Quaker Chemical Corp Q4 FY2020 Earnings Call

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.

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. A great deal has changed over the past year with the COVID-19 pandemic. For us, our top priority is and has been to protect the health and safety of our employees and our customers, while ensuring our business continuity to meet our customers' requirements. All of our 31 plants around the world are operating, and we are continuing to meet our customers' needs. I am very proud of what the Quaker Houghton team has done to continue servicing our customers, as well as continuing our integration. We are pleased with our results for the fourth quarter. Overall, our sales were up sequentially 5%, with all regions or segments showing revenue growth, which was primarily driven by higher volumes as our businesses continue to come back from the negative impact that COVID-19 had on our end markets. The sequential increase was strongest for us in EMEA as we saw an increase in sales of 13% compared to the third quarter. I think it is interesting to look at our revenue changes from the fourth quarter of 2019, which was pre-COVID, of course. Overall, our sales were down only 1%, and our volumes were relatively flat, but there was a difference when looking at this by region or segment. The only area that showed an increase in volume sold was Asia-Pacific, which had an increase of 8% versus prior year, primarily driven by higher sales in China and India. EMEA was relatively flat on volumes, mainly due to the fourth quarter of '19 being an unusually weak quarter. Americas was down 2% on volumes, primarily due to end markets still being impacted by COVID, and our global specialty business volumes were down 9%, primarily driven by lower aerospace mask and sales. I also want to point out that our ability to gain new pieces of business and take market share contributed significantly to our performance, as our analysis shows that we had total organic sales growth due to net share gains of approximately 4% in the fourth quarter of '20 versus the fourth quarter of '19. While we were overall relatively flat in our volumes, the 4% net share gains made a bit of difference as our Asia-Pacific growth helped to offset the negative COVID impact on our end markets. I am very pleased to see the continued improvement from last quarter, but we're certainly not all the way back. As we said previously, we estimate it will take approximately two more years for end markets to fully return, and some markets, like aerospace, which makes up about 3% of our sales, may take more time than that. However, we expect ourselves to rebound more quickly due to our projected continued market share gains, as well as making acquisitions, which I'll now talk more about. As you may have noticed, since our last conference call, we did make two small bolt-on acquisitions. The first was a private company called Coral Chemical based in the U.S. that we purchased in mid-December for $53 million net of cash required. Coral provides technical expertise and product solutions for pre-treatment, metalworking, and waste treatment applications to the beverage can and general industrial end markets. Coral had approximately $37 million in net sales and approximately $5.5 million of adjusted EBITDA in 2020. For this acquisition, we also expect to achieve annualized synergies of approximately $3 million over the next two years. Also, in February, we bought assets related to tin plating solutions primarily for the steel end market for $25 million, which will add full-year net sales of approximately $8 million and approximately $4 million full-year adjusted EBITDA going forward. So, we are pleased with the strategic additions to our product portfolio, which we estimate will add about $11 million of EBITDA in 2021, which equates to an approximate 7 times EBITDA multiple purchase price for the combination of these two acquisitions. So overall, we were pleased with the quarter given the environment we're operating in, and we saw good sequential improvement in our sales and adjusted EBITDA. Synergy achievement also was a factor, as we achieved $18 million in this quarter compared to $5 million in the fourth quarter of last year. In addition, our strong operating cash flow of $66 million in the quarter allowed us to reduce our net debt by another $24 million for the full year, and for the full year, we reduced debt by about 12%, in addition to making the Coral acquisition. The positive cash flow nature of our business during severe downturns is something we have discussed with investors in the past, and we have seen this positive impact again over the past year. In reflecting upon the full year, the past 12 months have been challenging due to COVID-19. But I'm very pleased with our overall performance. Over the past year, we continued to service and supply our customers despite difficult economic conditions. We continued to gain share in our markets and we completed a significant part of our integration activities, and we were able to realize $58 million of cost synergies, which exceeded our previous estimate of $35 million. We also made the addition of these two additional bolt-on acquisitions, which will add approximately $11 million to our adjusted EBITDA in 2021. And even with those acquisitions, we were able to reduce our debt by 12% or $94 million. So, in short, we are delivering on the powerful benefits that we anticipated for our combination. As we look forward to 2021, we expect some short-term headwinds from higher raw material costs and lower than expected volumes to the automotive market due to the semiconductor shortage. Hopefully, these are just timing issues that will impact mainly the first half of the year. Despite these short-term headwinds, we feel positive about 2021 and continue to expect a step change in our profitability with over a 20% increase in our adjusted EBITDA from 2020 as we complete our integration cost synergies, continue to take further share in the marketplace, benefit from a projected gradual rebound in demand in our end markets, and see the positive impact of our recent acquisitions. As you may have read in our press release, I've announced that I will retire from my role as CEO at the end of the year, but I will continue in my role as Chairman of the board. As we mentioned in the press release, the board is committed to a strong, orderly process and transition with a comprehensive search that will include internal and external candidates. As far as the timing and why I made this decision now, I really want Quaker Houghton to be in a strong position when we made this transition, and we are. This year we will take a step change in our profitability. We will essentially complete our integration, and we will pay down more debt and reach our targeted leverage ratio. We have the right strategy in place, a strong management team, tremendous people throughout the whole organization, and strong opportunities for above-market growth in our businesses for the foreseeable future. So, to me, our future is very bright, and this is the right time to make this transition, and I look forward to continuing to be involved in the company's bright future as Chairman of the board following my retirement. In closing, I want to thank all of our colleagues at Quaker Houghton, whose dedication and expertise help to create value for our customers and shareholders and differentiate us in the marketplace. I am so proud of how our team has performed in servicing our customers, meeting their needs, and successfully continuing with our integration execution, which was both critical and difficult for us this past year. People are everything in our business and by far the most valuable asset, and ensuring their safety and well-being is and will continue to be a top priority for us. I'm proud of and very happy with our Quaker Houghton team and what we have and will be able to accomplish for our customers and investors both now and going forward. And that concludes my prepared remarks. I'll now hand it over to Mary so that she can review some of the key financials for you.

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 are 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, in 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 as 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. For the full year, reported net sales increased 25% in 2020 due to the inclusion of Houghton and Norman Haye, but on a pro forma basis, sales were down 9% primarily on lower volumes due to the global downturn in economic production as a result of the COVID-19 pandemic. Gross margin of 36.8% in Q4 is up from 34.8% in Q4 of 2019, which was deflated somewhat due to inventory adjustments for purchase accounting for Norman Haye. Excluding these adjustments, we estimate Q4 of 2019's gross margin would have been about 35.3%. The increase in gross margin Q4 over Q4 is primarily a result of our progress in achieving combination-related synergies in logistics, procurement, and manufacturing. Our sequential gross margin was down somewhat from Q3, reflecting a one-time benefit to gross margin in Q3 of approximately 0.5% and current quarter pressure from rising raw material costs and product mix. On a full-year basis, gross margin was 36.2% versus 2019's 34.6%. Excluding similar cost adjustments as Q4, we estimate our gross margins in 2020 and 2019 would have been 36.3% and 35.7% respectively. Looking ahead, we expect to realize additional combination cost synergies throughout 2021, which should result in a gradual improvement to gross margin. We expect to head towards the 38% gross margin area later this year as we further realize our combination synergies and manage prices to offset rising raw material costs. Please refer to slide 10 for a snapshot of certain key financial measures. On both a GAAP and non-GAAP basis, our Q4 operating income improves significantly, and our non-GAAP operating margin of 11.3% is up 1.7% versus Q4 last year, reflecting a sequential recovery in sales this year and our combination synergies and the cost-saving actions we took to mitigate the impacts of COVID-19. Full-year GAAP and non-GAAP operating income also improved significantly; however, full-year operating margin declined due to the COVID-related steep decline in sales and volumes in Q2 and the resulting pressure from fixed cost absorption, which we discussed in our Q2 earnings call. Our reported effective tax rate was an expense of 4.9% in Q4 of '20 versus a benefit of 18.2% in Q4 of '19. Excluding various one-time items, our Q4 effective tax rates would have been approximately 30% and 24% respectively. For full-year 2020 and 2019, we estimate that our effective tax rates, excluding non-core and one-time items, would have been approximately 25% and 22% respectively, in line with our guidance for this year. For 2021, we expect our full-year effective tax rate will be in the range of 24% to 26%. Our non-GAAP EPS of $1.63 for Q4 is up 22% from $1.34 in Q4 of '19, due primarily to the improved operating income I discussed earlier. Our full-year non-GAAP EPS of $4.78 was down from $5.83 last year but ahead of consensus of $4.67. On Slide 11, we show the trend in our pro forma adjusted EBITDA. Our Q4 adjusted EBITDA of $65 million is up $4 million from Q4 last year and up $1 million sequentially. And our full-year adjusted EBITDA of $222 million is ahead of consensus. Also, our adjusted EBITDA margins improved for both the quarter and the full year. Our Q4 adjusted EBITDA margin of 17% is up 1.5% versus 15.5% last year, and on a full-year basis, our adjusted EBITDA margin increased to 15.7% from our 2019 pro forma margin of 15%. The improved margins are primarily due to the combination-related synergies we've realized, partially offset by the lower impact from the fall-off in sales due to COVID-19. On Slide 12, we provide an update on our leverage and liquidity. As Mike noted, cash flow was the star in 2020. We frequently talked about how the asset-light nature of our business helps us to weather downturns, as our main investment is in working capital versus property, plant, and equipment, and we released working capital and generated increased cash flow during economic downturns. We saw this in 2020 during the financial crisis and we saw this year during the COVID pandemic. Operating cash flow for the full year was a record $178.4 million, allowing us to reduce net debt by 12% to $717.3 million, paid $53 million for the Coral acquisition, net of cash acquired, and paid approximately $7 million in dividends. We're delivering on our commitment to prudently allocate capital by prioritizing debt reduction while continuing to pay our dividends and seizing growth opportunities which make strategic sense. As a result of our prudent capital allocation, our primary leverage covenant of net debt to trailing 12 months adjusted EBITDA continues to improve and was 3.2 times at year-end 2020 versus 3.5 times last year. We expect to be at our target level of 2.5 times net debt to adjusted EBITDA by the end of 2021. In addition, our cost of debt continues to benefit from the current interest rate environment with our borrowing cost under 2%. In summary, Quaker Houghton continued to deliver on its commitments in 2020 despite the very challenging market conditions we faced. I said during this call last year that my crystal ball was murky. At that time, we were in the very early stages of the pandemic with no way of knowing what was to come. It certainly turned out to be a very difficult year, but we focused on what we can control. We kept our integration, execution, and synergy capture on track, and in fact ahead of schedule. We implemented additional cost savings actions to mitigate the fall-off in sales, and we continued to deliver market share gains. As a result, we achieved record cash flow during the year and were able to reduce debt while continuing to execute on strategic acquisitions that make financial sense. In 2021, we expect to see a greater than 20% increase in adjusted EBITDA and further expansion of our margins as we realize the full synergy benefits toward the end of the year. Thank you all for your interest in Quaker Houghton. And now, back over to you, Mike.

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

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

Hi. Good morning.

Good morning, Mike.

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.

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.

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 have 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?

It's a good question. Overall, our views on organic growth haven't changed. The 20% we're referring to is intended to be a conservative floor since we mentioned over 20%. Historically, we've approached things conservatively, and there are still uncertainties, such as rising raw material costs and ongoing COVID situations. It's not an ideal environment. However, considering our current position and how we ended the quarter, I believe we'll see strong organic growth, especially with the added acquisitions. For example, we initially projected at least $215 million in EBITDA for last year, but we ended up at $222 million. So, we're essentially setting a floor for our expectations.

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?

I will start with Coral. It really strengthens our offerings, as Quaker had a can portfolio and Houghton had a can portfolio as well, with Houghton having a historical relationship with Coral and a licensing agreement in place for certain aspects. Adding the Quaker Houghton legacy portfolio with Coral provides a very complete product range for the can industry and significantly enhances our presence in that sector. This industry has remained one of the stronger markets even during COVID times, which gives us confidence in our ability to gain market share in the future. Regarding the tin-plating, we previously had a tin-plating product that we acquired years ago from McDermott. When this asset became available, we saw it as a valuable addition to our portfolio. We believe the technologies we possess in this area are competitive and that the combination of these two technology sets will grow faster than the market, allowing us to penetrate into alternative technologies used for tin-plating. Therefore, we feel optimistic about our growth potential in these markets.

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?

It's a great question. Coral will actually be separate; the can business will fall under our beverage can operations and global specialties, so that part will be included in global specialties. The other aspect will be allocated to the Americas region and the general industrial segment. Additionally, the tin-plating will be managed out of global specialties, but it will also impact various regions.

All right. And then, last question I have for now is on the EMEA business. It 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?

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 together, that showed nice sequential improvement throughout the year. 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.

All right. Thanks very much.

Thanks, Mike.

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

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.

Thank you.

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?

It's quite widespread. We're seeing various segments of our business growing across different product lines and areas. So, it's not concentrated in just one major sector. Overall, the growth is well-distributed.

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?

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 it 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. Most of the time, in most of these discussions 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 are 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.

Great. Thanks so much.

Thanks, Katherine.

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

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.

Thank you, Jon.

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.

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 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.

Thank you for that. I was curious if you have a total synergy realization target for the year. I know you've performed well in the last couple of years. Do you have a target for this year, and is there a timeline or schedule for that?

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 to $80 million. 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.

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?

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.

Okay. Fair enough. Thank you, guys.

Thank you.

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

Hi. Good morning, and thanks for taking the question.

Good morning, Steve.

Yes, I want to start by congratulating everyone once again. While there's still a lot of time left in the year, I hope this year will go a bit more smoothly than last year, considering the challenges we've faced. I had some connectivity issues, but I wanted to ask about the EBITDA growth you are forecasting. Can you explain the impact of the headwinds you expect in the first half of the year? Also, regarding the process for passing through raw material prices, it seems like there might be a two-quarter lag; is it a straightforward process with customers?

That's a great question. I wish I could predict the future because the situation really varies. We've noticed a significant change in raw material costs. The question for me is whether this will be a one-time occurrence or if it will develop differently over time. Currently, we are in the process of implementing price increases for our customers. Most of these will take effect in the latter part of the quarter. However, we have already been impacted by price increases throughout the quarter. We typically do not provide specific guidance on this, but over time, we generally observe a three-month lag, and for some customers, it can take up to six months before we fully capture the impacts. It is primarily a timing issue, and it isn't something we worry about in the long term. It's more of a short-term challenge that we need to navigate, and hopefully, things will stabilize, allowing us to move forward.

Okay. That's helpful. Regarding raw materials and inflation, would you have a more favorable impact than your competitors concerning inflation, or do you expect to be on the same level as everyone else if prices continue to rise?

I don't believe we have a competitive advantage or disadvantage concerning raw materials. Typically, when raw materials fluctuate in price, it affects everyone in the industry similarly.

Okay. Lastly, in terms of finding your replacement, what do people usually say when I speak to them about your team, particularly regarding the strength of your management? It looks like you have a solid pool of talent. Do you think there’s anything an outsider could bring that you’re currently missing, or is it more about making sure to consider all options to ultimately benefit shareholders and the company?

I believe our Board views it as good governance to consider all possibilities. Personally, I am happy with our management team, and the Board shares that sentiment. We have strong candidates to consider in this process. Therefore, I wouldn't interpret this as a move away from our current direction; it's simply about exploring all options to ensure we are practicing good governance.

Thank you. Our next questions come from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Good morning. Mike, I know this may seem like an unfair question, but please bear with me. Can you discuss the challenges or unresolved issues that you will be leaving for your successor? Additionally, could you share your thoughts on the culture at Quaker Houghton and its current status, particularly how it might limit or present opportunities for acquisitions beyond simply expanding existing skill sets? It appears that cultural factors will pose a significant challenge, and you've done a commendable job of identifying the right assets for the business. Could you elaborate on these two points?

Sure. Regarding your first question, a significant challenge is the timing. I truly didn't want to leave since the company is in a good place, and I believe we are currently very strong. Our integration is in place, and we expect our profitability to reach an all-time high this year, with our debt capacity in the target range we desire. These are solid foundations for leadership. I have confidence in our strategy, and our Board shares this belief. We are not seeking major changes to our strategy and believe we can continue to grow organically above market levels. We will keep looking for acquisition opportunities within our market, focusing on a CEO who can carry our strategy forward. Regarding culture, we are very aware of it during acquisitions, as it is a core element of our company. We view our people as our most valuable asset, and we prioritize collaboration, teamwork, inclusiveness, and diversity in our culture. A significant amount of our time and energy goes into fostering the desired culture at Quaker Houghton as a combined entity. I am pleased with our progress in this area. I also want to clarify that when considering acquisitions, ensuring a good cultural fit from a people perspective will always be crucial to avoid negatively impacting our culture.

And then, also, can you talk a little bit about sort of staff turnover or churn? What happened in 2020? And then, do you see any sort of pent-up churn at either yourselves or potentially at competitors where, as things normalize, people become more willing to take risks and move? Can you just give us a sense for where we are at on kind of the migration of talent within the industry?

Sure. I mean, over time, with just kind of historic perspective, Quaker went from having 1,200 people to over 2,000 people before the combination with Houghton. And we try to really attract talent because we are growing above the market; we need good people. Again, people are the most valuable part of our company, and having people to understand customers' processes and so forth is really critical. And now, we've doubled that size and now we have 4,200 people in Quaker Houghton today. And we continue to make sure we want to keep it and retain our key people and attract new talent to the organization. That's something we'll constantly work on. Our retention rate is something that we look at. Our voluntary retention rate, where somebody chooses to leave us, is relatively low. And I don't have the exact numbers on me, but it's definitely below 5%, in that range. So, it's something that we definitely put a lot of time and effort into and making sure we can retain and attract key talent.

Thank you. Our next questions come from the line of Garo Norian with Palisade Capital Management. Please proceed with your questions.

Hey. Good morning, guys. Wanted to just ask on the raw material side. As you look at what is driving that, could you talk about kind of both the fossil fuel related and the non-fossil fuel related as far as what the drivers might be and kind of how sustainable and I'm particularly curious if global regulations, whether it's around biodiesel or something, might be more of a secular driver of cost that you have to contend with?

Sure. We're observing widespread increases in raw materials. A significant portion of these increases is in base oils, as crude oil prices continue to rise. We're also seeing a rise in raw materials based on vegetable and animal fats. There is a connection between these categories, but they can't deviate too far from each other due to biodiesel market dynamics, which tend to realign them. Additionally, we are experiencing price increases in other categories such as additives. While we don't have a definitive prediction, the last thorough analysis suggested a potential stabilization period, but circumstances can change unexpectedly. Ultimately, we believe that raw material costs will continue to fluctuate over time, and we will adjust our pricing and manage our margins accordingly.

Okay, great. Thanks. And this may be more for Mary. I think at the beginning of last year, you guys had talked about maybe a $35 million capex number for the year. Is that a good starting place to think about for this year?

I believe we concluded the year with our capital expenditures slightly below our initial guidance from early last year. Our expectation is in the mid to low $30 million range, Garo.

Got it. Okay. And then just lastly, I feel like since you guys had done your Investor Day, there has been very possibly a bit of accelerated move in the electric vehicle world compared to maybe where thoughts were at that time. I am just curious if you've refined your thoughts on the impact of that on the company in any way?

Yes, we have continued to evolve and study the situation. We haven’t provided updates on this recently. My overall conclusion from Investor Day regarding the impact of electric vehicles on our business remains largely unchanged. While there may be reductions in the use of our chemicals in some areas, we are also capturing new business opportunities that we believe will eventually balance each other out. Thus, our overall conclusions from Investor Day are still applicable, although we have updated our perspective slightly.

Got it. And then just lastly, seems like most investor events and calls these days have some sort of update on ESG related things; anything you could highlight there?

Certainly. We are dedicating considerable resources to ESG efforts, which is receiving significant focus across our Company. About a year ago, we established a Board Committee on sustainability, and we plan to release our sustainability report around March 23. Our annual report will include additional information on this topic. Last year, we conducted a comprehensive material assessment to identify areas where we can create the most significant impact, gathering feedback from customers, investors, and various stakeholders, including our employees. Expect to see more information regarding our activities in this area. We will be adopting the FASB framework and GRI in our practices and will issue a letter of support for TSFD. You can anticipate the announcement of substantial goals related to ESG later this year.

Thank you. Rejoining the queue is Mike Harrison with Seaport Global Securities. Please proceed with your question.

Hi. Just a couple more. Mike, in terms of some of the near-term impact you see, obviously, you talked about the raw materials. Can you maybe touch on the impact of the unusual winter weather and maybe some of the logistical challenges or outages that you saw from maybe some of your suppliers? And then, maybe a related temporary thing. You mentioned some uncertainty around the auto business and the semiconductor shortage. How serious of a concern do you see that as? And do you view it as just a timing issue that you'll make up in the rest of the year?

So far, the issues in Texas and the supply chain disruptions haven't significantly affected us. From the automotive and semiconductor perspective, we are noticing that some plants worldwide might reduce production temporarily. This will have some impact on us, but we believe it will clear up in the spring. We anticipate that this is more of a temporary situation that will be compensated for with increased volumes later in the year. We expect some impact in the first quarter and possibly into the second quarter, but we are hopeful that everything will balance out in the latter half of the year.

All right. And then, wanted to ask also about the APAC margin. It looks like it weakened quite a bit sequentially. Can you talk about what was impacting that in Q4? And I guess, as we look into 2021, is that a business that should see operating margin up into the high-20%s or even 30% level like it was in the first three quarters, or more like the mid-20%s like it was in the fourth quarter?

As we consider the Asia-Pacific region, it remains an excellent business for us. In that quarter, what we experienced was primarily a timing issue related to some of our costs, which were more concentrated at the end of the period. For instance, in China, we had a strong year last year, and as we reached certain performance thresholds, we needed to set aside more for bonuses. This resulted in some expenses being deferred to the end of the year, which was atypical and contributed to the lower results. However, we view this as a one-time occurrence in the fourth quarter and do not anticipate similar issues in the first quarter moving forward. Therefore, we don't expect this to impact future performance.

Thank you. There are no further questions at this time, I would like to turn the call back over to management for any closing comments. Okay. Given there are no other questions, we will end our conference call now. And I want to thank all of you for your interest today. Our next conference call for the first quarter will be in late April or early May. And if you have any questions in the meantime, please feel free to contact Mary or myself. Thanks again for your interest in Quaker Houghton. Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.