Q2 2020 Quaker Chemical Corp Earnings Call
Greetings and welcome to the quickly <unk> second quarter 2020 results conference call.
A brief question answer session will follow the formal presentation. If anyone should require assistance during the conference. Please press Star then one of your telephone keypad.
As a reminder, this culture is being recorded.
It is now my pleasure to introduce your host Michael Barry Chairman, Chief Executive Officer, and President for quicker help. Thank you Mr. Barry you may begin.
Good morning, everyone.
Joining me personally today as we are all currently working from home Mary Hall, our CFO, Robert drop our general Counsel and Shanghai Stutter, our head of finance the Chief Accounting Officer, we have slides for this call you can find out in the Investor Relations section of our website at Www Dot Quaker out.
A great deals change in the World and 20 point with the Kobin high teen past that like for US our top priority is to protect the health and safety up our employees and their customers, while ensuring our business continuity to meet our customers require.
Over 34 plants around the world our operating we are satisfied all of our customer needs.
I'm very proud of what Quaker health team has done to continue servicing our customers as well as continuing with our integration effort, which is not necessarily.
The second quarter was consistent with our expectation over.
Overall, our cereal.
Our sales were down 27% from the second quarter last year on a pro forma basis and down 24% from the first quarter.
I think it's helpful to understand where are the 24% decline sales from the first quarter came from and I'll first did this on a geographic basis.
The Americas decline, 35% amazed declined 23%.
In Asia Pacific declined 4%.
The declines in all three regions were primarily driven by the impact of Copel <unk> on our customers businesses.
And as you can see drip rapidly there was a large difference between these regions.
The Americas was the most impacted as many of our customers had shut downs worsened I forgot slowdown that lasted welcome Tonight.
And they are what's the next largest that back at the customer shutdowns and production slowdowns were less expensive as a shorter duration than in the Americas.
Asia Pacific declined 4% well most of the clients in India and Southeast Asia.
China sales were actually higher in the second quarter versus the first quarter as the China industrial sector returned to more normal conditions relatively quickly.
I'd also like like to give you a sense of how our sales played out timing wise for the quarter.
April what's the lowest small quarter and they with only a little better as we saw a 1% sequential monthly increase and that sells.
Yeah. This is just the many of our customers had an extended shutdowns or significantly reduced production. During this period of time.
And yeah, we did see a much more significant improvement net sales increased 20% amaze level.
And we expect the sequential improvement to continue over the next several months, which I'll talk about later.
Another way to indicate the sequential quarterly sales trend is to look at what happened before three major customer industry groups.
Metal working declined the most and decreased 30% sequentially from the first quarter due primarily to automotive OEM every latest suppliers, having a prolonged shutdowns or significantly reduced production in the quarter.
Our other customer industry groups of metals and global specialty businesses were less impacted and showed declines of 21% 16% respectively.
I hope these different cuts or 24% sequential self supply help provide insight into what was happening in the quarter.
I also want to point out that we do continue to take market share as despite the continued or the current difficulties and our end markets. As our analysis continues to show we had total organic sales growth due to net share gains of 2% in the second quarter of 20% the second quarter lighting.
Concerning gross margins, our second quarter gross margin was down probably second quarter 2000, I like Jay.
The decline was primarily due to lower volumes and its impact on the fixed portion of our manufacturing costs.
What may not be at Paris is better product margins actually increased approximately 2% from last year.
Our raw material synergies beyond the vast majority of the anchors.
That's pandemic and its impact.
Has been somewhere in many ways to what we went through in late 2000, and they just like that we could pass action to save Clos numerous ways.
Essentially all discretionary expenses have been eliminated we stop new hires executive pay cuts were implemented.
Some positions were part of a and our planned capital expenditures haven't caught by over 30%.
Very importantly.
We have reviewed our integration synergy plans in light of the situation additional actions as well as accelerated other synergies where where possible.
And as we announced last quarter, we increased our guidance on synergy achievement for 2020 or current estimate is $53 million cost synergies achieved persons or earlier estimate of 35 million.
And this quarter, we achieved $12 million, a Saturday and we expect sequential improvement during our future quarters.
One question, we have been asked is whether this kinda like impacted our integration and the answer is that it really hasn't negatively impacted the synergy capture part of our integration plan.
Give our people tremendous amount of credit for being able to do plant shutdowns.
Product manufacturing site transfer ERP implementation and various other strategic changes during this challenging work environment.
Our two years of integration planning are paying off and we are fortunate to have this integration execution ongoing during this period helped us offset some of the volume impact we are experiencing.
Even with these additional cost synergies.
We have not been anything that would impede our business execution or strategic initiatives, including our ability to service our customers well continue to grow above the market in the future and further the golf and execute our strategic platform.
So overall it was a tough second quarter by any measure, but one that we exit to exit if not better place.
Also wire EBITDA was nearly cut in half from the first quarter, we still generating good cash flow and have less than that that now by $13 million.
The positive cash flow in nature of our business during severe times, it's something we have discussed with investors on a path.
And we're now seeing the positive impacts again nice top clients.
Looking ahead, we do anticipate that throughout the second half a year, we will see gradual sequential improvement.
For example, we saw Joan come in stronger than the April may lows.
July was better than June.
And we expect continued gradual improvement that should make our third quarter performance better than the second quarter and the fourth quarter better to another.
However, we do not expect our business returned to levels, we experienced pretty cobot high paid by the every year.
Last quarter, we said that we expect our full year adjusted EBITDA to be more the 200 million dollarss.
Based on the multiple scenarios, we have stimulated and our forecasting.
We continue to expect this to be the case. So nothing has really changed from what I mentioned last quarter about the full year.
Also we do not expect to have any liquidity or bank covenant issues.
Overall, our higher expected synergies.
Additional cost saving action improvement or product markdowns and our cash flow management are expected to continue to help us. During this period of time, when our volumes are down versus pre copel level.
And if we look forward to 2021 2000 at 22 I continue to be optimistic about our future and I still expect us to achieve significant increases in our adjusted EBITDA as we complete our integration cost synergies.
Okay to take share in the marketplace.
Benefit from our projected gradual rebanner demand in our end markets over this period.
In closing I want to thank all of our colleagues I, Quaker Helen whose dedication and expertise help create value for customers and shareholders and differentiate us in the marketplace.
So proud of how our team is performing servicing our customers.
Meeting their needs.
And successfully continuing with our integration execution, which is critical and difficult for us this year.
People are everything our business and by far most valuable asset and ensuring their safety and wellbeing.
He is and will continue to be a top priority for us.
We just celebrated our one year anniversary of our combination and I'm proud of them very happy with our Quaker helping team and what we have and will be able to accomplish for customers and investor spoke now and going forward.
And that concludes my prepared remarks, I'll now hand, it over to married so that she can reviews on the key financials for you for the quarter.
Thank you, Mike and good morning, all before I begin let me remind you that comments made during this call include forward looking statements, which are based on current expectations estimates projections and assumptions that are subject to risks and uncertainties, which may cause actual results could differ materially for a discussion of these risks. Please review the.
Caution married statement regarding forward looking statements included in our earnings release and in our 29 team form 10-K filed with the FCC. These are available on our website.
Please also note that we updated our risk factors in our form 10-Q, following our Q1 O eight to address the evolving cobot 19 related issues and these risk factors should be reviewed along with those in our 2019 form 10-K.
In our press release and in this presentation, we provided certain information, including non-GAAP earnings per diluted share non-GAAP operating income and adjusted EBITDA as well as certain pro forma items in an effort to provide shareholders with better visibility into that accompanies core operations excluding certain.
In terms, which we believe do not reflect our core operating performance reconciliations are provided in the appendix of the this investor day.
We followed a similar review format for the stack as the one we used during our last couple of calls because combination where our comparison period show actual and non-GAAP results as well as pro forma sales and pro forma adjusted EBITDA as if we had been combined with Houghton throughout the periods presented.
Oh, please see slide six through eight now while I review some hot I life.
As Mike noted the precipitous decline in volumes, we began to see in the latter half of March continued into April we expected April to be the trough in volumes and it was was slightly better performance in may and in June we saw more meaningful improvement in volumes and performance as Mike mentioned.
So while our actual sales are up significantly to 286 million in Q2 compared to 206 million in the prior year. This is due to the inclusion of how the norm in high on a pro forma basis, including Houghton in Q2 of last year net sales declined about 27.
1%.
Most of this decline was due to the company's 19 impact on volumes, but we also saw negative foreign exchange impact on the topline is about 4% due primarily to the significant weakening of the Brazilian real Oh, the Mexican peso and the R&D versus the dollar.
These negative impacts were partially offset by the inclusion of Norman Hey.
Our gross margin of 34% for Q2 was down from 36.5% in the prior year quarter.
Which we attribute a trend due primarily to the steep decline in volumes and the related impact on fixed manufacturing costs.
As Mike mentioned, we realize meaningful procurement synergies in the quarter and our product margins were up approximately 2%, which was masked by the impact of fixed manufacturing costs on our significantly lower volumes.
As volumes pick up we expect the benefits to our gross margin to be more visible and fall to the bottom line.
The drag from co bid is also evident in our non-GAAP operating income.
11.2 million compared to 25.5 million in Q2 of 19 and 36 million in Q1 2020.
Similarly, our non-GAAP EPS of 21 cents was down from $1.56 in Q2 of last year, there and $1.35 sequentially.
Our effective tax rate in the current quarter was 57.9% compared to 24.2% in Q2 of last year.
This quarter's elevated rate was primarily driven by an adjustment to tax reserves related to the tax credits we acquired without.
And also twin adjustment relating to certain foreign tax audit.
Excluding all unusual items, we expect our effective tax rate for the full year 2020 will be in the range of 20% to 25%.
As Mike mentioned earlier, our Q2 adjusted EBITDA of 32.1 billion is in line with our guidance at roughly half our Q1, adjusted EBITDA 60.5 million.
We continue to expect our full year adjusted EBITDA will be more than 200 million.
With the decline in adjusted EBITDA, Our net leverage has picked up about 22 times to 3.7 times on a reported basis and 3.1 times on a bank calculated basis, which is still comfortably below our bank covenant of 4.25 time.
We stress tested our projections for this year under multiple scenarios as Mike mentioned and expect no problem and remaining Incompliance with our bank covenants and we had strong liquidity to support these uncertain times.
In addition, we're benefiting from the current low interest rate environment. That's the average interest rate on our debt is now about 1.9% as compared to 2.4% at March 31 fun.
[noise] bright spot in the quarter with our cash flow. We're pleased to report that our operating cash flow doubled year to date to 44.7 million versus first half of last year 22.4 million. A 22.4 million. In addition, our Q2 operating cash flow of 24 point.
5 million exceeded the prior quarter of 20.2 million.
The positive cash flow trend is primarily due to improved working capital as we've discussed in the past. The company has a very asset life business model for the majority of capital deployed boy did some working capital and not in property plant and equipment.
General economic or industry crises occur stress sales, we generate cash through their up release of working capital. We saw this mid 2008 2009 crisis.
And we aren't seeing it now.
In addition, our low capital intensity allows us flexibility in our case that spending and we're on pace to reduce capex by about 30% from our initial combined company estimates as we mentioned last quarter.
As Mike mentioned, it was a tough quarter, but we're encouraged by some positive trends in business performance.
And the increasing cash flow I, just mentioned as well as the 12 million cost synergies realized this quarter.
In addition, the increase in total synergies, we expect to realize this year, which is up from 35 million to 53 million.
And the discipline cost reduction actions, we have taken will help mitigate the impact of this difficult economic and business environment.
In summary, our track record of weathering tough economic environments to regaining share cost reductions and generating good cash flow during major downturn, all gate give us confidence in our ability to weather the storm more importantly, we positioned our confidence need to leverage the future upswing in best.
This activity when it occurs.
Thank you all for your interest in Quaker Houghton and now back over to you Mike.
Thank you Mary we will now open it up for questions.
Thank you at this time, we will conduct a question answer session.
If you would like to ask a question. Please press star one well your telephone keypad a confirmation to indicate your line is in a question Q.
You mean press star too if you will like to remove your question from the Q.
For participants use the speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Once again that star one to ask a question at this time.
One moment, while we pull for first question.
Our first question comes from Jon Tanwanteng from CJS Securities. Please proceed with your question.
Good morning. Thank you for my take is taking my questions.
One write off.
My first one is married maybe can you quantify some of the temporary cost cuts you've been making you know what layers back in as volumes improve number one and number two if any of those could be made permanent and maybe that's incremental to the synergy cost savings that you were very announced.
So the cost actions that we took in response to a specifically because that situation include a and I think Mike mentioned, a few but executive pay cuts. We did have some merit increase deferral certainly.
It all.
Or see any was when it's pretty much shut off so.
Those were the major contributor or we would expect John as business resumes to more normal levels are continues to pick up that are those type of cost will will come back.
The more structural changes that we've made in the integration.
Plan that are coming through obviously in our synergies that Weve art articulated those are separate from those cost actions and those are structural and we view is permanent.
Got it so so no real permanent reductions it from the temporary cost cousins is what you're thinking.
Yeah, I would say I would say John that we most of that increase between let's say the on the synergy increase for this year between 35 million 73 million most of that was due to a sure integration stop as we got into it.
It's more than we had expected.
There were also in light of this situation and also light in light of how things are going to look for the next.
Year to.
We did take a harder to walk at another thing. So some about increase is is is really because a co bed at a value or building that into our structure.
Got it okay that makes sense and just Mike from a longer term perspective any changes in the you know the ability to reach called <unk> $300 million EBIT up bogey in the next year too and that's just simply using the results you had in 29 10, plus the expected synergies any changes to that timing.
And your ability to achieve that level I'm just given your outlook in the current environment.
Yes, Thats you know, it's hard to exactly predict timing at this point, but we do we do expect to see.
A big increase and EBITDA next year as we get all for synergies come fully baked and over the next two years.
And then we also expect to have you know above market growth and as has the man, even though it doesn't come back yet this year and it probably won't for a couple years, we think that will lead to.
You know at least a nice gradual improvement and demand on our lower cost base and that should Battlestar increased margin wall shouldn't give us a nice pop in EBIT, though the exact timing of that is not let you know you know hard to predict at this point, but we still expect to be.
You know shut these significant increases of 21, and it's way too.
Okay. Thanks, and then just finally on the as we go into July I know you expected sequential increases or your thoughts sequentially increases going in July and and for Q3 and into Q4.
Can you just talk about the business is located in regions that are still being impacted by depth endemic concerns.
The Americas, Brazil, and do you asked specifically India. For example at how are you operations, there on coping or I'm being affected by whatever regional restrictions or lock down to maybe in place.
Yes. They are all of our plants are operating right now so there's not a there hasn't been a really too many issues once in awhile there can be a disruption for example in India, but pretty much everywhere all around the world there hasn't been but right now everything is operating.
And we are seeing businesses.
Pick up off a very you know lower level, there's areas that you imagine as loved the areas that you mentioned in the Americas, whether the U.S. from Mexico, and Brazil, or they India had them and in many ways most challenging countries for us, but they certainly are improving but.
In general, we're seeing improvement everywhere around the world.
Okay got it thank you.
Thanks.
Once again, ladies and gentlemen to ask a question at this time. Please press star one on your telephone keypad.
Our next question comes from Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Good morning.
Oh I was wondering if you can Mike maybe provide a little bit a guide.
The expected sequential improvement in brother huge [noise].
I've heard from a lot of companies. So far this earnings season, and it seems like many of the industrial exposed companies out there are suggesting the Q3 revenue could be down in the 10% to 15% range year on year or is that kind of in the right ballpark or to square with your expectations.
For a sequential improvement.
Yeah, we we've chosen I guess not to give a specific improvement just given the or guidance relative to the.
UBS, Yeah, certainly levels. So I think any guidance that we feel comfortable given at this point is that third quarter will be better in the second quarter, we will see sequential improvement and we all see.
You know EBITDA over 200 million. So yes, if he got to see where we were you know through the first six months now essentially we were 93 round numbers millions of EBITDA obviously.
Second half of the year were expected to be over a 107 million of EBITDA. So we are and you know Soviet did just look at the book sequential improvement could be in the quarters and estimate that you know from an EBITDA perspective about the any.
Kind of guidance, we want to indicate at this point.
Okay, and just to clarify the sequential improvement or that would be bull saw the revenue basis and EBITDA basis.
Yes, okay.
Okay.
Can you talk a little bit about.
Customer inventory levels of your product.
I'm really think those customers, it's managing that pretty tightly in some cases, you guys manage the inventory for them.
But did you see any restocking benefit or is there some restocking yet to come or are those levels generally pretty lean then and we shouldn't expect to restart.
Yeah, I mean in our business.
A lot of you know our customers do not store a lot of.
Our product.
So where are we really see this inventory effect tends to be more on.
Yeah.
On the customers' inventory level and for example, I was reading yesterday car inventories might be lower now like in the United States and they they were a year ago, a pretty significantly and so that customers have I'll put option because to get their inventory back with the level you know better levels.
And that will impact us just either increase production, but the amount of.
Product that we scored a customer site is really not that bad fig.
Alright, and then not wanted to ask about the aerospace business. Obviously, that's an area that was under some pressure coming into this year.
And that will be expectations are that bad.
Take a even longer to pick back up are there other markets that you're looking at.
Where you believe you could be facing a slower recovery trajectory.
Besides aerospace.
No I I think aerospace would be though an example of a market that would have the most of the time that color I plan to come back to normal you're right now aerospace.
Makes up a brown.
4% of ourselves actually in this quarter, it's 3% of ourselves.
So you know that gives you the magnitude of it but and we have so we have been impacted by a you know if you look at that the drop in our revenue what do the aerospace.
Quarter from look less second quarter last year it was.
2% of that impact that we saw all of a.
27% so.
So I do I do very very thing. He said I think that's the most impacted but we don't.
Have any other markets are going to be isn't part of that.
And then on the flip side to that.
Can you talk about ER, we've we've heard that there are shortages of aluminum cans.
I know that you guys have some exposure to canning or to metal packaging has that been a bright spot for you can you maybe go through some other areas, where you've seen a these markets be a little bit more resilience or recover more quickly.
Oh, Yeah, Yeah, China is a great example, one area that really does.
I have no.
Pretty good curve characteristics are good you know not as unpack that as much so.
My definitely agree with you on that you know a lot of what our other sectors are generally more.
Hi towards.
No general industrial type of thing of course, we have the automotive.
But I was I would I would say that.
Overall, we definitely have other initiatives another area like I I think up you know things like die casting and so forth that have art. You know are definitely important market type of growth characteristics that we're excited about.
Alright, and then the last question I have is.
Pricing versus raw material fraud.
It looks like price mix was positive in those regional segment.
Within the the metals and metalworking businesses is that sustainable as you are presumably seeing raw material costs continue to watch the lower year on year.
Yeah, we I would say from a raw material perspective, and like you said its price nice right. So it's hard.
I wouldn't I would say.
Maybe a lot of that in that case might have been mex I. So I don't I don't view any major issues from pricing perspective, and when you look at our raw material environment that we're in right now it is relatively flat it was relatively flat overall it from the second quarter.
Oh for the first quarter to second quarter and as we look forward, we expected to be a.
Relatively flat in the second half of the year as well so I don't I don't really see much change at all.
That regard.
Alright sounds good thanks very much.
Thanks, Mike.
Once again.
To ask a question that star one on the telephone keypad.
There are no further questions in queue at this time I would like to turn the call back over to Mr. Ben for closing comments.
Okay, given that no other questions, we'll enter conference call now and I want to thank all of you for your interest today.
Our next conference call for the third quarter will be in early November and if you have any questions in the meantime, please feel free to contact Mary or myself. Thank you again for your interest in Quaker House.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a great day.