Quaker Chemical Corporation
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Welcome to Quaker Houghton Fourth Quarter and Full Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It is now my pleasure to introduce Chairman, CEO and President, Michael Barry. Michael you may begin.

[Michael Barry:]

Good morning, everyone. Joining me today are Mary Hall, our CFO; Robert Traub; our General Counsel; and Shane Hostetter, our Head of Finance and Chief Accounting Officer. We have slides for our conference call. You can find them in the Investor Relations section of our website at www.quakerhoughton.com.

[Mary Hall:]

Thank you, Mike and good morning all. Before I begin. Let me remind you that comments made during this call include forward-looking statements which are based on current expectations, estimates, projections and assumptions that are subject to risk and uncertainties which may cause actual results to differ materially. For our discussion of these risks please review the cautionary statements regarding forward-looking statements included in our earnings release and in our previously filed 2019 Form*10-K and third quarter 2020 Form 10-Q filed with the SEC. These are available on our website. Please also note that updated risk factors will be included in our 2020 Form 10-K which we plan to file next week. As we disclosed in our press release filed last night all 2020 numbers we are presenting our preliminary unaudited and subject to change as we finalize our audit. In our press release and in this presentation, we have provided certain information including non-GAAP earnings per diluted share, non-GAAP operating earnings and adjusted EBITDA as well as certain pro forma items and an effort to provide shareholders with better visibility into the company's core operations excluding certain items which we believe do not reflect our core operating performance. Reconciliations are provided in charts 15 to 23 of this investor deck and some are in the press release as well. We followed a similar review format for this deck is the one we used for our Q3 call where our comparison periods show actual and non-GAAP results and also pro forma sales and adjusted EBITDA as if we'd been combined with Houghton throughout the periods presented. Our Q4 comparisons of 2020 and 2019 in this deck reflect actual results not pro forma as we completed the combination with Houghton in Q3 of 2019. For the full year comparisons, I will generally compare 2020 to pro forma 2019 results so that you can see the periods on an apples-to-apples basis. As Mike mentioned, the gradual recovery in our business that we began to see in Q3 of 2020 continued through Q4. Q4 net sales were up 5% sequentially as all segments benefited from a gradual increase in volumes and net sales were down only 1% compared to Q4, 2019, recall however that Q4, 2019 was a relatively weak quarter that was negatively impacted by a widespread slowdown in industrial production especially in Europe.

[Michael Barry:]

Thanks, Mary. And now, we will open it up for questions.

[Operator:]

Thank you. Our first question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.

[Mike Harrison:]

Hi. Good morning.

[Michael Barry:]

Good morning, Mike.

[Mike Harrison:]

And congratulations on a nice finish to the year and congrats as well on your retirement, Mike. It's been an impressive run and well deserved.

[Michael Barry:]

Thank you, Mike. And we've still got another bulk of the year here to do. So we're focusing on that, but I appreciate it.

[Mike Harrison:]

Understood. So, I wanted to ask you a question about the guidance. You previously, on the Q3 earnings call, had said that you expected 20%-plus EBITDA growth in 2021. So you kind of reiterated that, but at the same time, you ended up with a little bit more EBITDA in 2020 than you may be had been expecting. And then you also announced a couple of acquisitions that are adding, call it, 5% to EBITDA this year. So, can you help us understand whether your underlying expectations around 2021 earnings have improved, stayed the same or maybe gotten a little bit more conservative in the meantime?

[Michael Barry:]

I'd say, it's a good question. Overall, nothing has really changed from our views of organic growth. I think, part of the 20% that we're imagining here is meant to be really a floor because we said over 20%. And I think, as you know, generally we've been a historically conservative company in that and of course there are still uncertainties out there. Raw materials are going up and we're still in some COVID situations here, so it's never a perfect world. But when I think of our position now and where we were at the end of the quarter, I still feel we're going to have really good organic growth, and now, we've added these acquisitions. So, I feel good and I think what you're seeing -- and just to give you an example, our conservatism or so is, we also said we thought we'd be at least $215 million of EBITDA for the full year last year and we came in $222 million. So, it's probably just -- we're just kind of setting a floor for that.

[Mike Harrison:]

All right. And in terms of the acquisitions, the Coral deal is a little bit bigger, sounds like it's focused on tins and general industrial finishing fluids. And there was also a tin-plating deal. Can you maybe give a little bit more color on what those deals bring to the product portfolio? And I think you mentioned the cost synergy number, but how do you see the cross-selling opportunity going forward for these businesses?

[Michael Barry:]

So, I think, the -- for this, I'll start with Coral. It really strengthens -- we have -- Quaker had a can portfolio, Houghton had a can portfolio and actually, Houghton had a historical relationship with Coral, and there was a licensing agreement with certain aspects. So, actually adding kind of Quaker Houghton legacy's portfolio with Coral really gives us a very complete portfolio of products to sell to the can industry and really I think strengthens our presence in that industry. And of course that's been an industry that even during COVID times has been one of the stronger end markets that we have. So, we feel really good about the strength of that and how that means that our ability to maybe take share in the future in that market. And the tin-plating is really just -- is kind of our -- we already had a tin-plating product that we bought many, many years ago from McDermott. This asset came up for sale. And we thought that was a good addition to go in our portfolio as well. And we believe these technologies that we have in this area compete against other technologies. And we think the kind of technologies that we now have between these two sets of technologies we'll have will be growing faster than the market and we will be penetrating into these other technologies that are getting used for tin-plating. So we're encouraged with the ability to grow in those markets as well.

[Mike Harrison:]

Okay. And are those acquisitions going to be going into the regions or are they going to be parked in global specialties for the time being?

[Michael Barry:]

It's a great question. Coral actually will be separate, the can will be -- we operate our beverage can business and global specialties, so that piece will be put into global specialties. And then the other aspect will be put into the Americas region and in the general industrial piece. And then the tin-plating will be -- it's being managed out of global specialties as well, but certainly hits parts of the regions as well.

[Mike Harrison:]

All right. And then, last question I have for now is on the EMEA business. Really looks like you had a nice step-change in the margin performance there. And I'm aware you were coming off an easy prior-year comp. But were there some unusual dynamics that contributed to the strength there or do you see this 28%-plus number as a sustainable margin level in EMEA?

[Michael Barry:]

We are very pleased with our EMEA regions. I see it as sustainable. It's really what you see kind of popping there is the combination of sequentially volumes picking up and getting more back to, what I call, normal level. At the same time, we're getting the benefits of the synergies from the integration. And so, when you put those two things, that showed nice sequential improvement throughout the year. And we do expect that to continue on at that kind of level. Now, in the first quarter of the year, we do expect to see pressure on margins because of this raw material issue that we're having. But we are putting in place price increases, but there is a lag effect that goes with that. But absent that kind of short-term nature, I do expect these to be sustainable.

[Mike Harrison:]

All right. Thanks very much.

[Michael Barry:]

Thanks, Mike.

[Operator:]

Thank you. Our next questions comes from the line of Katherine Griffin with Deutsche Bank. Please proceed with your question.

[Katherine Griffin:]

Thank you. Good morning. And I'll also echo congratulations on a strong end to the year and on a well-deserved retirement to you, Mike.

[Michael Barry:]

Thank you.

[Katherine Griffin:]

First, I just wanted to ask, on the 4% net market share gains this quarter, can you highlight any regions or industries where you're having the most success with new business wins?

[Michael Barry:]

It's pretty broad-based. It's -- these things are made up of kind of pieces of business that we're picking up in all different kind of product lines and all different areas. So, we're actually -- it's pretty broad-based. So it's not just really one major area or another. And so, it's pretty well-distributed.

[Katherine Griffin:]

Okay. Thank you. And then, I mean, just kind of related to that, I know you talked a little bit about this in answering my question. But could you just talk more about your bolt-on M&A strategy going forward? Are you focusing more on expanding into core end markets like steel and metal finishing, looking at cross-selling opportunities that are similar to the two recent transactions or are there opportunities to get into more differentiated or specialized applications that you also have interest in?

[Michael Barry:]

Yes, it's really a combination. So, in the short-term, we are exclusively only looking at smaller acquisition opportunities until our leverage ratio is at the place we want to be, which we think that will be at the end of the year. Then, we'll look at larger opportunities. So, in the short-term, these bolt-ons tend to be various technologies that we feel will be good additions to our portfolio. And these are two good examples at once . Most of the time, in most of these discussions that we have or these acquisitions that we're working on, we tend to have and develop relationships with companies over time. So when they come to market, they are generally talking to us about that. And we can kind of come to a conclusion on the acquisitions at an attractive price. So we still feel there is a number of these opportunities out there, relatively small companies that can really add something to us from a product perspective or maybe it's a technology or a service application perspective too that we've done a couple of those as well that can really add to our whole offering for our customer base.

[Katherine Griffin:]

Great. Thanks so much.

[Michael Barry:]

Thanks, Katherine.

[Operator:]

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

[Jon Tanwanteng:]

Hey. Good morning, guys. Thank you for taking my questions. And Mike, congratulations on your retirement. I know it's a way off, but it's been a real pleasure working with you and your team and you've done a great job.

[Michael Barry:]

Thank you, Jon.

[Jon Tanwanteng:]

I was wondering if you could first talk about your gross margin expectations just for the first quarter. Given the rising input prices, maybe some volume headwinds from these logistics shortages and headwinds that are out there, I'm just wondering what your expectations are for the first quarter and when you might expect them to recover as you pass pricing through.

[Michael Barry:]

Yes. So, yes, we're not going to kind of give the specific number guidance, but they're definitely going to be impacted for the reasons that you just stated, just raw materials and things in general that are going on, like our container costs and things like that are going on. And we are in the process of getting price increases in the marketplace. There is generally a lag effect in that that our prices go up first and then we get our price increases. So there will be some impact on margins. And if it was absent that kind of a thing, we would expect to be in this 37% to 38% range margins, but they probably would be somewhat depressed in the first quarter. But as we get through the year, we get our price increases through and so forth. As Mary kind of mentioned in her remarks, we do expect to be getting back into that 38% area, which is where we think we're more longer-term at this stage once raw materials kind of line out.

[Jon Tanwanteng:]

Got it. Okay. Thank you for that. And I was wondering if you had a total synergy realization target for the year. I know you've done better in the past couple of years. Just wondering if you had a target for this year and when -- is there a phase and a schedule for that?

[Michael Barry:]

Sure. Our synergies for this year target is $75 million. I believe we announced that a quarter or two ago when we kind of upped our guidance and we expect to ultimately get $80 million, but -- so by the end of this year, if you look at kind of the run rate we expect to be at, we will probably be more at that $80 million going forward. It's just that you get the full year effect in 2022.

[Jon Tanwanteng:]

Okay. Great. And then, just a quick question for Mary. Do you expect cash flow to improve to the same degree as EBITDA this year or is it going to be held back a little bit more by maybe capex returns and you're investing in working capital as revenues grow?

[Mary Hall:]

Yes. That's a fair question. Certainly the answer depends on how quickly the rebound picks up steam. Again, we threw off a lot of working capital in 2020. If the rebound picks up quickly, we would expect to have some reinvestment in working capital, but we would expect that to be more than offset by earnings improvement if that's the situation as well. So, a little bit difficult to call. From a capex perspective, I should point out, post the onslaught of COVID, we announced that we scaled back our capex from our original expectations last year and we would expect to invest a bit more in capex this year. So, a very long-winded way of saying, I expect cash flow to remain healthy, but we'll see the progress of the rebound this year and talk more in later quarters.

[Jon Tanwanteng:]

Okay. Fair enough. Thank you, guys.

[Michael Barry:]

Thank you.

[Operator:]

Thank you. Our next questions comes from the line of Steve O'Hara with Sidoti. Please proceed with your questions.

[Steve O'Hara:]

Hi. Good morning and thanks for taking the question.

[Michael Barry:]

Good morning, Steve.

[Steve O'Hara:]

Yes. Just, I guess, first, echo the -- congratulations again. And though there is still a lot of green here left in the year, but hopefully a little bit this year than last year after