Prepared remarks
Good morning, and welcome to the Sensient Technologies Corporation 2026 Second Quarter Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Tobin Tornehl, Vice President and Chief Financial Officer. Please go ahead, sir.
Good morning. Welcome to Sensient's earnings call for the second quarter of 2026. 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 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 remove the impact of currency movements, cost 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 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 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 on Slide 5 of our deck. Now we'll hear from Paul.
Thanks, Tobin. Good morning, good afternoon. Earlier today, we reported our second quarter results. We delivered 10% local currency revenue growth, 21% local currency adjusted EBITDA growth and 26% local currency adjusted EPS growth in the second quarter. These results continue to build on our strong first quarter results and are well above our earlier projections for the year. We continue to have outstanding results from the Color Group, which delivered a 17.6% local currency revenue growth and 36.8% local currency operating profit growth. The commercial activity around natural color conversions continues to be very strong, and the momentum is building as customers approach their launch dates. Flavors & Extracts Group also had a solid quarter, delivering 3.8% local currency revenue growth and local currency operating profit growth of 6.1%. The Asia Pacific Group contributed strongly with local currency revenue growth of 12.3% and local currency operating profit growth of 23.7%. Each of our groups has delivered strong results for the first half, and we expect even stronger results in the second half of the year. During the second quarter, we continued to generate strong new sales wins across each of our groups and our sales pipelines continue to grow to support our revenue expectations. Our emphasis on sales execution, delivering exceptional customer service and constant innovation continues to drive our performance. We're delivering very high win rates in natural colors, specifically natural color conversions. Our long-term strategy and preparations position us to support our customers throughout this conversion process and achieve our $1 billion sales target. Aside from natural colors, our robust and innovative product portfolios across our other food, personal care and pharmaceutical product lines are enabling us to win across the globe. As I've stated before, despite a choppy macroeconomic environment and sluggish overall food market, we believe we are well positioned to continue our sales momentum. As I've mentioned on previous calls, we made a strategic shift over 15 years ago in anticipation of the conversion of synthetic colors to natural colors in the U.S. and beyond. We're seeing strong conversion activity and newly converted natural color products are already hitting the shelves in the U.S., Canada and Mexico. I will reaffirm what I've said previously. The U.S. conversion to natural colors is the single largest opportunity in Sensient's history. We are aggressively pursuing the commercial opportunities while also executing on our considerable investments in our production capacity, supply chains and product innovation to support us for a $1 billion sales goal. Turning to Slide 6 and our group results. The Color Group had excellent second quarter results, delivering 17.6% local currency revenue growth and 36.8% local currency operating profit growth. The group's second quarter adjusted EBITDA margin was 28.3%, up 320 basis points compared to prior year. This included approximately $4.3 million from one-time tariff refunds which contributed 200 basis points to the group's adjusted EBITDA margin. Excluding the tariff refund, the group's adjusted EBITDA margin would have been 26.3%. Without the tariff refund, the group still had an outstanding quarter and continued our increased investments in support of the natural color conversion opportunity. The group continues to sell technically differentiated products, control its costs, execute pricing and most importantly, deliver quality new wins. We are seeing acceleration in customer orders for conversions of the synthetically colored products in the U.S. Alongside these conversions, the vast majority of new product launches throughout the world continue to utilize natural colors. I can reaffirm that the pipeline to our $1 billion sales goal looks very promising. As we approach the second half of the year, I now expect the Color Group to deliver local currency revenue growth in the high teens for 2026, with natural color conversion sales building as the year progresses. During the second quarter, the Color Group invoiced approximately $25 million of natural color conversion revenue. This $25 million is in addition to the $20 million of revenue that we cumulatively invoiced through the end of Q1. I also expect that the EBITDA margin for the Color Group in Q3 will be similar to prior year's Q3 EBITDA margin of 24.7%. Overall, the Color Group is progressing very nicely in 2026 and remains on a great sales trajectory. Turning to Slide 7. Flavors & Extracts Group saw local currency revenue growth in the second quarter of 3.8% and increased local currency operating profit by 6.1%. The agricultural ingredients business, in particular, had nice volume growth in the quarter. The group's adjusted EBITDA margin was 18.1%, up 30 basis points versus the prior year's comparable quarter. The results are in line with our expectations for the second 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, for the Flavors & 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 a very strong quarter, delivering 12.3% local currency revenue growth and 23.7% local currency operating profit growth. The group's adjusted EBITDA margin was 24.4%, up 210 basis points versus the prior year second quarter. Overall, the Asia Pacific Group got up to a substantially faster start than we anticipated in the first half and is set up nicely for the rest of the year. The Asia Pacific Group continues to generate strong new sales wins across all geographies. I expect the group to deliver high single-digit revenue growth for the full year. Turning to Slide 9. Regarding our full year guidance, we expect our local currency revenue to be up high single to low double digits. Based on our strong start to the year, we now expect local currency adjusted EBITDA and EPS growth in the mid- to high teens for the year. Our previous guidance called for high single- to double-digit growth rates. On the capital allocation front, we previously communicated expectations for consolidated capital expenditures in 2026 of between $150 million to $170 million to ensure that we are prepared for the forthcoming natural color conversion activity. I would anticipate we still land within that range but trending towards the top end. We continue to expect to spend around $250 million for natural color capital over the next few years. We also continue to anticipate an increase in our natural color working capital requirements. We are full steam ahead on this multiyear plan to add the necessary capacity and allow for further growth in the future. Beyond capital expenditures, we will evaluate sensible acquisition opportunities, but we do not anticipate any share buybacks in the near term. Now before I turn the call over to Tobin, I'd like to provide some information on two of our more innovative natural color technology platforms shown on Slide 10. We provide a little background. Mexico, like the U.S., recently announced an official ban on Red 3. Brands will have until mid-2028 to replace Red 3 with alternative solutions. As we have discussed, the U.S. ban goes into effect in January of 2027 for food, beverage and pet products, with a slightly later date of January 2028 for pharmaceuticals. Our technical teams have been working with our customers to convert their products, and this slide depicts some of our most successful technologies to enable this conversion. First, UberBeet is our stable and concentrated BEET platform designed for pink bakery items that undergo heat processing. This technology offers benefits to mitigate taste impact and potential bakery rise issues. Secondly, our Microfine technology sells in pink icings, fat-based coatings and frostings which mitigates the bleeding of color into the baked good item. Lastly, Watermelon Rose is an ultra-high temperature stable vegetable-based technology that delivers vivid pink shades that work well in the harsh temperatures used to make strawberry milks and high-acid juices. Marine Blue Assure is a natural color innovation, which solves many heat stability challenges with standard Spirulina-based blue solutions. This technology is especially effective in confection applications such as gummies, hard-boiled candy and fruit snacks, along with gelatin. As I've said before, the key to the successful natural color conversion for food and beverage brands is to maintain the variety and vibrancy in colors that consumers are used to seeing in their favorite products. To that end, the vast majority of our customers are striving to match their existing synthetic shade through their development. At this point, we observed very few instances where customers are electing to remove color or use less color. Our R&D efforts continue to be focused on removing performance gaps that exist between synthetic and natural colors. For more information on the Natural Color Technologies, please visit our website. Overall, I'm pleased with our financial performance in the second 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 sales target. The growth we are experiencing is a result of our execution of our long-term strategy. Since 2019, the company's local currency adjusted revenue compounded annual growth rate is approximately 6%. Our growth this year is above the historical rate, and I remain optimistic about 2026 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 differences between our GAAP results and our non-GAAP or adjusted results. The adjusted results for 2025 removed the cost of the portfolio optimization plan. While we do not have any portfolio optimization plan costs in our 2026 second 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. Now turning to Slide 12. Sensient's revenue was $462.1 million in the second quarter of 2026 compared to $414.2 million in last year's second quarter. Operating income was $76.7 million in the second quarter of 2026 compared to $57.7 million in the comparable period last year. Operating income in the second quarter of 2025 included $3.3 million or approximately $0.06 per share of portfolio optimization plan costs. Excluding the cost of the portfolio optimization plan in the prior year, adjusted operating income was 23.4% in local currency in the second quarter of 2026 compared to $61 million in the prior year period. Interest expense was $8.2 million in the second quarter of 2026, up from $7.4 million in the second quarter of 2025. The company's consolidated adjusted tax rate was 25.1% in the second quarter of 2026 compared to 25.2% in the comparable period of 2025. Local currency adjusted EBITDA was up 20.9% in the second quarter of 2026. Foreign currency translation increased EPS by approximately $0.02 in the second quarter of '26. The company received approximately $5 million of tariff refunds in the second quarter, most of which was in the Color Group, as Paul mentioned. No additional refunds of any significance are expected in future periods. This refund resulted in approximately $0.09 benefit to EPS and improved Color Group and Flavor & Extracts Group operating profit by $4.3 million and $500,000, respectively. Turning to Slide 13. Cash flow from operations was $48 million in the second quarter of 2026. Capital expenditures were $39 million in the second quarter of 2026, and as Paul indicated, we continue to anticipate our capital expenditures to be between $150 million and $170 million for the full year, likely closer to the $170 million. Our net debt to credit adjusted EBITDA is 2.3x as of June 30, 2026. As we communicated last quarter, we also expect higher investments in inventory throughout the year to support the increased natural color conversion revenue. That is expected to increase further with our leverage ratio entering the mid to upper 2s 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'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 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 and where there is a strategic advantage on the technology, supply chain or geography front. As we stated last quarter, we are constantly monitoring the situation in the Middle East. And although we do not have any significant operations in this region, we are working to mitigate any potential supply chain risk that may result from the overall increase in fuel, transportation and certain commodity prices. We have already adjusted prices where necessary to minimize our financial impact, and we'll continue to try to avoid any major disruptions to our customers. Turning to Slide 14. Revisiting our 2026 guidance. We now expect our local currency revenue to be up high single to low double digits. Based on our strong results halfway through the year, we now expect local currency adjusted EBITDA and EPS to grow at a mid- to high teen growth rates. Our previous guidance called for high single-digit to double-digit local currency adjusted growth. We expect our third quarter interest expense to be approximately $9 million and our fourth quarter interest expense to be around $9.5 million. We expect our third and fourth quarter adjusted tax rate to be approximately 25%. Based on current exchange rates, we expect the impact of currency on EPS to be immaterial in both the third and fourth quarters. As we explained, we do not expect any further benefit from the tariff refunds in the second half of the year. With that in mind, we expect EBITDA margins for the Color and Asia Pacific Group to be in the mid-20s and EBITDA margins for the Flavors & Extracts Group will be in the high teens. We'll now open the call up for questions.
Questions and answers
Today's first question comes from Ghansham Panjabi with Baird.
Congrats on all the progress. First off, on the conversion between synthetic and natural, it sounds like customers generally intend to maintain the same color aesthetic. If you can just give us some sense as to whether that's true across the various product categories that are converting based on what you're seeing now? And just given that natural color conversion has some technical challenges, including potentially influencing taste because you obviously use a lot more volume, et cetera. How are customers managing through that? And is your Flavors & Extracts segment also participating in that reformulation activity?
Yes. So I would tell you, in general, customers are very, very keen to match the synthetic color in the food product. So for example, you have a drink or a piece of candy or a snack, pretty much across the board. Colors are utilized in a lot of different ways from a marketing standpoint to linking the consumer expectation to a flavor. And so maintaining the color, I think that's pretty evident to CPGs: you have to really maintain your color. If you don't, you get a lot of complaints about your flavors which obviously haven't changed, but because the color changed the consumer believes the flavor has also changed. This is more of a psychological outcome than anything else. And then, of course, if you use a substandard-looking color that impacts the consumers' preference for your product as well. While some brands might have experimented with color changes years ago, perhaps when Europe did conversions 15-plus years ago, there were fewer technologies available to get those kinds of great matches. The technology has advanced so considerably even over the last five years that by and large, we can get an exact match or really excellent-looking vibrant color in just about any application. Of course, there are always exceptions, but I would tell you those are more at the margins than anything else. I can't think of off the top of my head any customer that is specifically deciding to make their product use less color to save on money or for some other reason. Customers really want to match this, and they want to match it very, very well. To your second point about the technical challenges, yes, they are considerable. Light, pH, heat conditions, these are all things that impact color considerably. Shelf life can impact natural color considerably. When you're using that much natural color, these colors can oftentimes react with other ingredients in the finished products, and they could also create unusual tastes and smells in the finished product. So yes, we have a very strong link with our Flavors Group, where Flavors has pioneered a series of taste-masking platforms specific to disguising natural color off-notes. To my knowledge, I'm not aware of any other flavor company that emphasizes this and has built that into their portfolio in the same way that we have, because they don't have a color business like we do. So yes, flavors is becoming more and more a critical part of the formulation exercise with color to ensure that when consumers get these products, they don't notice anything except a great-looking color with a beautiful label and possibly a declaration on the front noting they are not using synthetic colors anymore. So yes, it's really come together very, very nicely.
Okay. And then relative to that $1 billion opportunity set, where did you exit 2Q? Because I think you said $25 million incremental relative to the cumulative $20 million. So is it sort of mid-40s in terms of the exit run rate? And then how are you thinking about that build-up into the back half of the year because you have some large customers that are looking to convert early part of next year as well?
That's right. So your numbers are right. We were about $20 million cumulatively coming into this quarter. We invoiced another $25 million. For clarity, we distinguish between invoiced amounts and projections, so these are amounts we actually invoiced. In Q2, we invoiced $25 million. One could project from that a substantially higher amount of revenue derived from those activities. I would tell you that approximately $25 million, I feel really good about. That's a nice step up from Q1. We're still by some accounts in the earlier innings of this conversion program. I would fully expect that this continues to grow as we enter into Q3 and Q4. Many consumers—many of our customers are driving towards a January 1, 2027 conversion deadline, whether that's stemming from the Walmart expectation of that date or a series of school lunch programs that are obligating products to be naturally colored in the school system by January 1, 2027. So those are two big factors. Another big factor as the year progresses is there are companies working towards a January 1, 2028 deadline, but they're not waiting until Q4 of next year to launch all of those. They have a very systematic launch plan where they're going to launch products each quarter between now and January 1, 2028. So I think all those things start coming together more and more as we get into the back half. I would fully expect these invoiced values to rise in Q3 and to rise again in Q4 and then, of course, to continue into 2028.
And our next question today comes from Josh Spector at UBS.
If I could actually just follow up on Ghansham's question actually, just specifically thinking about the second half. So if I take away some of the stuff you just said there, it sounds like you expect the invoiced natural colors to increase through the second half. I mean we pretty easily get to that natural colors organic, probably up in like the low to maybe high 20s year-on-year in the second half, which kind of puts the segment easily 20% plus. You said high teens, which could mean that there's no acceleration. So I just want to see if I'm thinking about the cadence there, right, and maybe the magnitude of second half growth or if there's anything else we should be considering?
We give guidance to give folks a frame of reference. We never want to disappoint in that guidance, and I think you're seeing us raise guidance once again this quarter. The second half is going to be very, very strong for colors on natural color conversions. But remember, the base business of the Color Group is still growing. That $25 million of invoiced conversion revenue is for natural color conversions, but there's also other natural color launches that continue, and we continue to have very strong win rates in that part of the market. There are some customers in other parts of the world that are still buying synthetic colors—large parts of Latin America and Asia Pacific are less converted than Europe and regions of the U.S. So that business is still growing. Our personal care and specialty markets are also growing very nicely this year and much of that is driven by natural color conversions as well. The pace and the momentum continues to build on the natural color conversions and it continues to be very strong in the balance of the business as well. So yes, the second half is going to be a really, really great half, and we feel quite good about that. If our guidance prints as high teens, and maybe your figure is higher, I don't want to disappoint you, Josh, but I would say we feel good about our guidance and the momentum underlying it.
That's very well understood. I do want to keep this kind of medium-term focus, I suppose, in just thinking about margins. And if I back out the tariff impact, you gave that number, you were 26% plus EBITDA margins. My math is that incremental is around 31%, 32%. It seems like your guide you're going back to saying the incremental is more like 25%, so is there a reason for that? Why was 2Q better? Why would 3Q see the incremental step down?
It all comes down to mix. I think our guidance on mid-20s, I think we feel very, very confident with that. Could there be a quarter where it's 26% or 27%? Sure. Could there be a quarter where it's 24%? Sure. A lot of that is driven by mix, and not necessarily mix stemming exclusively from natural color conversions; natural colors could be another segment of the business. I would leave you with this thought: we feel solidly committed to the mid-20s EBITDA margin. If Q3 comes in at 25%, I wouldn't see that as a disappointment. I would just see it as more of a function of mix than anything else. So I wouldn't get terribly concerned with that. It could come in at 26% again, but we want to give you a number you can really take to the bank, so to speak.
And our next question comes from Larry Solow with CJS Securities.
Great. Just to ask the question another way. So the $25 million invoiced this quarter, just remind us, is it safe to say you're at about $100 million annual run rate?
Yes, I think your math is probably not too far off. Typically, in a normal state of affairs, here's my perspective. When a customer launches a new product that includes color, and we project that to be a $1 million opportunity for Sensient, we would typically get anywhere between 20% and 30% of that in the first purchase order. So if you want to launch January 1, the first PO may be $200,000 to $300,000. After initial launch and validation, you typically get to a state where it's roughly 25% per quarter as the product ramps. So generally speaking, $25 million of invoiced initial orders would typically represent about a $100 million projected annual revenue for those products in normal cases. The natural color conversions can add a wrinkle because conversions replace existing synthetically colored products on the shelf. A customer may order less in the first PO to clear existing inventory, which changes that ratio. So the $25 million could be understating or could translate to something like $100 million to $130 million in projected annual revenue. I would tell you it's not likely to be less than about $100 million based on typical behavior. That shifting on the shelves creates some noise and makes normal launch projections trickier to assess. That's why we like giving you the invoice figure each quarter; it gives a sense of progression.
No, I appreciate that granularity. So it's not like the customer is ordering more than a quarter's worth. So you're at least, let's just say, $100 million, but here, you're probably at a greater than $100 million run rate today? And do you think this number by the end of '28 or early '29 could be $250 million a quarter, right? That's basically what you're saying?
Yes, that's about right to get to the billion-dollar target. In a normal state of affairs, yes, seasonality will affect timing—more beverage in certain parts of the year and more ice cream in others—but at the macro level your thinking is aligned with ours.
Right. And just directionally on the margins. So just excluding the tariff impact, obviously, you had a nice site again jump up this quarter. Maybe some of that was timing or whatever. But I think when we started the year, we thought there was going to be for the first two, three quarters compression in the Color segment because you're investing ahead of kind of revenue. The revenue has been a little bit better than expected, but not crazy better than expected. So your margin profile has been a lot better than we thought. Is there anything else—perhaps timing of some of those expenses? Or you mentioned mix, but was the mix within color even better? I'm just trying to parse anything that kind of drove that difference?
The short answer, Larry, is we're actually doing a lot better on revenue and wins than I thought. We were up substantially in the U.S. and above our budget because we got more wins earlier than we expected and we got a really nice mix of new wins. That has overwhelmed the incremental costs—investments in technical folks, commercial engineers and other resources we've added ahead of this program—more than we had anticipated.
Okay. That's fair—so it's not really a timing thing. So the drop back in Q3, again, excluding the tariff benefit, sounds like there's a little bit of variability in there, but it's not that expenses are necessarily accelerating relative to Q2?
No, I don't think so. I don't think there is a dramatic structural issue here. We want to be able to deliver on the figures, and it's more about mix and timing than an acceleration in expenses relative to Q2. We could have better news in Q3 than we currently expect.
Just last question on the IFF transaction. I know they sold their functional food ingredients earlier this year and then just announced they're selling their functional and natural color stuff. I'm curious: do they compete with you at all in natural colors, and is the change to the new owner a potential competitive concern?
I think the business that was sold wasn't a particularly large natural color business. I believe the natural color portion was a smaller fraction of that sale, and it tended to be heavier in things like carmine and annatto, which are different parts of the market than where we typically play. We have a number of competitors in this space and we take them all seriously, but we aim to outcompete them. I don't necessarily anticipate a substantial change under new ownership; a competitor is a competitor from my standpoint, and we will compete rigorously against them.
There was a comment from the buyer suggesting the industry is shifting more toward renally supported ingredients or more regulation. Does that suggest more regulation that might impact colors? Any thoughts?
Regulations tend to be good for our business because they create technical complexities and formulation challenges for our customers. The U.S. is moving in this direction through a combination of regulation and consumer demand; Europe was principally through legislation. Other parts of the world are moving similarly. Countries in Southeast Asia have attempted to outlaw certain synthetic colors in the past. It would be great if governments in Latin America and Asia moved broadly away from synthetic colors—that would create a new wave of conversions for us. I don't think Sensient will return to mid-single-digit growth after the U.S. conversion; the next waves include pet food, over-the-counter products, more activity in Latin America (which may be roughly one-third naturally colored today and two-thirds synthetic), and further activity in Southeast Asia, China and India. Personal care is another addressable market with more technical challenges but significant opportunity. Overall, this is a good time to be in this company.
Our next question comes from Nicola Tang at BNP Paribas.
I thought I'd actually follow up where you left off in terms of talking about the global opportunity. I think I also saw that Nestlé has extended their commitment to their global portfolio, not just U.S., as well by the end of 2026, which seems ambitious. I wanted to try and put numbers around this. So I think you have around $100 million of revenue in synthetic colors outside of the U.S. or outside the Americas. In a scenario where we see momentum and conversion outside of the Americas, any reason why that conversion multiplier would be any different from the 8% to 10% average that we're talking about on the Americas side? That's the first question.
Good question. Based on our experience thus far, we've typically used 10x as our ratio. In certain parts of the world, it may be lower—for example, Brazil might be on the lower end at 5x to 6x. Latin America overall could be as strong as the U.S. on that conversion ratio because products are highly colored. China and India could be in the 8% to 10% range, though some products may be less intensely colored and could yield lower ratios. So blended averages might be between 7x and 10x. In highly colored markets, 8 to 10 is a good number, maybe even closer to 10 in many cases. I can get back with a more definitive blended answer.
That would be interesting. And just for reference, what's the ratio in Europe, which is already quite converted?
Europe is different. Back in 2008–2009, when conversions occurred there, there weren't nearly as many technologies available and many customers had to move quickly with what was available. The technology available today is more effective and performance-driven. We see more and more wins in Europe where we've upgraded customers' colors—bringing in newer technologies that make products look substantially better or enable more efficient production. Europe needs some upgrading on some colors, which forms part of our pipeline.
Okay. And then maybe—given what you said about better-than-expected momentum in terms of wins, but that we're still very much in the early innings of this conversion opportunity, wouldn't operating leverage improve from where we are? What's your view on midterm EBITDA margins for the Colors business?
I'll pass that to Tobin for some color on how we think about modeling margins.
Paul covered this earlier. Overall, we think mid-20s for the Color Group for the full year is appropriate—think around 25% on an annual basis. That can change quarter-to-quarter: excluding the tariffs this quarter, they were 26%, which is really healthy. We're investing in SG&A people across the Color Group, and those investments are ongoing. The next round of investments will be in production and cost of goods sold as more revenue comes in. Overall, mid-20s for the Color Group and Asia Pacific Group, and the Flavors & Extracts Group in the high teens is how we're modeling margins for the year. That should help frame expectations.
Sure. And then one final one around working capital: you mentioned working capital to serve naturals will increase. We talked in the past about risks of bottlenecks upstream in raw materials. Can you talk through what's happening upstream and how we should think about weather events and other risks to raw material supply?
Our plan is built around having enough raw materials to achieve our $1 billion target and to retain and grow that base. We've been doing supply chain work for almost 20 years. Our program includes expanding growing regions, increasing the number of growers entering this market and working with processors who are making investments. We're not the only company seeing this. We feel very good about our footprint and our ability to source raw materials. There will routinely be weather events or political events, so we plan to mitigate that through holding working capital for problematic raw materials, having backup alternative formulas, and having growers in both hemispheres to enable continuous harvest in some part of the world. We have an organization dedicated to this activity and we continue to mitigate risks day in and day out. As technologies emerge, we may become less dependent on the current supply chain arrangements. In short, we are going to reach our $1 billion goal, and raw material and supply chain planning will be part of why we get there because we have done a lot of mitigation and planning.
And that concludes our question-and-answer session. I'd like to turn the conference back over to the company for any closing remarks.
Okay. Thank you. That concludes our call today. Thank you, everyone, for participating. And if you have any follow-up questions, please feel free to contact the company. Have a great weekend.
Thank you, sir. And this does conclude our conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.