Conferencia de resultados del T3 de 2026 de Sensient Technologies (SXT): El crecimiento de los colorantes naturales impulsa los resultados

Puntos clave

• Sensient Technologies (NYSE: SXT) presentó sus resultados del tercer trimestre de 2026 con unos ingresos de 455,8 millones de dólares, frente a los 412,1 millones del mismo periodo del año anterior. Los ingresos en moneda local crecieron un 10%, el EBITDA ajustado subió un 15% y el BPA ajustado aumentó un 18%.
• El grupo Color lideró los resultados con un crecimiento del 17% en los ingresos en moneda local y un aumento del 21% en el beneficio operativo. Su margen EBITDA ajustado aumentó 40 puntos básicos hasta el 25,1%.
• Las conversiones a colorantes naturales generaron aproximadamente 30 millones de dólares en ingresos durante el tercer trimestre, sumados a los 45 millones registrados hasta el segundo trimestre. La directiva señaló que el valor anualizado del negocio de conversión ya reconocido podría superar los 160 millones de dólares.
• La directiva mantiene su objetivo de alcanzar un ritmo de ventas incrementales de colorantes naturales de 1.000 millones de dólares a finales de 2028. Indicó que aproximadamente el 20% de la meta podría cerrarse a finales de 2026, aunque las órdenes de compra iniciales podrían representar solo una fracción del valor anualizado del proyecto.
• Sensient reiteró sus previsiones para todo el año, que apuntan a un crecimiento de los ingresos en moneda local de entre el dígito simple alto y el doble dígito bajo, y a un incremento de entre el rango medio y alto del 10% al 20% para el EBITDA ajustado y el BPA en moneda local.
• La empresa elevó el límite inferior de sus previsiones de BPA GAAP para 2026, estrechando el rango a 4,15-4,20 dólares desde los 4,10-4,20 dólares anteriores. Se espera que el elevado gasto de capital y las necesidades de fondo de maniobra aumenten la deuda y limiten el flujo de caja libre.

Datos financieros principales

Rendimiento comercial y operativo

Grupo Color

Los ingresos del grupo Color aumentaron un 17% en moneda local, mientras que el beneficio operativo subió un 21%. El margen EBITDA ajustado alcanzó el 25,1%, lo que supone un aumento interanual de 40 puntos básicos.

La directiva atribuyó el crecimiento a las conversiones a colorantes naturales, los productos técnicamente diferenciados, la fijación de precios y la captación de nuevos clientes. Aproximadamente el 85% de los nuevos lanzamientos de productos en EE. UU. durante el tercer trimestre utilizaron colorantes naturales. La empresa también citó una disminución de casi el 10% en las certificaciones totales de colorantes sintéticos de la FDA en los 12 meses anteriores como evidencia de la actividad de conversión.

Sensient contabilizó aproximadamente 30 millones de dólares en ingresos por conversión a colorantes naturales en el tercer trimestre, tras acumular 45 millones de dólares hasta el segundo trimestre. La directiva prevé una importante actividad de conversión en 2027 y una adopción continuada a lo largo de 2028.

La empresa está invirtiendo en capacidad de producción, I+D, inventario y preparación de la cadena de suministro. El fondo de maniobra para colorantes alimentarios ha aumentado en más de 70 millones de dólares, lo que refleja mayores ventas y los preparativos para los lanzamientos de clientes.

Grupo de Sabores y Extractos

El grupo de Sabores y Extractos logró un crecimiento de los ingresos del 3% en moneda local y un aumento del 9% en el beneficio operativo. El margen EBITDA ajustado aumentó 80 puntos básicos hasta el 18,5%.

Los ingredientes agrícolas registraron un crecimiento del volumen favorable. La directiva señaló que los contratos conseguidos con productos técnicamente diferenciados y la optimización de costes deberían seguir respaldando el apalancamiento del beneficio de cara a 2027.

Grupo Asia-Pacífico

Los ingresos de Asia-Pacífico aumentaron un 15% en moneda local, con un incremento del beneficio operativo del 32%. El margen EBITDA ajustado se amplió 330 puntos básicos hasta el 27,5%.

El grupo se benefició de la consecución de contratos de colorantes y sabores en sus mercados. La directiva advirtió de que no debe considerarse el margen del tercer trimestre como un ritmo trimestral estándar, ya que la combinación de productos y el calendario de contratos pueden afectar a los resultados.

Cuidado personal

La directiva prevé un crecimiento del sector del cuidado personal a nivel anual de un dígito simple medio, lo que implica una mejora en el cuarto trimestre. Atribuyó la volatilidad reciente principalmente a los cambios geopolíticos y en las cadenas de suministro, incluidos los cambios en las ubicaciones de fabricación de terceros como respuesta a aranceles y restricciones comerciales.

Previsiones de la directiva

Sensient mantuvo las siguientes expectativas para 2026:

• Crecimiento de los ingresos en moneda local de entre el dígito simple alto y el doble dígito bajo.
• Crecimiento del EBITDA ajustado y del BPA en moneda local de entre el rango medio y alto del 10% al 20%.
• BPA GAAP de 4,15-4,20 dólares, en comparación con el rango anterior de 4,10-4,20 dólares.
• Aproximadamente 160 millones de dólares en gastos de capital consolidados.
• Gastos por intereses para todo el año de aproximadamente 34 millones de dólares.
• Tasa fiscal para todo el año de aproximadamente el 25%.
• Gastos corporativos de aproximadamente 66 millones de dólares, lo que refleja una mayor retribución basada en el rendimiento.
• Márgenes EBITDA en el rango medio del 20% para Color y Asia-Pacífico, y un margen en el rango alto del 10% al 20% para Sabores y Extractos.

Por segmentos de negocio, la directiva prevé que el crecimiento de los ingresos en moneda local del grupo Color se sitúe en el rango alto del 10% al 20%, el crecimiento de Sabores y Extractos en el dígito simple medio y el de Asia-Pacífico en el doble dígito bajo.

Sensient continúa planificando aproximadamente 250 millones de dólares en inversiones de capital para colorantes naturales, ejecutando la mayor parte del gasto en 2026 y 2027. La empresa no anticipa recompras de acciones a corto plazo, pero considerará adquisiciones que ofrezcan beneficios estratégicos en tecnología, cadena de suministro o ámbito geográfico.

Riesgos y puntos a vigilar

• Los resultados del cuarto trimestre están sujetos a la incertidumbre estacional, ya que los clientes suelen lanzar menos productos y reducir el fondo de maniobra y los pedidos a finales de año.
• Los calendarios de lanzamiento de colorantes naturales pueden sufrir variaciones debido a que los clientes deben reformular los productos, actualizar el envasado, realizar pruebas con consumidores y alinear la producción y las cadenas de suministro.
• Las órdenes de compra iniciales de colorantes naturales pueden representar aproximadamente el 10% del valor anualizado del proyecto, lo que significa que el negocio cerrado no se traduce inmediatamente en un ritmo completo de ingresos.
• La depreciación aumentará a medida que entren en servicio nuevos equipos de producción, lo que podría generar variaciones trimestrales moderadas en torno al margen EBITDA de aproximadamente el 25% del grupo Color.
• Se espera que los gastos de capital y la inversión en inventario aumenten la deuda y el apalancamiento durante 2027. La directiva afirmó que la empresa se mantiene dentro de su compromiso financiero (covenant) de 3,5x.
• La directiva coincidió en que el flujo de caja libre podría continuar limitado hasta 2028 mientras la empresa financia la capacidad y el fondo de maniobra.
• El suministro del sector sería insuficiente si todo el mercado de colorantes naturales se convirtiera de forma inmediata. Sin embargo, la directiva considera que el cronograma de conversión previsto es gestionable y afirmó que Sensient cuenta con proveedores diversificados, opciones tecnológicas e inventario suficiente para respaldar los lanzamientos previstos.

Puntos destacados del turno de preguntas de los analistas

Ritmo de conversión a colorantes naturales: La directiva señaló que aproximadamente el 20% del objetivo de ventas incrementales de 1.000 millones de dólares podría cerrarse para finales de 2026. Se espera que el resto de las conversiones se realicen a lo largo de 2027 y 2028, con la empresa marcándose como objetivo alcanzar el ritmo incremental completo para finales de 2028.

Economía de la conversión: Sensient sigue considerando que un múltiplo de ingresos de colorante natural frente a sintético de aproximadamente 10 a 1 es un promedio razonable. La proporción varía según la intensidad del color, y las aplicaciones de color más intenso generan por lo general múltiplos más elevados.

Márgenes del segmento Color: La directiva recomendó utilizar aproximadamente un 25% como estimación del margen EBITDA del grupo Color. Podrían producirse variaciones trimestrales de unos 30 puntos básicos en cualquier dirección debido a la programación de las amortizaciones y la combinación de productos, pero la empresa prevé que los productos diferenciados mantengan dicho nivel de margen.

Perspectivas para el T4: La directiva prevé otro trimestre sólido para los colorantes naturales y una mejora secuencial en el negocio de cuidado personal. También espera un rendimiento favorable de Sabores y Extractos y de Asia-Pacífico, al tiempo que destaca la estacionalidad habitual del T4 y la incertidumbre en los pedidos de los clientes.

Rentabilidad del capital: Sensient tiene como objetivo aumentar la rentabilidad del capital invertido desde aproximadamente el 9%-10% hasta el rango medio del 10% al 20% en los próximos años, a medida que la actividad de conversión a colorantes naturales aumente de escala.

Transcripción completa de la conferencia de resultados

Transcripción completa de la conferencia de resultados

Comentarios de la dirección

Operator

Good morning and welcome to the Sensient Technologies Corporation 2026 Third Quarter 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 Gorne. Please go ahead, sir.

Unknown Speaker

Good morning. Welcome to Sensient's earnings call for the third quarter of 2026. I'm Tobin Gorne, Vice President and Chief Financial Officer of Sensient Technologies Corporation. I'm joined today by Paul Manning, Sensient's Chairman, President, and Chief Executive Officer. Earlier today, we released our 2026 third quarter results. A copy of the earnings release and the slides we'll be using during today's call are available on the investor relations section of our website at sensient.com. During our call today, we will reference certain non-GAAP financial measures, which remove the impact of currency movements, costs of the company's portfolio optimization plan from our 2025 results, and other items as noted in the company's filings. We believe the removal of these items provides investors with additional information to evaluate the company's performance and improves the comparability of results between reporting periods. It also reflects how management reviews and evaluates the company's operations and performance. Non-GAAP financial results should not be considered in isolation from or as a substitute for financial information calculated in accordance with GAAP. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our press release and slides. We encourage investors to review these reconciliations in connection with the comments we make today. I'd also like to remind everyone that comments made during this call, including responses to your questions, may include forward-looking statements. Our actual results may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings. We urge you to read Sensient's previous SEC filings, including our 10-K and our forthcoming 10-Q for a description of additional factors that could potentially impact our financial results. Please keep these factors in mind when you analyze our comments today. We'll start the presentation on slide 5. Now we'll hear from Paul.

Paul Manning

Thanks, Tobin. Good morning and good afternoon. Before I begin, I would tell you that given that we're joining you today from Milwaukee, Wisconsin, I'd like to open by congratulating the Milwaukee Brewers on their first ever World Series championship on Wednesday evening. It was a truly dominant October run for the hometown team. Earlier today, we reported our third quarter results. We delivered 10% local currency revenue growth, 15% local currency adjusted EBITDA growth, and 18% local currency adjusted EPS growth in the third quarter. These results build on our excellent first half and set us up for a strong finish to 2026. Color Group continues to deliver exceptional results with 17% local currency revenue growth and 21% local currency operating profit growth. We remain focused on supporting our customers through their natural color conversion, and the momentum continues to build as they approach their conversion launch dates. Flavors and Extracts Group also had a solid quarter, delivering 3% local currency revenue growth and 9% local currency operating profit growth. The Asia Pacific Group had an outstanding quarter with local currency revenue growth of 15% and local currency operating profit growth of 32%. All our groups delivered strong results in the first half and continued on that trajectory in the third quarter. During the third quarter, we continued to generate strong new sales wins across each of our groups. These sales wins are a direct result of our innovative product portfolio, exceptional service levels, and focus on customer collaboration. We are delivering particularly high win rates in natural colors as we see strong conversion activity and newly converted natural color products continue to enter the market. In fact, 85% of all new launches in the U.S. in the third quarter were naturally colored. We expect that figure to keep growing. At the same time, customers are actively working to convert their existing products to natural colors. And our sales pipeline continues to grow as we push towards our $1 billion conversion sales target. We are leveraging our outstanding technical and commercial teams along with the substantial R&D, capital, and supply chain investments we have made over the last 15-plus years. The conversion momentum continues to build, and there has been nearly a 10% decline in total FDA synthetic color certifications over the last 12 months. This is a truly noteworthy indication of the natural color conversion progress. Customers are destocking synthetic colors and replacing them in earnest across their portfolios. I would anticipate a continued decline in synthetic colors going forward. Eventually, nearly all of our synthetic colors produced in the United States will be directed at Latin America and Asia Pacific customers. During the third quarter, the Color Group recognized approximately $30 million of new natural color conversion revenue. This $30 million is in addition to the $45 million of natural color conversion revenue that we cumulatively recognized through the second quarter. We expect a substantial number of conversions in 2027. This expectation is based on wins already achieved, plus our customers' projected natural color conversion launch dates. We also estimate the conversion activity to continue into 2028, such that we approach our incremental $1 billion run rate as we exit 2028. While our business focus remains substantially on natural color conversions, we continue to generate strong win rates across the globe in our other food, personal care, and pharmaceutical product lines. Now, turning to slide 6 in our group results, Color Group had excellent third quarter results, delivering 17% local currency revenue growth and 21% local currency operating profit growth. Third quarter adjusted EBITDA margin was 25.1%, up 40 basis points compared to the prior year. The group continues to make progress on its investments in natural colors, primarily in production capacity, working capital, and R&D. We expect these investments to continue into the foreseeable future. We are aggressively pursuing these initiatives to achieve our $1 billion natural color conversion sales target. The group remains focused on selling technically differentiated natural color products, controlling costs, executing pricing where necessary, and most importantly, delivering quality new wins. We're seeing acceleration in customer orders for conversions of their synthetically colored products in the U.S. Conversion is happening. As we approach the final quarter of the year, I continue to expect the Color Group to deliver local currency revenue growth in the high teens for 2026. Overall, the Color Group is having a fantastic year and remains on track for a great, remains on a great sales trajectory. Turning to slide 7, Flavors and Extracts Group saw local currency revenue growth in the third quarter of 3% and local currency operating profit growth of 9%. The agricultural ingredients business in particular had nice volume growth in the quarter. The group's adjusted EBITDA margin was 18.5%, up 80 basis points versus the prior year's comparable quarter. The results aligned with our expectations for the third quarter. The group continues to focus on new and technically differentiated flavor wins and optimizing its costs. These factors have fueled the favorable profit leverage that we expect to continue into 2027. Overall, for the Flavors and Extracts Group, we expect local currency revenue growth of mid-single digits for the year. Now turning to slide 8, the Asia Pacific Group had an outstanding third quarter delivering 15% local currency revenue growth and 32% local currency operating profit growth. Group's adjusted EBITDA margin was 27.5%, up 330 basis points versus the prior year's third quarter. Asia Pacific Group continues to generate strong new color and flavor sales wins across all geographies. I now expect the group to deliver low double-digit revenue growth for the full year. Turning to slide 9, regarding our full-year guidance, our growth expectations remain consistent with our previous guidance. We continue to expect our local currency revenue to be up high single to low double digits and our local currency adjusted EBITDA and EPS growth in the mid to high teens for the year. On the capital allocation front, we expect consolidated capital expenditures to be around $160 million for the year. We continue to expect to spend around $250 million for natural color capital, with the majority in 2026 and 2027. We also continue to anticipate an increase in our natural color working capital requirements as we build our supply chain. We are absolutely committed to delivering $1 billion in incremental natural color sales. We are fully engaged on this multi-year plan to add the necessary capacity and allow for further potential growth in the future. Beyond capital expenditures, we will evaluate sensible acquisition opportunities, and we do not anticipate any share buybacks in the near term. Now, before I turn the call over to Tobin, I'd like to profile some of the consumer research that our Color Group has conducted to reinforce the value of color. This is shown beginning on slide 10. To provide a little background, Sensient's Value of Color series is a large-scale research initiative spanning several years. It quantifies how food color drives consumer perception, preference, and purchasing behavior. To date, this multi-phase research has engaged over 12,000 consumers in the United States, testing more than 70 consumer products across seven major food, beverage, and pet food categories to help deliver actionable color insights for our customers. Turning to slide 11, you can see an example of some of the findings from the research specifically focused on breakfast cereal. Color has a powerful influence on how people perceive the taste of food, and there is a clear linkage between color vibrancy and variety and the consumer's perception of flavor intensity. The critical point of this research is that color has a powerful influence on how people perceive the taste of food. As a result, when considering the impacts for natural color conversions, it is imperative that food and beverage brands maintain as much consistency in the appearance of their products to minimize the risk of a perceived change in flavors. In other words, for brands to win, they should match the synthetic color to drive taste and quality expectations. Analyzing our pipeline, the vast majority of our customers are striving to match the synthetic colors. There are very few instances where customers plan to remove color or use a dull, less vibrant color match. Another insight which became apparent through the data gathered was that consumers are willing to pay more for natural colors within the cereal category. They also associate quality with the visual appearance in their bowl. Additionally, we concluded that natural color use continues to increase purchase intent across all categories. This research has reinforced much of what I had said before regarding the importance of maintaining color consistency, quality, and vibrancy. Our R&D efforts continue to be focused on removing performance gaps that exist between synthetic and natural colors. If you'd like more information on any of our natural color technologies, please visit our website. Overall, I'm very pleased with our financial performance in the third quarter. I'm excited about the growth opportunities within each of our groups, and I'm looking forward to the continued progression towards our natural color sales target. The growth we are experiencing is the result of our execution of our long-range strategy, and I remain optimistic about the rest of 2026, and I expect 2027 and 2028 to be outstanding years for our business. Tobin will now provide you with additional details on the third quarter results.

Unknown Speaker

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 remove the cost of the Portfolio Optimization Plan. While we do not have any portfolio optimization plan costs in our 2026 third quarter results, we believe that the removal of these prior year costs produces a clear comparative picture of the company's performance for investors. This also reflects how management reviews the company's operations and performance. We'll start on slide 13. Sensient's revenue was $455.8 million in the third quarter of 2026 compared to $412.1 million in last year's third quarter. Operating income was $72.4 million in the third quarter of 2026 compared to $57.7 million in the comparable period last year. Operating income in the third quarter of 2025 included $3.3 million, approximately $0.09 per share of portfolio optimization plan costs. Excluding the costs of the portfolio optimization plan in the prior year, adjusted operating income was up 18.6% in local currency in the third quarter of 2026 compared to $61 million in the prior year period. Interest expense was $8.3 million in the third quarter of 2026, up from $7.3 million in the third quarter of 2025. The company's consolidated adjusted tax rate was 24.6% in the third quarter of 2026 compared to 23.8% in the comparable period of 2025. Local currency adjusted EBITDA was up 15.4% in the third quarter of 2026. Foreign currency translation had no impact on the EPS in the third quarter of 2026. Turning to slide 14, cash flow from operations was $40 million in the third quarter of 2026. Capital expenditures were $38 million in the third quarter of 2026, and as Paul indicated, we anticipate our capital expenditures to be around $160 million for the full year. Our net debt to credit-adjusted EBITDA is 2.3x as of September 30, 2026. As we communicated the last couple of quarters, we also expect higher investment in inventory throughout the year to support the increased natural color conversion revenue. Debt is expected to continue to increase further with our leverage ratio remaining around its current level. Overall, our balance sheet remains well positioned to support our capital expenditures, sensible acquisition opportunities, and our longstanding dividends. As Paul indicated, we will 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. We maintain our goal of pushing our ROIC to the mid-teens over the next few years as we look ahead to peak natural color conversion activity. We will evaluate sensible acquisition opportunities where there is a strategic advantage on the technology supply chain or geography front. Turning to slide 15, reiterating our 2026 guidance, we continue to expect our local currency revenue to be up high single to low double digits and our local currency adjusted EBITDA and EPS to grow at a mid to high teen growth rate. Based on current exchange rates, we expect the impact on currency on EPS to be immaterial in the fourth quarter. We expect our full-year interest expense to be around $34 million and our tax rate for the year to be around 25%. We expect our full-year corporate expense to be approximately $66 million, with the increase driven by higher performance-based compensation. We are increasing the low end of our GAAP EPS range to $4.15 from $4.10 and narrowing the GAAP EPS range to $4.15 to $4.20. We still expect EBITDA margins for the Color Group and Asia Pacific Group to be in the mid-20s for the year, and EBITDA margins for the Flavors and Extracts Group will be in the high teens for the year. We will now open the call up for questions.

Operator

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

Preguntas y respuestas

Ghansham Panjabi

Good morning, everybody. I hear there's a big parade in town.

Paul Manning

I know our team's excited. Morning, Ghansham. Morning. Excellent. Well, I'm looking over my shoulder and I'm realizing I'm sitting up here while they're down there. There's a lot of people walking the streets right now.

Ghansham Panjabi

Congrats again to the Brewers. So Paul, in the past, you've given us invoice sales by quarter for the natural color sales specific to the conversion from existing synthetic. But, of course, that could include load-ins and so on and so forth. So, after $100 million in synthetic color sales that feed into the billion opportunity for natural color, over time, where do you think you'll be from a conversion standpoint by the end of 2026?

Paul Manning

Yes, so I think as we've tried to make it, a couple of factors here. So we like to just speak in actual revenue rather than projected revenue. So if you look at our actual revenue, which we've been profiling each quarter, one could probably infer from that that the annualized value of that would be north of $160 million, and that would probably be a pretty good guess. So that's comment #1. When you look at kind of the pace of the launches, we've talked about there's, there's a fair amount of activity in '26 leading up to many of the milestones set by Walmart and some other retailers, January 1, 2027 being their deadline. As we get into 2027, most customers are still working towards a January 1st, 2028 deadline. But there are others working towards the July 1st, 2028 deadline. And as we said, the run rate would probably be towards the end of 2028, the run rate of the $1 billion. You know, is it about 20% by the end of 2026? That's probably about right. And then another chunk in 2027 and the balance of it in 2028 is largely what we expect. And the reason I can tell you that is, you know, we're the largest food color company in the world. We are essentially talking to every single customer brand out there. So we have a very broad perspective. And from that perspective, and given our years as the incumbent color supplier, we have a great deal of collaboration with our customers. We have, in particular in this case, what are their plans? So as we look ahead to 2027, we see kind of how our bigger customers have planned, plan their launches for the 2027 year, plan their launches for 2028 year. We have very good visibility. Now, do these things slip? Of course they do. Multinational launch dates will slip in normal times. Now we're in an instance where they may be converting hundreds of products from synthetic to natural. So not only do you have the complexity of the reformulation with the natural color, you have to repackage, you have to make sure you can produce. You don't produce products the same way with a natural colors you would with a synthetic. There's consumer testing. There's aligning on the supply chain. So there's a lot of moving parts, and this is a very aggressive timeline that most folks are working towards, most customers are working towards. So we've seen some movements to the left, but we've seen more movements to the right. I think ultimately about 20% for the end of this year is probably about right, and the balance coming in '27 and '28.

Ghansham Panjabi

Okay, that's very helpful. And then for the color segment, you know, it looks like 3 key incremental margins, roughly 26%. I know you're obviously layering in cost to support the growth there. You've communicated that prior. But is that the ballpark for how we should model operating leverage for Q onwards? Or will there be some lumpiness associated costs as you ramp up the investment to support that?

Paul Manning

Well, I would say this. I think many of the or much of the SG&A has been added over the last 1 year-plus. That's not to say that there will not be more. I think what will change moving forward is that the equipment comes online and we start layering depreciation. You know, you would see the impact of that now as things, you know, as the little green light goes on on the equipment, as I like to say. That may create moderate lumpiness. By moderate, you could see mild shifting in that 25% EBITDA. But, you know, our projections for the year on EBITDA for color, we feel very good about this 25%. I think we feel very good about this 25% next year. Might there be some movements quarter to quarter? Yes. Is it indicative of anything more than the timing of depreciation? No. I think we continue to see some movements quarter to quarter. We continue to win sales with technically differentiated products. So we like to deal on the more advanced part of this market, which commands a more defensible position with higher margins in general. So, no, listen, I look at our pipeline and I look at the opportunities, and 25%, I feel really, really good about that. '27 regardless really of depreciation. So you're not going to see some big movement down in that 25% in any one quarter, but could there be shifting of 30 basis points, plus or minus? Sure. Does that mean anything? Like I said, it does not. When we start selling low margin commodity junk, then you would see that. But since we're not going to do that, you shouldn't see much shift off that 25%.

Operator

Okay, very clear. Thank you. And the next question comes from Joshua Spector with UBS. Please go ahead.

Joshua Spector

Yes, hi, good morning. Just on your comments on the exit rate, hey, I just wanted to ask, I mean, that 20%, obviously the simple math is maybe your natural color conversion will be about $50 million in fourth quarter. Yes, that triangulates with your guidance. Is that what you're expecting at this point based on the visibility of orders in hand?

Paul Manning

Well, so let me let me just be clear here, right? So when you get a win from a customer, right, they're going to give you a PO. They're not going to give you a PO for the full value of that project, right, because they're going to give you some fraction of the annualized volume. In a normal product launch, and new to the world of product, you'd get 25% to 30% of the volume. So let's just say you win a $1 million sale of an LTO or just a line extension of an existing customer, new product to the market. He would probably give you about $250,000 to $300,000 on his first order, right? As he's loading up the channels, as he's putting enough product out there for consumers to try this new product. And then, you know, in the next quarter you may get another 25% and so forth. What we are seeing on the natural color front is a little bit different. Think of this as more of a packaging change pace. So initially, when natural colors came along and West Virginia passed its law and the customers started looking at that, the law originally said, to the best of my recollection, hey, you have to have all of your synthetic colors off the shelf on January 1st, 2028. This later came to be understood as July 1st, 2028, everything off, but nothing new after January 1st. So long story short, first POs in the Q3 sales wins and even late Q2 were more along the lines of 10% of the annualized value, right? So in other words, instead of $250,000, $100,000 first PO and that million-dollar win you might get like about $100,000 because because he's replacing the old with the new as he sells the old. So that's a little bit of a change. So when I talk about 20%, that means 20% of these things have been closed. They're not necessarily running at a full run rate. And so if you look at what would close, we would expect about 20% towards our goal to close, it may close on December 23rd, right? You get your first PO, but you're not going to get your full annualized value. So it's a little bit of a change based on what we saw in Q3 and late Q2 in terms of how the POs are coming to us. And I think, again, this is just as customers have begun to interpret expectations a little bit differently, there's not this need to clear the shelf of all products with synthetic colors. They are metering in the newly developed products with the natural colors off the synthetic and then they get to a normal ordering pace.

Joshua Spector

Okay, I think I understand all that. I'll probably follow up a bit more offline, but kind of related with this, it seems like there's maybe some nuance with how you're framing the target now. I think your comments were approaching a billion and exiting 2028. I guess, is that a shift in your prior messaging at all? Is that a little bit later? Or would you frame that as higher confidence that now you're putting in more specific timelines, I suppose?

Paul Manning

Yes, I think what we're trying to do, what I'm trying to do is tell you the exit rate is to, based on the pipeline and the launch dates, that is our, we've always felt like 2028, everybody's going to convert by sometime in 2028. Initially, it was the beginning, as the understanding of those state laws changed, it became mid to late 2028. And so it's an indication that the vast majority of these conversions will be completed in 2028. It may be later in 2028, maybe early in 2028, but we feel very confident based on our knowledge and our understanding of each of these customers and their launch plans that by the end of 2028, we would be at that $1 billion incremental run rate as a business.

Operator

Okay, thank you. And the next question comes from Lawrence Solow with CJS Securities. Please go ahead.

Lawrence Solow

It's Gary, but Larry works too. Hey Larry, no, that was still.

Operator

Hey Larry, you didn't change your name though. I will still call you Larry.

Lawrence Solow

Congrats to you as well, Paul, and the Brewers. You got the, you got the Brewers in 1 hand and the Jets in the other. So you should definitely go for the Lions. Yes. Yes. I lost that other hand. Packers 1 last time. Packers 1 last time. Yes, absolutely. Question, just on the margin profile, and I realize it's, you know, last quarter was a little bit of an aberration up, and now you're back down on the collar side. Just curious, still early stages, but how is it shaking out? I know we were kind of looking for a little bit of a lower gross margin. And then eventually, you know, when you get some leverage up at a higher rate, maybe operating income would be about flat. But it sounds like if your SG&A expenses are already up front, mostly paid, as you look out over the next few years, would you expect to actually get some margin improvement on the color side?

Paul Manning

I think it's possible. I want to give you guys a number you can really rely upon, and I think 25% is that number. But you bring up an interesting point, right? The timing of the SG&A, the timing of the depreciation, it may not line up that this is a pure every quarter. Quarter is 25.0. Again, it's just really nothing more to do than the timing of when equipment comes online. But I would tell you this, the majority of the SG&A expense we anticipated adding to the business, much of that has already taken place. But the depreciation, the majority of that has not yet taken place. And so whereas we may be having less SG&A, we may have more depreciation as we, you know, move forward into 2027. So net-net, you know, that's, that's why it's very easy for me to say, as I look at our modeling, 25% is a really good number. Is it 25% every quarter, every month, every week, and every day of the year? No, but I think, again, that's just more to do with the timing and the shifting. So whereas we may have a higher gross margin and that's offset by some SG&A, we then get a lower gross margin from the depreciation, but then we have less SG&A. But I would say this too, right? I mean, the SG&A, a lot of that is driven by adding new folks to the business, technical, commercial, and otherwise. But there's also a fair amount of R&D underway, right? One of the things that we've talked about is this first version of the conversion to natural colors is generally from conventionally grown crops. These crops are being now grown at a scale that is rather unprecedented. So as we get into '27 and '28, as farming techniques improve, as efficiencies grow, as more suppliers enter the market, that in theory drives down the raw material costs for us, all really good things. As we continue to optimize, customized with our customers, kind of version 2 of a natural color. We think there's costs and optimization that can take place. And so, yeah, we've got a lot of things in mind that can help us to continue to really maintain and, hey, in our wildest dreams, even grow off that 25. But I think in terms of your modeling, let's stick with 25. As some of these things come to fruition, you'll certainly see that in the figures. But no, I think we feel really, really good about maintaining that. You also saw in Asia, they hit 27.5. I wouldn't necessarily model that. But again, it just shows you that in any given quarter through a product mix or one product, wins than you had anticipated. These types of factors can really give you a nice uplift in any 1 quarter, but I don't want folks to necessarily overreact or underreact to that. We give 25% because, again, that's what I think we can consistently deliver for you folks as you're modeling out the returns you can get here.

Lawrence Solow

Okay, and the ratio, at least on volume and relative to price, has been hanging close to that? I realize it's still early, but high singles close to 10, I mean, that's still something you're comfortable with?

Unknown Speaker

In terms of revenue. You mean in the multiple, Larry, the conversion multiple? Yeah, yeah, no, we...

Paul Manning

Yes, 10 times is a good average. I would tell you that it depends greatly on the type of product. The more intensely colored, the higher that margin. Lower intensity of that color, the lower that ratio. But yeah, I track all these wins. I look at all these ratios and I would tell you I feel really good, really good, Larry, about a 10 to 1. I don't have, I don't lose a wink of sleep over that.

Lawrence Solow

Great. Last question for me, just free cash flow. It sounds like just with the rapid growth and, you know, top line and the investment and the build-out, perhaps free cash flow won't be free or positive until '28. Is that fair? Yes.

Unknown Speaker

Yes, you know, when we look forward, directionally you're probably correct. Our leverage ratio right now is about 2.3. So we anticipate the end of the year right around where we are. You will see debt increasing as we spend more on capital and working capital and the investments we're making in the business. So debt will increase, and our leverage ratio will increase throughout next year. We're well within our covenants of 3.5. But with the whole goal of improving our ROIC, as I mentioned, getting to the mid-teens from where we're at right now, around 9% to 10%. But, yes, free cash flow will be an impact of that, but I think at the end of it getting our ROIC to mid-teens is going to be very nice.

Lawrence Solow

Absolutely. Okay, great, thanks. I appreciate all that.

Unknown Speaker

Okay, thanks, Larry. Thanks, Larry.

Operator

Again, if you would like to ask a question, please press star and then 1. Our next question comes from Nicola Tang with BNP. Please go ahead.

Ming Tang

Hi, everyone.

Paul Manning

Hey, Nicola.

Ming Tang

Hello. Hey. I wanted to ask first, just related to your new, the revised EPS guidance. I think just in simple terms for me, it's 2.5 cents higher, but you beat consensus for Q3 by about 4 cents, and actually you're guiding to a slightly lower interest cost. So to me, it reads like an implied downgrade on the core business for Q4. Am I misunderstanding this, or can you explain what's driving that? And of course, it implies a sequential slowdown versus Q3, and I understand there's usually seasonality, but perhaps you could remind us of that usual seasonality.

Paul Manning

So, yes, sure. I'll start off and I'll let Tobin augment. So you're right. It was a great Q3. We're having a great year, year-to-date, and we're going to have a great 2026. So I think that's #1. I think #2, that's right. Seasonality in this business is a very real thing. Sazerac was started in 1882 and we were selling alcohol. There wasn't much seasonality then, but after 1919, there's been seasonality in this business. So it's just a fixture and a function of the food industry. Two big factors there. There are fewer launches by our customers in Q4, and then there is a substantial working capital pullback in most businesses, as let's face it, folks are trying to please investors and they're also trying to hit their budget. So what do they do? They order a lot less in Q4. So these 2 factors more than any other create a lot, a great deal of seasonality and quite frankly a little bit of unpredictability in Q4 results at times. As I look forward to Q4, to be honest, I'm again natural colors is going to have another nice quarter, really nice quarter. You see that we had sequential growth in natural colors here in Q3. And by the way, that 22% in food colors growth. That takes into account the loss of synthetic colors. So the cannibalization factor that we've mentioned as you replaced the place is synthetic, you get the natural. So net of that, we were up 22% in Q3. So it was really, really nice. I think the pace will continue to be very, very nice for natural colors in Q4. I think you're going to see some sequential improvement in personal care as well. I think Flavors is teed up to have a very nice Q4. And, of course, so is Asia Pacific. So, listen, I think we're going to have a very nice Q4, top line, sales wins, prospects. Pricing, we've executed our pricing for the year, and I think we've been very, very successful there. But again, I think we are oftentimes somewhat constrained by the behavior of customers, given those 2 factors that I just mentioned. And then remind me, Tobin, what was our original guidance at the start of the year? Start of the year. Okay. And then we ratcheted.

Unknown Speaker

Are there? Yes, we started, I think our original guidance was $3.60 to $3.80. And now we're...

Paul Manning

up. So we went in April, we were at $3.70 to $3.90. July, we increased to $4.10 to $4.20. And now we're increasing to $4.15 to $4.20. I think we've done pretty well on raising the guidance and hitting the figures. And so I think Q4, you know, as you close out the year, I think we're saying $4.20 versus $3.80 at the start of the year. So I think it's been a nice year for us. But, Tobin, you want to add some more details there? Sure. Yeah, no, I think that was a good summary.

Unknown Speaker

You know, we did raise our guidance throughout the year. I think when you look at Q4, also take into account some of the items below our groups. So for the year, our interest expenses, as I was just kind of mentioning to Larry, we anticipate our debt to continue to increase. So you will see an increase in our interest expense. We're modeling about $34 million for the year. Tax rate, you know, there's a lot of movement in tax rate. Last year, we had a low tax. Q4 tax rate. This year we anticipate higher than what we reported last year for a full year tax rate around 25%. And in our corporate expense, you know, we anticipate to be around $66 million for the year, and that's really driven by our incentive-based compensation. So those are some things to take into consideration for Q4.

Ming Tang

That's helpful, thanks. Next question, you referenced it there actually, just in terms of the food colors versus personal care. I think you had a particularly strong quarter in personal care colors last quarter and then a slowdown this quarter. Can you explain what was going on there and I guess, you know, the outlook from here?

Paul Manning

Yes, so that's right. So food colors is sequentially up, Q3 versus Q2 from a growth rate standpoint. Personal care had a slowdown. Yes, there's a little bit of lumpiness in that market right now. There are a lot of moving parts. We had very nice profit growth in that business. But as we look at the year for personal care, I would expect something in the range of mid-single digits, which would be, I think, very, very good. That implies an uplift in Q4 for that business. These are products with the longer supply chain. They have longer shelf lives. These factors can become somewhat distortive. The other big, the thing you'll see in personal care is a lot of production and product launches are coming from what we call TPMs, third-party manufacturers. These third-party manufacturers would be the driving force behind indie brands and startups and other sort of smaller businesses, but more recently they actually are now TPMs, large multinationals are using TPMs to drive some of their production. And as tariffs come along and as other constraints and trade come along, this production has been shifting all over the world. So a lot of TPM production moved from Europe to Asia Pacific last year. We still see a little bit of that. There's a lot of shifting of these supply chains principally in response to tariffs and these other sort of geopolitical factors you're reading about. And so I would tell you that just base business, win rates continue to build, particularly in Asia Pacific personal care, as well as Europe personal care. So we feel very good about that. And so as we get into Q4, I think you're going to see some improvements in LATAM in North America as well. And those businesses come together, I think, to produce a really nice Q4. But I would tell you that the lumpiness is really geopolitical and supply chain related more than anything else at this point. Because the underlying business is good. The trends are really good in this market. Mass market growing very nicely. Prestige market growing very, very nicely. So I think we're pretty well set up for a successful Q4 there, and I feel quite good about 2027 on personal care as well.

Ming Tang

Okay, and then final one around the supply chain. You mentioned that crops are being grown at a scale that's unprecedented. I remember we spoke on the last call about how you're making sure that you're in the right place, that you're able to supply and you don't have a supply chain issue. But that being said, I was reading, you know, Gatorade sort of delaying some of their conversion in certain colors because there's not enough natural beta carotene. So I was wondering whether you're seeing across the industry there's a wider issue or constraint in terms of availability of various natural raw materials in order to sort of serve the industry conversion at the pace that the market would like to. And then sort of linked to this, I was wondering, could you talk a little bit more about the competitive landscape in terms of sort of at a processing level in the color space? I think, you know, we hear some of the peers now starting to make investments. Ultimately, it's a lot later than you have made those investments. But I was wondering if you've seen any change in competitive landscape and capacity, thanks.

Paul Manning

So to the first one on the supply chain, yeah, I think I said early on, if the whole market wanted to convert tomorrow, there would not be a supply chain. More production capacity available to meet that type of demand. But over this timeframe that we've been talking about here, it becomes much more digestible for the industry. I would tell you that our service levels are quite good, Nicola. My goal is to never have to get on a conference call and tell you guys I got a revenue problem because I have a supply chain shortage. We've been working on this for many, many years. We've got suppliers all over the world. We've got programs all over the world. We have technology that enables us to come up with lots of different supply chain solutions as well. So we really have a nice connection between our formulation folks, our production folks, and supply chain. And so I like what I'm seeing. So again, this is a supply chain that's really, really scaling up, as you reiterated from what I said. And so, yes, there'll be hiccups. But again, I haven't talked to anybody publicly about hiccups in the supply chain because I have not had to. And it's my expectation that we will not talk to you guys about, oh, I think we're going to have to, I can't get this done because of the supply chain. So a lot of work, a lot of infrastructure. You see the working capital levels and food colors have gone up more than $70 million. We got a lot more suppliers, a lot more raw materials, a lot more finished goods. A lot of that's driven from bigger sales, but it's also, right, having these products available for the launch dates. And so the amount of working capital we have should give a hint to everybody as to the launches we expect coming up here in 2027. In terms of competitors, we are very much focused on the technologically differentiated part of this market, the things that are really hard to achieve, the colors that are very difficult to achieve in the formulation and the production environment of the customer. We were out of the gate very, very quickly. Which equipment would be the most difficult to get and take the longest? And we went and got it immediately. And I didn't sit around and wait for permission or any of this other business. And so we move very, very quickly on that. And I feel really, really good. But you know what? There's a lot of challenges even in capital deployment nowadays, particularly in the United States. A lot of competing projects out there, data centers and otherwise, that are sucking up a lot of the raw materials like steel, for example. And then, of course, as you're also very well aware, there's tariffs and other geopolitical constraints. So I like the fact that we got on this one really, really quickly, and I like the idea that we've got plants in Europe and LATAM and the U.S. that are well, well invested in and and we've completed a lot of our capital work in those plants. There's also a lot of work underway in the United States. So we have been very, very aggressive from the very start. We have not wavered or changed any of our forecasting on the $1 billion. It's been $1 billion, and that's what we continue to drive. And having the right supply chain and the right capital, even with these competitors, that's still our expectation, and that has not changed, regardless of what our competitors may or may not be doing.

Ming Tang

Okay. Makes sense. Thanks.

Paul Manning

Okay, thanks, Nicola. Thank you.

Operator

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

Unknown Speaker

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

Operator

The conference has concluded. You may now disconnect.

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