would describe as a high-level problem. But I'd be happy to maybe become a little bit more granular about the doubles. But I would say at least 10%, and it could be better than that. But again, I don't want to disappoint anybody. So I think 10% is a really good base to start from.

Okay. Got it. And then just maybe to give the other two divisions a bit of airtime. How confident are you in terms of an improvement in Flavors & Extracts? And is it solely driven by the recovery in ag ingredients? Or do you also expect improvement on the Flavors side? And then I guess a similar question to Asia. You talked about this rebound in the second half, but what gives you confidence in a rebound other than just lapping the impact of this year?

Okay. Yes. Great. So Flavors & Extracts, I think on the 2/3 of the Flavor Group, that is what we call flavors and flavor ingredients, they were up nearly mid-single on top line, but substantially on the profit side of that ledger, well above that #10 on the profit growth there. So I have every reason to believe that, that continues. Q1, I think we said that we'll be fairly flat in the Flavor Group for Q1 on revenue and profit, principally related to order timing and things of that nature. But for the year, mid-single digit for the Flavor Group, I feel very confident and comfortable with that, and that should translate to high single-digit growth on the EBITDA.

Now as you just noted, SAI, I think we are in a -- we said we had a really tough 2025, and that was absolutely true. But I think we're at -- as I noted in the monologue there in the beginning, we have hit that inflection point. So I think you're going to see some top line growth out of that business this year, which will only contribute to that Flavor Group top line growth. And we have a lot of work underway. We think there's a lot of cost that we can take out of that business.

Most notably, we got our biggest crop ever, which is outstanding news because, as you know, with agricultural products, when you don't have the product, you don't sell the product. And I think there have been instances over the years where we just didn't have enough. We were losing opportunities because we didn't have that. And so we've addressed that in the process of addressing that, the season ran longer and the season ran longer, and we had some rather highly unusual weather events, which I would describe as onetime in nature. I don't think this is going to be every Q4 we're having this conversation because we've been able to make a lot of adjustments from that. So no, I think there's going to be a nice resumption back to the normal cadence you become accustomed to see out of the Flavor Group.

And then similar for Asia Pacific, yes, the whole tariff logistical nightmare that has become the tariff policy as it pertains to sections of Asia Pacific, certainly played out. You saw that in Q4. You'll see it here again in Q1. We're going to be flat in Asia Pacific on revenue and profit. But as we get into Q2, you're going to see return to what you've also very much become accustomed to revenue and profit growth. What gives me confidence in that is that the business is not impacted by that tariff are doing exceedingly well right now. And so I think once we sort of stabilize in the logistical side of things, we're very, very happy with Asia Pacific, who, of course, as we noted, mid-single-digit top line, high single-digit EBITDA for that group as well. So once again, I think we're going to -- we're positioned for a very nice year in that group.

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

Okay. Thank you. That concludes our call today. If you have any follow-up questions, please contact the company. Have a great day.

The conference has concluded. You may now disconnect.

Good morning, and welcome to the Sensient Technologies Corporation 2025 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornehl. Please go ahead.

Good morning. Welcome to Sensient's earnings call for the third quarter of 2025. 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 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 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 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 on Slide 5. Now we'll hear from Paul Manning.

Thanks, Tobin. Good morning, good afternoon. Earlier today, we reported our third quarter results. I'm pleased that we continue 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 continue 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 & 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 digit to double digit for EPS. We now expect double-digit local currency adjusted growth for both EBITDA and EPS. The major storyline for Sensient and 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're 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 continued 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 and 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 we'll 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 6 and 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 & 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 Sensient 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 & Extracts Group to deliver solid results for the year.

Now turning to Slide 8. 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 in 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-single-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 & Extracts and 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 time lines 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 said previously, the conversion to natural colors results in revenue multiples of approximately 10:1 on average.

Turning to Slide 11. The FDA is now maintaining a master tracking list on their website 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 have also recently seen Walmart announced 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 Certasure, 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 Certasure 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 Sensient Certasure screening. These failures are often due to exceeding levels of pesticides and adulteration. While our Certasure program prevents the use of contaminated raw materials, it appears that other companies may not have such stringent standards as Sensient as we frequently see our failed lots of Paprika go back into the open market for others to procure. Only batches that pass our Certasure 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 a NATO, beta-carotene, and carrot juice, none of them compares to Pure-S stability and clear vivid orange in beverages. As we have discussed and as we experience 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 & 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 pure mask technology, includes a range of products that are ideal for balancing taste and neutralizing off notes that could originate from various ingredients in the 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 time lines, we can provide more definitive guidance on revenue timing going forward. Looking ahead to 2026, we will give more detailed guidance during our conference call this coming February. However, we continue to expect our long-term consolidated local currency revenue to grow at a mid-single-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're 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.

Tobin will now provide you with additional details on the third quarter results.

Thank you, Paul. In my comments this morning, I'll be explaining the differences between our GAAP results and our non-GAAP or adjusted results. The adjusted results for 2025 and 2024 remove the cost of the portfolio optimization plan. We believe that the removal of these costs produces a clearer picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance.

Turning to Slide 15. Sensient's revenue was $412.1 million in the third quarter of 2025 compared to $392.6 million in last year's third quarter. Operating income was $57.7 million in the third quarter of 2025 compared to $50.5 million of income in the comparable period last year. Operating income in the third quarter of 2025 includes $3.3 million, approximately $0.09 per share of portfolio optimization plan costs.

Operating income in the third quarter of 2024 included $1.2 million, approximately $0.03 per share of portfolio optimization plan costs. Excluding the cost of the portfolio optimization plan, adjusted operating income was $61 million in the third quarter of 2025 compared to $51.7 million in the prior year period, an increase of 15.7% in local currency. Interest expense was $7.3 million in the third quarter of 2025, down from $7.7 million in the third quarter of 2024. The company's consolidated adjusted tax rate was 23.8% in the third quarter of 2025 compared to 23.1% in the comparable period of '24. Local currency adjusted EBITDA was up 14.3% in the third quarter of 2025. Foreign currency translation had a minimal impact on the third quarter of 2025.

Turning to Slide 16. Cash flow from operations was $44 million in the third quarter of 2025. Capital expenditures were $20 million in the third quarter of 2025. And as Paul indicated, we still anticipate our capital expenditures to be around $100 million for the full year of '25. Our net debt to credit adjusted EBITDA is 2.3x as of September 30, 2025. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible acquisition opportunities and our long-standing dividend. As Paul indicated, we'll 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 the years to come.

Turning to Slide 17. Revisiting our 2025 guidance, we expect our consolidated full year local currency revenue growth to be mid-single digits. We have now raised our local currency adjusted EBITDA to double digits. Previously, our expectations was high single-digit growth. We now expect our local currency adjusted EPS to be up double digits in 2025. Last quarter, we guided high single to double-digit growth. We expect our fourth quarter interest expense to be around $7.5 million, and we expect our fourth quarter adjusted tax rate to be around 24%. Based on current exchange rates, we still expect the impact on currency on EPS to be a slight tailwind for the year. Considering our GAAP EPS in '25, we now expect approximately $0.28 of portfolio optimization plan costs. We expect our GAAP EPS in 2025 to be between $3.13 and $3.23 compared to our 2024 GAAP EPS of $2.94. Thank you for participating in the call today.

We'll now open the call for questions.

[Operator Instructions] Our first question comes from Ghansham Panjabi from Baird.

I guess, first off, on the -- it sounds like you've honed in on the $100 million in sales as it relates to food and nutraceuticals and the potential with that conversion, et cetera. Can you give us a sense as to what portion of that is in the process of reformulation conversion? I mean, clearly, regulations are moving around, and there seems to be a sense of urgency with these public mandates and goals that a lot of these companies have announced, as you pointed out in your slide deck. But can you just quantify that in terms of backlog?

Well, let me -- I think I get where you're going with this one, Ghansham. The $100 million, I mean it's a cross-section of really a whole range of customers. In fact, it's everything from candy to beverage to baked goods to processed foods, you name it. In fact, as I noted in the comment, really the only thing that you would probably exclude from this longer term, maybe even is the pet food and the pharmaceutical OTC. So that said, any customer that I've spoken with or any of our sales folks or other leaders have spoken with, everybody is moving in this direction. The only real variable here, I think you go back a few months, I would tell you that there were probably 3 groups of customers. Group 1, we're doing it. We're going there. We knew that we were going to have to do this, and we want to do this. There was another group maybe Group 2 was a bit more -- we need to kind of understand where this may make some sense, which products. And then there was a Group 3 that I must tell you was a bit more cautious, perhaps wondering if this is really going to happen, was there really going to be a requirement here. In -- even just the last few months, I don't hear anything of a Group 3 anymore. And I would tell you that just about every company out there is either well down the path of this, working very, very diligently or it's really the bucket 2 has probably evolved to yes, we're going to do. We just need to figure out which ones go first and which ones go last in terms of how we prioritize. So there is a strong expectation from customers that this deadline of January 1, 2028, is the deadline. There's really no kind of playing around with that one. And so I think everyone that we're speaking with, every customer and every prospect, they're fully aware of the requirement, and it's going to be either sometime in 2027 or sometime in 2028, but one way or the -- or sorry, 2026 or 2027. But one way or the other, I think everybody gets there in 2028 is certainly the goal that we observe.

Sure. But it does take time for the reformulation and so on. And I assume your technical people are a big part of that process. So I guess that's what I'm referring to is the activity starting to match up with the customers' narrative as it relates to wanting to push towards natural at this point?

Yes. Well, I think you said it perfectly. These are like new launches and new launches are very, very complex and they can take some time. And beyond just the formulation challenges of trying to match a synthetic color, select the right color to include in that formulation, then there's stability testing. How well does that color do in that formulation. They may have never experimented with that particular beverage or that candy or that baked good. So there's a need to conduct stability testing. Will this color still look good? Will this formulation hold up 6 months down the line after it's been sitting in a warehouse or on a store shelf. Many companies will do test marketing. How does the consumer perceive this product? Do they like it? Is it aligned very strongly with the taste expectations? And then there's 1,000 other elements that go into these launches and the bigger the company, the bigger the risk. There's regulatory questions, there's repackaging, production scale up. So it is a massive, massive undertaking. What has happened here is the biggest multinationals who may have hundreds of products that they're reformulating, they are essentially doing hundreds of launches, relaunches within a fairly narrow window and time frame. And so yes, it's a complicated game. It gets less complicated as you get to smaller customers who maybe have a handful of products that they're looking to launch. They still have to contend with all those factors that I just described. But that's what puts a lot of -- folks want to ask me, well, when is it going to happen and what percent by what month and what date?

Well, that's a hard question to answer because most of our customers haven't necessarily definitively pointed out a specific time line for all these hundreds and dozens of products that they may be reformulating. So yes, but your comment there really gets at what is the complexity of predicting precisely when somebody launches. And that's why I encourage folks to just remember, it's January 1, 2028. That's 9 quarters from now. So there's not a whole heck of a lot of variability that would be associated with these outcomes, I would suggest right now.

Okay. That's very clear. And then -- so on the food and pharma growth of almost 11% during 3Q, what exactly is that being driven by if you're saying that you're not really benefiting yet from the $100 million converting, et cetera? And how much of that 11% growth is being driven by maybe new wins in natural color, how would you have to think about that?

So the reason that business is growing so well is because it's -- we have a really good strategy. We're focused on really understanding why we win and why we're successful at customers. We are very selective about the types of projects and customers we want to work with. We tend to say no business that doesn't align very closely with our strategy. So you're going to see us continue to avoid commoditized high-volume here today, gone tomorrow. Let me send out a bit and win this by a penny type business. We stay away from that stuff. So we very much insist on having that differentiated defensible business model. And so that means that the product starts with product performance, [indiscernible] great products that we continue to use today. Many have been developed over the years, and we continue to develop them. But I would tell you that's a considerable source of our success. We continue to have exceedingly robust service levels across the board. And this is on the basic blocking and tackling of the business, samples and documents and sales people showing up and being responsive that is certainly a foundation for why we're successful there as well. But the natural colors, I think where generally regarded as a very good natural call company. And so we've got really great products. We have products that I would argue others do not have and certainly do not have them to the same level of precision and consistency. And so I think our customers recognize this more and more, and they see us as a tremendous resource, not just for providing color or flavor or cosmetic ingredient, but all the other components of making their launch and their business successful. So I think it's really just a continuation of the ongoing strategy, nothing particularly new that I would comment we did during Q3. But what I would note is I think I asked [indiscernible] before this, what was the final amount of conversion in Q3, products that were synthetic that converted to natural and we've calculated less than $1 million so that's not at all driving those results right now. So when those conversions start happening, it should be a real exciting time around here.

The next question comes from Larry Solow from CJS Securities.

Great. I appreciate that was some good color, Paul. Just a follow-up on that. I guess, on the $100 million target, I guess, to change, that's obviously your existing customer base. Curious, there's a whole outside of your current share on the on the synthetic side. I suppose there are lots of customers out there who are using synthetic callers today who will be switching to natural who are not a customer of yours today, at least on that synthetic piece, but I suppose our target. So I'm just kind of curious outside of that. I know you focused on that initial 100, but I suppose there's a much greater circle outside of that. And then I guess on the flip side, is there also a possibility that some of this $100 million, yes, they have to get away from synthetic, but are there places where there's not a 10 to 1 conversion or there may be not a great alternative for them to get to that exact color and maybe they don't match color and can go on a cheaper route to get a much even like Pepsi has is naked out there. So I'm just kind of throwing out other alternatives to where you go natural, but not necessarily that exact color match and 10:1 revenue ratio.

All right. I see where you're going there. So the first one, the $100 million. So the simplest way to look at this is $100 million at that 10:1 ratio. Now to your point, are we going to get $100 million of that No. Do you know why? Because I don't necessarily want all $100 million of that. Some of this stuff, there's a whole range of natural colors. There's a very strongly performance-driven technically differentiated variety. And then there's sort of the belly wash commodity variety, and it's a spectrum. And so our business has very strongly focused on the former and largely ignored or avoided the latter. And so in that $100 million, yes, there may be some synthetic colors that lend themselves to less exciting natural color solutions. We may be less interested in some of those. But then again, there's some synthetic colors in the market out there, not in that $100 million that maybe weren't real interesting to us as a synthetic color. Maybe we just never had that business. But you know what, when those convert to natural, it's really technically challenging. It's really performance [indiscernible] stuff, and we'd be super excited to get it. So it's all those puts and takes. So I think right now, we use 100 as kind of just a good benchmark. You're absolutely right. There's pluses or minuses within that. And we'll keep you folks kind of posted, I think, as we kind of continue on this journey. But I like our chances. We've been putting in a heck of a lot of work and there's a lot of folks bringing this thing together. But the nice thing, this is a culmination of 15-plus years in this company. So as I said before, this is very much the long game strategy in this company. And so I think we have a very good chance and very good opportunity here to win very, very nice looking projects. Now to the second part of your question, kind of that 10:1, yes, that too is an average. So think of it this way. The brighter a product appears and the more harsh the manufacturing environment it took to bring it to you, the higher that ratio % going to be. So think about maybe something that got baked in an oven and it's got a natural color. That may be a higher ratio than 10:1. Still has that bright vivid but it's being produced in a very, very tough, harsh environment. So heat, light, hot, low asset conditions like a low PH. These are all very, very damaging to color. I think I told you, if you look at that sofa in your room and buy the sunlight [indiscernible] as brown as it used to be. Well, that's what happens to color and food and beverages, too. So it's a -- it's trying to find ways to retain that vibrancy despite those really tough situations. Those types of products lend themselves to a higher ratio. Now on the other end of the spectrum, to your point, guy is like, "Well, I just want this lightly colored, I've got to know opaque package or I'm going to get really cute and try to take color out. Well, a couple of things on that. So first of all, some of those would come in, obviously, at lower than a 10:1 ratio. But I think our guidance to our customers is you want to match and you need to match this embedded color. All the data and all the cautionary tales in the market suggests that if you go with less than the synthetic color match, you were putting your brand at risk because consumers first complain more than any other it seems, they are set that the flavor has changed. So the color is very strongly tied to the flavor expectation of a product. And when you modify that in a way that's off the standard, consumers will revote in some cases. And then still in other cases, they may just simply not like it because the color doesn't look as good. So those are the reasons that we guide our customers and advise them to go with the best match possible that gives you the best chance to be as successful as possible. But I'm not going to deny that. I'm sure there will be a handful of brands out there who, again, will tend to use less color or no color or put it in a opaque package and try their luck with that. But that -- I don't believe anybody has ever demonstrated that to work in any market that I'm familiar with.

No, that all makes sense really helpful. One quick follow-up, Paul. Just you mentioned no real change in regulations or ongoing legislation things in the last few months. Just any thoughts on the potential change on the generally recognized as safe, I guess, the FDA made tighten regulations a little bit on that, where you actually are now required to file something where I think previously or currently it's kind of self-governed basically, right? Does that -- could that potentially have any effect on your business at all?

Not really. The [indiscernible] date that you're referring to, specific to colors. Color I continue to argue are the most regulated food product in the world, synthetic colors anyway. And as much as every manufacturing batch has to be approved by the FDA certified by the FDA. But even to get the right to manufacture those products, you have to petition the FDA for use of that product in food. And so that involves an extensive set of testing, topological testing, quality control, all sorts of parameters. And so that is the case with a natural color. If you'd like to add one, there is no grass process for adding natural colors. One would have to actually file with the FDA petition that and again, go through that rigorous process. So now there could be impacts on other components of the business, for example, flavors, which don't have that equivalent color additive petition but that would not be applicable to the cosmetic business. So there could be. But that is a rather vast and extensive part of the food world today. So attempting to modify that I'll be interested to see what that proposal could look like. But that would be a -- that may bring elements of the food industry to an absolute halt. In terms of bringing in new products into the market and introducing new ingredients. And so I think that's an interesting conversation [indiscernible] process foods is another one. And so I think a lot remains to be seen on those 2 fronts. But I think there's a lot of good discussions underway on both of those.

[Operator Instructions] Next question comes from Nicola Tang from BNP Paribas.

I want to stick on the color topic, but then I do have some questions on other divisions as well. On colors, you mentioned in the remarks that even Walmart is also committed to converting some of its products towards natural colors as well. Firstly, how -- do you see other private label brands also following suit? How meaningful could this be from a Walmart or a general private label point? And given these tend to be lower price point items, do you see any impact in terms of this conversion price to, I guess, [indiscernible] earlier question around whether some of those customers might choose to compromise on vibrancy or something else? That will be the first question.

Okay. So yes, I think Walmart, the largest retailer certainly in the U.S. market, their declaration that their private brands great value being one of them will convert to natural colors by January 1, 2027. And was a big move in the right direction for the natural color market and this whole notion about conversion. Many folks have sort of wondered, is this really happened, could this -- could these deadlines [indiscernible], could this maybe just be all sorts of facade and it's really not going to happen? I really don't think that's going to happen. And Walmart making this and expectation and moving up the time line a year earlier than West Virginia, I think, is a very positive development because again, consumers want natural colors. So I suppose you could say, well, why don't we give consumers what they want. And certainly, that is what Walmart has said that they intend to do. They want to give consumers what they want. So they've deliberately made this edict, and they intend to do that by January 1, 2027. So that may move some of the other launches to the left, which again could be a positive. We certainly don't want everybody to attempt to convert their products in the fourth quarter of 2027 because that would be physically impossible. So this move is important for that reason. Now -- and because of its size and its influence, it's very, very meaningful for other brands and private labels to follow suit to be competitive with those brands that are converting. With respect to this generate lower price points, I don't think so. I think that when you look at a lot of products, raw materials are not necessarily, in fact, in general, they're not the driving costs behind bringing a product to market. Now synthetic colors or represent almost nothing to the cost of a product on an individual SKU basis. But as you convert to naturals, it certainly becomes more expensive. And in most applications, it becomes somewhat at the level of a flavor, which is to say still fairly small in the annals of raw materials, but substantially more than they would have been paying for us in better color. So I don't necessarily anticipate that being dilutive in any way to certainly, by no means, is that dilutive to the quality expectations of natural colors. I mean, these are fairly well-established brands and very, very strongly performing brands. So I think they have every expectation, I would assume, to have the highest performing colors in their products. So no, I don't think that there's any diminishment in quality or price or anything else between private label and brand on a product like a natural color.

Nicola? It looks like her line has dropped.

Hopefully, I didn't make or upset with that [indiscernible]

There are no further questions at this time. I'll turn the conference back to the company for closing remarks.

Okay. Thank you for joining the call today. That concludes our prepared comments. If you have any follow-up questions, please reach out to the company. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning and welcome to the Sensient Technologies Corporation 2025 Second Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornehl. Please go ahead, sir.

Good morning. Welcome to Sensient's earnings call for the second quarter of 2025. 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 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 removed 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 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 5.

Now we'll hear from Paul.

Thanks, Tobin. Good morning and good afternoon. Earlier today, we reported our second quarter results. I'm pleased that we continue 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 6.6% local currency growth.

The Asia Pacific Group delivered 7.6% local currency revenue growth, and the flavors, extracts and flavor ingredient product lines within our Flavors & Exacts Group delivered 4.6% local currency revenue growth. These results align with our expectations and position 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 Sensient's history. We made a strategic shift in natural colors more than 15 years ago, investing internally and through acquisitions and technologies, production capabilities and supply chain. We believe that the conversion to natural colors was inevitable given the broader market conversion of 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 continued 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. 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 uncertainty 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 6 and our group results. Color Group had excellent second quarter results, delivering 6.6% local currency revenue growth and 22.1% local currency operating profit growth. The group's second quarter adjusted EBITDA margin improved to 25.1% 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 conversions later in our discussion. Color Group is progressing nicely, and I'm very excited about the future ahead of us.

Turning to Slide 7. The Flavors & Extract Group saw local currency revenue declined in the second quarter by 3.2%, but increased local currency operating profit by 8.6%. The group's adjusted EBITDA margin was 17.8%, up 160 basis points versus the prior year's comparable quarter. Flavors, extracts and flavor ingredient product lines reported 4.6% 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 Asia Pacific.

As discussed during our last quarterly call, our natural ingredients business, which consists of dehydrate and 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 & Extracts Group to deliver solid results for the year.

Now turning to Slide 8. The Asia Pacific Group had a solid second quarter, delivering 7.6% local currency revenue growth and 8% local currency operating profit growth. The group's adjusted EBITDA margin was 22.3%, up 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 multiyear success and we expect more of the same in the future.

Turning to Slide 9. 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 for the year.

On the capital allocation side, while we increased our capital expenditure guidance last quarter to be between $80 million 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 & Extracts Group and Asia Pacific Group. Beyond capital expenditures, we will continue to 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. 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 colors and 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 effective 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, Sensient 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 like -- I would now like to take a moment to highlight 2 key technologies that are enabling our customers to successfully move from synthetic to natural colors without sacrificing the vibrancy and stability that the customers expect. As we have discussed and has experience in the market has shown, contributing -- converting to vibrant natural colors is critical for brands conducting the transition of their products, using 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 synthetic vibrancy. Whether it's an iconic soft drink or a breakfast series 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 brands through this transition.

The first technology I want to highlight is our Microfine range, which is arguably the single most successful natural color technology we have ever launched. Microfines our natural colors used extensively in salty snacks to in part bright reds, yellows and other colors. Salty snacks are a very large category, and the popularity of spicy varieties has increased demand for our microphone substantially over the last few years. Now as 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 Sensient's Butterfly Pea Flower Extract, which was first approved by the FDA in 2021 in 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. Butterfly Pea Flower Extract also provides bold reliant purple shades for many beverages. Sensient not only discovers the novel color source, but stabilize the color in 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 and natural color regulatory time that I just outlined, we anticipate Sensient's natural color revenue to increase more significantly beginning in 2027 and to ensure our customers' 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.

Tobin 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 GAAP results and our non-GAAP 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 produce a clearer picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance.

Turning to Slide 14. Sensient'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 $0.06 per share of portfolio optimization plan costs. Operating income in the second quarter of 2024 included $1.8 million, approximately $0.04 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 16.9% 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 25.8% 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 10.2% 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 to credit adjusted EBITDA is 2.4x as of June 30, 2025. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible position opportunities in our long-standing dividend. 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 '25. 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 a 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 guided 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 the strong U.S. dollar in recent years. Considering our GAAP earnings per share in 2025, we expect approximately $0.20 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.

[Operator Instructions] And your first question comes from Larry Solow with CJS Securities.

First question would be just Paul, lots of moving parts and positive things on the color side. And as you mentioned, we've seen a lot of positive headlines. 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. So 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 raw material available to fulfill the type of demand and need we're talking about here. So like any agricultural product, there's a lead time associated with that. And of course, naturally, a lot of planning goes into that process. And so that's point number one. I mean 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 can have great technology and great capacity and wonderful salespeople and a terrific website. But if you don't have tetanicles, the train stops. And so I think very early on, we identified that is perhaps a single most critical factor in this whole conversion activity. And so, for us, this is kind of year '16, '17 or more working in earnest on the supply chain and how we can have enough mitigate as much of the risk as possible through diversification and the identification of new sources, selected vertical integration. You've seen us buy a couple of businesses over the years, focused in this area. But no, I think you're hitting on a profoundly important point and that is the supply chain. Yes, there's a lot of other factors, too. But yes, this is one that we have worked and continue to work very, very diligently to ensure that we have it when the time comes.

Got you. So the outlook for them for 2027, it doesn't sound like you'll get some incremental in '26, but it sounds like 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.

Yes, I think that's a fair assumption with January 1, 2028. Now the regulation for West Virginia states that you will not have items on the shelves on January 1, 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. Yes, I think you're about right on the 2027. And what's noteworthy about the colors continued success, as we mentioned in the comments there, those results, that great revenue growth, that great profit growth, there is no like major conversion or even minor conversion that I could speak to associated with those numbers. So it's -- 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 yes, I think 2027 and 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. And if I could just squeeze one more for Tobin. Just the quarter, nice earnings growth on somewhat -- a little more modest sales growth, obviously, a 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 mix? What's kind of driving that nice improvement in gross margin?

No, margins are up across the board, especially our EBITDA margins across all 3 groups. So we did see good movement there. Pricing is really immaterial 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 3 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.

And your next question comes from Ghansham Panjabi with Baird.

Congrats on the progress. So I guess, first off, on the $110 million 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 to 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.

Yes. So I think the opportunity, as we see it, so that's the number, the $110 million that's not only the U.S., but there's a component of that associated with Latin America. And so while this conversion is a U.S. conversion, there are certainly manufacturers outside the U.S. who would export to the U.S., who will also be subject to these requirements. And so therefore, it provides opportunities outside of the U.S., 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 U.S. or certainly any other part of the world. Our activity would suggest in the U.S. 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 sitting in the sunlight for too long, the brown is no longer brown, it's like tan. And then like if it just keeps going, like 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, like, 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 the 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 yes, 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. And then for the Color segment specific to 2Q and the incrementals were north of 60%, is 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.

Yes. No. I mean, Ghansham, just Color Group reported really nice EBITDA margins 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 SG&A that we're able to leverage that. It's 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. And then just last question, maybe a two-parter. So first off, on natural ingredients, what do you think is the realistic time line for volumes to inflect higher? Obviously, 2Q was -- it looks below our forecast. And then second, in terms of CapEx, I mean, is rare for a company of your size to raise CapEx so quickly during the course of the year, 2 quarters in a row and so on. What exactly -- what exactly are you spending on in terms of capacity? And then how should we think about CapEx needs for 2026? I realize that's going on and so on, but the opportunity set is big. So I'm just trying to get a sense as to how much of an uptick we should keep in the back of our minds for next year?

Okay. So the time line on S&I, 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 a downy mildew, I guess, you'd call it up light last year in a number of our growing regions. And so I think you'll see a nice turnaround in S&I for 2026. But also, as you can see, we more than overcame whatever reductions in S&I we had to face from a headwind standpoint and flavor has 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 in 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, yes, that's right. We raised CapEx last quarter, and we're doing it again. And I would do it more if I could. But my constraint right now is how quickly that 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 raise essentially 100% of it, 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 want 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. 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.

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

First, I guess, a follow-up on the CapEx point. You mentioned that you already have a lot of capacity that you want to enable costs 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're referring to earlier 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 sort of incremental growth opportunity there is on top of just the conversion of existing customers.

Today's -- yes, so today's manufacturing footprint would be insufficient to convert that $110 million. Now could it get us halfway there? I don't know. I haven'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 be on just converting the $110 million? 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 yes, 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 naturals and synthetics and how this could develop over time. I think today, you talk about exactly color match, talks a little about the importance of this, kind of average 1 to 10 conversion synthetics to naturals. I was wondering given what you said about the challenges around supply chain, around like 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 and then there are other applications of maybe 3 or 4x. So there's a lot of possibilities within that. So as this begins in earnest this conversion, you can imagine that there will 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% 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 yes, 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 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, has 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 in these spaces.

Okay. Great. And then a final question, just on the Flavors & Extracts division. I mean, package for volumes from an industry perspective have been pretty less last year for quite a long time. I was wondering if you could talk a little bit about your outlook, both in terms of the industry but also what you're seeing in terms of new win activity and what's your outlook for growth 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 U.S., up slightly in Europe. There are nice patches in Asia as much as folks talk about China and oh, they're still up 4%, 5% in that -- in most of the markets that we're serving there.

With respect to launch activities, to me, it's a little bit more of the same, pretty flat, not a lot of movement from Q1. Yes, line extensions, yes, 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 the continued maybe slow launch activity. But hey, listen, I mean natural colors is an enormous launch activity. So whereas, yes, 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 picked 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 yes, 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% and in local currency. So I think we picked the right segments, and I think we're going to continue to execute pretty well in these.

Your next question comes from David Green with Boldhaven.

Yes, first quick question. You've raised 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've maintained revenue. EPS is still high to double digit. And so 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 EPS is oftentimes rather than a 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 will say Sensient's EPS is flat because it doesn't take into account local currency results. So it was an interesting metric 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, yes, 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. .

Yes. And just maybe to F&E and to the cost headwinds in S&I, -- 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 copper having?

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 want something that we don't have, so you can almost call that there was a little bit of culling there. But I think first -- first of all, we 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 S&I. 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 -- and 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 back half of the year. But these tariffs and the very long shelf life of these products kind of contributed to some of the headwinds that we're seeing right now. So yes, 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 downy mildew, 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 that we think it's going to be really, really good for the duration of the harvest season, which would go for a few more months. So I think we'll be in a very nice position in 2026 on S&I not only on revenue, but on profit. But I think you'll see some sequential improvements as we get into Q3 and 4 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 was still up almost 9% in EBITDA, and we feel really, really good about that. And I think that as we get S&I fire and all thrusters, I think we have 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 Colors and F&E. And I think you had mentioned mix as one of the drivers. When you say mix within those respective businesses, what does that mean specifically?

So mix in Flavors, for example, is selling more flavors. In the universe of flavors, there are things flavors like you know I love great flavor, for example, so that. But there's also components of flavor systems. We call those flavor ingredients. And so I think certain products in certain applications generate 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 as one of the single biggest components and mix that has contributed to the really positive outcomes there you see in flavors. In 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 what you might call a belly wash natural color. There's some 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 real nice uplift stemming from mix. So those are a couple of examples that I'd speak to explain the mix and the operating leverage.

Great. I guess one -- 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. Yes, it is a little bit soft. And really in Europe is the big one, soft in North America as well, quite nice growth in Asia Pacific and Lat Am. So yes, 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 afoot. Whoever have 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 divide. 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 product 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 start-up brands in personal care space that's really, really shaken that market substantially. And so a couple of years ago, it was all about skin. Now it's all about fragrance. And a couple of years from now, it's not going to be about either of those or maybe it will be about both or maybe they will 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 sensing for the next 10 to 15 years, you'd say, okay, lot of natural colors in food and beverage for the next, call it, 4 or 5 years. And then it will 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 Sensient 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 is -- as we did the food, there is an inevitable conversion to natural colors that you will see in personal care in the coming years. So a, they might have had 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.

There are no further questions at this time. I will turn the conference back to the company, and Tobin Tornehl 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.