Good morning and welcome to the Sensient Technologies Corporation 2024 Fourth Quarter and Year-End Earnings Conference Call. All participants will be in listen-only mode. [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 the Sensient's earnings call for the fourth quarter and full year of 2024. 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 2024 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 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 on 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 and our forthcoming 10-K 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. The slide deck that will be referenced throughout today's call is available on our website. We'll start on Slide five. Now we'll hear from Paul.

Thanks, Tobin. Good morning and good afternoon. Earlier today, we reported our fourth quarter and full year 2024 results. I'm very pleased to report that we finished the year with a strong fourth quarter, delivering 8.9% local currency revenue growth, 18.8% local currency adjusted EBITDA growth, and 29.4% local currency adjusted EPS growth. For the full year of 2024, we reported 7.4% local currency revenue growth and 8.3% local currency adjusted EBITDA growth. Each of our groups had outstanding local currency revenue and local currency operating profit growth in 2024. Since 2019, we have shown strong operational and financial growth. Our performance is a direct result of our continued focus on sales execution, customer service, and commercialization of new technologies. We have proven to our customers that we are a reliable supplier, and our innovative product portfolio has a wide variety of natural flavors and natural colors along with personal care products. The volume improvement we experienced throughout '24 is due to our record level of new sales wins across each of our groups and the stabilization of end customer demand in North America and Europe. Despite an overall decline in new product launches in the market in 2024, we were able to capitalize on strong launch activity with local and regional customers and our ongoing expansion to new market segments and geographies. We continue to focus on optimizing our cost structure and reducing our inventory. Our portfolio optimization plan is on track to be completed by the end of 2025, and we believe we will achieve our targeted savings of approximately $8 million to $10 million annually. While we do not anticipate any further portfolio optimization plans, we are relentlessly focused on managing our fixed costs in SG&A. We will also continue to focus on reducing our inventory over…

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 2024 and 2023 remove the cost of the Portfolio Optimization Plan. We believe 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 13. Sensient's revenue was $376.4 million in the fourth quarter of 2024, compared to $349.3 million in last year's fourth quarter. Operating income was $42 million in the fourth quarter of 2024, compared to $8.1 million of income in the comparable period last year. Operating income in the fourth quarter of 2024 includes $0.9 million of Portfolio Optimization Plan costs. Operating income in the fourth quarter of 2023 included $27.8 million, approximately $0.65 per share of Portfolio Optimization Plan costs. Excluding the cost of the Portfolio Optimization Plan, adjusted operating income was $42.9 million in the fourth quarter of 2024, compared to $35.9 million in the prior year period, an increase of 20.8% in local currency. Interest expense was $6.4 million in the fourth quarter of 2024, compared to $6.5 million in the fourth quarter of 2023. The company's consolidated adjusted tax rate was 24.9% in the fourth quarter of 2024, compared to 26.5% in the comparable period of 2023. Local currency adjusted EBITDA was up 18.8% in the fourth quarter of 2024, and up 8.3% for the full year of 2024. Foreign currency translation reduced EPS by approximately $0.01 in the fourth quarter of 2024. On Slide 14, cash flow from operations was $157 million in 2024, compared to $170 million in 2023. Capital expenditures were $59 million in 2024, compared to $88 million in 2023. Free cash flow was…

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Ghansham Panjabi with Baird. Please go ahead.

I just want to go back to your comments on natural. I think you said it was about 20% of your sales base and it's growing faster than the mid-single-digit growth rate for the company that you've targeted. Can you just give us more specifics on exactly where you're seeing that increase in activity and business wins for Sensient? Also, for flavors and extracts, what activity are you seeing specific to the natural dynamic? You were actually down a little bit in that vertical in flavors and extracts. Thanks.

On the natural front, in the quarter, we were up double digits on revenue and volume on that part of our food colors business. So couple of things. Number one, there is an ongoing conversion towards natural colors such that today, on average around the globe, approximately 80% of all new product launches contain natural colors. So that's been a strong underlying current for a number of years for us, taking advantage of new-to-the-world launches. The other piece that will come from time to time, and I referenced this in my prepared remarks, when you have an existing brand on the market that's been using synthetic colors and they elected to convert to natural colors. What you've been seeing, some of the more outsized growth we've seen more recently, a handful of these have converted. That, of course, has been very favorable to the top line and the bottom line for the group. I would fully expect that 80% rate to continue. That has been the rate for a number of years now, so I don't see that abating anytime soon. To the extent some of the legislative commentary and state actions may initiate faster conversions with some of the other brands, again, very, very high positives for Sensient. The conversion to natural colors, that is the biggest opportunity in the history of Sensient Corporation, and it is probably the one I've been the most excited about in the 15-plus years I've been at this company. So we've been very, very strongly focused on how do we position ourselves to win the lion's share of these market conversions, given all the technical complexities, the supply chain QC, those complexities I mentioned earlier in the prepared remarks. So I feel exceedingly good about our chances there. Not only throughout 2024 we…

Okay, very helpful. And then going back to your, once again, on the natural components specific to color, what is the margin differential? How should we think about that between natural versus synthetic specific to color? And I guess I'm asking because your comments about the 10x sort of volume differential, just given the nature of the molecules, et cetera, it just seems like an enormous increase in cost for your customer as well.

Yes, I think, well, first of all, the raw material impact of a synthetic color on a typical packaged product is exceedingly low. For most CPG companies, the expense is in the marketing, the distribution, the packaging. Raw materials are a very, very small part of that cost picture. And within those raw materials, synthetic colors it's almost, well, it's an even more substantially lower impact to that finished product. So it's nothing to blink at to have 10x that potential cost rise. But nevertheless, it still pales in comparison to other raw materials that CPG companies may be spending their money on. So that said, as you think about our profile financially, yes, you may see, you will see an increase in revenue, an increase of volume that Sensient would sell to match that synthetic color. So you may see a little bit of erosion on the gross margin for that product sale compared to a synthetic color sale. But on a relatively fixed SG&A base, you would see consistency at the operating profit margin line. So in conclusion, revenue would be up, gross margin could be eroded a bit, but operating profit margin would be stable. And so that's a little bit more background on my comment, but a very, very important question and very, very important consideration. And so this is why I say things like, this is a great opportunity for Sensient because it's a really technically strong challenge. There's a lot of supply chain and regulatory, all sorts of different, this is not just, hey, your raw material costs X and his costs Y, so I'm going to buy his. That's the real basic part of the natural color market. We don't really play in that area. We play in the more innovative, engineered products within the market, customers looking for the exact match. And so we can drive a lot of technology and really build that moat, so to speak, in our commercial interactions in the market.

Okay. And just one final one for me, Paul, just to kind of put a ball on this. So the 2025 guidance in terms of sales, mid-single digits, core sales growth, if you will, if natural color is 20% of your sales base and that's growing 10% plus, is that sort of two points that builds up to that mid-single digit growth? Is that the right way to think about it on a go-forward basis?

So yes, natural color is a bit more than that. About 75% of our color group is food colors and within that, about 60% is natural colors. So whatever that would be, 40% to 45%. So yes, that would be the contribution from natural colors and I think you may not be too far in your expectation there. So yes, mid-single digit, we feel quite confident for the company and of course for the color group as well that that's a very achievable level. Now, I don't control the pace of these conversions and I don't control the pace of customer launch activity and so we talk about the year. There can be volatility in any given quarter. You may see a quarter where we're up 3% or 4%. You may see a quarter where we're up 7% or 8%. But I think we land this plane as we have for each of the last five years on average mid-single digit range, I think is a very achievable level. But to your point, led significantly by the activity around natural colors. So I think it's -- I don't want to say it's a dramatic departure from the past. I think it's been fairly consistent that again, these launches and their timing of those could add considerably to the top line at any given point.

The next question comes from Nicola Tang with BNP Paribas Exane. Please go ahead.

I'll start on the same topic on colors and then I want to talk about a few other things as well. Thanks so much for the interesting information and the new slides around natural colors and product launches. I just wanted to ask a bit more about penetration and where you think we might be at in the U.S. today just to understand and size this big opportunity that you're talking about for Sensient. I think in an old slide from what was Christian Hansen and [indiscernible] from a couple of years ago they talked about a 25% natural colors conversion rate in food and bev versus something like 60% in Europe. I was wondering if you had an estimate of what the penetration might look like today in the US. That's the first one.

Sure. Yes, there's no official database for this that one could easily reference. So what I would tell you is that the numbers that we use to describe the penetration rate in Europe you're looking at, probably a good 80% plus of that market has converted away from synthetic colors to either natural colors or coloring foods. In the U.S. it's probably more like about a third of the market has converted to natural colors. Customers in the U.S. don't typically use that coloring foods designation. And so figure about a third of the U.S. market has converted. And then you go to places like in LATAM, you're a bit lower than that. Somewhere between about 25% and 30%. And then in Asia Pacific, it's really going to vary considerably by country. So for example in Japan the majority of the market there would be natural colored but in China the estimates would be probably closer to a U.S. perhaps even a little bit below the U.S. in terms of penetration. So in short, we're in the if you like baseball analogies folks seem to like that. We're in kind of the early third inning maybe top of the third or bottom of the third. Which is to say there's lots of runway ahead of us. A lot of opportunity to convert the long runway. And again food is really kind of phase one. I see personal care as a phase two to this market as well. So a lot of good growth opportunities ahead of us.

Really interesting. And just on this topic you talked there about the higher barriers to entry in naturals and the complexity and the investments that you put in over time. And being a leader in colors generally I wonder if you could talk a bit to the difference in competitive landscape in natural versus synthetic in colors.

Yes. Well so we are arguably one of the only companies in the world that does it all. Synthetic, natural and coloring foods. Some competitors may offer synthetic for example but they're not basic. They don't manufacture them. They're simply trading them. And so yes there's a group of competitors who really just do synthetic and that's what they do. And there's a group of competitors who do natural colors and that's what they do. So I think our advantage is by doing both we have largely established ourselves as the incumbent in a great many customers around the world. At the multinational level and at the local and regional level. And we've invested considerably in our sales force over the years. That is the most effective selling model for colors. Particularly natural colors, which is a really challenging formulation problem for many customers. A lot of production and QC and all the other challenges that I described. So really having a direct sales person is a huge, huge advantage for Sensient. And so as we go out and compete we have some very good competitors for sure. They are also very strongly focused on natural colors. But I think the market tends to sort of divide itself into two camps. Camp one which I would put Sensient in as I described earlier. We really want to focus on those technically challenging natural color conversions. There's one lesson learned that every brand around the world I think has taken in by now. When you convert from synthetic to natural colors you have to have an exact match. No matter how you may try to outsmart it or out think it or oh it's the new this. It doesn't work when you don't match the synthetic color. But in order to…

Thank you. Just to give some of the other divisions a bit of air time as well especially given the notable strength in Asia specific in terms of local policy growth. I was wondering if you could explain a bit what was driving that. You just mentioned new salesmen but could you be a bit more specific and then help us understand what's underpinning your outlook for high single digit local currency growth in the division as well.

So Asia specific, yes they had an awesome year and an awesome fourth quarter. For years we've been investing and working on Asia really trying to elevate their portfolio their sales force, the technical applications groups over there and so I think what you're seeing is really the culmination of a lot of years of work and effort on the strategy side of that business and the focus of the portfolio and so all these comments I'm making about natural colors and the pursuit of flavors we've executed exceedingly well in Asia specific. We have a very strong leadership team there. The hustler mentality is alive and well among the sales force that's sentient. I can't speak to others there but we really emphasize folks who like to win and they want to come to work and they want to succeed and all others need not apply. So I think we've really elevated the performance of the folks in that region and that has really, really helped us execute on a new sales win which was exceedingly high in the quarter as well. So really three or four of those factors have really brought to bear the opportunities that we've had in Asia. We've had a lot of geographic expansion in Asia as well over the years. Whether we're talking about China or India or Southeast Asia, we've really kind of left no stone unturned. Yes, there's still a lot more we can go after but our emphasis on expanding into new markets, new segments has been really, really, really helpful. Now, Nicola, I didn't hear the second part about the high single digit. Did you catch that about the high single digit? Can you repeat that part, Nicola?

It was just to ask about the guidance for 2025 for the division and what's underpinning your confidence in the high single digit?

Oh yes, okay. So yes, the high single digit for Asia which would effectively be, well, it's a touch heavier than color and flavor. Yes, I think it's more of what I've just described. A continuation of the strategy, a continuation of the emphasis on new wins, servicing customers, being fast, being local, and I think it's really more of the same. So we feel quite good about our chances in Asia for 2025.

Okay. And then, if you don't mind just a final one and then I'll stop hogging the questions. I noticed that in the slides you reiterated the long-term revenue outlook but you didn't actually mention the long-term local currency EBITDA ambition of high single digit growth. So I was wondering I just wanted to check that that target was still relevant.

Yes. I think it is. I think, you know, as we look at 2025, we've got it mid on the revenue, mid to high on the EBITDA. Every year is a unique year. Every quarter can have some choppiness most notably because certain customers delay launches or they conduct launches. Things change and in 90-day periods you can see a little bit of that volatility. But as you look over the year, again, I think we land the plane in those ranges. Take 2025 for example. January is a very unusual month. There was a lot in the news about tariffs. There was a lot in the news about some reluctance of companies to launch products. Others wanted to launch. There was a keen focus on promotion activity. So we look at our January. January started off very, very slowly in most parts of the world. And then for whatever reason at the end of January a light switch went off and then the new wind started building up again and the organic orders started coming in again. And so then that sort of starts playing out a much better February and March. And so you can have moments like that in the business. So I wouldn't be surprised if Q1 comes in, 3% or 4% percent, maybe it's 5%. But I think for the year last year we said mid-single and we delivered as you saw 7.5% across the board. So things like that can happen and I don't think folks should necessarily get particularly panicked about anything like that. Stable markets, consistent markets at the macro level in over a year I think is a really good guide. So yeah, I feel very good about the mid-single digit. That will lead to mid to high single digit EBITDA.…

[Operator Instructions]. The next question comes from David Green with Boldhaven. Please go ahead.

I guess just a quick question around obviously the exit rate for Q4 at a group level, I think was 8.9%. And it's very clear that a large part of that has been driven by ongoing new wins. And those obviously take 12 months to annualize. And then at the same time you're winning new business as well. And so it was really just to get more color around that sort of, and I know you've talked a little bit to it, the mid-single-digit guidance in terms of whether that feels conservative. And if I could just link that with just a very simplistic observation your color guidance for 2025 is the mid-single-digit whereas flavors is mid-single-digit and APAC high-single-digit is obviously guiding at a group level to mid-single-digit. I know it's fairly nuanced given the size of APAC. I'm just wondering if I should just again tie that into an element of conservatism.

Yes, David I can kind of take that. But you're exactly right. So when you look at Q4 our total local currency revenue was just about 9%. So we had really good new wins across all three of our groups. And those new wins that we talked about before, they benefit the quarter that we're in and then they also roll into next year. So we got a healthy program on our sales force and the new wins that we're realizing and we're realizing across all the different segments. So from that standpoint it's positive and it also helps us as we roll into the next year. So as Paul said, this year it started a little slow at the beginning of the year but now we're starting to see a little increases from that standpoint. Our guidance across each of the groups were mid-single-digits and flavor in color and then our Asia-Pacific group is slightly above from that standpoint. So overall for the full year looking at it mid-single-digit growth on a consolidated basis feels good from that point. Paul kind of mentioned first quarter with how we started. 3% to 5% is probably right in the range where we'll probably be for the first quarter and then we'll kind of see how the year progresses. Did you have another question David?

Hello David, your line may be muted.

Oh sorry about that. In terms of the natural colors conversion, apologies I know you've talked a fair amount about this already but just outside of Red 3, are there any other compounds for want of a better word being talked about that could be significant and are you already starting to see some of the, it sounds like you are, conversion benefit come through and are you seeing that accelerate? Are you seeing more incoming with regard to the conversion?

So in the annals of synthetic colors Red 3 is quite small. I think it's like the second smallest. Green 3 may be technically the smallest but Red 3 is super small. The big ones are things like Red 40, Yellow 5, Yellow 6 and at this point the FDA has outlawed Red 3 with the sunset date in a couple of years here. Those other synthetic colors some states have named them in their proposed legislation to either regulate or ban. The first phase has largely been around school so foods and drinks that would be accessible to small kids who go to school but in other states they're calling for the ban of all of them. So how this shakes out is anybody's guess and so I think that the short answer to your question is all of them are being considered at some level but at this point the FDA has only picked red 3. Now this is not the first time in the history of the world that the FDA has delisted a synthetic color. This has happened a number of times before and so that's not necessarily an unusual fact. So the question will ultimately come to the timing and whether or not the FDA takes action, or a state takes action, or whether both parties let the market decide and the market effectively drives the pace and which products this comes from. So time will tell but yes we're definitely seeing a continuation in some segments but an acceleration in others towards natural colors and customers fall in a number of different buckets. One of those buckets is guys we were just going to continue on pace with natural colors. Another bucket may be hey in light of this news we're going to do this and whether it gets legislated or not we're going to convert. And then, you have various other constituents buckets so to speak that have maybe a little bit of a different mindset on the question. So yes, I think those first two that's what's driving a lot of the wins right now and certainly as I noted that could accelerate at any point.

And just in terms of the reference to the buyback in terms of thinking about quantum and where you're comfortable with the leverage you know you'll probably be down to the sort of low 2s fairly soon in '25. How should we think about sort of magnitude of buybacks? Should we think about it in terms of the max leverage you want to take on is, or you don't want to be more than two and a half or how would you be thinking about that?

Yes. No, I'll take that one David. Yes, we worked hard in '24 to really pay down our debt and lower that interest expense burden and now our leverage ratio is about 2.3 from that standpoint. So rolling into this year in 2025 our dividend we feel good about. Our capital expenditures you know you probably noticed we increased our range so we're about 70 to 80 million dollars this year. We got a lot of good ROI projects especially in our flavor group from that standpoint, so we feel good from that standpoint. So excess cash we will use to buy back stock. The first quarter is usually our lowest cash from ops cash flow standpoint from a quarterly standpoint just because of a number of different payments. So we'll probably start that program you know reassess it starting in the second quarter. But staying around 2.3, we don't necessarily have can you go up to 2.5. I think you mentioned but we want to you know stay in the low twos is kind of where we're at and we'll kind of look at it as we enter the second quarter. So that's what we're thinking about right now.

Yes. I think David kind of slow and steady wins the day on that one. So I don't anticipate we're going to announce some massive all at once buyback. I think slow and steady ultimately earns the best return. It's the most efficient use of cash for investors and certainly many of our investors ask this question. We want to be responsive to it. It is a tax efficient way to execute returns for shareholders. So very, very positive but we think conceptually with respect to excess cash which is to say it wouldn't have an appreciable increase on the debt to EBITDA ratio. But hey sometimes this is opportunistic too. And so yeah slow and steady with patches of opportunism built into that could be a feature of the program. But I think I just reiterate probably not a lot of activity in Q1 given those typical every single Q1 style of dynamics. But the big message here is, we have a lot of confidence in the future of the business between natural colors and a lot of other activities going on in the flavor group in Asia. We see a lot of upside here. We got a lot of inventory we still want to take out and that's going to be happening. So what are we going to do with all this cash? Well this is going to be part of the picture for sure.

I guess just one final question on the portfolio optimization plan, which feels like it's just very much on track. Is there scope for any incremental savings there or are we pretty much just in line with expectations?

Yes, no you're exactly right. We're in line with our original $8 million to $10 million. So that plan is moving just as we kind of laid out and started at the end of last year and we're on track right now to be done this year. So within the cost that we identified of 40 million and the savings of eight to ten. So moving along.

Now we've got your fireside chat now.

Yep. Are there any further questions?

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

Okay. Before we conclude the call today, I'd just like to thank everyone for joining. I'd also like to summarize our expectations for the first quarter. We expect our first quarter local currency revenue growth to be between three percent and five percent. We also expect our adjusted EBITDA margin for the flavored and extracts group to be around 16.5%. Our adjusted EBITDA margin for the color group to be around 23% and the Asia Pacific adjusted EBITDA margin to be around 23.5%. We expect interest expense to be around 7.5 million in the quarter and our adjusted tax rate to be around 25.5% percent for the quarter. We do not anticipate any significant share buybacks in the first quarter. So that concludes our call today. Thank you for joining. If you have any follow-up questions, please contact us directly at the company. Thank you.

The conference has concluded. You may now disconnect.