Q4 2020 Quaker Chemical Corp Earnings Call
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Greetings and welcome to the Quaker Houghton fourth quarter and full year 2020 results conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
Should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce <unk>, Chairman CEO and President Michael Barry Michael You May begin.
Good morning, everyone. Joining me today are Mary Hall, our CFO Robert trial for our General Counsel and Shane Hostetter, our 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 Houghton Dot com.
A great deal has changed over the past year, but the COVID-19 pandemic for us our top priority is and has been to protect the health and safety of our employees and our customers, while ensuring our business continuity to meet our customers' requirements.
All of our 31 plants around the world are operating and we are continuing to meet our customers' needs I am very proud of what the Quaker Houghton team has done to continue to service our customers as well as continue our integration.
We were pleased with our results for the fourth quarter overall, our sales were sequentially up 5% with all regions or segments, showing revenue growth, which was primarily being driven by higher volume is as our businesses continue to come back from the negative impact that COVID-19 had on our end markets.
The sequential increase was strongest for us in EMEA as we saw an increase in sales of 13% compared for the third quarter.
I think it is interesting to look at our revenue changes from the fourth quarter of 2019, which was pre COVID-19 of course.
Overall, our sales were down only 1% and our volumes were relatively flat.
But there was a difference when looking at this by region or segment.
The only area that showed an increase in volume sold was Asia Pacific, which had an increase of 8% versus prior year, primarily being driven by higher sales in China and India.
EMEA was relatively flat on volumes, mainly due to the fourth quarter of 19 being unusually weak quarter.
Americas was down 2% on volumes, primarily due to our end markets still being impacted by Covid.
And our global specialty business volumes were down, 9%, primarily driven by lower aerospace basket sales.
I also want to point out that our ability to gain new pieces of business and take market share contributed significantly to our performance as our analysis shows that we had total organic sales growth due to net share gains of approximately 4% in the fourth quarter of 'twenty versus the fourth quarter of 19.
So while we were overall relatively flattened our volumes the 4% net share gains made a big difference as did our Asia Pacific growth, helping to offset the negative COVID-19 impact on our end markets.
I am very pleased to see the continued improvement from last quarter, but we're certainly not all the way back as we said previously we estimate will take approximately two more years for our end markets to fully return and some markets like aerospace, which makes up about 3% of our sales may take up more time than that.
However, we expect our sales to rebound more quickly due to our projected continued market share gains as well as making acquisitions, which I'll now talk more about.
As you may have noticed since our last conference call. We did make two small bolt on acquisitions for.
The first was a private company called Coral chemical based in the U S that we purchased in mid December for $53 million net of cash acquired.
Coral provides technical expertise and product solutions for pretreatment, metalworking and waste treatment applications to the beverage can and general industrial end markets.
Coral had approximately $37 million in net sales and approximately $5 $5 million of adjusted EBITDA in 2000 on 'twenty.
For this acquisition, we also expect to achieve annualized synergies of approximately $3 million over the next two years.
Also in February we bought assets related to Templating solutions, primarily for the steel end markets for 25 million, which will add full year net sales of approximately $8 million and approximately $4 million of full year adjusted EBITDA going forward.
So we were pleased with these strategic additions to our product portfolio, which we estimate will add about $11 million of EBITDA in 2021, which equates to an approximate seven times EBITDA multiple purchase price for the combination of these two acquisitions.
So overall, we were pleased with the quarter given the environment, we're operating in and we saw good sequential improvement in our sales and adjusted EBITDA.
Synergy achievement also was a factor on our results as we achieved $18 million in this quarter compared to $5 million for the fourth quarter of last year.
In addition, our strong operating cash flow of $66 million in the quarter allowed us to reduce our net debt by another $24 million for the full year.
For the full year, we reduced our debt by about 12%.
In addition to making the coral acquisition.
The positive cash flow nature of our business during severe downturns is something we have discussed with investors in the past and we have seen this positive impact again over the past year.
In reflecting upon full year or the past 12 months have been challenging due to COVID-19, but I'm very pleased with our overall performance.
Over the past year, we continue to service and supplier customers despite difficult economic conditions.
We continue to gain share on our markets and we completed a significant part of our integration activities.
And we were able to realize $58 million of cost synergies, which exceeded our previous estimate of $35 million.
We also made additional these two additional bolt on acquisitions, which will add approximately $11 million to our adjusted EBITDA in 2021, and even with those acquisitions, we were able to reduce our debt by 12% for $94 million.
So in short we are delivering on the powerful benefits that we anticipated for our combination tap.
As we look forward to 2021, we expect some short term headwinds from higher raw material costs and lower than expected volumes to the automotive market due to the semiconductor shortage.
Hopefully these are just timing issues and will impact mainly the first half of the year.
Despite these short term headwinds we feel positive about 2021 and continue to expect a step change on our profitability with over a 20% increase in our adjusted EBITDA from 2020, as we complete our integration cost synergies continued to take further share on the marketplace benefit from our projected graduate rebounded.
Demand in our end markets and see the positive impact of our recent acquisitions.
Yeah.
As you may have read in our press release, I've announced that I will retire from my role as CEO at the end of the year, but I will continue in my role as chairman of the board.
As we mentioned in the press release, the board has committed to a strong orderly process and transition with a comprehensive search that will include internal and external candidates.
As far as the timing and why I made this decision now I really want to Quaker Houghton to be in a strong position when we made this transition and.
And we are.
This year, we will take a step change in our profitability, we will essentially complete our integration and we'll pay down more debt and reach our targeted leverage ratio.
We have the right strategy in place a strong management team tremendous people throughout the organization.
And strong opportunities for above market growth in our businesses for the foreseeable future. So to me our future is very bright and this is the right time to make this transition.
And I look forward to continuing to be involved in the company's bright future as chairman of the board following my retirement.
In closing I want to thank all of our colleagues at Quaker Houghton, whose dedication and expertise helps to create value for our customers and shareholders and differentiate us in the marketplace.
I am so proud of how our team has performed and servicing our customers meeting their needs and successfully continuing with our integration execution, which was both critical and difficult for us this past year.
People are everything in our business and by far most valuable asset and ensuring their safety and wellbeing is and will continue to be a top priority for us.
I am proud of I'm very happy with our Quaker Houghton team on 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 Mary.
Thank you, Mike and good morning, Michael 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 for a discussion of these risks.
Please review the cautionary statements regarding forward looking statements included in our earnings release and in our previously filed 2019 form 10-K, and third quarter 2020 form 10-Q filed with the SEC. These are available on our website. Please also note that updated risk factors will be included in on.
2020 form 10-K, which we plan to file next week.
As we disclosed on our press release on last night, all 'twenty 'twenty numbers, we are presenting our preliminary unaudited and subject to change as we finalize our on it.
In our press release and in this presentation, we provided certain information, including non-GAAP earnings per diluted share non-GAAP operating earnings and adjusted EBITDA as well as certain pro forma items in an effort to provide shareholders with better visibility into the company's core operations, excluding certain items.
<unk>, which we believe do not reflect our core operating performance reconciliations are provided in charts 15 to 23 of this investor day and some are in the press release as well.
We followed a similar review format for this stack has come on we used for our Q3 call where our comparison periods show actual and non-GAAP results and also pro forma sales and adjusted EBITDA as if we'd been combined with Houghton throughout the periods presented our Q4 comparisons on 'twenty 'twenty and 'twenty.
19, and the stack reflect actual results not pro forma as we completed the combination with Houghton in Q3 of 2019.
For the full year comparisons I will generally compare 2020 to pro forma 2019 resolved. So that you can see the periods on an apples to apples basis.
As Mike mentioned, the gradual recovery in our business that we began to see in Q3 of 2020 continued through Q for Q4 net sales were up 5% sequentially as all segments benefited from a gradual increase in volume and net sales were down only 1% compared to Q4 2019.
Recall, however that Q4 2019 was a relatively weak quarter that was negatively impacted by a widespread slowdown in industrial production, especially in Europe.
For the full year reported net sales increased 25% in 2020 due to the inclusion of Houghton and Norman Hay, but on a pro forma basis sales were down 9% primarily on lower volumes due to the global downturn in economic production as a result of the COVID-19 pandemic.
Gross margin of 36, 8% in Q4 is up from 34, 8% in Q4 of 2019, which was displayed and somewhat due to inventory adjustments for purchase accounting for Norman Hay. Excluding these adjustments we estimate Q4 of 2019 gross margin.
Would have been about 35, 3% the increase in gross margin Q for other Q4 is primarily a result of our progress in achieving combination related synergies and logistics procurement and manufacturing.
Our sequential gross margin was down somewhat from Q3, reflecting a one time benefit to gross margin in Q3 of approximately 5% and current quarter pressure from rising raw material costs and product mix.
On a full year basis gross margin was 36, 2% versus 2000 1934, 6%, excluding similar Cogs adjustments as Q4, we estimate our gross margins in 2020 in 2019 would have been 36, 3% and 35, 7%.
On prospectively.
Looking ahead, we expect to realize additional combination cost synergies throughout 2021, which should result in a gradual improvement to gross margin, we expect to head towards the 38% gross margin area. Later this year as we further realize our combination synergies ant man.
<unk> prices to offset rising raw material costs.
Please refer to slide 10 for a snapshot of certain key financial measures on both a GAAP and non-GAAP basis, our Q4 operating income improved significantly and our non-GAAP operating margin of 11, 3% is up one 7% versus Q4 last year.
Reflecting the sequential recovery in sales this year and our combination synergies and the cost saving actions, we took to mitigate the impacts of COVID-19 full.
Full year GAAP and non-GAAP operating income also improved significantly however, full year operating margin declined due to the COVID-19 related steep decline in sales and volumes in Q2, and the resulting pressure from fixed cost absorption, which we discussed in our Q2 earnings call.
On a reported effective tax rate was an expense of four 9% in Q4 of 'twenty versus a benefit of 18, 2% in Q4 of 19.
Excluding various one time items, our Q4 effective tax rates would have been approximately 30% and 24% respectively.
For full year of 2020, and 2019, we estimate that our effective tax rates, excluding non core and onetime items would have been approximately 25% and 22% respectively in line with our guidance for this year.
For 'twenty 'twenty, one we expect our full year effective tax rate will be in the range of 24% to 26%.
Our non-GAAP EPS for the $1 63 for Q4 is up 22% from $1 34 in Q4 19, due primarily to the improved operating income I discussed earlier on.
Our full year non-GAAP EPS of $4 seven eight was down from 5.83 last year, but ahead of consensus of force for 0.6 salmon.
On slide 11, we show the trend and on a pro forma adjusted EBITDA. Our Q4, adjusted EBITDA of 65 million and is up 4 million from Q4 last year and up 1 million sequentially and our full year adjusted EBITDA of $222 million is ahead of consensus on.
Also our adjusted EBITDA margins improved for both the quarter and the full year. Our Q4 adjusted EBITDA margin on 17% is up one 5% versus 15, 5% last year and on a full year basis, our adjusted EBITDA margin increased to $15.
<unk>, 7% from our 2019 pro forma margin of 15%.
The improved margins are primarily due to the combination related synergies, we've realized partially offset by the lower impact by the impact of lower sales due to COVID-19.
On slide 12, we provide an update on our leverage and liquidity as Mike noted cash flow was the star and Twenty-twenty, we've frequently talked about how the asset light.
Nature of our business helps us to weather downturns as our main investment is in working capital versus property plant and equipment, and we released working capital and generate increased cash flow and economic downturns. We saw this in 2020 during the financial crisis, and we thought this year during the Covid pandemic.
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Operating cash flow for the full year was a record $1 78 for malian, allowing us to reduce net debt by 12% to seven and $17 3 million per.
$53 million for the Coral acquisition net of cash acquired and pay approximately $7 million in dividends.
We're delivering on our commitment to prudently allocate capital by prioritizing debt reduction, while continuing to pay our dividends and seizing growth opportunities, which make strategic sense.
As a result of our prudent capital allocation, our primary leverage covenant of net debt to trailing 12 months. Adjusted EBITDA continues to improve on was three two times at year end 2020 versus three five times last year.
We expect to be at our target level of two five times net debt to adjusted EBITDA by the end of 2021.
In addition, our cost of debt continues to benefit from the current interest rate environment with our borrowing cost under 2%.
In summary, Quaker Houghton continued to deliver on its commitments in 2020, despite the very challenging market conditions. We faced I said during this call last year that my Crystal ball is murky at that time, we were in the very early stages of the pandemic with no way of knowing what was to come.
Certainly turned out to be a very difficult year, but we are focused on what we can control we kept our integration execution and synergy capture on track and in fact ahead of schedule, we implemented additional cost savings actions to mitigate the falloff in sales and we continued to deliver market share gains.
As a result, we achieved record cash flow during the year and were able to reduce debt, while continuing to execute on strategic acquisitions that make financial sense.
In 2021, we expect to see a greater than 20% increase in adjusted EBITDA and further expansion of our margins as we realize the full synergy benefits towards the end of the year. Thank.
Thank you all for your interest in Quaker Houghton and now back over to you Mike.
Thanks Barry.
And now we will open it up for questions.
Yeah.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Mike Harrison with Seaport Global Securities. Please proceed with your questions.
Hi, good morning.
Morning, Mike.
Congratulations on a nice finish for the year and congrats as well on your retirement, it's been an impressive brawn and well deserved.
Thank you Michael but we're are still got another a bulk of the year here to do so on focusing on that but I appreciate it.
Understood. So.
I wanted to ask a question about the guidance you previously on the Q3 earnings call.
I had said that you expected, 20% plus EBITDA growth in 2021. So you you kind of reiterated that but at the same time you ended up with a little bit more EBITDA in 2020 that than you maybe had been expecting.
And then you also announced a couple of acquisitions that are adding call it 5% to EBITDA.
This year.
So can.
Can you help us understand whether your underlying expectations around 2021 earnings.
Improved stayed the same or maybe gotten a little bit more conservative.
In the meantime.
Yeah.
I would say it's a good question up but overall nothing has really changed from our views of organic growth I think.
Part of the 20% that we're mentioning here is meant to be really a floor, because we said over 20%.
And.
I think as you know generally we've been our historically conservative company and that and of course, there are still uncertainties out there already in our raw materials are going up on as you know we're still a from COVID-19 situations here. So it's never a perfect for all but when I for one I think of are you now positioned now and where we were at the end.
For the quarter I do I still feel we're going to have really good organic growth and now we've added these acquisitions. So so I am Bert I.
Feel good and I think what you're seeing in just to give you. An example of our conservatism or so this is we also said we thought we'd be at.
At least $215 million of EBITDA for the full year last year and we came in through 'twenty. Two so so it's probably just we're just kind of setting a floor for that.
Okay.
Alright, and in terms of the acquisitions.
Coral deal is a little bit bigger sounds like it's focused on cans and general industrial finishing fluids.
And there was also a tin plating deal can you.
Maybe give a little bit more color on what those deals bring to the product portfolio and I think you mentioned the cost synergy number, but how do you see the cross selling opportunities.
Going forward for these businesses.
So I think the FERC.
For for the if I start with coral.
Really strengthens you know we have a.
One in our Quaker had a cam portfolio out in that camp.
Can portfolio and actually health had a historical relationship with coral and there was a licensing agreement with certain aspects. So so actually adding kind of Quaker Houghton legacies portfolio with coral really gives us a very complete.
Complete.
Portfolio of products to sell to the to the can industry and.
And really I think strengthens our presence in that industry and of course, that's been an industry that even though COVID-19 times. That's been one of the stronger end markets that we have so so we feel really good about the strain for that and how that means that you know.
Our ability to maybe take share in the future in that in that market.
And the tin plating as earliest is.
Kind of are.
They are already had a tin plating.
Product.
That we bought many many years ago for Mcdermott.
This asset came up for sale and we thought that was a good addition.
To go in our portfolio as well and we believe these technologies that we have in this area compete against other technologies and we think.
The kind of technologies that we now have between the two sets of technologies will have will be growing faster than the market and will be penetrating into these other technologies that are getting used for tin plating. So so we're encouraged with the ability to grow in those markets as well.
Okay and are those acquisitions going to be going into the regions or are they gonna be parked and global specialties for the time for you.
It's a there's.
It's a great question.
Our coral actually be separate the can will be we are operating our beverage can business and global specialty so that piece will be put into a global specialties.
And then the other aspect will be put into.
The Americas region and then.
The general industrial piece and then the.
Tin plating.
B E. That's being managed out of.
Global specialties, as well, but certainly hits parts of the region as well.
Alright, and then last question I have for now is on the EMEA business really looks like you had a nice step change in the margin performance, there and I'm aware you were coming off on.
Z prior year comp.
But were there some unusual dynamics that contributed to the strength there or do you see this.
20th push on plus number is a sustainable margin level in EMEA.
Oh, we are very pleased with our EMEA region as I see it a sustainable it's it's really what's what you see kind of popping there is the combination of.
Sequentially volume is picking up and getting more back to what I call normal level at.
At the same time.
We're getting the benefits of the synergies from the integration and so when you put those two things it showed nice sequential improvement throughout the year and and we do expect that to continue on at that kind of level now on the first quarter of the year.
We do expect to see pressure on margins because of this raw material issue that we're having but we are putting them in place price increases, but you know there's a lag effect that goes with that but absent that absent that kind of short term nature of it I do expect these to be sustainable.
Yeah.
Alright, thanks very much thanks.
Thanks, Mike.
Thank you. Our next question comes from the line of Katherine Griffin with Deutsche Bank. Please proceed with your questions.
Hi, Thank you good morning, and I'll also add congratulations on a strong end to the year and on a well deserved retirement for you Mike. Thank.
Thank you Ben first I just wanted to ask firstly I just wanted to ask on the 4% net market share gains. This quarter can you highlight any regions or industries, where on <unk>.
You're having the most success with new business wins.
It's it's a it's pretty broad based it's these things are made up of.
So I think other pieces of business that we're picking up and in all different kind of product lines and all different area. So we're actually it's pretty broad based so it's not just really.
One major area or another.
So it's pretty well distributed.
Okay. Thank you and then I mean, it's kind of related to that I know you had talked a little bit about debt and answering my question, but could you just talk more about your bolt on M&A strategy going forward are you focusing more on expanding into core end markets like steel on metal, finishing looking at cross selling opportunities for similar.
For these two recent transactions or are there opportunities to get into.
Mark differentiated our specialized applications that you also have interest in.
Yes, it's really it's really a combination so.
On the short term.
We are exclusively only looking at smaller.
Acquisition opportunities until our.
Our leverage ratio is is that the place we wanted to be which we think that will be the end of the year. Then we'll look at larger opportunities. So in the short term that these bolt ons tend to be.
Various technologies that.
We feel would be good additions to our portfolio and these are two good examples of ones.
Most of the time too and most of these.
Our discussions that we have or these acquisitions that we're working on we tend to have and develop relationships with companies over time, so when they come to market. They are they're generally.
Talking to us about that and we can kind of come to a conclusion on.
On the acquisitions.
At attractive price. So so we still feel there's a number of these opportunities out there relatively small companies that can really add something to us from a product perspective, or maybe it's a technology or a.
Our service application perspective, too that we started a couple of those as well that can really add to our whole offering for our customer base.
Great. Thanks, so much nice.
Thanks Catherine.
Yeah.
Thank you our next questions come from the line of John time on tank with C. J S. Securities. Please proceed with your questions.
Hey, good morning, guys. Thank you for taking my questions and Mike Congratulations on your retirement and I know, it's a way off but it's and that's been a real pleasure working with you on entertainment you've done a great job.
Thank you John.
I was wondering if you could first talk about your gross margin expectations just for the first quarter.
Given the rising input prices, maybe some volume headwinds from these logistics shortages in net headwinds that are out there I'm just wondering what your expectations are for for the first quarter on when you might expect them to recover to pass price through.
Yeah. So yeah, we're not going to get kind of give a specific number guidance, but but they're definitely going to be impacted for the reasons that you. Just stated just raw materials and things in general going up like our container cost.
And things like that are going on our balance and it's we're in the process of.
Getting price increases in the marketplace, there's generally a lag effect on that that their prices go up first and then we get our price increases so there will be.
Some impact on margins.
And.
If it was.
Uh huh.
Absent that kind of thing we would expect to be in this 37 to 38 per cent range.
Margins, but they they probably would be somewhat depressed in the first quarter.
As we get through the year.
Net of price increases through and so for if we as as Mary mentioned in her remarks, we do expect to be getting.
Getting back into that 38% area, which is where are we.
I think we're more longer term at this stage once once raw materials cut on line out.
Okay.
Got it okay. Thank you for that and I was wondering if you had a.
Total synergy realization.
For the year I know you've done better in the past couple of years, just wondering if you're on target for this year and when.
There was a phase in the schedule for that.
Sure.
Where are our synergies for this year target at $75 million.
I believe we announced that.
A quarter or two ago, when we up kind of upped our guidance and we expect to ultimately get 80 million but.
So by the end of this year, if you look at kind of on the run rate, we expect to be at we will probably be.
More at that 80 million going forward. It's just that you get the full year effect for 2022.
Okay, Great and then just a quick question for Mary do you expect cash flow to improve for us.
Same degree of EBITDA this year or is it going to be held back a little bit more by maybe capex for triangle and youre investing in working capital as revenues grow.
Yeah, that's a fair question.
You know certainly a.
The answer depends on how quickly.
The rebound.
On picks up steam.
Again, we throw awful lot of working capital in 2020.
Yeah.
Rebound picks up quickly we wouldn't expect to have some reinvestment on working capital, but we would expect that to be more than offset by by earnings improvement.
That's the situation as well, so a little bit difficult to call from a capex perspective, I should point out post the onslaught of Covid, we announced that we scaled back our capex from our original expectations last year.
And we would expect to.
To invest a bit more in capex. This year, so a very long winded way of saying I expect cash flow to remain healthy.
But I will see the progress on the rebound this year and talk more in later quarters.
Okay fair enough. Thank you guys.
Thank you.
Yes.
Thank you. Our next question comes from the line of Steve O'hara with Sidoti. Please proceed with your question.
Hi, good morning, and thanks for taking the question.
Morning, Steve.
Yeah, just I guess first.
Echo.
Congratulations again on others.
A lot of green here left in the year, but.
Hopefully, it's a little bit the Swedish early this year the last year for everybody hopes debt.
I guess just on.
And I had some connectivity issues, but you talked about the EBITDA growth that you're forecasting.
And can you talk about what the impact was.
From the headwinds you kind of expect in the first half of the year.
And then.
What's the typical process for passing through raw material pricing is it kind of it sounds like maybe it's a two quarter lag.
Is it is.
Pretty straightforward with customers and things like that.
That's a great question.
So.
In some ways I wish I had a crystal ball because some of these you know sometimes it really depends upon because we have kind of seen a step change in raw materials cost and the question to me is going to.
Is that correct correct.
That happened.
It happened once and then and kind of line out.
Whereas it's going to be something that evolves in a different way, but but based on what where we are today.
We are putting out price increases to our customers kind of as we speak.
Most of the price increases will go on a cut on the back half for the quarter.
And yet the price increases have been hitting us and continue to hit us throughout the quarter. So so you do see some but we're not we haven't given any guidance and generally don't give guidance around anything on a specific like that.
And then to.
To your question of like you know what we find over time on this as debt.
Generally there's a three month lag and sometimes can take up to six months at times are dependent upon the customers.
Before we kind of fully capture everything so so it is a timing issue.
And it is not something that we.
Sit there on borrower in a worry or get concerned about from a longer term perspective, it's just a more of a short term got to get through it and then hopefully things will just line out and we'll go on from there.
Yeah.
Okay. That's helpful and then.
Maybe.
Just from a.
Kind of sticking with raw material inflation and things like that.
Is there any.
Would you guys have a.
More favorable impact.
Than competitors.
On the inflation side or.
Is there a negative or positive or do you feel like you'd be kind of on the same footing as everyone else if.
You see a continued moving in prices.
Yeah, Yeah. So I don't think we're at a competitive advantage or disadvantage relative to raw materials. So I think it would generally if raw materials go up or down or gel.
It's generally hitting people throughout the whole industry.
Okay.
And then maybe lastly, just I mean in terms of the.
Search for your replacement I mean, what other things that you know people tend dimension.
Wanted to talk to them.
But you guys as you know the strength of your management team.
And I'm just I mean, it seems like you know you have a pretty good day.
With talent.
Is there something you think that you know somebody from outside the company.
It might bring in that you are missing.
Currently or is it something where it's the right thing to do where you have to explore all options and you know what's right for shareholders right for the company et cetera.
Right I think the way the way our board looks at it is it's it's good governance to.
To kind of look at all options.
We.
And myself.
I'll speak for myself, but I know the board as well as very happy with our management team and we have very good strong candidates to be considered as part of the process there.
And so it's really.
I wouldn't read into anything that says.
That we're on we're not building that direction, it's more around we just want to look at all options.
And make sure we're doing good governance.
Okay, alright, great. Thanks for the time.
Thank you.
Yeah.
Thank you. Our next question is coming from the line of Laurence Alexander with Jefferies. Please proceed with your question.
Good morning, I'm, Mike I guess unfair question, but you know if you're on.
Be patient with it is can you talk a little bit about your.
On what challenges.
Or what sort of the unsolved problem is that you're leaving for your successor or that.
And also can you speak a little bit about the culture of hard for them.
Her Houghton and.
Yes.
<unk> for the culture, and where where do you think that either limits or creates opportunities for acquisitions.
Outside what.
Sort of straight.
Expanding on the existing sort of skill sets for me here. It just seems as if the cultural element is going to be a real challenge and it's been something that you've managed well in terms of finding the right assets.
To bring into the business. So can you just talk a little bit about those two things.
Sure.
On your first question a big challenge again part of my rationale is.
Is of the timing around now is that I think it's a really really didn't want to leave in the company at a good place.
And I really do believe we are on a very strong place right now so so to me having the integration in place our profitability at a.
We'll certainly be I believe at all time high this year and and then we have.
Our debt capacity down to the target area for one I really think those are kind of good foundations on which.
In which the lease off day two of them in and it's and we still have I mean, we I really do believe in our strategy. Our board believes in our strategy and we you know we're not looking for any major changes on our strategy. So we feel we can continue to grow above our market organically. We work on acquired I continue to look at acquisition opportunities.
Attunity.
Within our market and so I think it's really.
Looking for a CEO that will continue on executing the strategy.
That we've put out.
As far as the culture aspect.
On the culture is something we really are very.
Cognizant of when we make acquisitions and it's something we believe is our core fabric to to our company.
As I mentioned people are our most valuable asset we really want to have a you'd be on.
Collaboration teamwork inclusiveness.
Diversity in our in our as part of our fabric and something that we're highlighting and trying to continue.
Continuing to improve upon throughout the whole organization. So we spent a lot of time and energy.
On on a kind of culture, we want to have and.
And that's something we've put up more probably more timing than anything into and making sure.
Quaker Houghton now as a combined company has a good culture and.
So I'm very happy with the progress, we're making there and.
Just I guess I'm not I didn't know if I read into your question that is other acquisitions. You know we always look at make sure. There's a good fit from a people perspective.
From it.
Acquisitions and that that will always be a key component going forward just to make sure. We have that we wouldn't want to do something that negatively impacts our culture.
And then.
I'll turn on can you talk a little bit about.
For staff turnover or churn.
You know what happened in 2020, and then do you see any sort of pent up churn to either yourselves or potentially our competitors, whereas things normalize people become more willing to take risks and move on.
Could you just give us a sense for where we are at on kind of the migration of talent within the industry.
Sure I mean over time.
With.
Kind of a historic perspective.
Quaker went from having a 1200 people to over 2000 people.
Before the <unk>.
Our combination with Houghton and and we tried to really attract talent because we were growing above the market. We need good people again, our people are the most valuable part of our company and having people that understand customers' processes and so forth is really critical.
And now now we've doubled that size and now we have 4200 people.
And Quaker Houghton today.
And and we continue to make sure we want to keep and retain our key people and attract new talent to the organization.
That's something we'll constantly work on our retention rates on them that we look at it's a it's.
Our voluntary retention rate, where somebody who choose to leave us is relatively low.
I don't have the exact numbers on on me, but it's definitely below 5% in that range.
So it's it's it's.
Something that we definitely put a lot of time and effort on and making sure we are.
Can retain and attract key talent.
Thank you.
Thanks, a lot.
Thank you. Our next question is come from the line of Garo <unk> with Palisade Capital Management. Please proceed with your question.
Oh, Hey, good morning, guys wanted to just ask on the raw material side.
As you look at.
What's driving that you know could you talk about kind of both for fossil fuel related on the non fossil snow related as far as what the drivers might be and.
Kind of how sustainable and I'm, particularly curious if if global regulations, whether it's around biodiesel or something might be more of a secular driver of costs that.
But you'll have to contend with.
Sure.
We're seeing a pretty broad based increases in raw materials are certainly.
Some of the bigger groups of our raw material increases gara are in base oils as you see crude continue to progress up over time.
And then and we also are seeing R. R.
Our festival or animal fat type based raw materials also inquiries are up as well and.
And now like you said that you know there is a connection there in some ways they can't get too far out of line because of biodiesel from kind of bring them back into line.
And then we're also seeing other groups like additives go up.
We we we don't have a perfect crystal ball on this where we are.
The last time, we took a very detailed look at this we thought things could should stabilize.
For a period of time, but as we know the world changes so well.
We'll see but regardless, it's kind of our mindset is raw.
Materials will continue to go up or down on us over time, and we will continue to.
Our adjusted our prices and maintain our margins as appropriate.
Okay, great. Thanks.
And this is maybe it's more for Barry are you I think at the beginning of last year you guys had talked about maybe a 35 million capex number for the year is that a good starting place to think about for this year.
I. Thank God, we ended the year actually spending on Capex, even in debt allow what we had guided.
Early last year so.
I don't.
I think our expectation is in that kind of.
Mid to low thirties area Kara.
Got it okay.
And then just lastly, you know I feel like since you guys had done your Investor day, there's been.
Barry, possibly a bit of a.
The accelerated move in the electric vehicle world compared to maybe where I thought were at that time. So I'm just curious if you've refined your thoughts on the impact of that on on the company on anyway.
Yes, we have some we continue to evolve on a look at you know in the study we havent, we havent share dad lately, we won't we'll take a look at that I would say the overall conclusion from Investor day, and looking at the impact of of electric vehicles on US is still the same.
Kind of conclusion that its.
It's not a <unk>.
Really major event for the company because we weather in certain areas there can be reductions of use of our chemicals and other areas.
We are picking up pieces of the business.
And we believe they tend to over time will be offsetting one another so.
So I think our overall conclusions from Investor day are still valid, but we have kind of updated or our view on it.
Got it and then just lastly, you know seems like.
Most investor events and calls these days have some sort of update on on ESG related things and didn't know if there's anything you could highlight there.
Sure we are putting in a thanks for asking that we are putting a lot of effort into ESG that nothing the that's certainly getting a lot of attention throughout the year.
Our company, we established a board committee.
Sustainability about a year ago.
We are in the process they'll come out later in March we will be putting out our sustainability report around March 23rd will come out Youll see more things in our annual report that will come out around this we did a material assessment for the whole company last year.
Where we can make the greatest impact.
We took in and got feedback from our customers, our investors and a lot of all stakeholders as well as.
People for us the company as well.
Sales, you'll be seeing more material around us on that we are adopting the.
S. A S b framework and your eye and our principles, where we're going to be issuing a letter of support from T. S. Up day. So there are and you'll be seeing for immaterial goals coming out from us around.
The whole aspects of ESG later this year.
Okay.
Great. Thanks, so much.
Thank you.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Rejoining the queue, it's Mike Harrison with Seaport Global Securities. Please proceed with your questions.
Hi, just a couple more Mike in terms of some of the near term.
<unk> you see obviously you talked about the raw materials.
Can you maybe touch on the impact of.
The unusual winter weather and maybe from other logistical challenges or outages that you saw for maybe some of your suppliers and then maybe a related temporary thing you'd mentioned some uncertainty around the auto business in the semiconductor shortage Oh.
Serious over concerned do you see that ads and do you view it as a just a timing issue that you'll you'll make up in the rest of the year.
Sure.
So far.
The that.
The issues in Texas.
And what happened for the supply chain around that Hasnt been a real big event for us. So so so far so good on that front from the automotive perspective on the semiconductors. We are we are definitely seeing a certain.
Plants are around the world, maybe where we're supplying some products that maybe reducing production or so for a period of time. So it will have some impact.
You know on US we think it's and from everything we read Mike is this like something that will clear up in the spring.
And then maybe this is more of a temporary issue now that that will be made up with volumes and later in the year. So it could be some certainly will be some impact to us again in the kind of the early first quarter, maybe into the second quarter, but then hopefully that all be made up on the second half of the year.
Alright, and then I wanted to ask also about the APAC margin it looks like it weakened quite a bit sequentially can you talk about what was impacting that in Q4 and I guess as we look into 'twenty and 'twenty. One is is that a business that.
The operating margin, you know up and into the high twenty's or even 30 per cent level like it was in the first three quarters or more like the mid 20th like it was in the fourth quarter.
So as we think about Asia Pacific. It's it's a it's a great business for US I think what you saw in that quarter.
That was really a timing issue relative to some of our costs and we had certain costs on our that were more backend loaded for for example.
Bonuses within China, China.
Really had a great year for us last year and as they hit certain thresholds you have to accrue more for for bonuses. So you had certain things like that that kind of back ended into that year that was unusual in nature and I think lowered that.
But we don't expect anything that was more I would say a fourth quarter aberration, we don't expect something like that to be seen in the first quarter for example.
So it's not going on can be something that carries forward.
Yes.
Alright, thanks very much thanks.
Thanks, Mike.
Thank you there are no further questions at this time I would like to turn the call back over to management for any closing comments.
Okay. Given there are no other questions. We will end on a conference call now and I want to thank all of you for your interest today. Our next conference call for the first quarter will be in late April or early may and if you have any questions in the meantime, please feel free to contact Mary or myself.
Thanks again for your interest in Quaker Houghton.
Thank you for your participation today. This does conclude today's teleconference. You may disconnect. Your lines at this time however.
Have a great day.