Q4 2022 Quaker Chemical Corp Earnings Call

February 24, 2023

Greetings and welcome to the Quaker Houghton fourth quarter 2022 earnings Conference call.

Question and answer session will follow the formal presentation.

Once you require operator assistance during the conference. Please press star zero on your telephone keypad.

Minder This conference is being recorded.

I'd now like to turn the call over to Jeffrey Schnell, Vice President of Investor Relations. Mr. Schnell, you may begin.

Yeah.

Thank you Paul.

And welcome to our fourth quarter and full year 2020 earnings conference call.

Joining us today are Andy Thomas.

Chief Executive Officer, Jane <unk>, our senior Vice President and Chief Financial Officer, and Robert Traub, Our General Counsel.

Our comments relate to the financial information released after the close of the U S market yesterday February 23 2023.

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 effects on Quaker houghton's operating and financial performance.

These statements involve uncertainties and risks, which may cause actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements.

This presentation also contains certain non-GAAP financial measures and the company has provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the appendix of the presentation materials, which are available on our website.

For additional information please refer to our filings with the SEC now, it's my pleasure to turn the call over to Eric.

Thank you, Jeff and good morning, everyone.

In the fourth quarter, we demonstrated progress on our key priorities, we delivered double digit sales and EBIT growth.

Compared to the prior year driven by continued execution on our value based pricing initiatives and disciplined cost management, which in turn drove an improvement in gross margins we.

We generated $68 million of operating cash flow and strengthened our balance sheet.

Overall, we displayed our ability to work together to deliver results in an uneven and difficult operating environment.

Sales volumes did decline compared to the prior year, but this result was largely in line with our markets and our expectations.

Volumes reflected a continuation of a softer end market environment, which was most pronounced in the back half of the year.

This was evident at varying degrees across our regional segments and primarily in the steel and industrial end markets.

In the fourth quarter, we delivered a year over year improvement in price and product mix of approximately 24%.

Though this was partially offset by substantial foreign currency impacts it illustrates the team's strong execution balancing customer relationships and needs with our top financial priority of improving our margins back to historic levels.

Compared to the third quarter pricing and product mix increased another 4% and across all segments.

<unk> volumes declined 6% sequentially as softer demand was amplified by typical fourth quarter seasonal patterns.

Yes.

Gross margins were 32, 2% in the fourth quarter, an increase of approximately 100 basis points compared to the prior year period.

This was primarily driven by higher prices and partially offset by higher raw material manufacturing supply chain and logistics costs.

Gross margins declined slightly compared to the third quarter of 2022.

But we are making progress with our margins the inflationary pressures on our cost dampened our progress in the quarter.

Raw material costs increased sequentially due in part to some supply chain challenges on certain key raw materials impacting the product mix within our Americas segment.

We also had some fixed cost absorption, resulting from lower volumes, especially in December .

Notwithstanding these challenges we again delivered for our customers in difficult circumstances, and this commitment to continuity of supply and superior service is a hallmark of our customer intimate model.

Taken together and despite the ongoing complexities and uneven demand environment, we delivered $68 million of adjusted EBITDA in the fourth quarter and adjusted diluted earnings of $1 39 per share.

The financial and operational performance in the second half of 2022 is a strong foundation for the company to improve on in 2023.

Turning to our segments once again price capture was strong across all of our segments, both on a year over year and sequential basis.

However volumes declined in all segments on a year over year and sequential basis, except for Asia Pacific.

Unfavorable foreign currency translation was also a significant year over year headwind.

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 basis and sequentially. They increased in Asia Pacific EMEA and global specialties business.

Segment operating margins in the Americas declined sequentially. However, this was primarily related to the absorption effect on lower volumes as well as higher cost related to some acute raw material supply constraints and corresponding product mix.

EMEA margins slightly improved sequentially, they remain well below prior year and pre pandemic levels.

The path to improved profitability is within our control.

In addition to further targeted price actions, we have identified and begun to implement a range of targeted cost actions and operational efficiencies to further improve our profitability.

This gives us confidence in our ability to improve our margins as we progress through 2023.

Turning to the full year, we finished 2022 strong and achieved record net sales of $1 9 billion.

This was despite a very challenging environment highlighted by ongoing macroeconomic and geopolitical uncertainty raw material and manufacturing cost inflation and supply chain disruptions and significant foreign exchange impacts.

In 2022, we delivered $257 million of adjusted EBITDA as we drove an inflection in gross margins in the second half of the year.

We also faced approximately $25 million of EBITDA headwinds from foreign exchange and our exit from the Russia, Ukraine region in 2022.

In addition, there were meaningful volume impacts due to the COVID-19 situation in China.

Excluding the significant foreign currency headwinds sales in all four segments were higher in 2022 compared to 2021 led by double digit pricing gains.

Volumes in our global specialties business increased in 2022, but declined in our other segments.

In total our volumes were largely in line with the market indices, which we estimate declined in a mid single digit percent range.

Our ability to continue to earn net new business contributed approximately 1% to volumes in 2022, which includes the impact of volumes, we declined due to our value based pricing initiatives.

Segment earnings increased in the Americas, and the global specialties business compared to 2021 were roughly flat in Asia Pacific and declined in EMEA.

Segment margins expanded in the global specialties business were flattish in the Americas, and Asia Pacific and down significantly in EMEA.

While there is still much more to accomplish especially in EMEA and I am proud of the team's hard work driving an improvement in margins in the second half of 2022.

Turning to the outlook, we expect continued progress on our priorities in 2023.

Executing on what we can control.

The end market environment, and overall macroeconomic backdrop is difficult to predict and will likely remain uneven as we progressed through 2023.

In the first quarter, we expect gross margins to improve from fourth quarter levels, while we manage some volume headwinds from the timing of the lunar new year, and a continuation of softer market trends.

We will also have some additional SG&A cost primarily due to labor inflation.

We are cautiously optimistic that demand will improve from first quarter levels as we progress through 2023.

Looking at the full year, we continue to expect to deliver earnings growth and improved free cash flow in 2023 compared to 2022.

This will be driven by an improvement in gross margin and cost management as well as our ability to earn new business and outgrow our underlying markets.

Stepping back I'm proud of what we've accomplished together in 2022 and I'm confident in the future of Quaker Houghton.

Throughout the year, we remained highly focused on our objectives. These objectives support our growth culture and will power the company for long term success.

We are fortunate to have a strong foundation, which is centered on earning value through differentiated customer intimacy.

With a disciplined approach we will continue with our strategic themes to take advantage of our scale invest in Digitization and drive sustainability for our customers our company and our stakeholders.

I'd like to highlight these themes, which are critical to our long term success a bit more.

Globalizing is how we will most efficiently leverage our scale and capabilities to enhance our portfolio of products and solutions and our footprint, becoming an even more valuable partner to our customers supporting long term growth.

Digitization will drive deeper levels of customer intimacy, using internal and external digital tools and data, including our fluid intelligence offering to manage our cost to serve while also enhancing high touch delivery that further differentiates our value proposition.

And sustainability will continue to be at the core of our company. We are building additional critical capabilities to further develop our platforms of sustainable solutions and driving towards our 2030 goals.

These three strategic themes are meant to support and accelerate our long term growth initiatives and further differentiate our leading customer intimate strategy.

And while focus on long term goals as always at the forefront the uncertainty and complexities of the current macroeconomic geopolitical and operating environment remain.

Therefore in the fourth quarter, we have initiated a global cost and optimization program to improve our cost structure and drive a more profitable and productive organization.

This plan will be enacted over the next few years and will include a range of actions to improve our footprint optimize our go to market strategy simplify the portfolio and organization and upgrade those things that will enable the company to deliver on our strategic plan.

To summarize we exited the fourth quarter with momentum and we're committed to delivering results.

In 2022, we outgrew our markets by increasing customer wallet share as we added new value and drove productivity enhancements for our customers, which we expect to build on going forward.

In 2023, we will take actions designed to further improve our margins and our cash flow.

We will use innovation to expand our capabilities, particularly as we advance our digital transformation and portfolio of sustainable products.

We will continue to invest in our people culture and diverse talent globally.

We will maintain a healthy balance sheet, while executing on our disciplined capital allocation strategy, including complementing our core portfolio with bolt on acquisitions.

And we will be deliberate in our investments cost and price actions, improving our profitability and better positioning the company for the future.

I am confident in Quaker houghton's differentiated customer intimate value proposition and our ability to harness the power of our global scale and capabilities in order to drive operational excellence and industry, leading growth for years to come.

With that I'd like to pass it over to Shane to discuss the financials.

Thanks, Andy and good morning, everyone in.

In the fourth quarter, we delivered net sales of $485 million, which was an 8% increase compared to the prior year.

This was driven by a 24% increase in price and mix, partially offset by a 9% decline in total sales volumes and a 7% unfavorable impact from foreign exchange.

Consistent with recent quarters, our value based pricing initiatives drove the increase in net sales and on a sequential basis, we realized pricing gains of another 4% as we continue to implement these actions across our portfolio and our response to the persistent inflationary pressures on our business.

Compared to the prior year volumes declined due to the ongoing conflict between Russia, and Ukraine as well as from the wind down of previous total on volumes, we divested as part of the combination.

Excluding these two impacts our volumes declined about 4% compared to the prior year.

Sequentially, a 4% increase in price was offset by a 6% decline in volumes as soft market conditions were further impacted by normal seasonal patterns.

In both cases and on balance we believe volumes were largely in line with our underlying markets.

Gross margins in the fourth quarter was 32, 2% compared to 31, 1% in the prior year and 32, 7% in last quarter.

The 110 basis point improvement year over year reflects our strong pricing actions implemented to contend with significant inflationary pressures.

Gross margins declined 50 basis points sequentially.

The primary drivers of this were higher than expected raw material costs limited availability of certain key raw materials for some high value products in the Americas, which impacted our product mix.

And manufacturing absorption all our fixed costs, especially in December .

While raw material costs increased another 4% in the fourth quarter raw material cost pressures had largely stabilize but remain at historically high levels combined.

Combined with the cost and optimization actions, we are taking we expect to make further progress on our margins as we advance through 2023.

Looking at our SG&A on a non-GAAP basis, we had an increase of approximately $8 million or 8% compared to the prior year period.

This reflects year over year inflationary pressures on our labor costs, but remained relatively consistent as a percent of sales. We expect mid single digit inflation on our labor costs in 2023.

Our adjusted EBITDA was $68 million in the fourth quarter.

Which was an increase of 12% compared to the prior year.

This was a result of an improvement in gross margins, which offset the impact of lower volumes as well as foreign currency.

Sequentially, adjusted EBITDA declined $2 million, which primarily reflects the seasonally lower volumes and its impact on gross margin that were mentioned earlier.

From a segment perspective, excluding foreign exchange, the Americas, EMEA and global specialties businesses delivered double digit sales growth compared to the prior year.

Driven by significant increases in selling prices.

Our volumes did decline in all segments.

Were most pronounced in Asia Pacific, primarily due to the direct and indirect impacts of Covid on our customers in China.

For the remaining segments, our volumes declined reflecting softer end market conditions in 2022 compared to 2021.

Related to foreign currency FX remained a double digit headwind in R&D is that a.

A high single digit impact in Asia Pacific and was a mid single digit headwind and our global specialty business.

All segments again realized positive sequential pricing, but at varying degrees.

Our volumes declined sequentially across the Americas, EMEA and global specialties businesses, while Asia Pacific increased due to the timing of uneven demand patterns, resulting from the impacts of COVID-19 on our customers.

Foreign currency was a low single digit impact in our Asia Pacific segment.

We delivered strong year over year increase in operating earnings in our Americas Asia Pacific and global specialty business in the fourth quarter.

This was a result of significant margin improvement in those three segments.

EMEA remained behind.

The prior year due to continued margin pressures looking ahead, we are taking additional pricing and cost actions to improve the profitability of this segment.

Sequentially.

Our operating margins increased from the global specialty businesses Asia Pacific and EMEA. However, they were down modestly in the Americas, primarily due to manufacturing cost absorption higher raw material costs and corresponding mix mentioned before.

The improvement throughout 2022 demonstrates we are on the right path to recovering our margins globally.

Switching to the full year in 2022, we generated sales of $1 9 billion in.

An increase of 10% year over year.

This was primarily due to strong price capture of 22%, partially offset by a 6% decline in total volumes and a 6% headwind from foreign currency.

Without the volume impacts related to the Russia, Ukraine War and the divested tolling volumes, we estimate our total volumes declined approximately 3%.

This result is in line with our overall markets, which reflected softer conditions globally.

Net new business wins, which include the impact of business, we declined due to our value based pricing initiatives was a positive 1% contribution for the year.

We will continue to prioritize this value based approach as we focus the company on long term profitable growth opportunities.

Our 2002 gross margins were 31, 5% for the year.

These were impacted by the incremental raw material manufacturing and energy cost inflation, we saw throughout the year on our business.

Our gross margins did improve as we progressed throughout 2022, and we're approximately 75 basis points higher in the second half than the prior year and nearly two percentage points higher than the first half of 2022.

We delivered $257 million of adjusted EBITDA in 2022.

This is a solid result to build <unk>.

Considering the approximately $25 million of combined EBIT headwinds from our decision to exit the Russia, Ukraine region and foreign currency impacts.

We are confident in the earnings power of this organization and we will continue to emphasize margin recovery through price and cost actions to deliver improved earnings and improved free cash flow.

By segment, excluding foreign exchange, our net sales increased across all segments in 2022, driven by our global pricing initiatives.

This increase was partially offset by lower volumes in each segment, except our global specialty business.

Foreign currency was also a meaningful headwind in 2022. This was most pronounced in our EMEA segment seeing a nearly 15%.

Segment operating earnings grew in the Americas, and global specialty business in 2022.

Our Asia Pacific segment was roughly consistent with the prior year as an improvement in our segment margins offset the impact of lower volumes.

For EMEA, both its earnings and margins declined in 2014 as the segment continued to lag on its price versus cost recovery.

As mentioned, we have actions underway to improve the profitability of our segments, especially in England.

Below the line with our interest expense and other expense were higher in the fourth quarter sequentially and compared to prior year our.

Our interest costs reflect higher borrowing costs with our cost of debt at approximately four 8% for the fourth quarter.

Our effective tax rate, excluding nonrecurring and non core items was approximately 31% in the fourth quarter and 27% for 2022, primarily due to timing and overall mix in earnings.

We expect our 2020 effective tax rate to be roughly in line with full year 2022 levels pending any changes to domestic or foreign legislation.

Our fourth quarter GAAP diluted earnings per share was a loss of $4 24.

This result, primarily reflects the noncash goodwill impairment charge, we took on our EMEA segment, which was a result of the unprecedented market conditions, we see today.

Including the impacts of the ongoing Warren Ukraine energy and other inflationary cost pressures and the effect of higher interest rates on our cost of capital.

Also we recorded a net 4 million restructuring charge in the fourth quarter of 2022 as part of our new cost savings program.

Our fourth quarter non-GAAP diluted earnings per share or $1, 39, which was up 8% compared to $1 29 in the prior year, reflecting the improvement in our operating earnings year over year.

Switching to liquidity we.

We generated $68 million of cash from operations in the quarter, which resulted in $42 million for full year 2022.

While working capital remains higher than we would like we made progress in the fourth quarter in 2023, we expect our cash flow conversion to begin to improve.

We invested $8 million in capital expenditures in the quarter and $29 million in 2020 to.

This translates to approximately one 5% of our full year net sales.

Looking ahead, we expect capex to be in the range of one 5% to 2% of net sales in 2023. However.

However, we will be prudent with these investments balancing the macroeconomic environment with our overall strategic outlook.

Our balance sheet and liquidity remains strong our net debt at the end of the fourth quarter was $774 million and our net leverage ratio was three times adjusted EBITDA.

We remain committed to reducing our net leverage towards our target of two five times and we will continue to balance the other priorities and our capital allocation strategy, including dividends, which remain a critical part of our shareholder return.

The macroeconomic and geopolitical environment remain difficult to predict.

We are well positioned and have ample opportunities within our various end markets, providing best in class products and services to our customers. We remain fully committed to our margin improvement initiatives as well as delivering earnings growth in 2023 and beyond.

Before I close I want to highlight that beginning in the first quarter of 2023.

We'll change our reportable segments to better reflect the alignment of our new executive management and business structure.

Our new structure will consist of three regional segments, Americas, EMEA and Asia Pacific.

These new segments will include the prior regional breakdown as well as results formally in the global specialty business in those respective geographies.

We will be providing you comparable financial information in the future.

With that I will turn it back to Andy.

Thank you Shane.

2020 to 22 was a challenging year, but we executed well.

Want to thank the entire Quaker Houghton team once again for their ongoing commitment to our customers our company and for living our values and with that we'd be happy to address your questions.

Thank you we will now be conducting a question and answer session and we would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue you may.

Press Star two if he'd like to remove your question from the queue for participants agents reefer equipment necessary to pick up your handset before pressing the star key hormone plays while we poll for questions.

Thank you. Our first question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.

Okay.

Good morning.

Good morning, Mike.

Congratulations on a solid finish to the year.

Was wondering if you can maybe kind of walk us around the world and talk about what youre seeing in terms of demand trends in the different regions.

I'm, particularly interested to hear if you're seeing.

Any signs of some post COVID-19 recovery in China.

And whether you have any concerns about underlying demand in the Americas.

As a result of inflation and higher interest rates may be affecting.

Industrial demand.

Okay.

Yes, Thanks, Mike.

Maybe starting with what we kind of saw in the fourth quarter. Because I think there is some continuity first part is there still a lot of uncertainty.

And a lot of the end markets.

We all know about the underlying markets being down but in the case of EMEA. There's been additional pressure as a result of the knock on effects of the war in the Ukraine and impact on energy.

Primarily some of the metal making assets being taken offline.

And then also in Europe , I think in the fourth quarter. There was some work down some inventories.

To a greater degree of though I think in the Americas, there was a little bit of seasonality as well as working through inventories and again. These are not inventories of our products. These are more our customers products and downstream of them.

We kind of have in the knock on effect.

In Asia Pacific I think there was a combination of factors. There was also some customer inventories I think were being worked out of the system.

I would also characterize it pretty uneven restart after the relaxation of the Covid policies.

And then in particular for us in Asia as well there was a small but controllable amount of churn.

Of our margin margin initiatives.

That we had going.

A lot of that Mike is kind of continuing.

As we go forward, there's still a fair amount of uncertainty we hear a lot in Europe about assets being brought back online, but I would say at this stage, it's more words than action.

So, we'll see where that goes and just improve the world is unstable place.

Just in the last two weeks, we've been dealing with the situation in Turkey, and I just want to take a moment to comp.

Comment very devastating impact there we've been working very hard with our colleagues to ensure that they are safe their families are safe.

Our primary objective there, but the knock on effect of that is a little bit unclear.

In Asia, we're coming off of the lunar new year.

So a little bit of uncertainty there and how thats going to play with again these COVID-19 restarts and some of the supply chain unevenness.

With respect to the Americas, we highlighted that we had a couple of issues with some raw materials.

The effect on our ability, but the demand for those products is still there.

The wind down is probably still occurring on some destocking. So that result is a little bit of.

Continuation of what we saw in the fourth quarter. However, I think we anticipate that it's going to improve as we as we move through the year.

Lot of these shorter term things that I think we will have worked their way through the system and we'll be back to a little more stability. So we're cautiously optimistic about where the year will develop.

Okay.

Alright. Thank you that was very helpful. I wanted to also see if we could get a little bit more detail.

Some of the cost actions, you're going to be taking.

It sounds like if this is going to be implemented over the course of the next few years.

Got it.

It's more comprehensive.

It's a bigger.

Set of actions.

So help us understand is this more on the operational and procurement side is it more SG&A and.

And how much savings do you project.

For the entire program and what would the costs look like.

Yes, Thanks, Mike why don't I'll get that started and then maybe ask shayne to ask add a little bit of commentary first I mean, the first thing I'd highlight is these actions are consistent with our strategic intent and our growth strategy to support our customer intimate model, we want to continue to do that as effectively and efficiently as possible.

It will touch all of our businesses around the world. Obviously, we're going to have a big focus on Europe as we've highlighted we've already started some activities there.

But the.

The overall goal is to optimize the delivery of our customer intimate model and to grow profitably. So major buckets will include simplifying the organization looking at footprint.

Opportunities.

Some supply chain improvements as we have a broader global scale now that we can take advantage of and some optimization on go to market. So we're going to be looking pretty pretty broadly, but as indicated it will continue for a while and maybe Shane can add some color there Mike. So it's already began in 2000.

The fourth quarter as you just mentioned so we took a $4 million restructuring charge, there and it will continue in the coming quarters.

And you just talked about the emphasis is to drive growth and profitability across the business with multiple brands, whether that be footprint or simplifying the portfolio and also repositioning EMEA for profitable growth.

From a perspective of.

SG&A.

It's about in my script it will be.

Going up mid single digits and that is net of this cost program.

Alright, and I guess in terms of the overall expected savings from this program do you guys have a number at this point or a ballpark.

Yes, not at this time, but we will keep you informed as the quarters to come.

Okay.

And then.

Last question I have for now is.

Maybe just a little bit better understanding of what your expectations are.

Outbound raw material and energy costs, as we kind of get into Q1 and start 2023, I know theres a lot of uncertainty.

But maybe just talk about your expectations and maybe help us understand.

How much of a headwind was inflation in 2022, you mentioned.

The $25 million headwind on EBITDA related to FX in Russia was inflation.

More than that in.

In terms of EBITDA impact in 2022.

Thanks, Mike I'll start on the raw materials, and then I think Shane can ramp on the back half of that Youre correct. There is still a fair amount of uncertainty as we highlighted even in the fourth quarter. We continued to see some increase in raw material costs I would characterize it as raw materials stabilizing as an overall pool.

As you know we have a pretty complicated pool with major buckets on petroleum derived base oils as well as biologically derived base oils are number insignificant portion of enabling chemistry surfactants and so forth that allow us to put our formulations together and then.

A large chunk of additives.

Really differentiate and there's different dynamics happening within each one of those buckets and within individual components in each one of those but in total we.

We see those starting to stabilize.

Really we continue to be focused not only on managing that but reinforcing our value proposition, which is security of supply to our customers.

So we've.

Continued to keep that focus.

Even the situation we had in the fourth quarter, we worked very closely not only with our supplier, but also with our customers to ensure that we did.

Did everything possible and continue to deliver that security of supply and so we will continue to look at where raw materials are going in the future and make adjustments as necessary, but again, we believe they are starting to stabilize yes, Mike Malone. Your latter point, certainly we have that too.

Combat significant inflationary pressures throughout the year.

That is the biggest cost bucket, we have on our raw materials.

'twenty, one, yes, raw materials have gone up over 60%.

So we've had to obviously price to get that back on that side from a dollar perspective, and then work back our margins and then also obviously significant questionary costs related to energy as well as on our scale.

Alright, thanks very much.

Thanks, Mike.

Thank you. Our next question is from David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you good morning.

Good morning, just on pricing how much carryover pricing we have in 'twenty three from actions you took in 2022.

Yes, so I mean first of all thanks for the question, David and I want to reinforce that we continue on our value in use based pricing and really the total the total cost of ownership for our customers. So that continues and all in all of our efforts we were working very hard on that throughout 2020 to that.

10 years, we still have very targeted actions as we go forward.

As I've indicated and we've talked about previously we do have a about a quarter of our of our customer base that is tied to indices with contracts and really it's going to depend on where raw materials go as I mentioned raw materials are starting to stabilize depending upon how that moves forward that'll have a direct impact on.

What happens with pricing. So we will continue to focus on the value and use approach manner.

Manage the relationship with our customers, we want to make sure that they are supporting what we're doing here as well and the goal is to drive margin improvement and just add on to that David all things equal obviously, Andrew just talked in highlighted things that could change that the year, but all things equal we're expecting about a mid single digit increase just from pure pricing of that.

Very good and Shane just on working capital given the use of cash in the last couple of years should we expect to release of some cash this year from working capital.

Yeah, David So obviously over the last two years have added over $200 million of working capital investment as we prioritize some continuity supply.

Q4, we did drive an improvement in our working capital and largely due to effects around inventory reductions as we really focus on improving our capital efficiency looking at 'twenty. Three we will continue to drive that improvement in our working capital where possible and to drive improvement in our cash flow conversion.

And so we'll look to 'twenty three.

As compared to prior years definitely an improvement in our cash flow.

Thank you very much.

Thanks, David.

Yes.

Thank you. Our next question is from <unk> <unk> with RBC. Please proceed with your question.

Great. Thanks for taking my question.

Andy Shane and Jeff.

Well.

So I guess good morning, Ralph.

Good morning, when you look into Q1.

Was there some seasonal impacts that also hampered Q4, and so do you expect a little bit of growth in Q1 and <unk>.

Maybe you can touch on if there was some destocking as well in Q4, and if thats kind of subsiding.

Thanks.

Yeah, Thanks, Arun as I highlighted.

Few minutes ago, we did see across our different region varying degrees of restocking again, not with our products per se with our customers. Because we are adjusting time model, but it's really more about our customers and their downstream for sure. There is a seasonality there.

Occurs in the fourth quarter as well as in the Asia region in particular, the unevenness that comes around lunar new year.

With those things behind US I think there's still some some uncertainties associated with the with the pick up coming out of where we were in the fourth quarter, but.

We believe that things will continue to improve not only as we.

Basically as we move through the full calendar year in 2023.

And how should we think.

Think about measuring that.

You mentioned that you wanted to prioritize.

Recovering your margins to pre COVID-19 levels.

How do you characterize that.

EBIT dollar basis, or EBITDA dollar basis or percent margins and what are some of those targets. If you could help us with that.

Sure. So ultimately the goal is to.

Get back to pre Covid levels of historic levels on EBITDA.

But a big driver for us relates to our gross margin and the progression you're making on gross margin.

The historic levels have been.

And the higher above.

Above 35% from a gross margin standpoint, so that has been our goal we've communicated that now for multiple quarters, it's going to take US time as we've worked through this with our value based initiatives with customers, but we continue to work on it and those goals remain in place, yes, just add to that arena, we certainly focus on EBIT margin.

This is well Andy mentioned that about 35%, historically, which largely will equate to above that 18% range from an EBIT margin perspective as well.

Great. Thanks, and just to clarify then so.

Obviously, you've been relatively.

SaaS fall in putting through price.

But there's obviously still some more to catch up on but it sounds like that bucket is moving along.

You noted uneven demand so is it really now.

We're covering those volumes in order to get the margins back in the fixed cost leverage that you get from that kind of improve.

Improvement or is it maybe less FX pressure or what are some of the buckets that would get you to that 18% plus EBITDA margin.

When do you expect to get there.

In early 'twenty, four kind of run rate basis, or what's the timing there.

So.

The biggest lever for us is continuing to add more value for our customers and focusing on the value and use and that's the approach. We have historically used and we've continued to use and I think we've seen the robustness of it.

In this current inflationary environment. So that is our primary goal of continuing to work with customers to add more value participate in more of their wallet.

To ensure growth is profitable.

As we continue to go forward here.

As I've mentioned before depending upon raw materials and the degree in which they hopefully stabilize we.

We will give us the opportunity to move that path forward a little more quickly.

Regardless, we will continue to focus on the value and use pricing as is our approach.

And just lastly, just to clarify the FX given the headwind that you did see last year.

Do you expect that to be a slight tailwind here just given some of the movements in currencies and again.

Maybe a slightly more manageable comp or how should we think about FX.

Yes.

As I think about the year over year comp right. So obviously, we had a strong U S dollar.

Throughout the year last year.

As I think about given where the rate is right now the year over year comparison looks like theres going to be a headwind at that said if I look at it sequentially right I think that it's probably around neutral so sequentially, it's probably not as big of an impact versus prior year.

Great. Thanks, a lot.

Thanks, Eric.

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

So good morning, two questions. One is can you.

Any sense for just how much volume you feel you've missed out on based on the supply chain issues.

And is any of that going to be picked back up in Q1.

Yes.

Hi, Lawrence Yeah. Thanks. Thanks for the question I think we've been pretty pretty manageable.

To this point.

Point in time, it's been relatively small it's had more of an impact.

Really on the margin the margin mix that came as a result of it.

We're serving our customers and.

Their demand is still there so I don't believe theres any demand destruction, it's just catching up as we get more security on key raw materials.

Margin.

Respect at the numbers Laurence I think it's probably 1% to 2% of America's volume somewhere in that range.

And then with respect to the.

Some of the SG&A inflation, which is after the restructuring savings.

What are you seeing in terms of are you seeing any regional abatement in wage inflation pressure.

Yes, I think in general I mean, you can tell on a country by country and we don't want to go to that level of detail, but I would say Laurence we're continuing to see it everywhere.

And each in each of the different regions.

I don't see dramatic there are idiosyncrasies in each particular geography, but for the most part of the pressure remains on overall inflation for labor continuing to increase.

Okay. Thank you.

Thank you Ross.

Thank you. Our next question is from Jon <unk> with CJS Securities. Please proceed with your question.

Hi, Good morning, guys call. Thank you for taking my questions.

First one is do you want to comment.

Sequential price and volume trends.

Coming out of the western holiday season, and some destocking, but going into the lunar new year. I think you did mentioned price just lapping year over year will be up mid single digits or so but.

Maybe more volumes the question any specific price on a sequential basis, if you have that.

Yes, Thanks, John for the first quarter as I highlighted already there is.

Bill a fair number of uncertainties that have not gone away here, but we anticipate pricing is going to be up sequentially from the fourth quarter volume for the reasons that I highlighted already including new challenges like Turkey and of course. This is assuming no new significant upsets anywhere in the world, We think will be.

Flattish to potentially a little bit down sequentially.

So net result, though is we believe our gross margins will expand and be up.

Okay. Great. That's helpful. And then can you just talk in general about your pricing power.

If you believe that will hold through the year.

<unk>, where volumes may be declining or flat and raws are monitoring or maybe even declining as you head through the year.

Are you getting more pushback from clients just in terms of.

When you try to push price to them.

It's still been most of the same just help us understand the elasticity and kind of implications you think about going forward.

Yes, Great question, John So first I'll say in my in my three decades of being involved in the specialty chemicals industry I don't think I've ever seen the sustained period of inflation and necessity to to push through pricing and valid based on value and use them also the first one to admit.

Theres never a meeting you go into where our customer is asking us to give them a price increase.

And so there is of course, the normal normal type of pushback that would occur, but I think what we've been very successful in doing and it shows in our results as Shayne highlighted we had net new business wins and Thats net of business, we chose not to participate in because we were doing strategic price increase.

We were still positive in 2022.

And so now with multiple quarters getting closer I think to probably about two years' worth of price increases, we're still having successful conversations because we're basing those on our value in use and real deliverables that the customers gained benefit from.

Got it that's very helpful commentary. Thank you and then just last one for Shane I think you mentioned the increase in SG&A going forward.

Again mid single digits for the year, but I was wondering if you could be a little more specific about Q1, and if that remains stable through the year.

Based on savings.

Yes, so if I look at sequential SG&A from Q4, we do anticipate it being up from Q4 to Q3, and that's related to inflation as well as some of the timing of our compensation with the costs if I look at timing throughout 2023.

It will increase a little bit ratably given inflation kicking in.

Midway through the year.

But all in all I don't anticipate much variances between second quarter third quarter.

Great. Thank you very much.

Youre welcome.

Thank you there are no further questions at this time I would like to turn the floor back over to management for any closing comments.

Thank you for that.

So just to wrap up we are clearly focused on executing on clear priorities and committed to generating value for all of our stakeholders I want to thank you for your continued interest in Quaker Houghton and please do reach out to Jeff. If you have any follow up questions.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

[music].

Greetings and welcome to the Quaker Houghton fourth quarter 2022 earnings Conference call. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

A reminder, this conference is being recorded I would now like to turn the call over to Jeffrey Schnell, Vice President of Investor Relations. Mr. Schnell, you may begin.

Okay.

Thank you Paul Good morning, and welcome to our fourth quarter and full year 2022 earnings conference call.

Joining us today are Andy Thomas.

Chief Executive Officer, Shane Hostetter, our senior Vice President and Chief Financial Officer, and Robert Traub, Our General Counsel.

Our comments relate to the financial information released after the close of the U S market yesterday February 23 2023.

Our press release and accompanying slides can be found on our investor website.

After 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 effects of Quaker houghton's operating and financial performance.

These statements involve uncertainties and risks, which may cause actual results to differ the company is under no obligation to provide subsequent updates to these forward looking statements.

For additional information please refer to our filings with the SEC.

Now, it's my pleasure to turn the call over to Ed.

Thank you, Jeff and good morning, everyone in.

In the fourth quarter, we demonstrated progress on our key priorities, we delivered double digit sales and EBIT growth.

Compared to the prior year driven by continued execution on our value based pricing initiatives and disciplined cost management, which in turn drove an improvement in gross margins.

We generated $68 million of operating cash flow and strengthened our balance sheet.

Overall, we displayed our ability to work together to deliver results in an uneven and difficult operating environment.

Sales volumes did decline compared to the prior year, but this result was largely in line with our markets and our expectations Volte.

Volumes reflected a continuation of a softer end market environment, which was most pronounced in the back half of the year.

This was evident at varying degrees across our regional segments and primarily in the steel and industrial end markets.

In the fourth quarter, we delivered a year over year improvement in price and product mix of approximately 24%.

Though this was partially offset by substantial foreign currency impacts it illustrates the team's strong execution.

Balancing customer relationships and needs with our top financial priority of improving our margins back to historic levels.

Compared to the third quarter pricing and product mix increased another 4% and across all segments.

Sales volumes declined 6% sequentially as softer demand was amplified by typical fourth quarter seasonal patterns.