QUAKER CHEMICAL CORP Q3 FY2024 earnings call

• Quaker Houghton showed resilience despite market headwinds, with third quarter net sales at $462 million, 6% below prior year but consistent with second quarter.
• Gross margins were 37.3%, in line with prior year and quarter. Adjusted EBITDA was $79 million, and non-GAAP diluted earnings per share were $1.89.
• Segments showed varied performance: Asia-Pacific outperformed markets, EMEA had lower sales, and Americas were impacted by industrial activity. Segment operating margins improved year-to-date due to portfolio focus and cost structure actions.
• Advancing enterprise strategy in globalization, digitalization, sustainability, and supply chain/manufacturing improvements, with progress made in these areas.

Asia-Pacific segment saw growth despite mixed end-market conditions, with volumes higher by ~9% in 2024, driven by new business wins in metals and metal working applications. EMEA segment had net sales 4% lower year-over-year, with volumes inclusive of the I.K.V. acquisition up ~1% but impacted by higher manufacturing costs. Americas segment net sales declined 10% year-over-year due to lower volumes and pricing, affected by industrial activity and customer downtimes. Segment operating margins improved year-to-date as a result of portfolio focus and cost optimization efforts.

• Soft underlying market conditions are expected to persist through the fourth quarter, amplified by seasonal patterns.
• Continue disciplined execution, focusing on earning new business, driving manufacturing and supply chain efficiencies, and prudently managing investments and margins.
• Achieved over $20 million of runrate savings from the Cost and Optimization Program announced in 2022, with ongoing efforts to identify further cost opportunities.

• Soft underlying market conditions persisting through the fourth quarter.
• Seasonal patterns impacting customer production and working capital.
• Extended customer downtimes and reduced production rates in EMEA and Americas segments due to factors like automotive, steel, and aerospace challenges.
• Macro-economic uncertainties affecting end-markets.

Q: Operating margin decline in Q3, Andy explained lag in pricing due to raw material indexes and SG&A timing with cost controls.

A: Yeah, thanks, Mike, and good morning again. Really down to a couple factors. So, at the gross margin level, we were also pretty consistent. But we did have a bit of a lag effect on our pricing due to indexes as over the past number of quarters reaching raw materials come down. There's typically a lag then when that kicks in on the pricing level. So we did have a bit of an impact in the third quarter related to that. Raw materials overall the basket was pretty balanced. So we were consistent, but there was a little bit of degradation in the third quarter related to that. As raw materials stabilize, we anticipate that that affect diminishes. And then on the SG&A side, we had fully expected that we were going to have a bit of an uptick just based upon some timing around phasing of a few of our cost structures. But the nice thing is we actually offset some of that with cost controls, as well. So, it was really down to those areas that that impacted a bit of the operating leverage.

Q: Asia-Pacific strength, driven by new business wins in metals and metal working, organic growth, and Sutai acquisition.

A: Yeah, it's a great observation, Mike. We've seen relative strength across the Asia-Pacific region. So it's not a particular country. It's China, it's India, it’s Southeast Asia. We've seen some positive not only in metals, but also in metal working. Now we did add a bit of help with the Sutai acquisition, but the vast majority of the growth has been organic growth for us and it's really focused on the new business wins. The team's doing a great job of identifying additional customer opportunities as they're unlocking their business and value associated with it and the team is really well positioned on that. So we're hopeful that some of the backdrop to the market continues to be positive on that. But we're making our own progress in a lot of other things we're doing.

Q: Q4 outlook, seasonality and continued soft market, but new business earning offsetting some headwinds.

A: Sure, yeah. Yeah, I mean, overall the market continues to be pretty soft as we look into the fourth quarter and you're right you’ve highlighted that we typically have a couple percent impact on seasonality in particular in the Americas, in EMEA. We're expecting the headwinds to continue in the fourth quarter including some of the outages that we saw in the third quarter around automotive and steel and now, some challenges in the aerospace industry as well. On a positive note though, we are still earning new business to offset some of that. And we continue to have expectations for Asia-Pacific to continue to be positive. So, overall, I think we're executing pretty well. We're managing our margins. Continuing to focus on our cost structure as we're still advancing our strategy and while we don't give explicit guidance, I hope that at least contextualizes a little bit for you because the next takeaway I would say is, while the fourth quarter will be a little bit challenging, we think we're setting the business up really well when the markets do start to improve.

Q: Pricing tailwind next year, expected stabilization as raw materials stabilize.

A: Yeah, well, first, Dan, thanks for the, the question. I mean, first just to give some context to it. Well, pricing was down year-over-year and we commented it was related to the index pricing. If you look at it on a sequential basis, it's already starting to mitigate. So it's down to - it was, 1% negative. And because of that that index pricing and now seeing some stabilization in raw materials, we would expect that to diminish. going forward. And you can see that in how we're managing the gross margin on a year-over-year. It's rather flat. So we're anticipating things will stabilize as we move into the next year. We're confident that we will do the things necessary to operate within our targeted 37% to 38% range.

Q: Customer shutdowns impact, auto, steel, and aerospace outages affecting EBITDA in Q4.

A: Yeah, so, first just highlighting again, where we're seeing the continued outages are primarily in auto and just general industrial and now aerospace. That has a bigger impact in the Americas, in Europe, but it does have some carryover, as well in the other regions. Tom, I don't know if you - you'd like to add any additional context on that? Tom Coler: Yeah. I would just say, I think Andy characterized it well in terms of auto and steel. I think the new item for us that impacted a very small amount in Q3 is in the aerospace, aero is approximately 5% of our, a little less than 5% out of our global revenue. And we work across many parts of the aerospace supply chain. But, again, we're seeing challenges in that market starting to emerge here in Q3, particularly in the Americas. So as we look forward into Q4, if the current market environment, particularly in Aerospace continues to exist depending on the length of that, we could see a few million dollars of EBITDA impact in Q4 associated with that market segment.

Q: Capital allocation, focus on growth, dividends, share buybacks, and inorganic opportunities.

A: Yeah. Great question. Of course, it's an important part of our capital allocation strategy, right? Inorganic growth will drive growth and we've seen a lot of success and shareholder value added as a result of that. We did the two bolt-on deals so far this year with I.K.V and Sutai. We've got a number of other bolt-on deals in our pipeline, as well as larger opportunities within the pipeline. You can't always predict when those things are going to happen. What I can say though is things are heating up. And we see the possibility to be able to move with a little bit of an acceleration as we go forward here. So, we'll continue to focus in on those places where we had channel, we had geography, we had technology or we had scale that's going to be useful and value adding for our customers. And we've done a really nice job, I think on the balance sheet and our cash generation to be in a position to be able to do that when the moment is right.

Q: Revenue decline attribution to price and volume, price cycle running course, margins stabilizing.

A: Yeah. This is Tom. Good morning, Arun. How are you? Thanks for the question. So, yeah, what I would say is, I think you're right. We saw year-on-year very low-single-digit year-on-year volume declines. If you look at our pricing impacts over the last several quarters, those continue to come down over time as the effects of the raw material deflation sort of work through our system and we see the impact come through on index-based contracts. So, as Andy had said, relative to our Q4 outlook, our anticipation is that margins will stabilize in this range and will continue to see less impact of price as we go forward.

Q: 2025 growth outlook, focus on strategy, new business wins, and macro improvement potential.

A: Yeah, thanks for the question. It's always our expectation to drive growth. But we also understand after the last couple years, we can't control everything\ in the macro environment. What we do know is, we're advancing our strategy with some of the key things that I mentioned in our - in the prepared remarks. We're continuing to generate new business wins as we're finding new opportunities to help customers to unlock value with respect to that. And we continue to manage our costs through whatever is happening in the macro environment. Should the macro environments improve, we're going to be in an even better position, but we will continue to focus on what we can control and do our best to build on the success we've had the last couple of years.

Q: Consolidation opportunities, interest rates, and pipeline of bolt-on deals.

A: Yeah. Great question. Of course, it's an important part of our capital allocation strategy, right? Inorganic growth will drive growth and we've seen a lot of success and shareholder value added as a result of that. We did the two bolt-on deals so far this year with I.K.V and Sutai. We've got a number of other bolt-on deals in our pipeline, as well as larger opportunities within the pipeline. You can't always predict when those things are going to happen. What I can say though is things are heating up. And we see the possibility to be able to move with a little bit of an acceleration as we go forward here. So, we'll continue to focus in on those places where we had channel, we had geography, we had technology or we had scale that's going to be useful and value adding for our customers. And we've done a really nice job, I think on the balance sheet and our cash generation to be in a position to be able to do that when the moment is right.