Q3 2023 Quaker Chemical Corp Earnings Call
Greetings and welcome to the Quaker Houghton third quarter 2023 earnings conference call. They.
A brief question and answer session will follow the formal presentation.
So the question queue at any time by pressing star one if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
A minder. 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.
Thank you good morning, and welcome to our third quarter 2023 earnings Conference call.
On the call today are Andy Thomas.
Our president and Chief Executive Officer.
Shane Hostetter, our executive 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 markets yesterday November 2nd 2023.
Our press release and accompanying slides can be found on our Investor Relations 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 measure in the appendix of the presentation materials, which are available on our website.
For additional information please refer to our filings with the SEC.
It's my pleasure to hand, the call over to Andy.
Thank you, Jeff and good morning, everyone.
The third quarter was another strong quarter for Quaker out we achieved.
<unk> consistent top line performance and further enhance the profitability of our business delivering another consecutive quarter of double digit increases in adjusted EBITDA and non-GAAP earnings per share.
Cash flow was also higher in the quarter.
We have generated approximately $200 million of operating cash flow year to date, a record for the company, providing significant balance sheet optionality for the enterprise.
Net sales were $491 million in the third quarter similar to the prior year.
We continue to benefit from our value based pricing actions and cost management.
Which helped offset sustained soft end market activity and a challenging operating environment.
Volumes declined approximately 3% compared to the prior year after excluding the impact of the wind down of tolling for products divested as part of the combination.
However sequentially volumes improved slightly and have been largely stable as we progressed throughout the year.
We are encouraged by demand in our aerospace automotive and China businesses, but we are being impacted by softer steel and industrial activity as well as customer order patterns, primarily in the Americas and Europe.
Positively we continue to gain additional business with new and existing customers and we are pleased that these gains are trending at the high end of our long term range.
This drives us to outperform our end markets as we are doing in 2023.
The diversification of our broad portfolio is also providing resilience in the current dynamic market environment.
And our people are continuing to deliver supporting the productivity sustainability and growth of our customers and our company.
In the third quarter pricing increased an additional 2% compared to the prior year and has increased 11% year to date.
We remain focused on earning value with our customers for the products and services we provide.
Well, we continue to implement targeted actions that are balanced with our cost to serve.
The pace of pricing gains is anticipated to slow in the coming quarters.
Throughout 2023, we have made significant progress recovering our margin profile, while balancing customer relationships and the long term aspiration of our business.
Gross margins in the third quarter were 37, 4%.
Nearly five percentage points higher than the prior year, and our fifth consecutive quarter of year over year margin improvement.
This was a result of a combination of our value based pricing actions product mix and cost management as well as a slight moderation in raw material costs that still remain at historically elevated levels.
In the third quarter, we generated adjusted EBITDA of $84 million and $2.05 of non-GAAP diluted earnings per share.
A 20% increase compared to the prior year.
Our financial results are primarily driven by consistent execution driving a recovery in our margins by focusing on solutions, our customers value as we manage the ongoing one.
Subtle and complex market environment.
Yeah.
Despite these challenges we continue to control we can control.
We generated $83 million of operating cash flow in the third quarter and approximately $200 million year to date.
This is a testament to the strong cash generation capabilities of Quaker Houghton.
The year over year improvement in our cash generation reflects not only the increase in our earnings but also improved working capital management.
We have continued to further strengthen our financial position and we have paid down $127 million of debt in 2023.
With this performance the company is well positioned to capitalize on the organic and inorganic opportunities.
Turning to our segments, we once again delivered earnings and margin performance in all of our segments on a year over year and sequential basis.
We continue to contend with a soft demand environment compared to the prior year, especially in the EMEA and Americas segment.
Volumes in the Asia Pacific segment increased due to a broad improvement in underlying demand.
Notwithstanding our results are generally in line with our underlying markets.
On a sequential basis overall volumes improved.
Raised a an increase in Asia Pacific.
Decline in EMEA and flat volume in the Americas.
We are pleased to see above market volume performance in Asia Pacific led by new business wins in China in both metals and metalworking.
We expect to continue to grow from these current low levels in Asia Pacific in the fourth quarter and in 2024.
Sequentially volumes in the Americas remained steady in the third quarter, despite some incremental headwinds in the packaging and industrial markets.
The impact of the UAW strike was not a significant driver in the quarter.
That said, we have continued to increase our share of wallet in 2023 in the Americas.
EMEA continues to be impacted by soft market conditions and uncertainty.
We expect demand in the EMEA market to remain at trough like levels through the end of the year.
We have continued to improve our cost position and financial performance in EMEA and are cautiously optimistic the market in the Americas and EMEA will begin to recover in the coming year.
We've executed very well in 2023, despite a considerable amount of uncertainty difficult market conditions and limited visibility in many of our end markets and regions.
Looking to the fourth quarter, we are encouraged by improvement in some products and end markets. We expect the current tepid demand environment will likely continue through the balance of the year.
We also anticipate some increased variability in customer order patterns in the fourth quarter as companies manage their own working capital.
If ratified the three recently announced tentative agreements with the UAW will lessen the impact in the fourth quarter.
By region, we expect a sequential improvement in the Asia Pacific region led by China and for demand to remain at lower levels in the Americas and EMEA regions.
We anticipate the fourth quarter will follow a more normal seasonal trend compared to recent years.
However, we continue to expect to deliver another quarter of year over year improvement in adjusted EBITDA.
We also expect another quarter of solid cash generation.
In summary, we are on track to deliver a meaningful improvement in margins and a strong double digit increase in earnings in 2023.
Additionally throughout this year, we have generated significant cash flow invested in our business.
We increased our dividend and strengthened our overall financial position.
Looking towards 2024, we are squarely focused on profitable growth.
Advancing our strategy, including contemporary rising the organization and enhancing the value we provide to our customers.
While macro and end market visibility remains limited we.
We believe the Destocking impacts our customers have faced are largely behind us and we are cautiously optimistic on many of our end markets for 2024, including automotive and aerospace as well as our China and emerging markets businesses.
Taken together, we expect to grow volumes above our market rates in 2024.
We are also making progress on our cost and efficiency actions and remain laser focused on earning share of wallet through additional customer valued solutions.
We have built momentum in our business and we are well positioned heading into 2024.
As we continue to manage the immediate realities of the world. The leadership team at Quaker Houghton remains fully committed to our enterprise growth strategy and driving long term value for stakeholders.
Much of our focus over the past two years has centered around mitigating the top financial and operational risks the company faced and driving efficiencies to further optimize our delivery of customer valued services and solutions.
Our strong business model and financial position has also enabled us to simultaneously continue investing in developing future opportunities.
As I have highlighted in previous quarters, our strategic pillars are centered around leveraging our global scale deploying digital capabilities and leading in sustainability. These.
These pillars are positioning Quaker Houghton to continue to meet the current and long term needs of our customers and deliver value for our company and our shareholders.
One area of focus is to leverage our scale to advance the intimacy of our model.
There are several commercial initiatives underway and I am pleased with the early progress.
For example, we are optimizing our current direct and indirect channel strategy.
We are advancing our capabilities and partner strategy to effectively and efficiently deliver the level of service and support that customers value more exactly.
This will be further enhanced with our fluid intelligence offering as we deploy digital capabilities to complement our service model, which will in turn provide openings to both deepen relationships with our customers and improve the productivity of our people as well as our customers' operations.
We are also working to accelerate opportunities to increase wallet share supported by our scale.
One example is through better leveraging our full global technology portfolio, including expanded sustainability options into new and existing markets.
This is especially true with our portfolio of advanced and operating solutions Weatherford developed or emerging geographies.
We have added talented local leaders and experts who are working closely with our global strategy R&D and other teams to advance our efforts many of which were made possible by the combination.
We expect to realize some additional benefit from these ongoing efforts, which are making good use of our global scale in 2024 and beyond.
These important initiatives are just some of the ongoing activities that are bringing our enterprise strategy to life.
There are natural extensions of our differentiated approach building on the foundation of providing customer intimacy.
In summary, we are focused on capitalizing on the positive momentum we have built and we are fully committed to further unlocking our potential.
We have a strong market position, our industry, which in turn has attractive long term growth characteristics.
We are making meaningful progress on our financial and operational priorities and have significantly improved our margin profile strengthened our balance sheet and are demonstrating the strong cash generation capabilities of Quaker Houghton.
We are focused on driving success for and with our customers and earning new business supporting our customers as they pursue new opportunities as well as manage through the challenges impacting their business.
We continue prudently investing to advance our growth initiatives building on our strong foundation.
It is through our strategic pillars that we will deliver profitable above market growth in 2024 and beyond.
I'm proud of our execution through 2023, delivering on our financial operational and strategic objectives, while managing through a myriad of challenges that have impacted us and our customers.
I am confident in the Quaker Houghton team, who continue to develop and deploy our leading portfolio of products and services and our differentiated customer intimate solution based business model and I remain.
Excited by the opportunities we have together to enhance the value of our customers and our business as we generate long term value for shareholders.
With that I'd like to pass it over to Shane to discuss the financials.
Thanks, Andy and good morning, everyone.
In the third quarter, we delivered net sales of $491 million, which was consistent with the prior year.
Primary drivers to our sales performance was an increase in average selling price and product mix up 2% and a favorable impact of foreign currency up 2% offset by a 4% decline in sales volumes.
The decline in our volumes was driven by softer market conditions, primarily in the Americas, and EMEA segments, and approximately 1% due to the wind down of previous tolling volumes, we divested as part of the combination.
Sequentially volumes increased in the third quarter by 1%, but were offset by a slight decline in price and mix and foreign exchange.
Gross margins in the third quarter was 37, 4%, which represents an increase of 470 basis points compared to 32, 7% in the prior year.
150 basis points compared to 35, 9% in the second quarter of 2023.
This improvement reflects continued execution on our pricing actions as well as the low single digit decline in our raw material costs sequentially.
Excluding one time items, SG&A increased $12 million or 10% compared to the prior year and $3 million or 2% sequentially.
These increases reflect the year over year inflationary impact on our labor costs, the timing and levels of our annual incentive compensation as well as impacts due to foreign exchange.
We delivered $84 million of adjusted EBITDA in the third quarter, which is an increase of 20% compared to the prior year and our fifth consecutive year over year increase.
Our adjusted EBITDA margins expanded to 17, 2%.
An increase of 290 basis points compared to the prior year, an increase of 100 basis points sequentially.
These improvements reflect the progress we've made advancing our strategy, while balancing our near term priorities with delivering our long term profitable growth initiatives.
Switching to our segments.
Net sales in the Americas declined approximately 3% year over year, driven by lower volumes, partially offset by higher selling prices and product mix and foreign exchange.
The decline in sales volumes was primarily due to soft end market activity compared to the prior year.
As well as some declines due to our value based pricing strategy, which were offset by new business wins.
Volumes were impacted by lower metalworking demand, including the direct and indirect impact of the UAW strike on a sequential comparison volumes were flat in the Americas.
Our EMEA net sales increased 4% compared to the prior year, primarily due to increases in selling price and mix and foreign exchange, partially offset by decline in sales volumes.
We continue to contend with salt and market conditions in India, especially in men's but these were partially offset by improvement in automotive and new business wins.
The wind down of the tolling for business divested as part of the combination also contributed to the decline and we will lap. This beginning in the first quarter of 2020.
Volumes declined sequentially in EMEA segment due to the soft market conditions noted earlier.
Net sales in Asia Pacific increased compared to the prior year as we experienced broad based improvements in both metals and metal working in China, as well as broader Asia Pacific.
Also new business wins contributed to the improved performance, while foreign exchange was a modest headwind to this segments sales in the quarter.
<unk> also increased in Asia Pacific compared to the second quarter as expected due to a modest improvement in underlying demand across many end markets.
During the third quarter, we continued to make progress on our margin recovery across all segments, having increased on both a year over year and sequential basis.
We delivered strong year over year increases in operating earnings and all of our shippers.
Overall, we continue to build on the strong performance we delivered in the first half of 2023, and we are making significant progress improving the profitability of our business.
Below the line our interest expense was higher in the third quarter compared to the prior year, but flat sequentially.
Our cost of debt in the third quarter was approximately 6%, which is in line with where we exited the prior quarter.
Our effective tax rate, excluding nonrecurring and non core items was approximately 29% in the third quarter.
Our GAAP diluted earnings per share were $1 87, and our non-GAAP diluted earnings per share were $2 <unk>.
This represents an 18% year over year increase and a 6% sequential increase.
Driven by the improvement in our operating areas.
Okay.
Switching to liquidity, we generated $83 million of cash from operations in the third quarter.
Year to date, we have generated 200 million of operating cash flow. This.
This year over year improvement reflects our solid earnings and improvements in working capital efficiency.
Year to date, we've invested $26 million in capital expenditures paid 23 million to shareholders through dividends and reduced our debt by $127 million.
Our balance sheet and liquidity remains strong.
Net debt at the end of the third quarter was $628 million and our net leverage ratio improved to two times adjusted EBITDA compared to two three times at the end of last quarter and three times at the beginning of the year.
Our capital allocation priorities remain consistent returned capital through dividends and strengthening our balance sheet and invest to grow the business both organically and inorganically.
For full year 2023.
Our anticipated Capex spend remains unchanged at approximately 1.5% to 2% of net sales.
We have ample opportunities to drive growth and we have conviction in the cash flow generation of our business. We will continue to balance the current macroeconomic environment and short term outlook with our long term strategy to deliver shareholder returns.
To summarize we executed well in 2023, we've delivered strong earnings growth and record cash flow, thus far despite a very difficult macroeconomic backdrop.
We are committed to our growth strategy and remain confident in the earnings power and cash generation capabilities of this time.
With that I'll turn it back over to Andy.
Thank you Shane and I'd like to thank the entire organization for their dedication and commitment to our company and our customers for their trust and partnership IMAX.
I am excited with the opportunities ahead and with that we'd be happy to address your questions.
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One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.
Hi, good morning.
Good morning, Mike.
Congratulations on another strong quarter here.
And do you you've kind of told us that we shouldn't assume that you guys keep delivering these step changes in gross margin, but that's exactly what you're doing.
Has the pace of gross margin expansion exceeded your expectations this year.
And I guess can you walk through some of the drivers that may have materialized more quickly than you might have anticipated.
Yeah. Thanks, Mike I appreciate your comments.
For sure we've been talking about margins in our journey for quite some time as I highlighted it was not necessarily going to be linear.
But we've made considerable progress in particular in 2023, if you look at it on a year to date basis are worried about 36%, which is getting closer, but we're still not at our target consistently.
So we still think there is some upward mobility there.
Lee that constant delivery is going to require us to use all levers. So while we'll continue to work with customers on our value in use.
We're going to continue to drive efficiencies and be focused on new business wins that are the most accretive in that space. So.
It's continuing we've continued to execute on each one of those levers we will do that going forward and our goal is to deliver that over the entire cycle.
Alright, you were.
Particularly strong I guess from a regional standpoint, the margin was particularly impressive in Europe Oh.
I know that that's been an area, where you're working you've been working on the cost structure, but can you talk about what's changed there too.
Generate such margin improvement despite continued volume challenges.
Yeah. Thanks, So for sure Europe continues to be weak overall the underlying markets.
No have continued to struggle a little bit as we highlighted kind of the steel and industrial or are still operating near the bottom we characterize it as kind of trough like but we've we've focused our efforts again, where we're adding the most value for customers and working with them.
We've continued to move forward on our cost program and that's contributing as well and we are at a better position from a profitability standpoint, but we still have a journey in front of us and we look forward to the position, we're creating as underlying demand does improve we believe we'll be in a very good position to serve our customers.
Alright.
Just kind of curious for your maybe a little bit more detail on Q4 and.
And how EBITDA might compare to what you just delivered in Q3 I know you said you expect it to be up year over year, but you're coming off a.
Three straight quarters, where you've been.
20% better year on year or more but maybe just walk us through some of the key puts and takes it and maybe also touch on <unk>.
How much impact we could see in the Americas from that UAW strike, which hopefully is on its way towards resolution.
Yes couple of couple questions are Mike. So let me, let me try to come out of them in sequence. So in the fourth quarter. We think we're going to build on the momentum that we've developed over over 2023. There is still is uncertainty.
In the market.
We highlighted that typically the fourth quarter has some seasonality associated with it particularly in the Americas and in Europe. We also think there could be some order pattern impacts.
Impacts this year as customers are watching their working capital very very closely.
UAW.
A little bit unclear, we're happy about the resolution.
That said that appears to be on the horizon, but were not quite clear on all the indirect impacts associated with that but in total we think that leads us to a Q4, where EBITDA grows year over year with again strong cash flow generation.
And then I think you didn't ask necessarily about beyond Q4, but I think as we start to look at 2024, it's still early.
We're in our budgeting process. So we have limited visibility, but we think again, we'll continue to build on the progress that we've made in 2023.
Advanced our enterprise strategy here with our targets, where we believe there'll be profitable growth and look we always expect to grow. This business. There are some encouraging signs as we see it now we're seeing markets showing some signals that could be improving on automotive and aerospace and.
And we believe we'll continue to as we have done operate and execute by growing above the market rates.
That are happening in our underlying market. So last thing I'll highlight two is as I mentioned on the margins. There is still room to grow on our margins. We think there will be some improvement for us and we will keep executing on our cost cost management. So some positive momentum we built here in 2023 that we intend to continue in 2000.
Four.
All right very helpful. Thanks, very much.
Thanks, Mike.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question is from Vincent Anderson with Stifel. Please proceed with your question.
Yeah, Good morning, everyone Mike.
Mike I mean really nice job.
On the quarter, particularly in pricing, which is where I wanted to start I am guessing raw material index products actually turned into a headwind on that front this quarter and if that's correct I'm curious if you're willing to comment.
More of the magnitude of your pricing improvement, excluding those raw material indexes.
Yes, thanks, Thanks, Vincent for sure pricing.
Is it related to not only the raw material costs, but also more importantly, the value we're providing to our customers generally speaking we are not giving back pricing because because of our focus on that value and use approach, but youre correct. There is a portion of our business about a quarter of our business that is related to index.
<unk> materials, it's rarely on a single raw material, though so it's a mix.
We continue to focus on on working with our customers delivering the most value and balancing that against our cost to serve the team's done a really nice job.
On their execution so well.
While pricing has been a key component of what we've been talking about and that will continue to be a component. It is not the only one as we move forward.
Sure. Okay Fair enough and then you spoke a bit about this on in your prepared remarks, but I just kind of wanted to clarify what's going on in Asia Pacific. So you mentioned broader market improvements in APAC driving volumes, though.
<unk> in the first half of the year did seem to be trailing what limited indicators, we have at least for China. So I was hoping you could kind of square your first half volumes relative to those data points like steel product production aluminum production versus the improvement that you saw specifically in this quarter.
Yes, Thanks Vince.
And in Asia Pacific and obviously, China is a key component of it although comments really apply across we have seen improvements in the second half.
We're seeing kind of general improvements both in metals and metalworking no from relatively low levels as you indicated in the first half.
We see that that.
Being a function of both whats happening with our customers in their business and also I think we're doing a differentiated job of targeting the right business to grow.
With them. So it's a combination of factors, but it is encouraging and we're hopeful that's going to continue.
Alright, Thanks, and if I could sneak in a quick one quick one in here just given the continued improvement in cash flow and the balance sheet health overall I'm curious how the tuck in M&A market is looking these days and your appetite for playing in that again next year through you know maybe a couple of different macro I.
Economic scenarios.
Yes, Thanks, Vincent for sure M&A is a key part of our capital allocation strategy and we continue to be focused on where we're going to add shareholder value. We also align it up in a disciplined fashion with our enterprise growth strategy. So while we invest in organic growth. We also want to align that with inorganic.
Opportunities, we have an active pipeline, we're continuing to make progress with a number of opportunities. We've had a lot of success at Quaker Houghton over the years with bolt ons, but take advantage of our service model to provide even more solutions for our customers as we expand our position in there and their overall spend and well.
Continue to move those forward and make use of our balance sheet.
We will reinforce our ability to do it.
Alright, Thanks again, that's all from me.
Thanks.
Thank you. Our next question is from Jon <unk> with CJS Securities. Please proceed with your question.
Hi, This is Justin on for John Good morning.
Good morning.
So leverage has come down substantially so I think it can be a little more flexible on the capital allocation you were mentioning so can you just kind of rank your priorities between further debt pay down M&A repurchases dividends internal investments and how might that change as you know rates go up or your share price changes.
Yeah.
Yeah, why don't I start with the capital strategy and then Shane can add some details at the end here on your question, but I mean, our capital allocation strategy remains consistent focusing on shareholder value first and foremost we've been a committed dividend payer.
Throughout our history, we increased our dividend again, 5%. This year, we've been also paying down debt over $125 million year to date, and we're investing in our organic growth as I highlighted a little bit earlier, focusing on where where innovation can be even more successful and how we can deliver that is.
<unk> as possible to our customers' M&A.
M&A with the bolt ons as I just highlighted is extremely important and then if there are other levers for us to to provide shareholder returns if the opportunities are appropriate we will pursue those.
I think Andy hit on the most important that is.
As shareholder value.
Think about items, we consider M&A, you know definitely hurdle rates changed a bit due to interest rates, improving and we have other levers similar to what Andrew just talked about buybacks, but we may consider.
So over overall, we'll balance what is the most appropriate avenue to return value to our shareholders.
Alright, that's helpful. Thanks, and then one more if I may.
What are your expectations for inflation deflation in the near term and the ability to pass through or hold on to price.
Yeah well.
Certainly inflation has been a big part of the story for quite some time, when we think about raw materials.
In the fourth quarter, we've got a very mixed bag with over 3000 different raw materials and there are some that that are moving up some that are kind.
Kind of stabilized, but I mean overall, we don't see a fundamental shift based upon what we see at the moment, we're not expecting it to necessarily move directionally in a significant fashion.
Alright. Thanks, I appreciate you taking the questions.
Youre welcome.
Thank you. Our next question is from Arun Viswanathan with RBC capital markets. Please proceed with your question.
Great. Thanks for taking my question good morning, I'm here all while.
That's helpful.
Good morning.
Yes.
Just coming back in the Q4 outlook.
Outlook.
Now most most the most of the quarters. This year like you've been in the double digit gain year on year of growth in EBITDA.
Is that kind of the magnitude you're still thinking of in Q4, I know, there's some seasonality that may play into that.
Maybe some lingering impacts of Destocking.
Destocking, but that and maybe hold on to.
As you did this quarter.
Strong pricing efforts and some mix.
Maybe you can just kind of size.
Size kind of the impact of of growth that you see in Q4, a year on year.
Yeah Arun.
We don't typically provide any detailed guidance on that but as I highlighted seasonality in the fourth quarter in particular in Europe, and the Americas as part of the equation and typically that's that's kind of low to mid single digits.
Relative to other quarters.
We also I would highlight to the order pattern with some of the working capital management, we expect our customers to do we will probably contribute to that.
Okay. Thanks, and then.
Definitely on on 24.
It sounds like you do expect it to grow.
Again, we have maybe a little bit more modest growth in 'twenty four modeled right now versus what we saw year on year in 'twenty three.
Again in 'twenty three you had.
A nice recovery of.
Margin.
That you're still targeting some margin growth for next year, but would.
Would you agree that the.
The growth that you expect in EBITDA.
Next year will be more modest in 'twenty three growth.
Yes, I think what I would what I would highlight it's still pretty early for 2024, but as we see it right now we have proven that we're able to continue to win new business valuable business over and above whats happening with our customers underlying business. We can we expect to continue to do that there are some encouraging signs.
See how those continue to play out but.
In markets like aerospace and automotive.
In our Asia Pac business.
Business that we think is encouraging and we're going to continue to manage the cost to serve overall, so we think.
Sorry, I missed the margins.
We still think there's a bit of room to go with respect to our margins. So.
We're anticipating and we're always going to expect to grow this business, but we're not quantifying it at this stage.
And then just lastly.
How do you think about working capital and cash flow.
Then Quaker itself.
You know I think again theres been a lot of volatility in the supply chain there.
Ben you know inventory restocking or destocking.
No regional differences.
So it's working capital likely to be a greater use next year.
Do you see the need to maybe build a little bit of inventory.
And so on.
And what would that kind of <unk>.
<unk> for for free cash flow.
Yeah. Thanks Arun.
As you imagine we were carrying a little bit more inventory.
Moving to safety stock and just security of supply over the last couple of years coming into this year was.
Focus to improve working capital and you see on our cash flow that some of those efficiencies have come through.
Thanks.
Thank you. Our next question is from David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you.
On raw materials I believe you said they were down low single digits in Q3 quarter over quarter would you expect a similar decline in Q4 and I think you mentioned, maybe not a big impact next year, but.
Should they be down next year as well.
Hi, David.
Did highlight that in the third quarter, there was a kind of a low single digit deflation in raw materials.
We've continued as we as we move forward, though we continue to see a mixed bag. There are some of the many raw materials in our 3000 that we buy that are moving up.
While others are a little more stable so were as we see it at the moment, we're seeing we expect fourth quarter to be relatively stable without any significant shift.
Beyond that Theres, just not clear visibility, but there's nothing right now to suggest that there will be a major deviation.
And whats raws are you seeing them being up sequentially right now.
Yes for sure some of the oil oil based products and derivative products related to that are the ones that have the pressure at the moment.
The whole basket is incredibly high versus where it's been historically.
Understood and next year on pricing would you expect pricing to still be up next year year over year.
So I think you know we're going to focus in on what value, we are providing the customers and understanding what's happening on our cost to serve.
Which will which will influence our exactly what that looks like so we're not necessarily forecasting.
Any significant movements, but I think value based pricing has always been part of the.
The model that Quaker Houghton and will continue where we are adding value to sharing that value with our customers.
Thank you.
Thank you.
Yes.
Our next question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.
Hi, Good morning, again, a couple more for me.
First of all Andy you talked in your prepared remarks about.
One of the areas that youre looking at for efficiency is optimization of your direct and indirect channel strategy can.
Can you give us a little more color on what Youre looking to do there and what that might entail.
Yes, Thanks, Mike.
Sure when we do talk about channel, we're referencing both the direct and indirect channel partners that we work with.
It's really about the customer journey and fully understanding and an intimate level each of our customers different journeys, how they're choosing using and repeating.
Their purchase and use of our products.
We're working to align the organization to be able to match that exactly with the right service levels and deploy digital capabilities to support that on an efficient basis and really I mean the goal here is we want to make sure we're servicing our customers exactly the way they need to be serviced not over serving them and not underserved.
Yes.
Alright. Thank you and then a quick one for Shane you mentioned that the one day of interest rate right now is 6% can.
Can you tell us what the fixed versus floating mix of your deck it looks like today and I guess.
What that means for expectations about your cost of debt in the next year.
Yes sure.
We have roughly 30, a third is fixed and the rest is variable at.
At the moment like you mentioned our cost of debt is roughly 6%.
Obviously this depends upon where the fed goes from an increase or decrease into the future.
But for now it seems to be steady on that side as I think about the next quarter.
However, as we continue to focus on debt pay down that will obviously impact our interest expense as well going from the fourth quarter as well as into 2024.
Yeah.
Is it fair to say that your debt Paydown focus is going to be on the variable portion.
That's fair Mike Yes.
Alright, Thank you very much.
Thank you.
Thank you there are no further questions at this time I'd like to hand, the floor back over to Andy commented for closing comments.
Yes, thanks, very much I just wanted to extend my appreciation for everybody and their interest in Quaker Houghton I think we're well positioned with the performance and execution and really looking forward to the opportunities.
That we have in front of US. Thanks for your continued interest and we'll look forward to the next opportunity of talking.
Okay.
This concludes today's conference.
You may disconnect your lines at this time, thank you for your participation.