Q2 2024 Quaker Chemical Corp Earnings Call

Greetings and welcome to the Quaker House in the second quarter of 2024 earnings conference call.

Operator: A 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. As 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.

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

Jeffrey Schnell: Thank you, good morning, and welcome to our second quarter 2024 earnings conference. On the call today are Andy Tometich, our President and Chief Executive Officer, Tom Coler, our Executive Vice President and Chief Financial Officer, and Robert Traub, our General Counsel.

Jeffrey Schnell: Thank you, good morning, and welcome to our second quarter 2024 earnings conference call.

Speaker Change: On the call today are Andy Tometich, our President and Chief Executive Officer, Tom Kohler, our Executive Vice President and Chief Financial Officer, and Robert Traub, our General Counsel.

Jeffrey Schnell: Our comments relate to the financial information released after the close of the U.S. markets yesterday, August 5, 2024. 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 effect on Quaker Houghton's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ.

Speaker Change: Our comments relate to the financial information released after the close of the U.S. markets yesterday, August 5, 2024. Our press release and accompanying slides can be found on our Investor Relations website.

Jeffrey Schnell: 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 hand the call over to Andrew.

Speaker Change: 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.

Speaker Change: These statements involve uncertainties and risks, which may cause actual results to differ.

Speaker Change: The company is under no obligation to provide subsequent updates to these forward-looking statements.

Speaker Change: 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.

Speaker Change: For additional information, please refer to our filings with the SEC. Now, it's my pleasure to hand the call over to Andy.

Andrew Tometich: Thank you, Jeff, and good morning, everyone. In the second quarter, Quaker Houghton's results were highlighted by a further expansion in our margins, which drove an increase in earnings and translated into solid operating cash flow. The resilience of our business is evident as we manage through the sustained challenges of the dynamic market conditions we are facing. We continue to earn new business with our customers, execute on our enterprise priorities, and improve the strength of our financial profile. We are also building momentum with the advancement of our strategy, which is focused on long-term, sustainable growth. Second quarter net sales were $464 million, 6% below the prior year and 1% lower than the first quarter.

Andy Tometich: Thank you, Jeff, and good morning, everyone.

Andy Tometich: In the second quarter, Quaker Houghton's results were highlighted by a further expansion in our margins, which drove an increase in earnings and translated into solid operating cash flow.

Andy Tometich: The resilience of our business is evident as we manage through the sustained challenges of the dynamic market conditions we are facing.

Andy Tometich: We continue to earn new business with our customers, execute on our enterprise priorities, and improve the strength of our financial profile.

Andy Tometich: We are also building momentum with the advancement of our strategy, which is focused on long-term, sustainable growth.

Andy Tometich: Second quarter net sales were $464 million, 6% below the prior year and 1% lower than the first quarter.

Andrew Tometich: Total reported volumes were once again stable on both a year-over-year and sequential basis, despite soft end market conditions. This was primarily driven by our team's sustained focus on expanding our relationships with our customers through our differentiated customer intimacy model and our leading portfolio of services and solutions, which help our customers achieve better outcomes in their 200 basis points higher than the prior year, while material costs were the primary driver of the improvement on a year-over-year basis. As expected, our raw material cost position has benefited from a modest deflationary movement.

Andy Tometich: Total reported volumes were once again stable on both a year-over-year and sequential basis, despite soft and market conditions.

Andy Tometich: This was primarily driven by our team's sustained focus on expanding our relationships with our customers through our differentiated customer management model and our leading portfolio of services and solutions which help our customers achieve better outcomes in their operations.

Andy Tometich: Of course, margins in the second quarter were 37.9%.

Andy Tometich: 200 basis points higher than the prior year.

Andy Tometich: while material costs were the primary driver of the improvement on a year-over-year basis.

Andy Tometich: As expected, our raw material cost position has benefited from modest deflationary movements.

Andrew Tometich: We've also maintained a disciplined approach with our customer value-driven, total cost of ownership model. Additionally, we are actively enhancing our capabilities and improving our manufacturing and supply chain productivity, providing avenues to support our customers and our own expectations for growth. In the second quarter, we generated adjusted EBITDA of $84 million, a 5% increase year over year, and $2.13 of non-GAAP diluted earnings per share, a 10% increase compared to the prior year.

Andy Tometich: We've also maintained a disciplined approach with our customer value-driven total cost of ownership model.

Andy Tometich: Additionally, we are actively enhancing our capabilities and improving our manufacturing and supply chain productivity, providing avenues to support our customers and our own expectations for growth.

Andrew Tometich: These results emphasize our financial and operational focus, while also pursuing investments in our strategic pillars, as we navigate the persistent and challenging end-to-market back-to-back. Our strong financial position is supported by our continued cash generation capabilities and incremental progress driving working capital improvement. In the second quarter, we generated approximately $46 million of operating cash flow, or $74 million year-to-date, and our net leverage ratio improved to 1.7 times our trailing 12-month adjusted EBITDA.

Andy Tometich: In the second quarter, we generated approximately $46 million of operating cash flow, or $74 million year-to-date, and our net leverage ratio improved to 1.7 times our trailing 12-month adjusted EBITDA.

Andrew Tometich: Our strong balance sheet, business model, and cash flow characteristics provide significant opportunities to support and accelerate our framework for long-term value creation. To that end, last week, our board authorized an increase of 6.6% in our cash dividends.

Andrew Tometich: Highlighting the commitment to our legacy of shareholder, Turning to our segments, we once again delivered improved margin performance in all of our segments on a year-over-year basis, driven by the execution of our profitable growth initiative. This was our 8th consecutive quarter of year-over-year improvement in our segment margins. Despite the soft end market conditions, volumes in our Asia-Pacific segment increased by a high single-digit percentage and are more than 10% higher in the first half of 2024 compared to the prior year.

Andy Tometich: This was our 8th consecutive quarter of a year-over-year improvement in our segment margins, despite the soft end market conditions.

Andrew Tometich: Growth has been broad-based and amplified by new business wins for both metalworking applications and across the region, including in China, India, and Southeast Asia, helping to combat the mixed levels of underlying demand in the region. Volumes in the EMEA segment, inclusive of the IKB acquisition, were consistent with the prior year and improved slightly sequentially. However, macroeconomic conditions in EMEA remain uneven by country, market, and customer. In the quarter, we saw improved demand for ferrous and non-ferrous metal applications, driven by new business wins. But metalworking applications, including industrial and auto, remain challenging.

Andy Tometich: Volumes in the EMEA segment inclusive of the IKB acquisition were consistent with the prior year and improved slightly sequentially.

Andy Tometich: Macroeconomic conditions in EMEA remain uneven by country and market and customer.

Andy Tometich: But metalworking applications, including industrial and auto, remain challenged.

Andrew Tometich: We're diligently working to advance our initiatives, focusing on value-added solutions for our customers, as well as supply chain efficiency to enhance our own profitability, which will benefit the organization as economic conditions begin to improve. Volumes in the Americas segment were consistent with the prior quarter, but declined compared to the prior year. The team continued to earn new business with new and existing customers. And while metals improved, metalworking applications reflect a continuation of soft industrial production activity. Our Americas segment also dealt with several unplanned customer outages. Segment earnings in the Americas declined on a year-over-year basis, primarily driven by a decline in sales and partially offset by an improvement in margins.

Andy Tometich: We are diligently working to advance our initiatives, focusing on value-added solutions for our customers.

Andy Tometich: As well as our supply chain efficiency to enhance our own profitability, which will benefit the organization as economic conditions begin to improve.

Andy Tometich: Volumes in the America segment were consistent with the prior quarter, but declined compared to the prior year.

Andy Tometich: The team continued to earn new business with new and existing customers.

Andy Tometich: Segment earnings in the Americas declined on a year-over-year basis, primarily driven by the decline in sales, and partially offset by an improvement in margins.

Andrew Tometich: Our volume growth continues to be consistent or better than the aggregate performance of our underlying markets and the regions in which we operate. Meanwhile, while industrial production remains soft globally and markets are uneven, we continue to convert customer trials to new business wins, based on the breadth and quality of our products, services, and technical knowledge, and value delivered to and shared with our customers. We have made substantial improvements in the profitability of each of our regional segments and believe we will further unlock the value of our model as end market conditions improve from these persistently low levels.

Andy Tometich: While industrial production remains soft globally and markets are uneven, we continue to convert customer trials to new business wins based on the breadth and quality of our products, services, and technical knowledge, and value delivered to and shared with our customers.

Andy Tometich: We have made substantial improvements in the profitability of each of our regional segments and believe we will further unlock the value of our model as end market conditions improve from these persistent low levels.

Andrew Tometich: Switching to the outlook, the dynamic market environment that we've experienced in the first half of 2024 will likely continue through the remainder of the year. Despite this uncertainty and our current visibility, we expect a modest sequential improvement in demand across our regional segments through a combination of new business winds, more stable end market conditions, and continued momentum in geographies like India and China. We will continue to remain disciplined on our value-based model, and we expect adjusted EBITDA in the third quarter to be in the range of the second.

Andy Tometich: Switching to the outlook, the dynamic market environment that we've experienced in the first half of 2024 will likely continue through the remainder of the year.

Andy Tometich: Despite this uncertainty and our current visibility, we expect a modest sequential improvement in demand across our regional segments through a combination of new business winds, more stable and market conditions, and continued momentum in geographies like India and China.

Andy Tometich: We will continue to remain disciplined on our value-based model and we expect adjusted EBITDA in the third quarter to be in the range of the second quarter.

Andrew Tometich: These results and our continued focus on execution, including deepening our relationship with customers, effectively managing our own productivity, profitability, and operation, and executing on our strategic initiatives, we'll continue to position Quaker Houghton to outperform our end markets and deliver earnings growth in 2024 and beyond.

Andy Tometich: These results and our continued focus on execution, including deepening our relationship with customers.

Andy Tometich: effectively managing our own productivity, profitability, and operations, and executing on our strategic initiatives, we'll continue to position Quaker Houghton to outperform our end markets and deliver earnings growth in 2024 and beyond.

Andrew Tometich: In addition, our cash flow generation and balance sheet are strong, which supports our disciplined capital allocation priority, including investing in our organic growth, paying dividends, advancing our M&A strategy, repaying debt, and being opportunistic with share repurchase. While we continue to navigate the near-term challenges, we remain fully committed to our enterprise strategy, balanced around globalizing, digitizing, and leading in sustainability. Our value-enhancing initiatives continue to gain traction with our customers and are the drivers that we believe will augment our competitive position and further unlock long-term outperformance compared to the market.

Andy Tometich: which supports our disciplined capital allocation priorities.

Andy Tometich: including investing in our organic growth, paying dividends, advancing our M&A strategy, repaying debt, and being opportunistic with share repurchases.

Andy Tometich: While we continue to navigate the near-term challenges, we remain fully committed to our enterprise strategy.

Andy Tometich: balanced around globalizing, digitizing, and leading in sustainability.

Andy Tometich: Our value-enhancing initiatives continue to gain traction with our customers.

Andy Tometich: and are the drivers that we believe will augment our competitive position and further unlock long-term out-performance compared to market rates.

Andrew Tometich: In the first half of 2024, we benefited from a meaningful contribution from our Asia-Pacific sector. We are taking advantage of our global scale, capitalizing on cross-selling opportunities by deploying the full breadth of our product, technical, and R&D capabilities to our customers. Globally, we have several new trials underway that provide both performance and environmental benefits for our customers, complimenting new business wins we have had. To support the expected opportunities in the Asia-Pacific region and consistent with our model, we broke ground on a new manufacturing facility in Zhangjiajie, China, which will be our latest manufacturing facility in this growth region.

Andy Tometich: In the first half of 2024, we have benefited from a meaningful contribution from our Asia-Pacific segment.

Andy Tometich: We are taking advantage of our global scale, capitalizing on cross-selling opportunities by deploying the full breadth of our product, technical, and R&D capabilities to our customers.

Andy Tometich: complementing new business wins we have had.

Andy Tometich: To support the expected opportunities in the Asia-Pacific region and consistent with our model, we broke ground on a new manufacturing facility in Zhangjiajie, China, which will be our latest manufacturing facility in this growth region.

Andrew Tometich: The new site is expected to be operational in the second quarter of 2026 and will be a critical part of our supply chain, amplifying our strong presence in China and across Asia Pacific and help us to meet the increasing needs of our customers. We are also pleased to note that in July, we completed the acquisition of the Sutai Group, which is based in Japan. Sutai will complement our existing global die casting and impregnation capabilities, enhancing our existing technical expertise and scale and further driving innovation within the industry, like our recent acquisition of IKV.

Andy Tometich: We are also pleased to note that in July we completed the acquisition of the Sutai Group, which is based in Japan.

Andy Tometich: Sutai will complement our existing global die casting and impregnation capabilities, enhancing our existing technical expertise and scale, and further drive innovation within the industry.

Andrew Tometich: SuTai will accelerate the growth of our advanced and operating solutions globally, a cornerstone of our enterprise strategy. Our global scaling efforts around reducing complexity and simplifying are ongoing. Two examples of these include product rationalization and implementing channel optimization strategies. We're also expanding the use of digital capabilities to drive efficiencies in our network and systems, including Supply Chain as well as our Fluid Intelligence Office, to support our ability to better anticipate and swiftly respond to our customers' needs. We have successfully launched our See Beyond campaign, highlighting our broad portfolio of sustainable solutions to help lead our customers and industry to achieve their targets.

Andy Tometich: like our recent acquisition of IKV.

Andy Tometich: SuTai will accelerate the growth of our advanced and operating solutions globally, a cornerstone to our enterprise strategy.

Speaker Change: Two examples of which include product rationalization and implementing channel optimization strategies.

Andy Tometich: We're also expanding the use of digital capabilities to drive efficiencies in our network and systems.

Andy Tometich: including supply chain, as well as our fluid intelligence offering.

Andy Tometich: to support our ability to better anticipate and swiftly respond to our customers' needs.

Andy Tometich: We have successfully launched our See Beyond campaign, highlighting our broad portfolio of sustainable solutions to help lead our customers and industry to achieve their targets.

Andrew Tometich: We're also investing in our business to enable the achievement of our 2030 Sustainability Goals and to develop our position as a leader in emerging and complex opportunities, like the shift to e-mobility. Our enterprise strategy is amplifying our model. It will allow us to further tailor how we most effectively and efficiently earn value with our customers, regardless of their scale or industry, and Unlock New Opportunities for Growth. Our investments in the future will reinforce our strong foundation and drive long-term value for our customers and our shareholders. We started strong in 2024, continuing to successfully navigate a challenging macroeconomic backdrop and end market environment.

Andy Tometich: We're also investing in our business to enable the achievement of our 2030 sustainability goals.

Andy Tometich: and to develop our position as a leader in emerging and complex opportunities, like the shift to e-mobility.

Speaker Change: Our enterprise strategy is amplifying our model. It will allow us to further tailor how we most effectively and efficiently earn value with our customers, regardless of their scale or industry.

Andy Tometich: and unlock new opportunities for growth.

Speaker Change: Our investments in the future will embolden our strong foundation and drive long-term value for our customers and our shareholders.

Andy Tometich: We've started strong in 2024, continuing to successfully navigate a challenging macroeconomic backdrop and end market environment.

Andrew Tometich: We remain committed to our financial and operational priorities, earning new business in all regions at improved levels of profitability by demonstrating the breadth of our products and services. We are dedicated to enhancing and expanding our leading position in this attractive industry. We continue to prudently invest in our enterprise strategy to supplement the improvements we are making in our productivity and profitability, enhance our customer intimacy model, and unlock attractive new opportunities, best positioning us to support the growth aspirations of our customers and our company.

Andy Tometich: We remain committed to our financial and operational priorities, earning new business in all regions at improved levels of profitability by demonstrating the breadth of our products and services.

Speaker Change: We are dedicated to enhancing and expanding our leading position in this attractive industry.

Speaker Change: best positioning us to support the growth aspirations of our customers and our company.

Andrew Tometich: And our balance sheet is strong, supported by our cash generation. We are committed to our disciplined capital allocation strategy, which remains focused on maximizing shareholder value, primarily through growth. I am proud of the collective efforts of everyone at Quaker Houghton who come to work every day to add and earn value, solving our customers' challenges, and constantly moving the company forward together. With that, I'd like to pass it over to Tom to discuss the financials. Thank you, Andy, and good morning, everyone.

Tom Coler: Our net sales declined approximately 6% from the prior year to $464 million. The primary drivers of the year-over-year change were lower selling price and product mix of approximately 4%, which primarily reflects the impact of our index-based contracts, lower sales volumes of approximately 1%, which includes the contribution of IKV, and an unfavorable impact of foreign exchange of 1%. Our sales volumes continue to be impacted by soft industrial activity, primarily in the Americas and EMEA segments. Demand for our metals applications has improved on both a year-over-year and sequential basis, but has been offset by continued challenges in metalworking applications.

Tom Coler: Notwithstanding the persistent and challenging end market environment, our sales volumes have been largely consistent on a sequential basis for the sixth consecutive quarter, reflecting the team's execution in earning new business in all cycles. Gross margins in the second quarter were 37.9%, which represents an increase of 200 basis points compared to 35.9% in the prior year and is compared to 38.7% in the first quarter of 2024. This is a result of moderating raw material costs, as well as the benefits from ongoing actions to improve our supply chain efficiency and productivity. Excluding one-time items, SG&A decreased three million dollars, or three percent, compared to the prior year and six million dollars, or five percent, sequentially.

Tom Coler: The decrease in both periods reflects a combination of cost controls for an exchange and the timing and levels of incentive compensation. On a year-to-date basis, SG&A is higher by approximately 1%. We delivered $84 million of adjusted EBITDA in the second quarter, which represents an increase of $4 million or 5% compared to the prior year and an increase of $1 million or 1% compared to the prior quarter. Our adjusted EBITDA margin was 18.2% in the second quarter, an increase compared to both the second quarter of 2023 and the prior quarter.

Tom Coler: The team continues to execute on our financial and operational priorities, including restoring the margin profile of the business while balancing our profitable growth initiatives with the end market environment. Now, switching to our segment results. Net sales in our Asia-Pacific segment increased approximately 3% compared to the prior year, driven by a high single-digit increase in sales volumes and partially offset by an unfavorable foreign exchange impact and a slight decrease in selling price and product. New business wins in China and throughout the Asia-Pacific region were the primary contributor to the strong volume performance in the region, for both metals and metalworking applications.

Tom Coler: Asia-Pacific segment net sales also increased approximately 1% compared to the prior quarter; segment earnings in Asia Pacific increased 11% compared to the prior year. The improvement in earnings was driven by higher sales and an improvement in segment gross margin. We are pleased with the performance in Asia-Pacific as it effectively balances our customer relationships with the value we provide and the cost of service. However, net sales in our EMEA segment were 4% lower year-over-year.

Speaker Change: And then gross margins.

Speaker Change: We are pleased with the performance in Asia Pacific as they effectively balance our customer relationships with the value, we provide and the cost to serve.

Speaker Change: Net sales in our EMEA segment were 4% lower year over year.

Tom Coler: The primary drivers were lower selling prices and product mix due to the impact of index-based customers and an unfavorable impact from foreign exchange. Sales volumes, inclusive of the impacts of the IKE acquisition, were consistent with the prior year. Overall, economic conditions remain subdued in this segment and at low levels.

Speaker Change: The primary drivers were lower selling price and product mix due to the impact of index index based customers and an unfavorable impact from foreign exchange.

Speaker Change: Sales volumes inclusive of the impacts of the ITG acquisition were consistent with the prior year.

Speaker Change: Overall economic conditions remained subdued in this segment and at low levels.

Tom Coler: Net sales and volumes in EMEA were consistent with the first quarter of 2024. The EMEA segment's earnings increased approximately 4% compared to the prior year. This increase largely reflects an improvement in our profitability due to our ongoing cost savings initiative. We expect to continue to drive productivity improvements and efficiencies in the EMEA segment as we progress through the year. Met sales in the Americas declined 12% year-over-year due to lower sales volumes and selling price for each product.

Speaker Change: Net sales and volumes in EMEA were consistent with the first quarter of 2024.

EMEA segments earnings increased approximately 4% compared to the prior year.

Speaker Change: This increase largely reflects the improvement in our profitability due to our ongoing cost savings initiatives.

Speaker Change: We expect to continue to drive productivity improvements and efficiencies in the EMEA segment as we progress through the year.

Speaker Change: Net sales in the Americas declined 12% year over year, due to lower sales volumes and selling price and product mix.

Tom Coler: Volumes in the Americas were impacted by lower industrial activity in the region, primarily in our metalworking business, as well as several unplanned customer outages in the quarter. Our selling price largely reflects the impact of our index-based contract. On a sequential basis, net sales in the Americas were down approximately 3%.

Tom Coler: However, sales volumes would have increased if not for unplanned customer outages driven by new business winds. America's segment earnings declined approximately 7% compared to the prior year, reflecting lower sales and partially offset by an improvement in the segment's margin. Segment margins were largely consistent on a sequential basis as we actively manage our cost structure with the market environment. Overall, the business is performing well, especially considering the persistence and the market challenges.

Tom Coler: We have made considerable progress in all our segments, aligning to the environment while continuing to best position the company to benefit as market conditions begin to improve. Turning to non-operating costs, Our interest expense was approximately $2 million lower in the second quarter compared to the prior year, which reflects the reduction in our variable cost debt in 2023. Our cost of debt in the second quarter was consistent with the prior quarter at approximately 6.2%. Our effective tax rate, excluding non-recurring and non-core items, was approximately 28% in the second quarter.

Tom Coler: We continue to expect our effective tax rate in 2024 will be approximately 29%. Our GAAP diluted earnings per share were $1.94, and our non-GAAP diluted earnings per share were $2.13, an increase of 10% compared to the prior year, which was driven by an improvement in operating earnings and lower interest rates. Switching to liquidity, we generated $46 million of cash from operations in the second quarter and $74 million year-to-date. We remain focused on improving our working capital efficiency and delivering another strong year of operating cash flow in 2024. Capital expenditures in the second quarter were approximately $7 million, an $11 million year-to-date.

Tom Coler: We continue to expect total CapEx will be within our prior communicated range of 1.5 to 2.5% of sales in 2024. In the second quarter, we also paid approximately $8 million in dividends and opportunistically repurchased 49,000 shares for approximately $7.8 million. Additionally, and as Andy mentioned, the board approved a 6.6% increase in our cash dividends, highlighting the confidence in our cash flow generation. Our balance sheet and liquidity are strong. Our net bet at the end of the second quarter was $549 million, and our net leverage ratio improved 1.7 times our trailing 12 months adjusted EBITDA.

Tom Coler: The second quarter was another solid quarter for Quaker Houghton, as we navigated through the challenging macro environment and executed on items within our control. We remain focused on delivering on our financial and operational priorities, investing in our enterprise strategy to support our growth expectations, and executing on our disciplined capital allocation strategy to accelerate our growth and deliver long-term shareholder value. Lastly, I want to thank the entire Quaker Houghton team for your warm welcome and dedication to our collective success.

Tom Coler: I also look forward to meeting many of you on the call and in person over the coming months. Quaker Houghton's foundation is strong and the future is bright, and I'm excited about the many opportunities ahead. With that, I'll turn it back over to Andrew. Thank you, Tom. Quaker Houghton continues to execute well while advancing our priorities. I'm confident in our strategy and our team and believe we are well positioned to drive continued success. With that, we'd be happy to take your questions. Thank you.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Operator: One moment, please, while we pull for questions. Our first question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your questions.

Mike Harrison: Andy, I was hoping that maybe you could give a little bit more detail on what you were seeing in the Americas. You mentioned that I think the volume was the weakest there, but you also mentioned that there were some unplanned customer outages that impacted your volumes, and it sounded like you said that volumes would have been higher year on year if not for those outages. So maybe just a little more color there, and I guess, you know, are the outages complete at this point, and do you expect volumes to be growing as we get into Q3 and Q4?

Andrew Tometich: Yeah, thanks, Mike. A really good question.

Andrew Tometich: Your takeaway is the right takeaway. So while we saw some positives in the primary metals business in the Americas, there was the softness that we kind of anticipated in the metalworking sector. And we anticipated some improvement on a seasonal basis, but the outages kind of canceled some of that seasonality benefit that we anticipated. And just to give you a little more color, you know, it was a combination of factors, pretty discrete events. There was flooding in Brazil that created some challenges down there.

Andrew Tometich: In Central and North America, there were some discrete customer outages around their own operations and a couple situations related to labor. So, you know, none of that impacted what we were hoping for in terms of seasonality. You know, as we look forward, we can't predict exactly when some of the benefit of the reversal on that will happen, but we are anticipating that as we move through the balance of the year, there'll be some recovery related to those outages. All right.

Speaker Change: It impacted what we were hoping for on seasonality as we look forward, we can't predict exactly when some of the benefit of the reversal on that will happen, but we are anticipating as we move through the balance of year there'll be some recovery related to those outages.

Mike Harrison: And then, on the flip side, the Asia-Pacific numbers were actually quite strong. I'm just curious if you could maybe disaggregate how much of that improvement there is related to what's going on in underlying markets and how much is related to new wins. And I think that's also Asia, the region where you were having the most headwind related to deselecting some lower margin business and prioritizing pricing. So just curious if you can kind of give us a little more color on the strength that you're seeing in APAC and the outlook there.

Speaker Change: Alright, and then on the.

Speaker Change: Flip side.

Speaker Change: The Asia Pacific numbers were actually quite strong.

Speaker Change: Just curious if you could maybe disaggregate how much of that improvement there is related to what's going on in underlying markets. How much is related to new wins and I think that's also Asia. The region, where you were having the most headwinds related to deselect.

Speaker Change: <unk>.

Speaker Change: Some lower margin business and prioritizing pricing.

Speaker Change: So I'm just curious if you can kind of give us a little more color on the strength that.

Speaker Change: You are seeing in APAC and in the outlook there.

Mike Harrison: Sure. Asia-Pacific was certainly a bright spot for us in the second quarter, and it was pretty widespread, Mike. So we saw some favorable trends in metals as well as metal working, which was overall up. That was complemented by our new business wins. So we've been operating there, really generating net new business wins well within our targeted range and actually even a little bit higher in that targeted range. But the underlying markets there, too, are positive. And we've seen not only some good results in China, but India and Southeast Asia are clearly going in the right direction.

Speaker Change: Sure Asia Pacific was certainly a bright spot for us in the second quarter and it was pretty widespread Mike.

Mike: Mike So we saw some favorable trends in metals as well as metalworking.

Mike: Which was overall up that was complemented with our new business wins that we've been operating there.

Andrew Tometich: So as we look forward, we anticipate that to continue as a directional trend. And of course, we're going to stay focused, regardless of whatever happens in the market there, on us continuing to outperform the market and generate those new business. All right, and then my last question for me is just kind of on the overall outlook for the full year. I'm curious, first of all, should gross margin, which you came down a little bit sequentially, should gross margin kind of recover back up into that 38, 39 percent range?

Andrew Tometich: And then as you're guiding to year-on-year EBITDA growth, any more specific numbers or details that you could provide for your Q3 expectations would be helpful. Yeah, sure. So why don't I start with Q3, Mike?

Andrew Tometich: So first of all, we've started strong in 2024, and the team's really been doing a great job of execution and delivering results. And not only have we improved profitability on a margin basis, but we've grown earnings and are generating strong cash flow. You know, for the third quarter specifically, we're expecting some modest sequential improvement in volumes. And I touched on a little bit of that with respect to the Americas and APAC already

Andrew Tometich: But the team's doing a great job across all the regions to generate new business wins, which is helping us to offset and, in some cases, even outpace what's happening in the underlying markets. So we feel good about that. We do believe the underlying markets are still going to have some challenges as we move through the balance of the year, but we're going to stay focused on those new business wins. There is a little bit of seasonality we would anticipate in the Americas and APAC. Europe's a little bit harder to predict.

Andrew Tometich: It kind of continues to bounce around trough levels. So, you know, we're cautiously optimistic that some of that seasonality will benefit us in the third quarter. Gross margins, we expect to be similar to the second quarter. We know, we're constantly balancing the value we provide to our customers against the cost to serve.

Mike Harrison: We're now, you know, continuing to operate consistently in the target range that we had talked about. As we continue to deliver those margins, we're also going to be very prudent on any of our SG&A spending. We expect a little bit of an increase as we continue to focus on those things that will help us to drive longer-term productivity as well as growth, but we're going to be really diligent with the costs associated with those investments.

Mike Harrison: When I take it all together for the third quarter, you know, we anticipate we're going to execute well and deliver earnings, as I mentioned, in the pre-prepared marks in the range of the second quarter. Transitioning to then the full year, just a couple additional comments. You know, we believe the volumes, our volumes are outperforming our end markets, and those end markets are likely to still be challenged as we go forward, but we will continue to focus on the outperformance with our new business wins.

Mike Harrison: Gross margins on a full year basis are not only within our target but trending towards the higher end of our range. So we wanna maintain that through the cycle and through the balance of this year. And we're gonna continue to control those costs as we move to the balance of the years I mentioned. So, you know, for the full year, we're expecting another year of earnings growth and a very challenging end market. And that's building on the success that we established in 2020. All right, thanks very much.

David Begleiter: Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

David Begleiter: Good morning. Andy, back to the Americas. What were volumes actually down in the quarter year-over-year?

Andrew Tometich: Yeah, they were, David, they were down low single digits on a year over year basis. And again, it was associated with the factors that I've already mentioned.

David Begleiter: Got it, so the remainder was due to the index-based pricing contracts, correct?

David Begleiter: I'm sorry, could you repeat that, David? The remainder of the year-over-year sales decline was due to the index-based pricing contracts? Yeah, sure. There was clearly an impact associated with the pricing. I mean, predominantly, any of our pricing impact was related to the index.

David Begleiter: Got it. And may be, margins were down sequentially from Q1 to Q2 by about 200 basis points. What drove that sequential decrease? Yeah, again, a combination of factors there.

Andrew Tometich: Yeah, again, a combination of factors there. There is index business there as well, and again, the demand of the underlying market continues to bounce around, so those two factors combined impact your AMA numbers.

Operator: Our next question comes from the line of Lawrence Alexander with Jeffrey. Please proceed with your question.

Daniel Rizzo: Hi, it's Dan Rizzo from Lawrence. Thank you for taking my question. Outside of the index-based pricing you just mentioned, how are you? Outside of the index-based pricing you just mentioned, are you seeing any customers kind of pushing back on pricing where you might have to do additional concessions? Is that something that could be a headwind in the second half of the year, in 2025?

Daniel Rizzo: Yeah, Dan, I always, I always characterize, you know, customers are always looking for better deals, right? So there's always those conversations. And there have been, you know, all the time.

Andrew Tometich: I think we continue to engage very proactively and in good partnership with our customers about the value that we're providing to them against the cost for us to provide that service to them. And we continue to do a pretty good job of finding that right balance with them on value. So we'll continue to do that as we go forward. The goal here is to be at our targeted gross margin level, which we've now achieved, and we want to make sure we continue to do that through the entire cycle as we go forward. So, of course, there's those conversations with customers, but I think our team is managing that very well in partnership with our customers.

Mike: Our achieved and we want to make sure we continue to do that through the entire cycle. As we go forward. So of course of course theres those dialogues with customers, but I think our team is managing that very well in partnership with our customers.

Daniel Rizzo: Okay, and then in China, do electric vehicles have an outsized impact on metalworking demand and your demand? Does it demand more from you guys, or is it kind of more broad-based than that? Yeah, I think in China, for sure.

Speaker Change: Okay, and then in China do electric vehicles have an outsized impact on metal metalworking demand in your demand is it does it demand more from you guys or not really it's kind of it's more broad based on that.

Andrew Tometich: Yeah, I think in China, for sure. First of all, as I highlighted, we actually saw some real positive results, not just in primary metals, but in metalworking, and they were pretty wide ranging. For sure, in China, there is an accelerated growth of electric vehicles. But as we've talked about in previous sessions, there are a number of new opportunities for us in those electric vehicles as well. So we continue to stay focused on that and develop those opportunities while continuing to serve the needs of the ICE vehicles that are still being produced, not only there but around the world.

Arun Viswanathan: Thank you. Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Speaker Change: Yes, I think in China for sure first of all as I as I highlighted we actually saw some some real positive results not just in primary metals metal working and it was pretty wide ranging for sharing China. There is an accelerated growth of electric vehicles.

Speaker Change: But as we've talked about in previous sessions Theres, a number of new opportunities for us in those electric vehicles as well. So we continue to stay focused on that and developing those opportunities while continuing to serve the needs of the of the ice vehicles that are still being.

Speaker Change: <unk> being produced not only there but around the world.

Speaker Change: Alright, Thank you very much.

Dan: Thanks, Dan.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Erin.

Speaker Change: I just wanted to end with RBC capital markets. Please proceed with your question.

Andrew Tometich: Great, thanks for taking my question, and congratulations on the good performance here. I just wanted to, maybe you could just walk us through some of the end market performance. You mentioned some weakness in metalworking, I think. What would you say are the conditions in, you know, maybe transportation and building and construction and some of your other end markets, if you would.

Erin: Great. Thanks for taking my question.

Erin: Congrats on a good performance here.

Erin: I just wanted to maybe you can just walk us through some of the end market performance you mentioned some weakness in metal working I think.

Speaker Change: What would you say are conditions, and MEO, maybe transportation and building and construction and some of your other end markets. If you would.

Andrew Tometich: Yeah, thanks for the question, Arun. So, when we think about model working, it's kind of a tale of different segments, as you might imagine. So, we've continued to see some positive trends in aerospace, in particular, and when we take the totality of transportation OEMs around the world, that continues to be positive as well. Kind of on the flip side, some of the transportation components have had some weakness as customers kind of manage their operations.

Speaker Change: Yes. Thanks for the question Arun So when we think about metal working it's kind of a tale of different segments. As you might imagine. So we've continued to see some positive trends in aerospace in particular and.

Speaker Change: When we take the totality of transportation Oems around the world that continues to be positive as well kind of on the flip side some of the transportation components.

Speaker Change: Have had some some weakness as customers manage their operations and then just generally in industrial.

Andrew Tometich: And then, just generally in industry, where our customers are engaged in providing industrial equipment, there still seems to be some latent weakness associated with that. So, there are both positives in model working, as well as some challenges. But again, we're focused, even in those areas where the underlying markets are not necessarily strong, we're very focused on new business wins and helping customers to solve the challenges they have in those spaces, and we do a good job of converting, kind of across the entire metalworking and metals segment.

Speaker Change: Our customers are engaged in and providing industrial equipment.

Speaker Change: Seems to be some latent weakness associated with that so theres both positives.

Speaker Change: In metalworking as well as some challenges, but again, we're focused even even in those areas where the underlying markets are not.

Speaker Change: <unk> necessarily strong we're very focused on new business wins, and helping customers to solve the challenges they have in those spaces and we're doing a good job on converting kind of across the entire metalworking and metals segments.

Arun Viswanathan: Okay, thanks for that. And I'm just curious, you know, you've called out, you know, kind of some persistent kind of sluggishness overall in volumes. You know, last year, I think, obviously, volumes were impacted by destocking and some other negative trends as well. So when you look at the footprint, do you think that there's any rationalization that could be necessary in certain geographies? Or are you pretty comfortable with where things are? Just curious, you know, given your limited visibility on when a turn could happen, how you're thinking about that. Thanks.

Speaker Change: Okay. Thanks for that and just curious.

Speaker Change: You've called out.

Speaker Change: Kind of some persistent kind of sluggishness overall in volumes.

Speaker Change: Last year, I think obviously volumes were impacted by Destocking and some other negative trends as well so when you look at the footprint.

Speaker Change: Do you think that theres any rationalization that could be necessary in certain geographies.

Speaker Change: Or are you pretty comfortable with where things are.

Speaker Change: Just I'm just curious.

Speaker Change: Given your limited visibility on when a turn could happen.

Speaker Change: How are you thinking about that thanks.

Andrew Tometich: Yeah, thanks, Arun. For sure, we're always looking, regardless of the end market conditions, at how we have the right footprint to be able to provide the service that we need for customers. Just as a reminder, you know, we tend to set up so that we're able to plan, source, make, and deliver locally, and that's a big part of our value proposition. So we balance the need to be able to do that and offer that to customers against how we can optimize it from an efficiency standpoint.

Speaker Change: Yeah. Thanks, Arun for sure we're always looking regardless of end market conditions on how we have the right footprint to be able to provide the service that we need for customers just as a reminder.

Speaker Change: We tend to set up so that we're able to plan source make and deliver locally and thats a big part of our value proposition. So we balance the need to be able to do that and offer that to customers against how we can optimize it from an efficiency standpoint, and we'll continue to look at that but.

Andrew Tometich: And we'll continue to look at that. But, you know, volumes, although they've been challenged, we're doing a good job of outperforming, and we're anticipating that we're going to continue to make our own good progress there through the things we're doing and taking control of the things we can.

Speaker Change: Volumes, although they've been challenged we're doing a good job of outperforming and we're anticipating that we're going to continue to make our own.

Speaker Change: Good progress there by the things, we're doing and taking control of the things we can control.

Arun Viswanathan: And then, just lastly, if I could, just maybe you can just elaborate on what you're seeing on the M&A side. I think you have completed the SuTai transaction.

Speaker Change: And then just.

Speaker Change: Lastly, if I could just maybe you can just elaborate on what you're seeing on the M&A side I think you completed the <unk> transaction.

Andrew Tometich: How does that fit in, and what else should we expect in the..., the next 6-12 months? Sure, yeah. So, first of all, capital...

Speaker Change: How does that fit in and what else should we expect them to stay.

Speaker Change: The next six to 12 months.

Andrew Tometich: Sure, yeah. So, first of all, the capital allocation strategy remains intact. We think we have a good one here that's focused on shareholder value and balance. Of course, a big way that we unlock shareholder value is through growth, both organically and inorganically. And we just completed two bolt-on acquisitions this year, IKV and SUTI. In both of those cases, that's kind of right down aligned to our strategy as we're building out our capabilities on advanced and operating solutions.

Speaker Change: Sure Yeah. So first of all our capital allocation strategy remains intact.

Speaker Change: We have a good one here thats focused on shareholder value imbalance of course, a big way that we unlock shareholder value is through growth both organically and Inorganically and we just completed two bolt on acquisitions this year, <unk> and <unk> and both of those cases, that's kind of right down aligned to our strategy as were built.

Andrew Tometich: And when we say building out that capability, it's taking advantage of our customer intimacy model and adding some unique channels to customers that we might not have as much strength that we can build up, a geographic play or a technology play. And in both of those cases, we added capabilities in all three areas. The pipeline is still rich. We're continuing to move it along. We cultivate that over time. There's a range of opportunities and sizes, and we have our balance sheet in a really good spot thanks to our cash generation that allows us to evaluate all those options.

Andrew Tometich: So, we're going to continue to prioritize and advance those that are best for our business, align to our strategy, and generate value for our shareholders, the two that we've executed on already fit very nicely. Thank you.

Jon Tanwanteng: Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Jon Tanwanteng: Hey, good morning. Thank you for taking my questions. I was wondering, Tom, if you could talk about your goals at CFO and if you expect to drive any meaningful changes versus your predecessors.

Tom Coler: Yeah, thanks. Thanks, John. And good morning.

Tom Coler: Yeah, I would say, you know, my priorities are sort of threefold. One, to the question you asked, is really to build on the strong foundation that we have here at QH and continue to make and advance the good progress that's happened over the last few years. So, you know, I'm really excited about the opportunity to do that. I think another focus area for me is to support the continued investments that we have to drive growth in the enterprise and then, you know, balance that with continued focus on generating operational efficiencies where we've got opportunities to do that.

Tom Coler: And then lastly, as we talked about in our prepared remarks, I think the cash flow generation for the organization has historically been strong, and so I'm focused on further enabling cash flow generation to maintain the balance sheet flexibility we have and to overall support our capital allocation strategy.

Jon Tanwanteng: Great. Thank you.

Jon Tanwanteng: And then, Andy, I think I heard you say that the M&A pipeline is rich at this point. Do you expect to be holding on to your cash and balance sheet to, you know, reserve firepower for those opportunities, or do you expect to continue, you know, more of the share repurchases that we saw in Q4?

Andrew Tometich: Yeah, thanks, John. I go back to, again, we've got a pretty disciplined and balanced capital allocation strategy, and our preference is for growth, and to do that through organic and inorganic means, and we do have a solid pipeline. But we're not going to let cash build. We want to have the flexibility of all the tools to be able to optimize and deliver that shareholder value. And the second quarter was a great example where we reduced debt, increased our dividend, invested in CapEx, bought SuTi, which builds on the acquisition that we had done earlier in the year of IKB, and we bought back some shares.

Andrew Tometich: But for context, those repurchased shares were pretty opportunistic. It was $8 million in the second quarter. So we're confident in our cash flow capabilities, and we believe we've got the right model and strategy to be able to deliver that shareholder value using all the tools that are available to us in our capital allocation strategy.

Jon Tanwanteng: Great, thank you. If I could, Sweden, one more. What's the expected accretion or contribution from Sweden? Yeah, so we haven't, we haven't.

Andrew Tometich: Yeah, so we haven't disclosed that. It's relatively minor in the overall top line, but what it really does for us is brings us some new technology that we can leverage not only within Japan but outside of Japan, and gives us really good avenues into some additional customers in Japan where we can take more of the Quaker health solution. So we're really excited about the opportunity that it brings, as well as what it will help us to do as we move forward.

Charles Nievert: Thank you. Our next question comes from the line of Charles Nievert with Piper Standler. Please proceed with your question.

Charles Nievert: Morning, guys. Just one question.

Charles Nievert: I mean, considering where things stand in Europe, that Asia-Pacific, although getting a little bit better, is still on the weaker side, as is Americas. Have you noticed, has there been, an acceleration in your ability to make wins since you're bringing value to companies that are, I won't say struggling, necessarily struggling, but are maybe really looking at their cost structure more carefully, and that makes your ability to win new business, I won't say easier, but more appealing? We'll be seeing an acceleration of that.

Speaker Change: Okay.

Speaker Change: Wanna say easier, but more appealing.

Speaker Change: Have you seen an acceleration in that.

Andrew Tometich: Yeah, for sure. You know, I think our value proposition is appealing to customers all over the world. But to your specific question, even in Asia Pacific and in China, you know, we end up selling products, but really, the value we're providing and the value proposition is helping customers to make the highest quality products possible, reduce their scrap rates, redeploy their resources on other challenges, and really make them successful. And that's appealing to customers, really in any geography and any end market. So we continue to stay focused on that. And as more and more of our customers drive that performance themselves, we're in a very good position to be able to

Speaker Change: Yeah for sure you know I think our value proposition is appealing to customers all over the world, but to your specific question, even in Asia Pacific and in China.

Speaker Change: We ended up selling products, but really the value, we're providing and the value proposition is helping customers to make the highest quality products possible reduced our scrap rates redeploy their resources on other challenges and.

Speaker Change: And really to make them successful and that's appealing to customers really in any geography in any end market. So we continue to stay focused on that and as more and more of our customers.

Speaker Change: Drive that performance themselves, we're in a very good position to be able to support it.

Charles Nievert: Great. And in terms of Can you talk at all about, you know, in the last, let's say, couple of years, a few quarters, how many wins you guys have had, you know, what it was maybe a couple of years ago and what it is now?

Speaker Change: Okay and.

Speaker Change: In terms of.

Speaker Change: Can you talk at all about.

Speaker Change: Last let's say couple of years a few quarters.

Speaker Change: Many.

Speaker Change: When you guys are adding on what it was maybe a couple of years ago and what it is now.

Speaker Change: Is there an expectation of sort of numbers for wins going forward.

Andrew Tometich: Yeah, Charlie, great question. I know we've always talked historically about outperforming our end markets. And we've said, you know, our target range is usually two to 4% over that level. But we've actually been operating at the higher end of that level and quite often exceeding that. So, our ability and our muscle to continue to add more value for customers and solve additional challenges is really represented by our ability to do that. And I anticipate as we go forward, that's going to continue to be an important part of our strategy. Because the world is getting more challenging for our customers to deliver on some of those things I talked about just a minute ago in our value proposition.

Speaker Change: Yeah, Charlie Great question, and I know, we've always talked historically about outperforming our end markets and we've said you know our target range is usually 2% to 4% over that level, we've actually been operating at the higher end of that level and quite often exceeding that so.

Speaker Change: Our our ability and our muscle to continue to add more value for customers and solve additional challenges is really represented in our ability to do that.

Speaker Change: We anticipate as we go forward Thats going to continue because the world is getting more challenging for our customers to deliver on some of those things I talked about just a minute ago and our value proposition.

Charles Nievert: Great. All right. Thanks very much.

Speaker Change: Alright, thanks very much.

Speaker Change: Thank you.

Speaker Change: Thank you.

Andrew Tometich: Thank you, and there are no further questions at this time. I would like to turn the floor back over to Andy Tometich for closing comments.

Speaker Change: There are no further questions at this time I would like to turn the floor back over to Andy Thomas for closing comments.

Operator: Yeah, thanks, thanks very much. We really appreciate your continued interest in Quaker Houghton and ask you to please reach out to Jeff if you have any additional questions for follow-up. Thank you very much, and have a great day. And this concludes today's teleconference. You may disconnect your line. Thank you for your participation.

Andy Thomas: Yeah. Thanks, Thanks, very much we really appreciate your continued interest in Quaker Houghton and ask you to please reach out to Jeff. If you have any additional questions for follow up. Thank you very much and have a great day.

Operator: And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: And this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Speaker Change: [music].

Speaker Change: Okay.