Q3 2020 Quaker Chemical Corp Earnings Call

November 6, 2020

[music].

Didn't sleeker welcome to Quaker how in the third quarter 22 of the Investor call.

This time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

But he was require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Michael Barry Chairman CEO and President. Thank you you may begin.

Good morning, everyone.

Joining me today are Mary Hall, our CFO, Robert crop, our general counsel and Shane hosts that are head of finance and Chief Accounting Officer, we have slides for our conference call you can find them in the Investor Relations section of our website at Www Dot Quaker Hell Dotcom.

Great deals change so were all the 2020 was elevated my team has done that for.

For us our top priority is and has been protect the health and safety of our employees and our customers, while ensuring our business continuity to meet our customers' requirements all of our 34 plants around the world are operating and we are satisfying all of our customer needs I am very proud of what the Quaker how the team has done to continue.

Waste and service our customers as well to continue our integration efforts, which are going well.

We are pleased with our results for the third quarter when considering we were coming from such a weak second quarter overall, our sales were up sequentially, 28% from the second quarter and down 5% from the third quarter last year on a pro forma basis.

Let me now give you a little more flavor on what we experienced by segment or region.

First as we look sequentially the Americas saw the largest quarterly net sales improvement as sales grew 48% sequentially driven primarily by stronger volumes.

A similar story occurred in Asia Pacific Amelia and our global specialty businesses, where volume improvement drove net sales increases of 24%, 21% and 16% respectively compared to the second quarter. So.

So we saw good sequential improvement in all business segments.

Another way indicates a sequential quarterly sales trial is to look at what happened in our three main customer industry groups local basis.

Metalworking increased the most and grew 39% sequentially for the second quarter due primarily to automotive OEM related suppliers coming back from the cool pool, all shutdowns or significantly reduced production rates in the second quarter due to cope with it.

Our other industry groups of metals and global specialty businesses also increased and showed growth of 21% and 16% respectively.

These different cuts of our significant.

Sequential sales increases helped provide insight to what was happening in the quarter.

So overall, our sequential volumes were up 27%.

What our pro forma volumes were still down versus last year by approximately 10% when excluding the positive impact of Norrman head, which we acquired last October.

This approximate 10% decline was felt in all regions and segments.

However, Asia Pacific was less impacted since China actually show modest year over year growth.

I also want to point out that we did continue to take market share. Despite the weakness in our end markets. As our continued analysis shows that we have total organic sales growth due to net share gains of approximately 2% in this quarter versus the third quarter of last year.

I'm very pleased to see the strong rebound from last quarter, but we're certainly not all the way back.

As we said previously we estimate will take at least two more years for our markets to fully retire and some markets like aerospace, which makes up about 3% of ourselves will take more time than that.

However, we expect our sales to rebound more quickly due to our projected continued market share gains as well as our potential smaller bolt on acquisitions in the future that we may make.

It's certainly gross margins for the third quarter, they were up significantly compared to both the second quarter and to last year.

Sequential increase is primarily due to higher volumes and its impact on the fixed portion of our manufacturing costs.

The increase from last year was primarily due to the realization of our manufacturing and raw material cost synergy savings.

This pandemic and its impacts have been similar in many ways. What we went through it in late 2000 and they just like then we took fast action to save costs in numerous ways.

Essentially all discretionary expenses have been eliminated we stop new hires where possible some positions were furloughed and our planned capital expenditures have been cut by over 30%.

And from a very importantly, we reviewed our integration synergy plan in light of the situation and took additional actions as well as accelerated other synergies where possible.

This has led to additional cost synergies as we have increased our guidance on synergy achievement again this quarter for 2020, our current estimate is $58 million of cost synergies achieved versus our earlier estimate of 53 million.

Also the total synergies we estimate that we will achieve in 2020 months had been raised from $65 million to $75 million with 22, reaching 80 million.

In this quarter, we achieved 17 million in synergies and we expect sequential improvement during our future quarters.

So overall, we are pleased with the quarter given the environment in which we were operating it and live work and we did see significant sequential improvement in our sales gross margins adjusted EBITDA.

Also our cash flow is very strong and our net debt decreased by 7% or $58 million.

The positive cash flow nature of our business. We're in severe downturns is something we have discussed with investors in the past.

And we're now seeing its positive impacts again in these tough times.

Looking ahead, we anticipate that throughout the next year or two our markets will show gradual sequential improvement.

However, it's hard to predict that improvement by quarter, given the continued uncertainty in our operating environment.

For the fourth quarter, we expect our adjusted EBITDA to be in the ballpark of the third quarter.

And for the full year, we expect our adjusted EBITDA to exceed $215 million.

Overall, our higher expected synergies additional cost saving actions and improvement in our product margins at our cash flow management are expected to continue to help us. During this period of time, when our markets are down versus pre cobot levels.

As we look forward to 2021, we expect our adjusted EBITDA to increase by 20 plus percent as we continue our integration savings take market share in the marketplace and benefit from an expected gradual rebound in demand.

In closing I want to thank all of our colleagues at Quaker House, whose dedication and expertise helps to create the value for our customers and shareholders and differentiate us in the marketplace I'm. So proud of how our team has performed in servicing our customers meeting their needs and successfully continue.

For integration execution, which is both critical and difficult for us this year.

People are everything in our business and by far our most valuable asset and ensuring their safety and wellbeing is and will continue to be a top priority for us.

I'm proud of and very happy with our Quaker happened team and what we have and we will be able to accomplish for our customers and investors, both now and going forward.

And that concludes my prepared remarks, I'll now hand, it over to Mary So that she can review some of the key financials for you for the quarter Aaron.

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 uncertainty, which may cause actual results to differ materially.

For a discussion of these risks. Please review the cautionary statements regarding forward looking statements included in our earnings release and in our 2019 form 10-K filed with the SEC. These are available on our website. Please.

Please also note that we continue to update our risk factors in our form 10-Q to address the evolving COVID-19 related issues and these risk factors should be reviewed along with other than our 2019 form 10-K.

In our press release and this presentation, we provided certain information, including non-GAAP earnings.

Per deluded 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 the companys core operations, excluding certain items, which we believe do not reflect our core operating performance reconciliations are provided in.

The appendix of this investor Dock.

In this review our comparison period show actual and non-GAAP results.

Well its pro forma sales and pro forma adjusted EBITDA, that's definitely been combined with Houghton throughout the period presented remember that we closed the combination on August Onest 2019, So our actual reported and non-GAAP Q3 2019 results include only two months and how.

Please see slide six through 10 now while I review some highlights.

As Mike noted, we saw sales rebound to 367 million in the third quarter, a 28% from 286 million in Q2, but still down 5% from pro forma Q3, 2019 sales of 386 million due primarily to lower volumes as a result of COVID-19, our gross.

Just a 38.2% is up significantly from a gross margin of 34% in Q2 and 32.3% in Q3 of last year, which we estimate would have been about 35.5%. Excluding a purchase accounting adjustment. We also saw a benefit to our growth.

Margin this quarter that we estimated approximately 2.5%, which we attribute to price mix that we believe was unique to the quarter you might remember on our last call that I commented that we expected the benefits of our procurement synergies and manufacturing optimization to be more visible in Bali.

James pick up and this is what you see coming through as part of our sequential improvement. In addition, our cost synergies in these areas continue to increase as reflected in our updated cost synergy estimates.

Our non-GAAP operating income of 43.2 million rebounded significantly from Q2's 11.2 million and it's also up 25% from 34.5 million in Q3 of last year, primarily due to the addition of how an enormous okay and the benefits of realized cost synergy.

Partially offset by the negative impact of Cove at 19 similar.

Similarly, our non-GAAP EPS of $1.56 is up significantly from Q2 to 21 cents. While it is flat to last year as a result of the additional shares issued at close of the combination.

Our effective tax rate in the current quarter was an expense of 8.1% versus a benefit of 27.6% in Q3 of last year, we've seen significant volatility in our quarterly effective tax rates due to cope in 19 related changes in profitability as well as continued.

The update to the 2017 tax law.

Excluding the impact of all unusual items, we estimate that our Q3 effective tax rates would have been approximately 24% and 20% for 2020 and 2019, respectively.

For the full year, we expect our effective tax rate, excluding all unusual items will be in the range of 23% to 25%.

As Mike mentioned earlier, we are pleased to see our adjusted EBITDA almost doubled to approximately 64 million in Q3 from the Q2 level of approximately 32 million and increased approximately 5% compared to our pro forma adjusted EBITDA of 61 million in Q3 of last year.

This is due primarily to the benefits of our realized cost synergies in the quarter and the inclusion of Norman high more than offsetting the negative impact of coated 90.

Another bright spot in the quarter was our cash flow as we discussed on our last call because our business is so asset light with most of our investment in working capital versus property plant and equipment. When we experience a major downturn in volumes, we expect to see significant positive cash flow from release.

He has been working capital Indeed, we saw this in both Q2 and Q3 and are pleased to report that our year to date operating cash flow more than tripled versus last year to 112 million. In addition, our low capital intensity allows us flexibility with our capital spending.

And consistent with our Q2 call we're on pace to reduce our capex by more than 30% versus our original pre co. The estimates.

As a result of our strong cash flow, we were able to reduce net debt by 58 million.

7% reduction from Q2 this improves our leverage ratio to 3.4 times from 3.7 times at the end of June and our bank calculated leverage at the end of Q3 was about 2.9 times versus our covenant maximum of 4.25.

In short our liquidity and leverage showed good improvement from our already solid levels.

In addition, as Mike noted before.

We further increased our estimates of the expected combination cost synergies.

$53 million to 58 million and 2020 from $65 million to $75 million in 2021 and from 75 to 80 million in 2022 in summary, our track record of navigating successfully through tough economic environment by gaining share.

Disciplined cost management and generating good cash flow during major downturns, all give us confidence in our ability to weather. The current challenges. This strong core operating performance is further enhanced by the cost synergies. We are realizing from the combination and were seeing the meaningful impact.

Back to the.

Hi synergies have on our financial performance in 2021, as Mike mentioned, we expect to see a greater than 20% increase in adjusted EBITDA.

Finally, we believe the company is well positioned to leverage the expected.

Swing in business activity. Thank you all for your interest in Quaker House, and now I'll turn it back over to you Mike.

Thank you Mary will now open it up for questions.

Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation still indicate your line is in the Quechee Q.

Press Star two if he would like to remove your question from like you and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys.

Our first question is from Mike Harrison with Seaport Global Securities. Please proceed.

Hi, good morning.

Good morning, My morning, Congratulations on a nice quarter, a and I hope they are counting your balance sheet as we speak.

[laughter] thick. They were I was wondering if you can talk a little bit about what's driving the confidence in your 2021.

EBITDA outlook, obviously, you increase the synergy assumptions and that's contributing but what so what are you assuming around the rate of recovery in some of your key markets and I guess what are your thoughts on the potential impact of the second coated waves.

Sure Yeah, it's hard to know obviously.

Obviously exactly what.

A second so the way, we will do and what the Lockdown set are going down in Europe, and how they will impact some things we were basing our [noise] 20.

20, plus percent kind of increase on really just a gradual increase from where we kind of are today in our markets.

Where we expect on top of that and continue to get.

Our market share gains in that the two or you know over a percent.

Like we normally get.

But you know we what we hopefully we will not have a similar and says that we had in the second quarter of this year, which is a pretty severe drop and so.

So is it kind of eliminate that have thought a gradual improvement in your markets have continued with our synergy achievements.

You kind of do the math on that is that but you're right I mean, it if something else happens from a covert perspective in the world lots down again.

And becomes worse than maybe what projections are for autos of steel, though you know that.

That could impact that but this is just based on what our best estimates at this time.

All right and then one of the ask about the steel business. So we've seen a little bit of consolidation and with Cleveland cliffs, and AK steel as well as ours, a little bit told to U.S. such a.

Can you talk about what their consolidation means for your steel business.

Both of those customers.

Our rubbery.

Significant customers to us.

In some ways it switches that probably will switch our largest customer for me in Arcelormittal too.

You know the AK steel here for the close group.

So.

But.

But essentially we don't expect to see any.

Difference, we have very strong relationships with those customers and we don't anticipate any.

Impact on our business because of that.

But wanted to ask about the the Americas business. It really seems like the margin performance. There was a lot stronger than ER than what we were anticipating and obviously a a massive improvement on a year over year.

Basis can.

Can you give us maybe a little bit more color about what drove that margin strength, particularly in the Americas.

The Americas.

We have I would say.

At this proportionate amount of.

Raw material savings, you know, our raw material savings ever achieving.

Or disproportionately more and more of it in the Americas than in other regions or business segments. So that.

That's one aspect.

We also had a.

We are doing our manufacturing consolidations weve been pretty.

It conservative are showing or you know ensuring that we don't disrupt supply. So we we have taken it.

These shutdowns and while that make sure we planned them properly and transition materials and so forth before the shutdown of certain flat most of those.

Shutdowns happens in the first wave of manufacturing consolidation really happened then.

Late in the second quarter.

In the course of the Americas, we saw some of that too, but that's really everywhere around the world basically, but when you add those two impacts together I think it's you just see tend to see more of it in the gross margin area of Americas and other places.

Right and then last question for me for now is just a clarification on the EBITDA guidance, you're talking that Q4, EBITDA should look similar to Q3, which was 64 million by my math that would put you above 220 million for the full year and your guide.

Moving to more than 250, and I'm I'm aware that to 20 or more than 215, but just wondering should we be looking for Q4 to be more like high fiftys than the 64 million you did in Q3 or do you feel like it exceeds six before.

I think it's I think that's just reflective of and somebody's, maybe our conservative nature, but also the uncertainty that we see in the in the marketplace right now.

For example, here, we have though we're having locked else take place and ER.

In Europe now how that eventually impact into that for example make.

Some of the seasonality impact that we see at the end of the year be more extended or where customers may shutdown, we don't know yet so.

So I think it's just it's just kind of reflective of the uncertainty in there, but we were trying to at least give you kind.

Kind of a range of where things go fallout.

Understood all right. Thanks very much thank.

Thank you Mike.

Our next question is from Laurence Alexander with Jefferies. Please proceed.

Hey, guys its Dan Rizzo on Florence, how are you.

Good morning, Dan.

Have you guys identified any heightened revenue synergies, yet and I missed it I mean is there any any kind of any throw any anything out there on that.

Yes, we are we are getting synergies, we havent really pointed them out.

Quantified them and and per se, but when I when I do say that that we are getting that market share gains of.

2%.

This quarter versus let's say the third quarter of last year part of that is due to the the cost synergies that we're achieving another call centers as the sales synergies that that we're achieving.

Due to the combination.

Okay. That's helpful and then I'm on the the cost synergies in a temporary cost reductions okay. Well I was wondering how much of the temporary cost reductions will be coming back next year, and when and how much that will be offsetting.

Well that'll will set the synergies you're looking for from out and just from general productivity.

Sure and that's that's a great question and I think a lot of that will probably be depend upon.

How quick a code that goes away you know for example, right now it's very difficult for us to travel a lot and so we do expect you know for example, especially in the second half of the year, hopefully getting back to a more normal situation last year, but.

So some will come back and we hope that when I guess, when I've mentioned about our EBITDA being Oh 20, plus percent next year that kind of takes into account the.

As those things that you have not only the additional synergies, but also takes and they get out of some additional costs that are come back just because of a fall getting back hopefully to a more normal business environment.

No I can certainly I would say hey, Dan let me chime in there if I could just add to that so when we talk about increasing the cost synergy as demand that is the only permanent what we view as permanent costs included in that so.

Any any temporary cost reductions as Mike mentioned, we've attempted to factor into the overall adjusted EBITDA guidance.

Okay, Alright, thank you very much.

Thanks, Pat as a reminder, this star one any telephone keypad. If you would like to ask a question. Our next question is from Jon Tanwanteng with CJS Securities. Please proceed.

Hi, good morning, and congratulations on the quarter like Martin Johnson.

Good morning, I may have missed this but I was wondering did you give any specific color on you know.

Real time demand in October and then heading into November as these cases spike in lockdown come in and you know if you've given you any specific cushion for yourselves and your guidance for Q4 and maybe early in next year is that as we went through with it.

I think.

You know I I guess, we did not comment specifically on October I mean, I think it's things are progressing like we expect it to be a to me again as I kind of mentioned in the previous question that was asked.

That that to me is more wildcard is or is not necessary December or November that'd be more oh, sorry, I've covered the November it's going to be more of a December issue and if something happen. There. So I think I do think our Uh huh.

Guidance that we mentioned you know has it has a range of that that data indicates that one park December could be weaker and that would be something closer to you know that that to 15 kind of number that we talked about it talks about the benefits if it's not and we continue to progress and things are.

Let's say more normal than it could it could be higher than that.

Got it that's helpful Amendment a question for Mary.

You're saying up what kind of cash you know that kind of a function of your business model I'm. Just wondering if any of that reverses out of the business recovers you have to put more into working capital how should we think about cash flow going forward, we've got as the contracts.

Sure and you know to typical working capital dynamics as sales continue to pick up obviously, the receivables will follow but you know where were also showing good inventory management and overall.

Oh, good working capital management. So you know when we look at that on a percent of sales basis. A again, we believe we will continue to manage that prudently and while we would expect not true you know that as business really begins to pick up that will be in that.

Thing in working capital as opposed to releasing cash from working capital.

We would still expect to see good positive cash flow and earnings pick up you know corresponding to to the sales and volume pick up.

Okay Fair enough and then last one for Mike.

You've been delivering on these higher and higher synergies up roughly about every six months or so I mean, where are they all coming from you know it. It does that will go to run out should we be expecting more as you will dive deeper into the businesses, especially you can travel more between locations and just pick back up.

Sure.

So I I think initially there were kind of two major drivers.

Well you know we had.

Early on we are.

You know the raw material synergies and some of the supply chain synergies were weren't able to be identified as good in the planning effort just because we had to operate in a clean room environment. Then then we saw that they were going to be greater as we got into the actual execution of those.

And then what do you I think what you're seeing out more [laughter] more recently is that an acceleration of putting our synergies and some place.

So you know he even it take what we have today and you say 17 million this quarter multiply by four you know rather 68 million kind of run rate with that so I think it's just showing that we're accelerating faster than we had and then the other element in here too is Uh huh.

Is that Weve, when we as we move through.

The coated situation that hit US you know starting in March April timeframe, we kind of re looked at a few things in light of the situation in light of.

And learning about that is it being in the within the combination in the first nine months and and then decided to maybe even some additional changes as well. So I think it's a combination of those things that have caused it to to increase.

Okay. We do have a follow up from Mike Harrison with Seaport Global Securities. Please go ahead.

[noise] hi.

Just a couple of questions on maybe digging into some of your end markets can you talk a little more about your aerospace exposure I know you have the chemical milling baskins business within global specialty but is there exposure.

In other products or other regions, where you would consider to be a aerospace and then as bad 'cause. It all commercial there's there's some military or business jet and then how much of that is is.

Maintenance versus new aircraft production.

Yes.

So yeah. Most of what was you know I'd say the majority vast majority of what we do is new rather than make has.

And you're right that the Mascus business is certainly a significant part of it for new aircraft goals, but we also do have.

We're in a metalworking fluids that get used in ER and the production of new aircraft as well. Okay. You know predominantly in a in U.S. and you were.

So overall all those things have been impacted right now we're looking at the aerospace being a roughly around 3% of our sales are and we don't really see much.

Ben you know potential increase a are in that particular market for a while you know that you know I said the other markets will come back probably over the next one to two years I think it will take much longer for aerospace to come up with that kind of gives you a magnitude, but you know I think what we're saying at experis.

Seeing right now.

You know is a is probably towards the bottom of that market at.

At this point.

Yes.

Right and then over on the the tube and pipe business.

Is that something that just remains weak until oil and gas activity improves or have you seen some pick up there.

[noise] Yeah, we have it's it's a it's been neat.

And probably and I.

You know I always say, it's weaker now than it was a you know in the past certainly just because of the oil situation, but oh, we have if we have seen some positives in the business as well recently, but we're certainly closer to a low point at this point given where oil is.

All right and then last a wanted to ask about the Canning business. We're hearing that there are shortages, a and a lot of those can producers are running flat out to meet demand, they're talking about adding capacity or are there things that you're doing to help those customers work harder.

Does it mean that they're using higher end products from you guys or are they just using more of them, but if they're running at a 100% capacity.

Yeah, I think you know in general of course, what our products tried to do is is make our.

Ah customers' processes more efficient and productive so so but I would say in general I don't know if there's been a major changes in that I think we've we've seen benefits in our business over the past couple of years, we've been taking share in that business because of our products.

And our customers are operating pretty much flat out at this point. So I agree with your assessment on that and I think it's just going to be a matter of time as they try to put on more capacity over time than that that should help our business as well.

All right thanks very much.

Thanks, Mike.

[noise], we have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.

Okay. Given there are no other questions. We will end our conference call now and I want to thank all of you for your interest today. Our next conference call for the fourth quarter will be in late February or early March of 2021, and if you have any questions in the meantime, please feel free to reach out and Mary or myself. Thanks.

Again for your interest in Quaker Huh.

Thank you. This does conclude today's conference and thank you for your participation and have a wonderful day.

[noise].

HM.

[noise] Hmm.

[music].

Greetings Sleeker welcome to Quaker how in the third quarter 2020 investor call.

At this time all participants are no listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operators. This is during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

I'll now turn the conference over to Michael Barry Chairman CEO and President. Thank you you may begin.

Good morning, everyone.

Joining me today are Mary Har CFO, Robert crop, our general counsel and Shane hosts that are head of finance and Chief Accounting Officer, we have slides for our conference call you can find them in the Investor Relations section of our web site at Www Dot Quaker Howden dotcom.

Great deals changes over all the 2020 with the Cove at my team has done that for US our top priority is and has been protect the health and safety of our employees and our customers, while ensuring our business continuity to meet our customers' requirements.

All of our 34 class around the world are operating and we are satisfying all of our customer needs I am very proud of what the Quaker how the team has done to continuing to service our customers as well to continue our integration efforts, which are going well.

Let me now give you a little more flavor on what we experienced by segment or region.

First as we look sequentially the Americas saw the largest quarterly net sales improvement at sales grew 48% sequentially driven primarily by stronger volumes.

A similar story occurred in Asia Pacific on that and our global specialty businesses, where volume improvement drove net sales increases of 24%, 21% and 16% respectively compared to the second quarter. So.

So we saw good sequential improvement in all business segments.

Another way to indicates a sequentially quarterly sales price is to look at what happened in our three main customer industry groups on a global basis.

Metal working to increase the most and grew to 39% sequentially from the second quarter due primarily to automotive OEM and related suppliers coming back from the pool for all shutdowns or significantly reduced production rates in the second quarter due to cope with it.

Our other industry groups of metals and global specialty businesses also increased and showed growth of 21% and 16% respectively I.

I hope these different cuts of Arsone that forget a sequential sales increases helped provide insight to what was happening in the quarter.

So overall, our sequential volumes were up 27%.

At our pro forma volumes were still down versus last year by approximately 10% when excluding the positive impact of norm. It had which we acquired last October.

This approximate 10% decline was felt in all regions and segments.

However, Asia Pacific was less impacted since China actually show modest year over year growth.

I am very pleased to see the strong rebound from last quarter, but we're certainly not all the way back.

As we said previously we estimate will take at least two more years for our markets to fully retire at some markets like aerospace, which makes up about 3% of ourselves will take more time than that however, we expect ourselves to rebound work quickly due to our projected continued market share gains as well as our potential small.

Our bolt on acquisitions in the future that we may make.

Let's turn to gross margins for the third quarter, they were up significantly compared to both the second quarter and to last year.

The sequential increase is primarily due to higher volumes and its impact on the fixed portion of our manufacturing costs.

The increase from last year was primarily due to the realization of our manufacturing and raw material cost synergy savings.

This pandemic and its impacts have been similar in many ways. What we went through it in late 2000, and they just like that we took fast action to save costs in numerous ways essentially all discretionary expenses have been eliminated we stopped new hires where possible some positions were furloughed and our planned capital spending.

Sure isn't a cut by over 30%.

And from a very importantly, we reviewed our integration synergy slab in light of the situation and took additional actions as well as accelerated other synergies where possible.

This has led to additional cost synergies as we have increased our guidance one synergy achievement again this quarter for 2020, our current estimate is $58 million of cost synergies achieved versus our earlier estimate of 53 million.

Also the total synergies we estimate that we will achieve in 2020 months had been raised from $65 million to 75 million, we have 22, reaching 80 million.

In this quarter, we achieved 17 million in synergies and we expect sequential improvement during our feature quarters.

Also our cash flow is very strong and our net debt decreased by 7% or 58 million.

The positive cash flow nature of our business, whereas severe downturns is something we have discussed with investors in the past.

And we're now seeing as positive impacts again in these tough times.

Looking ahead, we anticipate that throughout the next year or two our markets will show gradual sequential improvement.

However, it's hard to predict that improve that by quarter given the continued uncertainty in our operating environment.

For the fourth quarter, we expect our adjusted EBITDA to be in the ballpark of the third quarter end.

For the full year, we expect our adjusted EBITDA to exceed $215 million.

Overall, our higher expected synergies additional cost saving actions and improvement in our product margins and our cash flow management are expected to continue to help us. During this period of time, what our markets are down now versus pre cobot levels.

In closing I want to thank all of our colleagues at Quaker had to syndication and expertise helps to create the value for our customers and shareholders and differentiate us in the marketplace I'm. So proud of how our team has performed in servicing our customers meeting their needs and successfully continue.

For integration execution, which is so critical and it's difficult for us this year Pete.

People are everything in our business and by far our most valuable asset and ensuring their safety and wellbeing is and will continue to be a top priority for us.

I am proud of and very happy with our quicker how the team and what we have and we'll be able to accomplish for our customers and investors, both now and going forward.

And that concludes my prepared remarks, I'll now hand, it over to Mary So that she can review some of the key financials for you for the quarter error.

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 to differ materially poor.

Discussion of these risks. Please review the cautionary statements regarding forward looking statements included in our earnings release and in our 2019 form 10-K filed with the SEC. These are available on our website. Please.

Please also note that we continue to update our risk factors in our form 10-Q to address the evolving 'cause it 19 related issues and these risk factors should be reviewed along with other than our 2019 form 10-K.

In our press release and in his presentation, we provided certain information, including non-GAAP earnings.

The appendix of this investor Dock.

In this review our comparison period show actual and non-GAAP results as well as pro forma sales and pro forma adjusted EBITDA, that's definitely been combined with Houghton throughout the periods presented remember that we closed the combination on August Onest 2019, So our actual reported and non-GAAP.

Q3, 2019 results include only two months of how.

Please see slide six through 10 now while I review some highlights.

As Mike noted, we toss sales rebound to 367 million in the third quarter up 28% from 286 million in Q2, but still down 5% from pro forma Q3, 2019 sales a 386 million due primarily to lower volumes as a result of Cove in 19, our gross margin.

In a 38.2% is up significantly from a gross margin of 34% in Q2 and 32.3% in Q3 of last year, which we estimate would have been about 35.5% excluding a purchase accounting adjustment. We also saw a benefit to our gross.

Margin this quarter that we estimated approximately 2.5%, which we attribute to price mix that we believe was unique to the quarter.

You might remember on our last call that I commented that we expected the benefits of our procurement synergies and manufacturing optimization to be more visible as volumes pick up and this is what you see coming through as part of our sequential improvement. In addition, our cost synergies in these areas continue to increase.

As reflected in our updated cost synergy estimates.

Our non-GAAP operating income of 43.2 million rebounded significantly from Q2's 11.2 million and it's also up 25% from 34.5 million in Q3 of last year, primarily due to the addition of housing in Norman Hale and the benefits of realized cost synergies.

Partially offset by the negative impact of COVID-19 similar.

Similarly, our non-GAAP EPS was $1.56 is up significantly from Q2 to 21 cents.

While it is flat to last year as a result of the additional shares issued at close of the combination.

Our effective tax rate in the current quarter was an expense of 8.1% versus a benefit of 27.6% in Q3 of last year, we've seen significant volatility in our quarterly effective tax rates due to cold in 19 related changes in profitability as well as continue.

The update to the 2017 tax law, excluding the impact of all unusual items, we estimate that our Q3 effective tax rates would've been approximately 24% and 20% for 2020 and 2019, respectively.

For the full year, we expect our effective tax rate, excluding all unusual items will be in the range of 23% to 25%.

This is due primarily to the benefits of our realized cost synergies in the quarter and the inclusion of Norman high more than offsetting the negative impact of Cove at nine he.

Another bright spot in the quarter was our cash flow.

As we discussed in our last call because our business is so asset light with most of our investment in working capital versus property plant and equipment. When we experience a major downturn in volumes, we expect to see significant positive cash flow from releases in working capital. Indeed, we saw this in both.

Q2, and Q3 and are pleased to report that our year to date operating cash flow more than tripled versus last year to 112 million. In addition, our low capital intensity allows us flexibility with our capital spending and consistent with our Q2 call we're on pace to reach.

Newstar capex by more than 30% versus our original pre cover the estimates.

As a result of our strong cash flow, we were able to reduce net debt I 58 million a 7% reduction from Q2. This improves our leverage ratio to 3.4 times from 3.7 times at the end of June and our bank calculated leverage at the end of Q3 was about two.

0.9 times versus our covenant maximum of 4.25 in short our liquidity and leverage showed good improvement from already solid levels.

In addition, as Mike noted <unk> <unk> <unk>.

Further increased our estimates of the expected combination cost synergies from that.

33 million to 58 million and 2020 from 65 to 75 million and 2021 and from 75.5 to 80 million in 2020 Chill in summary, our track record of navigating successfully through a tough economic environment by gaining share there.

The plan cost management and generating good cash flow during major downturns, all give us confidence in our ability to weather. The current challenges. This strong core operating performance is further enhanced by the cost synergies. We are realizing from the combination and were seeing the meaningful impact.

Oh.

Hi synergies have on our financial performance in 2021, as Mike mentioned, we expect to see a greater than 20% increase in adjusted EBITDA.

Finally, we believe the company is well positioned to leverage the expected upswing in business activity. Thank you all for your interest in Quaker House, and now I will turn it back over to you Mike.

Thank you Mary will now open it up for questions.

Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation still indicate your line is in the question queue.

Press Star two if you would like to remove your question from like you and for participants using speaker equipment may be necessary to pick up the handset before pressing the star tease out.

Our first question is from Mike Harrison with Seaport Global Securities. Please proceed.

Hi, good morning.

Morning, Mike Good morning, Congratulations on a nice quarter, a and I hope, they're counting your balance sheet as we speak.

[laughter] thick. They were I was wondering if you can talk a little bit about what's driving the confidence in your 2021.

Sure Yeah, it's hard to know obviously exactly what.

A second so that way, we will do and what the Lockdown set are going down in Europe, and how they will impact things. We were you know we're basing our [noise] 20.

20, plus percent kind of increase.

Really just a gradual increase from where we kind of ARCC today in our markets.

Where we expect on top of that to continue to get.

Our market share gains in that the two or you know over a percent.

Like we normally get.

But you know, we what we hopefully who will not have a similar and says that we had in the second quarter of this year, which is a pretty severe drop and so it kind of eliminate that have thought a gradual improvement in your markets have continued with our synergy achievements.

I do the math on that it is.

But you're right I mean, it if something else happens from a color perspective in the world locked out again.

And becomes worse than maybe what projections are for auto steel though.

That that could impact that but this is just based on what our best estimate at this time.

Alright, and then what are they ask about the steel business. So we've seen a little bit of consolidation or with Cleveland cliffs, and AK steel as well as ours, a little bit tall to U.S. subs or can you talk about what their consolidation means for your steel business.

Both of those customers are are are very.

Significant customers to us.

In some ways it switches that probably will switch our largest customer for me in our celebrities out too.

You know the AK steel group or the close group so but.

But essentially we don't expect to see any.

Differently, a very strong relationships with those customers and we don't anticipate any.

Impact on our business because of that.

Hmm Wonder.

Wanted to ask about the the Americas business. It really seems like the margin performance. There was a lot stronger than than what we were anticipating and obviously a a massive improvement on a year over year basis too.

Can you give us maybe a little bit more color about what drove that margin strength, particularly in the Americas.

The Americas.

We have I would say.

At this proportionate amount of.

Raw material savings, you know, our raw material savings ever achieving.

Or disproportionate more and more of it in the Americas that in other regions or business segments. So that.

That's one aspect.

We also had or we are doing our manufacturing consolidation is we've been pretty.

Uh huh.

Conservative her shirt or you know ensuring that we don't disrupt supplies that we we have taken it.

These shutdowns.

And while that make sure we planned them properly and transition materials and so forth before the shutdown of certain flat most of those shutdowns happens in the first wave of manufacturing consolidation really happened then.

Late in the second quarter.

And of course in Americas, we saw some of that too, but that's really everywhere around the world basically, but when you add those two impacts together I think it's you just see tend to see more of it than the gross margin area of Americas and other places.

All right and then last question for me for now is just a clarification on the EBITDA guidance, you're talking the Q4 EBITDA should look similar to Q3, which was 64 million by my math that would put you above 220 million for the full year and your guide.

Moving to more than 215, I'm I'm aware that to 20 more than 215, but just wondering should should we be looking for Q4 to be more like high fiftys than the 64 million you did in Q3 or do you feel like it exceeds six before.

I think it's I think it's just reflective of and somebody is maybe our conservative nature, but also the uncertainty that we see in the in the marketplace right now.

For example, here, we haven't we're having locked else take place and ER in Europe now how will that eventually in passing through that for example make.

Some of the seasonality impact that we see at the end of the year it'd be more extended or customers may shutdown, we don't know yet so.

So I think it's just it's just kind of reflective of the uncertainty in there, but we were trying to at least give you kind.

Kind of a range of where things go fallout.

Understood all right. Thanks very much thank.

Thank you Mike.

Our next question is from Laurence Alexander with Jefferies. Please proceed.

Hey, guys its Dan Rizzo on Florence, how are you.

Good morning, Dan.

Have you guys identified any how about revenue synergies, yet and I missed it I mean is there any any kind of any throw any anything out there on that.

Yes, we are we are getting a synergy we have a really pointed them out.

Quantified them and and per se, but when I when I do say that that we are getting that market share gains of 2%.

This quarter versus let's say the third quarter of last year part of that is due to the the cost synergies that we're achieving that another cost synergies the sales synergies that that we're achieving a due to the combination.

Okay.

That's helpful and then I'm on the the cost synergies in a temporary cost reductions okay, well I was wondering what how much of the temporary cost reductions will be coming back next year, and when and how we shall be offsetting well home.

Well that will set the synergies you're looking for from out in there just from general productivity.

Sure. That's a great question and I I think a lot of that will probably be dependent upon how quick a code that goes away. You know for example, right now it's very difficult for us to travel a lot and so we do expect you know for example, especially in the second half of the year.

Sure hopefully getting back to a more normal situation next year, but.

So some will come back.

We hope that when life, what I've mentioned about our EBITDA being Oh 20, plus percent next year that kind of takes into account those those things that you know not only the additional synergies, but also takes into account. Some additional costs that are come back just because of a fall getting back.

Lead to a more normal business environment.

No it correctly it looks like Hey, Dan Let me chime in there if I could just add to that so when we talk about increasing the cost synergy estimates that is the only permanent what we view as permanent costs included in that so you know any any temper.

Very cost reductions as Mike mentioned, we've attempted to factor into the overall adjusted EBITDA guidance.

Thank you very much.

[noise] success as a reminder, this star one any telephone keypad, if he would like to ask a question. Our next question is from Jon Tanwanteng with CJS Securities. Please proceed.

Hi, good morning, and congratulations on the quarter like Morningstar, Inc.

Good morning, I may have missed it but I was wondering did you give any specific color on you know real time demand in October and then heading into November as these cases spike in lockdown come in and you know if you've given any specific coalition for yourselves and the guidance for Q4 and maybe early next year as as as we run through the incident.

I think.

More Oh I'm, sorry, I'll cover the November is going to be more of a December issue and if something happened. There. So I think I do think our.

Guidance that we mentioned.

Has it has a range at that data indicates that one park December could be weak or that would be something closer to you know that that to 15 cut a number that we talked about talked about and then if it's if it's not and we continue to progress and things are.

Well, let's say more normal than it could it could be higher than that.

Got it that's helpful Amendment no question for Mary you.

Sure and you know to typical working capital dynamics, a AD sales continue to pick up obviously the receivables will follow but you know where were also showing good inventory management and overall.

Oh, good working capital management. So you know when we look at that on a percent of sales basis again, we believe we will continue to manage that prudently and while we would expect not true.

You know that as business really begins to pick up that will be investing in in working capital as opposed to releasing cash from working capital.

We would still expect to see good positive cash flow and earnings pick up you know corresponding to to the sales and volume pick up.

Okay Fair enough and then my last one for Mike you've been delivering on these higher and higher synergies up roughly about every six months or so I mean, where are they all kind of saying you know what it is that well go to run out should we be expecting more it you will dive deeper into the businesses, especially in travel more between locations and just pick back up.

Sure.

So I I think initially there were kind of two major drivers.

Well you know we had.

Early on we are you.

The raw material synergies or some of the supply chain synergies werent able to be identified as good in the planning effort just because we had to operate in a clean room environment. Then then we saw that they were going to be greater as we got into the actual execution of those.

And then what do you I think what you're seeing out more [laughter] more recently is that an acceleration of our putting our synergies into place. So you don't even think it take what we have today and you say 17 million this quarter multiply by four you know rather 68 million.

Kind of run rate with that so I think it's just showing that we're accelerating faster than we had and then the other element in here too is.

Is that we've you know when we as we move through.

The Cove is a situation that hit us starting in the March April timeframe, we kind of re looked at a few things in life as a situation in light of.

And.

Okay. We do have a follow up from Mike Harrison with Seaport Global Securities. Please go ahead.

[noise] hi.

Just a couple of questions on maybe digging into some of your end markets can you talk a little more about your aerospace exposure I know you have the chemical milling mass business within global specialty but is there exposure.

In other products or other regions, where you would consider to be a aerospace and then as bad because it all commercial there's there's some military your business jet and then how much of that is.

Maintenance versus new aircraft production.

Yes.

So yeah most of what you know I'd say the majority vast majority of what we do is new rather than they have and you're right that the mascus business is certainly a significant part of it for new aircraft models, but we also do have.

We're in a metalworking fluids that get used and Oh the.

Production of numeric craft as well, okay predominantly in a in U.S. and you were.

So overall all those things have been impacted right now we're looking at the aerospace being a roughly around 3% of our self.

Yeah, we don't really see much.

That you know potential increase they are in that particular market for a while you know that you know I said the other markets will come back probably over the next one to two years I think it will take much longer for aerospace to come up with that kind of gives you a magnitude, but you know I think what we're saying Alex Paris.

Seeing right now.

As you know is a is probably towards the bottom of that market.

At this point.

Yeah.

Right and then over on the the tube and pipe business or is there something that just remains weak until oil and gas activity improves or have you seen some pick up there.

[noise] Yeah, we have it's it's a it's been weak.

And probably at <unk>.

You know I always say, it's weaker now than it was a you know in the past.

Certainly just because of the oil situation, but.

We have if we have seen some positives in the business as well recently, but we're certainly closer to a low point at this point given where oil is.

All right and then last Ah I wanted to ask about the Canning business. We're hearing that there are shortages.

And a lot of those can producers are running flat out to meet demand, they're talking about adding capacity.

Are there things that you're doing to help those customers harder or does it mean that they're using higher end products from you guys or are they just using more of them, but if they're running it.

100% capacity.

Yeah, I think you know in general of course, what our products try to do it as make bar.

Ah customers' processes more efficient and productive so so but I would say in general I don't know if there's been a major changes on that I think we've we've seen benefits in our business over the past couple of years, we've been taking share in that business because of our products.

All right thanks very much.

Thanks, Mike.

[noise], we have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.

Okay. Given there are no other questions. We will end our conference call now and I want to thank all of you for your interest today. Our next conference call for the fourth quarter will be in late February or early March shows 2021, and if you have any questions in the meantime, please feel free to reach out and Mary or myself. Thanks.

Again for your interest in Quaker Huh.

Thank you. This does conclude today's conference and thank you for your participation and have a wonderful day.

Q3 2020 Quaker Chemical Corp Earnings Call

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