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Negative Points

• The US implementation of tariffs is expected to impact Sensient Technologies Corp (NYSE:SXT) by approximately $10 million annually, adding complexity to their operations.

• The Natural Ingredients product line saw a decrease in sales due to a challenging prior year comparable and lower demand.

• The company anticipates lower volumes and higher costs to persist throughout most of the year for the Sensient Natural Ingredients business.

• Sensient Technologies Corp (NYSE:SXT) has deferred its stock buyback program to increase capital expenditures due to accelerated natural color conversion activities.

• The conversion from synthetic to natural colors presents challenges, including technical application issues and supply chain complexities, requiring significant investment and resources.

Q & A Highlights

Q: Can you elaborate on the growth opportunities for natural colors and how Sensient plans to manage the supply chain to support customer growth? A: Paul Manning, CEO, explained that the opportunity in the US and Latin America is significant, with a potential conversion factor of 10:1 from synthetic to natural colors. Sensient's strength lies in its ability to formulate natural colors across various applications, overcoming technical challenges such as sensitivity to light, heat, and pH. The company has invested heavily in its supply chain and manufacturing capabilities to standardize and deliver consistent products, positioning itself well against competitors.

Q: How does Sensient plan to address the impact of tariffs, and which raw materials are affected? A: Paul Manning, CEO, stated that the estimated $10 million tariff impact is primarily on raw materials, representing about 1% of the cost of goods sold. Sensient plans to mitigate this through pricing strategies, leveraging its past success in managing costs during the COVID-19 pandemic. CFO Tobin Tornehl added that the impact is more significant in the color segment than in flavors.

Q: What are the volume trends across key geographies, and did Q1 see any pre-buying due to tariffs? A: Paul Manning, CEO, noted that the US food market is largely flat, with slight volume growth in Europe and positive trends in Asia, particularly in personal care. He mentioned that while some pre-buying occurred in the SNI business due to tariff uncertainties, it was not a significant factor across other segments.

Q: Can you provide more details on the increased capital expenditures and their focus areas? A: Paul Manning, CEO, explained that the increased CapEx, now expected to be between $80 million and $90 million, will focus on expanding capacity, particularly in the US, to meet the growing demand for natural colors. The investments will also optimize the supply chain, with some processing potentially occurring closer to raw material sources globally.

Q: What is the outlook for the color segment in 2025, and how will tariffs impact growth? A: Paul Manning, CEO, indicated that the color segment is expected to achieve mid-single-digit growth, with potential upside depending on customer conversion timelines. The $10 million tariff impact will be managed through pricing adjustments, and the company remains confident in its ability to recover these costs.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.