Q3 2022 Quaker Chemical Corp Earnings Call
[music].
Greetings and welcome to the Quaker Houghton third quarter 2022 earnings Conference call. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Under this conference is being recorded I would now like to turn the call over to Jeffrey Schnell head of Investor Relations. Mr. Schnell, you may begin.
Thank you Paul Good morning, everyone welcome to Quaker Houghton's third quarter 2022 earnings conference call.
Joining us on the call today are Andy Thomas Our Chief Executive Officer, and President Shane hosted our senior Vice President and Chief Financial Officer, and Robert trial, Our General Counsel.
Our comments relate to the financial information released after the close of the U S markets yesterday November three 2022.
Our press release and accompanying slides can be found on our investor website.
Both the prepared commentary.
And discussion during this call may contain forward looking statements, reflecting the company's current view of future events and their potential effect on Quaker houghton's operating and financial performance.
These statements involve uncertainties and risks, which may cause the actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements. This.
This presentation also contains certain non-GAAP financial measures and the company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the appendix of the presentation, which is available on our web site for.
For additional information. Please refer please refer to our filings with the SEC.
Now, it's my pleasure to hand, the call over to Ed.
Thank you, Jeff and good morning, everyone.
In the third quarter, we delivered double digit growth led by strong price realization.
We continue to execute on items within our control countering softer market conditions continued supply chain and raw material challenges and significant foreign currency translation.
We are making further progress addressing our overall margins by offsetting the significant and persistent inflationary pressures on our business.
Throughout the quarter the team remained focused on our objectives.
This included taking steps to optimize our business and control costs, while balancing investments to support and accelerate our long term growth initiatives.
All while we continue to prioritize delivering value for customers and a highly complex operating environment.
I was wondering you expected the end market environment was on EBIT in the third quarter.
While we performed in line with our markets, we are not immune to the lower underlying market activity impacting our customers and in turn our volumes spill.
Specifically, our activity in Europe , and China softened throughout the quarter, whereas demand in the Americas, and our global specialties business remained healthy.
Moving to our record sales and earnings performance those segments during the third quarter.
Despite the complexities of the operating environment, we delivered $70 million of adjusted EBITDA and adjusted diluted earnings of $1 74 per share.
In short strong price driven sales growth and cost management more than offset continued raw material inflation and a softer market environment.
The progress on our strategic pricing initiatives drove an improvement in our gross margins, which we expect to continue in the quarters to come.
Pricing in the third quarter increased 25% year over year as a result of our ongoing value based pricing initiatives, but was partially offset by lower sales volumes and foreign exchange headwinds.
We estimate underlying market growth rates declined by mid single digit percentages on both a year over year and sequential basis, which were in line with our underlying volumes considering the impact from the Russia, Ukraine War and the exploration of the tolling agreement as part of the combination.
Our results also included continued new business wins focused on higher value products and services, which were offset by business. We declined as we focus on higher value opportunities.
These new business wins continue to be a testament to the ability of our teams to demonstrate to our customers the value of our products and services, even as we implement our strategic pricing initiatives to offset inflation.
Inflationary pressures on our cost did remain a challenge in the quarter.
As expected the <unk>.
Pace of raw material inflation has declined sequentially in the third quarter, but overall continues to increase.
Raw material availability also continues to impact our ability to win further business as we prioritize continuity of supply for all of our existing customers.
Gross margins were approximately 33% in the third quarter, an increase of more than two percentage points compared to the second quarter of 2022, and a slight increase compared to the third quarter of 2021.
This was primarily driven by continued price capture as we implemented targeted actions to offset the impact of ongoing raw material inflation.
EBITDA margins also increased reflecting the improvement in our gross margins and the only thing remaining slightly below the prior year. They have increased more than two percentage points sequentially as we effectively leverage our model and manage our costs.
Moving to sales by segment once again price capture was strong across all of our segments, both on a year over year and sequential basis.
Volumes increased compared to the prior year and our global specialties business, but declined in our regional segments.
Sequentially volumes also declined as increases in the Americas, partially offset softer demand in EMEA and Asia Pacific.
Unfavorable foreign currency translation intensified in the quarter and wasn't headwind all of the segments, but the Americas.
Importantly, the recovery in our year over year segment margins continues margins in the Americas Asia Pacific and our global specialties business improved on a year over year and sequential basis power.
However remain below pre pandemic levels due to continued inflationary pressures.
That said, we expect the improvement trend to continue and pricing actions will be complemented by actions, we are taking to drive efficiencies throughout the global organization.
So while the macroeconomic environment remains challenging we have confidence in the value proposition of Quaker Houghton and the ability to leverage our scale and capabilities to generate value for customers.
This will be reinforced with the targeted investments we are making to continue to drive long term performance above market growth rates by providing even more value added innovative solutions to our customers around the world.
These value added capabilities delivered through our customer intimacy model.
Turning to be a key differentiator for us in the marketplace.
All the while recovering our margin profile to pre pandemic levels remains a top priority.
It is anticipated that cost will remain elevated both raw materials and other costs, including labor.
Our commercial leaders are working diligently with our customers to implement further price actions, while balancing future growth potential and underlying market dynamics in these critical relationships.
Additionally, we are pursuing various avenues for cost improvement globally.
Including footprint operations head count.
<unk> and other productivity measures.
We'll be balancing our decisions to ensure the macroeconomic pressures we face are addressed by the cost measures. We pursue while also considering our customer relationships and the requirements to achieve long term growth.
Any actions taken will help address efficiencies within the organization and together with the investments to contemporize, our business will help advance our capabilities improve our profitability and better align the enterprise to deliver on our long term strategic growth initiatives.
To support our strategic growth effective January one we will align our organization under a more streamlined business structure and leadership team.
Joe Berquist.
Currently as our EVP Chief strategy offer officer, and managing director of our global specialties business will assume the role of Chief commercial officer.
Our global commercial approach implemented locally under Joe's leadership will facilitate additional revenue synergies through increased share of wallet, while helping to streamline and standardize processes and through the use of tools, which will drive a higher level of intimacy for our customers.
Additionally, due at baseline who is currently our SVP and managing director of the America segment will assume the role of Chief strategy Officer.
Do you want will have ownership of implementing our strategic plan and will lead us to drive enterprise wide ownership and improvements.
Our updated global approach will unlock companywide opportunities to enhance our organic innovation and business development.
Improved global pricing and sourcing initiatives.
The advantage of the success of our corporate development as well as drive us towards a more sustainable and digital enterprise.
Joe and GE water seasoned committed and accountable leaders that have extensive experience across geographies.
Mrs and with driving successful transformation.
Their leadership will help us harnessed the energy in the organization to drive meaningful multi year improvement.
Our globalization and Digitization and sustainability focus, which will all power our future growth.
Working seamlessly together, we will fuel our growth engine with innovation and optimize more efficiency with productivity as we focus on our journey of continuously generating and earning more value for and from our customers.
Turning to the outlook, we expect continued execution by our team in the fourth quarter and beyond.
The demand environment, which softened further in Europe , and China. During the third quarter is expected to remain challenging and is further subject to typical seasonal patterns in the fourth quarter.
The primary external factors, which will have an impact include higher energy and other input cost for our customers operations.
Raw material availability challenges.
Ongoing war in Ukraine and.
And China's zero Covid policy.
Specific to the fourth quarter, our pricing initiatives are expected to continue to drive year over year organic topline growth.
Partially offset by slower end market demand.
Inflationary pressures and foreign exchange.
We continue to expect the sequential improvement in our gross margins and we will maintain our disciplined cost controls as we did in the third quarter.
As a result, we remain committed to our previously communicated outlook of generating EBIT growth in the second half of 2022 compared to both the first half of 2022 as well as the second half of 2021.
And we expect to generate positive cash flow in the fourth quarter.
I am pleased with our execution in the third quarter and I'm confident in our differentiated customer intimate approach that drives our growth engine.
The outlook for the company is bright and we're committed to delivering results.
<unk>, the third quarter with momentum executing on those things within our control.
Through the third quarter, we have driven meaningful net new business wins by increasing customer wallet share as we add new value and we also drive productivity enhancements for our customers.
We have continued momentum with our pricing initiatives and are focused on reestablishing our pre COVID-19 margin profile, while also balancing the valued relationships growth opportunities and commitments to our customers.
We will drive higher innovation and expand our capabilities, including through the use of data, particularly as we advance our digital transformation.
We are advancing our growth initiatives through sustainable solutions as we capitalize on the opportunity to drive deeper relationships with our customers.
We are leveraging our capabilities and strategy work to drive continued progress in our existing markets, we are identifying and expanding our total addressable markets and into new value added growth areas. While we also optimize our processes productivity and footprint in order to better align the company.
Future profitable growth.
We will continue to invest in our people our culture, our expertise and our diverse talent around the world, providing our team with the development and tools needed to drive meaningful results.
And we will maintain a healthy balance sheet and liquidity to support our capital allocation strategy, including our M&A playbook.
Taken together these growth and profitability enhancing actions combined with our differentiated customer intimate model is expected to support earnings growth in 2023 and beyond.
We are balancing our near term priorities with our longer term opportunities.
Evaluating our model is evident, especially when raw materials and other inflationary pressures eventually improve.
But we will not wait we are taking steps to better equip the business for whatever macroeconomic environment, we face.
Quaker Houghton has much opportunity ahead, and the company is demonstrating the resiliency of our business model and our people.
I am confident we have the right strategy and our leadership is committed to unlock our team's potential to continue to deliver customer and long term shareholder value.
With that I'd like to pass the call to Shane to review our financial results in more detail Shane.
Thanks, Andy and good morning, everyone.
The third quarter was another strong quarter for the company delivering net sales of $492 million, which was a 10% increase compared to the prior year.
This was driven by a 25% increased pricing mix, which was partially offset by an 8% decline in total sales volumes and a 7% unfavorable impact from foreign exchange.
Consistent with recent quarters, we experienced a strong increase in net sales directly related to our strategic pricing initiatives.
These were negative across all our businesses in response to the significant raw material increases that began last year and have continued into this year.
We've maintained this pricing momentum as we prioritize these initiatives and on a sequential basis, realizing pricing of another 8%.
While our volumes declined 8% year over year.
This includes a reduction due to the ongoing conflict between Russia and Ukraine.
As well as lower volumes related to previous totally on divested volumes as part of the combination.
Without these two impacts we estimate our volumes declined approximately 5%.
Which was largely in line with our underlying markets, but with regional differences.
New profitable business wins continue to be focused on the come.
In the quarter, we estimate that new business wins contributed approximately 3% to volumes compared to the prior year.
This was a strong reasonable and driven by the team's continued focus on driving higher value products and services to our customers, which in turn increases their productivity and profitability.
During the quarter, our value based pricing initiatives resulted in lower volumes.
Which did offset our new business wins on a volume basis that said, we anticipated. This effort as we work with customers to offset the inflationary pressures that are currently impacting our business and our costs.
Further we will continue to prioritize higher value product and service offerings as we work to regain our margins and focus the company on long term profitable growth opportunities.
Sequentially net sales were flat compared to the second quarter.
This is driven by an 8% sequential increase in price and product mix offset by lower volumes of approximately 5%.
Unfavorable foreign currency impact of 3%.
Net new business wins of approximately 1% were similarly, offset by our value based pricing.
Compared with the prior quarter.
On a sequential basis, our volumes were also broadly in line with our underlying markets, which softened during the quarter.
Our European business continues to be impacted by the direct and indirect impacts of the ongoing war of Ukraine, including its impact on energy costs and also our Asia Pacific operations were impacted by uneven customer order patterns, the zero COVID-19 restrictions and other impacts on our markets in the region.
It is important to note however that on a year to date basis, our volumes have outperformed our underlying markets, which are down mid single digit percentages due to the new net new business wins.
Even when considering the impact of our value based pricing.
This continues to highlight our ability to earn new profitable business. Despite our strategic pricing initiatives as we continue to make progress increasing our wallet share and driving increased value for customers when they need it most.
Our gross margins in the third quarter were 32, 7%.
An improvement of 40 basis points compared to the prior year period, and 230 basis points compared to the second quarter.
Overall, I am pleased to see our pricing initiatives begin to help drive an improvement in our gross margins.
Our commercial teams have worked extremely hard to offset the continued and significant inflationary pressures on our business.
And also we continue to expect our gross margins will show sequential increase next quarter.
Looking at our SG&A.
We had an increase of approximately equally or 8% compared to the prior year.
This largely reflects year over year inflationary pressures on labor costs.
SG&A was down slightly sequentially.
As a percentage of sales remains.
Adjusted EBIT was $70 million.
<unk>, which is an increase of 6% compared to the prior year, an increase of 20% compared to the second quarter.
These increases were a result of improvements in gross margin, which offset the impact of lower volumes and FX, which was approximately $3 million headwind year over year.
This is a solid result, despite the lower end market demand and the macroeconomic and geopolitical challenges we are facing.
From a segment perspective compared to the prior year and exclusive with <unk>.
The Americas, India, and both especially businesses delivered double digit sales growth driven by significant increases in selling prices of the product.
Our sales volumes declined in all segments, except the global specialties.
And similar to last quarter FX was a double digit rate.
And our immediate Sir.
Due to the strength of the U S dollar compared with the Euro and British pound.
And with a lesser meaningful impact on our other segments.
Sequentially.
All segments saw positive price compared to the second quarter.
Volumes declined 5% compared to the second quarter as increased volumes in the Americas were more than offset by softer conditions uneven order patterns in India, and Asia Pacific as well as a 3% foreign currency hit.
We delivered record operating earnings in our global specialty businesses and Americas.
But EMEA was behind prior year due to continued gross margin pressure.
Operating earnings in Asia Pacific were flat compared to the prior year as softer end markets were offset by stronger gross margins.
Importantly, though our segment operating margins improved in all segments, except for me on a year over year basis, and sequential basis, which gives us confidence that we're on the right path to recovering our margins.
Below the line.
Interest expense and other expense were slightly higher sequentially and against prior year.
Interest costs continue to increase during the quarter largely due to higher borrowing costs with our cost of debt at approximately three 4% for the third quarter.
From a tax perspective, our effective tax rate, excluding nonrecurring and non core items was largely consistent at approximately 46% in the current period.
We continue to expect this current year's effective tax rate to remain roughly in line with 2021 levels.
Having any changes to put forward legislation.
Our GAAP diluted earnings per share were $1 44.
And our non-GAAP diluted earnings per share were $1 77 slightly equal.
We're up 7% compared to $1 63 in the prior year.
Reflecting the improvement in our overall operating earnings.
Switching to liquidity.
Our cash flow from operations was an outflow of approximately $18 million for the quarter.
Or $26 million year to date.
Our working capital continues to be impacted by higher accounts receivables due to our pricing initiatives and higher inventories due to raw material cost of anchors.
Okay.
We are taking steps to improve and optimize our cash flow conversion and our working capital efficiency, we expect to show a working capital improvement translating into positive operating cash flow in the fourth quarter. Additionally, we expect our free cash flow conversion to normalize next year.
Outside of operating liquidity.
That's a $5 million in capital expenditures in the quarter or approximately $20 million year to date.
This translates to approximately one 4% of our states and is expected to remain at the low end of our prior guidance of one five to two 5% of sales for 2022.
As we invest in certain profitability and productivity improvement.
Also we paid approximately 7 million in dividends in the third quarter, having increased our dividend for the 13th consecutive year in 2022.
Our net debt at the end of the third quarter was $815 million and our net leverage ratio was three three times adjusted EBIT.
This was higher than our expectations due to the timing of cash flow generation. However, our liquidity remains solid.
On a bank basis, we are at three one times adjusted EBITDA, let's.
Which provides us ample room compared to our ceiling of four times net leverage for our credit facility.
We also have no material maturities until June of 2020.
We remain committed to reducing our net leverage towards our target of two and a half times and we will continue to balance the other priorities and our capital allocation strategy.
To summarize as we look ahead, the macroeconomic and geopolitical environment remains highly uncertain at.
It's very difficult to predict.
But we will continue to execute on what we can control.
Specifically, we expect continued momentum with our pricing initiatives, which are intended to see further expected increases in our raw material costs.
We expect to continue to demonstrate progress on our margins in the fourth quarter, providing a solid foundation as we enter into 2023.
This momentum gives us confidence in our ability to deliver on our 2022 commitment of EBIT growth in the second half of 2022 compared to both the second half of 2021.
In the first half of 2022.
As well as delivering earnings growth in 2023 and beyond.
I remain optimistic on the growth and cash flow generation potential of our business and the steps we are taking to improve the foundation and future of our company.
Which will position us to provide the best products and services to our customers and deliver long term value for our shareholders.
With that I'll turn it back over to you.
Thank you Shane before we address your questions I want to once again, thank our team who has executed well this year and has stayed focused on our objectives their commitment to our customers and our company reinforces our core values and underscores our ability to prepare for and execute in any environment.
We may face with that we'd be happy to address your questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question is from Mike Harrison with Seaport Research partners.
Please proceed with your question.
Hi, good morning, and congratulations on a nice quarter in a challenging environment.
Good morning, Mike Thanks.
Andy I was wondering if you could talk a little bit about the Americas business.
But nice sequential improvement you saw in the margins there.
Just curious if there were any one time drivers.
That helped.
The margin performance or if you feel like that.
Getting towards that mid <unk> level, which is sustainable margin level.
Yeah. Thanks, Mike first of all thanks for recognizing that.
The leadership team has really been doing a great job.
As we move through the year.
Not a single factor there they are working on improving the mix deepening customer relationships and the value we add.
<unk> solutions.
<unk>, new product introductions as well as taking advantage of some of our innovation. So.
It's a myriad of things and again, we want to build on that.
Additionally, within Europe , and take a cue from that in some of our other segments as well.
And then looking over at Asia Pacific.
Little bit surprised to see the volumes, they're down 20%.
You know definitely worse than last quarter, when we were expecting lockdowns to have the most severe impact and we had also heard that.
Auto production in Asia.
Improving so maybe just a little more color on what's going on there and what your expectations might be for volumes in Asia Pacific because we get into Q4.
Okay.
Again, thanks, Thanks for that Mike I mean, as we've signaled for multiple quarters now theres, an unevenness and in China. We're still experiencing there are still direct as well as indirect impacts with the zero Covid policy and the Lockdowns that have come as a result of that.
Within within our business as well there is also variation in customer order patterns.
That plays into it I'd also highlight that like we're doing in all regions were using strategic pricing test any elasticity.
And the net result of that is the profitability.
The mix of business, we have is very healthy and has improved.
We're expecting some of the unevenness to continue there does not appear to be a movement away.
From the lockdown policies.
And then the fourth quarter as well, we typically have some seasonality.
But beyond that I think we feel like we're well positioned and what we've been doing with the business there will be in great shape as the recovery desktop yeah, Mike just to add on to that you mentioned some of the indicators around auto and some of the Kpis.
We estimate our markets were down high single digits.
Honestly, we just we just did not see what we see the auto indicators, there and I think it's been publicized to the market.
Being a little bit more weakness compared to what the audit of indicators.
Interesting okay. Thanks for the color there and then my last question for now is just on the Q4 outlook.
In terms of revenue and margin I guess any any further.
Detail you can provide.
There the math that I did suggest that you're seeing kind of like the 57 million dollar EBITDA level.
It's kind of a floor for Q4.
But I'm looking at where consensus numbers are and it looks like they're kind of snack between the 60.
$60 million you did last year.
70 billion that you just did in this quarter and I was wondering if you could.
Comment on how you feel about where that consensus number inch for Q4. Thank you.
Michael Let me start and kick it off and then I'll ask <unk> to add some color, but I mean first of all just a reminder, we continue to execute on the things things we can control.
There is still significant macro challenges and the uneven demand as well as some of the seasonality that I've mentioned.
Sequentially, we are continuing to work on value based pricing.
As we continue our path for margin recovery.
As we move forward.
We're also working very hard on new business wins, and continuing that as we have done all year.
And that will help us as we move forward as well as we look to control our costs to make sure that we're as efficient as possible with that chain, maybe you want to add a little additional color yes.
Impacted a little bit like I'm, not going to get into specific numbers, but.
And Andy just talk about the overall environment is pretty uncertain as you think about 8% decline we had in our volumes from Q2 to Q3, we see that continuing however, we do see some additional probably volume declines due to seasonality in Q4 on normal seasonality that we impact.
Another headwind, we will see as the strong U S dollar from an FX perspective.
On the bright side, Andy talked about we will continue to operate in what we can control.
Indicated in my script, we will price.
Above where our raw material costs are going again, and we indicated that we will show another uptick in gross margin percentage in the fourth quarter compared to the third quarter.
And then this should drive higher EBITDA expansion as well and then from there free cash flow should be positive in the fourth quarter as we unlock working capital and work on some of those efficiencies as well as improving our cash conversion.
Alright, thanks very much.
Yes, My apologies one clarification as I say I just wanted to emphasize was EBITDA margin not EBITDA. So.
Right understood.
Thanks.
Thank you. Our next question is from David Begleiter with Deutsche Bank. Please proceed with your question.
Hi.
I guess Chris.
Have you seen destocking impact in Q3, and if so do you expect that to be down by year end.
Yeah.
Yes.
Thanks for the question.
We haven't seen any significant trends with respect to destocking.
So no no signals for us to suggest that that's going to be changing.
Okay.
Then just a raw its looks like its still going up in Q4, what's the current lag versus raw material price increases and I guess when do you expect.
Relief on raws.
Yeah. So first of all just a reminder for everybody we have seen raw material cost inflation of about 55% since the beginning of 2021.
And we have continued on our pricing journey on that recovery of margins to pre COVID-19 levels and we're continuing there.
Overall raw materials as we indicated in our script have slowed and their rate of increase but are still increasing.
And really it's the basket of raw materials, but depending upon region and category have slightly different trends, but in total our app.
In particular, some of our attitudes and are enabling chemistry surfactant asset spaces are still continuing to inflate. So we're expecting that.
That trend to continue but again at a decelerated rate I'd also like to emphasize that regardless of what raw materials are doing.
We are implementing our value based pricing.
The recovery value over and above.
What maybe happened on inflationary basis, and we'll continue that journey.
And I guess lastly are you seeing any incremental volume loss, how do you implanted.
<unk> then more presses.
Yes.
I'd like to highlight that.
One of the key strategies for US is to continue to have profitable new business wins for us and we talk over and over the long period of time that we expect to grow over and above our underlying markets and at the same time right. Now we're also doing some strategic pricing to test the elasticity.
In order to recover our margins and in the third quarter, we really did both we had about 3% and new business wins, but that was offset as we implemented the strategic pricing on a volume basis with with the reduction on choices of where we wanted to serve business. The net result.
However, as our portfolio is much healthier margins are up so while we anticipate there could still be some volume.
Volume decline.
We'll be focused on lower value business that will be replacing with higher value business. We continue to balance that as we manage things and a focus of the organization remains on profitable growth as well as margin recovery.
Right.
Thank you. Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.
Hi, everyone. It's Dan Rizzo on for Laurence Thank you for taking my questions.
If we think about it.
I should say if current conditions persist in terms of cost cutting raw materials and pricing what would the initial set up look forward it looks like in <unk>.
Thousand 23.
Yeah, Dan Thanks for the question good morning so.
Premature for us to give guidance at this stage, we haven't finished 2022 yet.
As you imagine we're in budgeting season, and so forth and as I've highlighted before we're really focused on executing on the things we can control and that includes focusing on value value, adding for our customers and earning more wallet share from them long term trends in our markets. We think are still positive. Despite some of the <unk>.
Short term challenges that could carryover, but our strategy is to remain customer intimate to execute our model and outperform the underlying markets regardless of what they do we will be balancing our pricing as well as margin recovery and efficiencies on cost and we expect earnings growth in 2020.
Great.
So can you maybe how we should think about Capex and working capital for next year or is it too early for that as well.
Maybe I'll kick off with Capex, and then Shane to talk a little bit a little bit more about working capital, but first of all our capital allocation strategy remains intact no change there and that clearly includes capex in particular to support our organic growth, our innovation and continuing to be.
More customer intimate and do that in an efficient way at the same time, we're going to be prudent.
On our spending.
And Shane indicated.
We'll maintain within the levels that we've been previously, but maybe you want to highlight a little bit there and then working capital yes, So Dan we had.
<unk> talked about this before going into this year, we said in the next couple of years would be within the range of 152, 5% of Capex compared to net sales. This year were at about one 4%.
Next year going into there, we think we will probably be in the mid range.
<unk>.
However, as Andy just talked about we will be flexible and prudent depending upon where the economy goes and spending associated with that.
As we look about working capital I indicated in my script.
That they were going to be working on improving conversion as well as working capital efficiency, specifically, we did take on a little bit of more safety stock to make sure that we can serve our customers.
Now during COVID-19 or working on reducing that to my mind levels.
And as I looked at head to next year, we will come back to a normalized cash conversion.
In a normal period without those raw material cost sites.
Look to unlock a significant amount of working capital next year.
Okay. Thanks, and then last question. So just a little clarification. So if you look at it like you end markets like auto and steel.
Are the volumes declined in line with what we're hearing from Oems and what's happening or have you been sheltered by by new product launches and legs.
Yes.
Yes, I would.
Today, as I think about the fourth quarter right.
As you kind of look at the bridge here.
We were down roughly 8% in volumes in the fourth quarter.
Within that.
We were down for both respective year over year, we were down 8% volumes.
And then within that we had 3% volume decline due to Russia, and Ukraine as well as the tolling and divesting of.
Alright, and then a tolling from previously divested products.
Without that we'd get down to around 5% decline and that shows neutral share gains and then offset by the strategic horizon losses. So that 5%. We think is in line with where we believe our markets for which is low down mid single digits that is a blend of obviously, our auto steel as well as overall.
Industrial markets.
Thank you very much.
Thank you. Our next question is from Jon <unk> with CJS Securities. Please proceed with your question.
Good morning. This is stefanos crist for John Thanks for taking my questions.
Can you talk about.
Good morning could you talk about what's driving the strength in the U S and if you think that's sustainable.
Yes, I think we've seen.
<unk> really across the board.
The underlying markets, we're continuing to perform over and above those some of the things I referenced a little bit earlier.
Some of the innovations and mix that we have continued to improve as we move forward and really just deepening our relationships with customers, providing more solutions participating in greater and greater percentage of their wallet. So.
I think some of the macro challenges that exist in <unk> and <unk>.
China and Europe for example are not as acute.
The U S and on top of that we are executing extremely well on our strategy.
Okay.
Great. Thanks, and then could you just talk about your confidence level and continuing to push price.
End markets do come under pressure.
Do you think you can get back to historic gross margin levels just on price.
Yes, I think it's a it's really a question of timing we continue to be very successful with our customers. So I don't want to minimize the challenges in the discussions with customers no. One is excited about.
About having a price increase and as we've talked about previously there's a lag in our business model because of our focus.
On value and the value that we're providing to our customers.
But I think the results show, even with our strategic pricing.
Relatively under control and allowing us to maintain volumes and improve the health of our portfolio and our margins as an indicator that our value is pretty sticky.
And we will continue to balance our approach as we go forward.
Great. Thank you so much.
Thank you. Our next question is from David Silver with CL King. Please proceed with your question.
Yes, hi, good morning.
I had a question I guess about your new.
New business wins, and maybe your philosophy of.
Selecting which areas you wish to target.
So so my impression is that you bring an awful lot of very very broad array of products and services that customers can choose to.
Upgrade or mix and match when they.
Consider.
Signing signing on with you.
And I was just wondering with the current if you look back to the current quarter, maybe a quarter or two ago.
Is there a trend in which parts of your value proposition tend to be more successful or more convincing and securing new business. In other words is it offering labor savings. So they can outsource is it supply chain.
Reliability is it ESG compliance.
Amongst your array of.
Benefits that you offer could you point to any trend in which of those attributes are most attractive too.
New clients. Thanks.
Yeah. Thanks, Thanks for the question, David I mean, I think one of the inherent characteristics of our customer intimate model as we serve the customer based upon what what problems. They have and how we can add solutions for them. So it's any number of things, including most if not more than you suggested there.
Where are we tend to add new business and greater share of wallet is where we build up and overall value and the number of solutions that we can provide to customers and our ability to adjust as they need us to adjust so.
So it's not related to a necessarily a specific product, but really more about the relationship with the customer and deploying the full capabilities, which of course got much more significant with the combination two years ago.
To a greater portion of our customer base, yes, just to add on that Dave you started the conversation with choice around.
As with share losses in the pricing side, and how we get to that product. It's not so much a product level, it's really dark cost to serve right. So we look at things from a return metric.
Yourself on an EBITDA basis economic value add so looking at each individual transaction, both on a customer level product level to ensure the appropriate return.
Not necessarily just a product decision it is a profitability decision tools.
Okay. Thanks for that.
And then maybe just a question about the nearer term outlook and in particular.
In Europe excuse me.
But from a number of my industrial companies that have reported to date I'm getting kind of somewhat mixed signals about.
How the major European customers are.
Let's say coming back or coming back online, let's say following the.
Traditional downtime for vacations in August maybe early September .
But.
From your more strategic customers is it your opinion that.
That they can continue to kind of operate or restore most.
Mostly normal operations.
Or would you say the tone is a little more negative than that and there may be hunkering down.
For a more difficult stretch so just a sense of how your major customers in Europe or are thinking about.
The next few months or three to six months. Thank you.
Thanks, David.
First of all Europe .
For us and.
For sure we know we're a bit behind on the price cost balance and we've done work and we will continue to improve in that space.
Price was actually up relatively significantly in the third quarter, but offset by some of the foreign currency translations back more than offset and we all know about the direct impacts of the Russia, Ukraine situation, but then the indirect impacts of energy.
In particular in steel and automotive are continuing I saw yesterday as a warm natal.
Just made a decision to take some of their capacity offline at least temporarily so I think those pressures are going to continue.
At the same time, we're staying focused on our pricing initiatives as well as controlling costs and looking for opportunities in that space.
We believe with no new significant issues that we will reach an inflection point.
On margins.
In the fourth quarter, but kind of understanding you want after that sure yes, only to add Andy as.
As you mentioned, an inflection point outside of anything.
Extreme we do see our margins our responsibility margins going up in the fourth quarter commitments third quarter, Europe and that really reflects operating around things that we can control.
Andy talked about our pricing initiatives in Europe .
Important to look for the third quarter, our organic topline growth was actually hard to defend our pricing offset our volumes, but the FX was pretty strong.
Yeah.
Okay. Okay.
Thank you. Thank you for that I appreciate the color.
Yeah.
Welcome.
Thank you. Our next question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.
Hi, just a couple more from me.
First of all it.
You mentioned that.
You're still seeing some some limited raw material availability, you said that was impacting your ability to win new customers, but it sounds like you still are winning some new customers with with the 3% number that you threw out there. So maybe help us understand what what your sales efforts look like.
Relative to normal.
How much more new business could you be winning if you had the raw materials that you did and I guess do you expect the availability issues to get better.
Maybe not next quarter, but as you look out into 2023.
Thanks, Mike.
I'd say that the supply chain issues have certainly decreased compared to the acute period, we experienced in previous quarters, but I think we're trying to highlight that theyre not gone there.
There are still spot issues in specific geographies or what specific products for the most part we're managing our way through that and we talk about our normal target is to be outperforming our underlying markets, 2% to 4%. We grew new business by about 3% in the third quarter I think it would be safe to assume we would have at <unk>.
A higher end of that range.
We don't have some of the supply chain issues, but I don't want to characterize it as material.
Okay.
And do you expect a little bit of further improvement in supply chain issues going forward.
We certainly hope so and I think we've seen cases in particular bundles of raw materials again, it depends upon the region.
But we've seen some areas where some of the mineral oil materials that some of the base oils from vegetable and animal derivative standpoint have started to stabilize so I think we're seeing signals of at least anecdotally.
And that things will continue to improve.
Alright. Thank you and then was also hoping that maybe you could give a little bit more color.
The reorganization that you referred to.
Moving Joe and <unk> into global rules are there still going to be individual business unit leaders or.
This part of it.
Greater shift away from your regional structure toward more of a global or like a matrix structure.
Yeah, Mike first of all I mean, I always like to go back to the fact, we have not changed our customer intimate strategy and that's really in service on this but it's one of the one of the activities that we feel is important to contemporize customer intimacy and serving our customers exactly the way that they want to be served to do that in the <unk>.
Efficient way for the value that's available and that makes sense.
And so taking advantage of our scale. We think this is an opportunity to deploy more of our capabilities in more places with more customers get more of that wallet share.
As we as we're able to cross sell into other applications with technologies and so forth at the same time.
We'll be doing some targeted investments to be able to support this that's going to allow us to be even more efficient from a process standpoint digital capabilities, we have some productivity enablers as well as footprint leverage that that will be taken are taking a look at yourself.
With respect to the comments that I made in the script, while Joe will be leading the commercial organization globally, we will clearly be implementing regionally and locally.
Alright, thanks very much.
Welcome. Thanks.
Thank you. Our next question is from Aaron Viswanathan with RBC. Please proceed with your question.
Great. Thanks, Good morning, taking my questions.
So a couple of questions just thinking about.
Q4, and some of the dynamics there. So do you expect a double digit price increases to continue in Q4, when do those start to lap kind of tougher comps is it say Q2 Q3 of next year.
And then similarly, if I just look at the volume side.
You said that you were down 8%, but maybe 5% if you normalize some of those things out. So can we expect kind of mid single digit volume declines for the next couple of quarters.
Maybe you can just help us with with price and volume a little bit.
Sure. Thanks for the questions. So.
Discussed price first looking at it sequentially are you were you were asking a year over year I think it's easier to explain sequentially given some of what we've talked about with our underlying raw material costs as well as some price and gross margin increase we indicated that our raw material costs are still going up but at a decelerated pace.
Up roughly 4% from Q2 to Q3, so something less than that we will price above that.
Most likely a little less than what we saw.
From Q2 to Q3.
<unk> continued to gain gross margins.
From a volume perspective and indicated in one of the Congress are one of the questions earlier.
But Q4 for us we tend to see seasonality.
And that 4% range ish.
So we're going to see continued volume softness that we saw from Q.
Three which was roughly in the 5% range plus that seasonality.
So you are looking at at least high single digit volume declines.
And as you think about attacking.
The overall kind of performance there I think I indicated before we are going to continue just to operate.
Where we can control right and the underlying markets are there, we'll continue to try to gain share.
Offset that pricing elasticity volume as well as grow our gross margin percentages.
Great. Thanks.
On that last point, then so I know that.
Maybe on an EBITDA margin basis.
The target is to get back to say 17, or 18% that you saw.
In Q1 of 'twenty, one before all the inflation, so what's kind of the path and trajectory that we should keep in mind are there any specific initiatives on the cost reduction side or.
Or is it mainly going to take just some some moderation in inflation and the pricing to kick in.
And maybe some relief on the FX side or how should we think about the path back to those margin levels.
Yes.
So I think we'd start with.
The point that we're on a journey here and we've talked about margin recovery being a journey that was going to take us. Some time I think the specific answer to your question depends a little bit on what happens with the inflationary environment of course, it raw materials and other inflationary factors start to recede that will help us to get back to art.
Targeted levels more quickly I think it's unclear for us to be able to predict exactly when that's going to happen prudently. In addition to recovering margins in capturing value price. We're also continuing to control our costs and look for opportunities to be as efficient as possible and delivering our model. So we'll continue that focus going.
Forward.
Great. Thanks, a lot.
Thank you.
Thank you there are no further questions at this time I would like to turn the call back over to Andy Thomas for any closing comments.
Yes. Thank you for that really I want to leave everyone with the future of Quaker Houghton is bright and we are executing on our priorities and we are committed to generating value for all of our stakeholders I want to thank you for your continued interest in Quaker Houghton and encourage you to please reach out to Jeff with any follow up questions.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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