Greetings and welcome to the Quaker Houghton's Third Quarter 2021 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 your host, Michael Barry, Chairman, Chief Executive Officer and President. Thank you, sir. Please go ahead.

Good morning, everyone. Joining me today are Andy Tometich, our incoming CEO; Shane Hostetter, our CFO; Robert Traub, our General Counsel; and David Will, our Global Controller. We have slides for our conference call. You can find them in the Investor Relations section at our website at www.quakerhoughton.com. Before I provide an overview of our business in the third quarter, I do want to introduce Andy Tometich, who will become CEO on December 1st. Andy joined Quaker Houghton on October 13th, and we are in the midst of a detailed transition process over this seven-week period until he becomes CEO. Andy has over 30 years of experience in the specialty chemicals industry, with a strong track record of accomplishments and a passion for the customer intimate business model. Andy, please feel free to say a few words.

Thanks, Mike, and good morning, everyone. I'm very pleased to now be at Quaker Houghton and to be with you here today. It's only been a few weeks, but I'm already grateful for the welcome I've received from everyone. Over Mike's very successful tenure, he and the Quaker Houghton team have developed a business model with customer experience as its true differentiator. And that truly resonates with me. After three decades in specialty chemical companies that focused on customer-based solutions, I'm really looking forward to building on this strong foundation at Quaker Houghton, especially as we look to grow in areas where our model adds sustainable value for our customers and our stakeholders. For now, I'll just wrap up my brief comments by saying I'm excited about the opportunities for Quaker Houghton. Mike, I really appreciate everything you are doing to support our seamless transition, including your continuation as Chairman. And I look forward to working with our analysts, investors, and stakeholders, including those who are with us on the call today. Thanks again, Mike, and back to you.

Thank you, Andy. I am very excited that we will have Andy's leadership going forward and I'm highly confident that Andy will take Quaker Houghton to new heights. And now on the quarter, our results for the third quarter were where we expected them to be, although how we got there was different than our original expectations. The major headwind for the quarter was raw material costs. They increased nearly 10% from the second quarter to the third quarter, which was considerably higher than our expectations. However, we also had good sales growth and continued our efforts around cost control, which helped offset the raw material headwinds. Let me now dive deeper into our performance and I'll start with sales. Overall, our top-line revenue was up 22% from the prior year, with all segments showing strong growth. We saw good organic volume growth between 7% and 9% for our three largest segments, which were the Americas, EMEA, and Asia Pacific. Higher prices of around 10% were also a major factor in our sales growth. In addition, we saw a benefit from acquisitions of 4% and from foreign exchange of 2%. On a sequential basis, our sales volumes were relatively flat. While we did see growth in some of our end markets, the sequential growth was muted by both seasonality in certain segments as well as the semiconductor shortage, which we estimate caused us approximately two percentage points of growth in the quarter. I also want to point out that our ability to gain new pieces of business and take market share continued to contribute to our strong performance, as we estimate total organic sales growth due to net share gains was approximately 3% in the third quarter of 2021 versus the third quarter of 2020. So we continue to feel good about our ability to deliver on our historical performance of consistently growing two to four percentage points above the market due to share gains. And looking forward, we continue to feel good about delivering these levels given the opportunities we have recently won or are actively working on. So in summary, the big picture on organic volume growth for us was approximately 3% due to market share gains, and about 4% due to growth in our underlying markets, which we estimate would have been 2% higher if it weren't for the semiconductor shortage. While sales were a positive for us in the quarter, a clear negative was the continued increase in our raw material costs. While we knew raw materials were trending up the last time we talked, the increases have continued longer and at a higher level than we expected. Overall, our cost of raw materials has increased nearly 10% sequentially in the third quarter. Further, the availability of raw materials has impacted us at times. But I'm proud to say that we've navigated this so far and have ensured that all our customers have continued to operate their business. The increase in raw material costs did put downward pressure on our gross margins in the third quarter, and the increases in raw materials will continue into the fourth quarter although at a slower projected rate. We have continued to implement price increases, and we will be implementing more over the next two months. Our expectation is that we will see sequential improvement in our product margins in the fourth quarter as we make strides to offset raw material increases. For the fourth quarter, we should start to see some improvement in our product margins, but we'll expect to have a larger improvement in the first quarter of 2022. Our goal still remains to exit the year with enough price increases in place that we will offset raw material inflation from 2021 as we enter into 2022, and we believe this is achievable. So overall, we are pleased with the quarter especially considering the challenges we face with the raw material pricing as well as the headwinds from the semiconductor shortage. Our trailing 12 months adjusted EBITDA of $279 million is an all-time high and is 25% higher than our $222 million from last year. So we are experiencing a step change in our profitability that we projected as we entered into the year. Related to our liquidity, our net debt in the quarter was relatively flat due to increases in our working capital primarily related to raw material cost increases and availability. However, our leverage ratio of net debt to adjusted EBITDA continues to be at 2.7, which is the low point since the combination two years ago, and down from 3.4 one year ago. You may have noticed in our press release that we recently made three small acquisitions for approximately $13 million. Each of them expands our technology capabilities and/or geographic expansion in certain product lines. In total, they're adding $15 million in revenue and $2 million in EBITDA. While maybe not that meaningful given the size, each provides another building block in our strategic portfolio. This also continues our trend of buying small companies for an attractive multiple of approximately 7 to 8 times EBITDA. As we look forward to the fourth quarter, we expect short-term headwinds from higher raw material costs, the power restrictions in China, and the continued impact from the semiconductor shortage on the global automotive market. But as I mentioned earlier, we expect to see some sequential improvement in our product margins. Overall, we expect our adjusted EBITDA in the fourth quarter to be similar to the third quarter and be somewhere in the 60s. And stepping back and looking at the year as a whole, I am more optimistic about our business now than I was at the beginning of the year. While we've likely end up with our profitability in 2021 in the same place as we originally expected, the way we are getting there is different. Essentially, we're seeing higher demand for our products in most of our markets, but at the same time, this higher demand was largely offset by the very large rising input costs, which negatively impacted our margins due to the lag effect of getting price increases. However, we are making headway in our price increases. And as I mentioned before, we remain committed to our goal of exiting the year when product margin is back to our targeted levels. So as we recover the past year's raw material inflation as we enter into next year. I believe this scenario is better than we expected entering the current year as we will exit with better demand in our end markets, coupled with getting our margins in a better place going into 2022. As we enter 2022 the headwinds in the fourth quarter caused by high raw material costs and the semiconductor shortage as well as the power restrictions in China are likely to last into the first part of the year, but become less of a headwind over time. For the full year, we believe 2022 will be a strong year for us with net sales and earnings growth to be above our long-term trend. We expect this to be driven by one, good growth in our end-markets, as our markets continue to rebound; two, continued market share gains; and three, sequential improvement in our product and gross margins over the course of the year as we recapture the raw material inflation from 2021. In closing, I want to thank all of our colleagues at Quaker Houghton, whose dedication and expertise helps to create value for our customers and shareholders and differentiate us in the marketplace. I'm so proud of how our team has performed in servicing our customers, meeting their needs, and successfully continuing with our integration execution, which is both critical and difficult for us given the conditions we face this year. People are everything in our business and by far our most valuable asset and ensuring their safety and well-being is and will continue to be a top priority for us. So I can't help but emphasize my pride in our Quaker Houghton team in 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 Shane so that he can review some of the key financials for you for the quarter.

Thanks, Mike, and good morning, everyone. Prior to discussing results for the quarter, I'd like to remind everyone that comments made during this call include forward-looking statements, which are based on current expectations and are subject to risks and uncertainties that could cause our actual results to differ materially. Further discussion of these risks please review the cautionary statements regarding forward-looking statements included in our earnings release and our Form 10-Q. In addition, please reference our Risk Factors disclosed in our 2020 Form 10-K for more discussion of the company's risks that could also impact our forward-looking statements. In addition, Mike and I make reference to several non-GAAP measures during this call; such are consistent with the press release and call charts filed yesterday. And also, there are reconciliations between U.S. GAAP measures and non-GAAP measures provided in our call charts on Pages 11 to 22 for reference. Getting into our third quarter performance, the story was pretty consistent with our previous quarters this year. And that it was really a tale of a positive solid top-line performance tempered by a negative higher input costs due to the global supply chain disruption that we and the rest of the world are currently facing. As I begin to discuss our quarterly performance, I'll point you to Slide 6, 7 and 8 in our call charts, which provide a further look into our financials. Our record net sales of $449.1 million increased 22% from the prior-year driven by 6% organic volumes, 10% from our pricing initiatives, 4% from acquisitions, and 2% from foreign exchange. When looking sequentially, we were up 3% from the second quarter, largely due to increases from our pricing initiatives on flat volumes. Turning to our gross margin trend. Our third quarter margin ended at 32.3%. Given the upward trend of generally all input costs in the world we knew this quarter would decline compared to the 35.5% level we had in the second quarter, and also signaled that this quarter would be the lowest of the year. That said, the pace of the raw material cost increases were more than we expected. And our sequential gross margin declined to show as such. Looking ahead to the fourth quarter margins, as Mike mentioned, we expect to see sequential increases in our product margins on a dollar profit basis. However, the impact of the price increases to our top-line will naturally impact our overall gross margin level on a percentage basis. As we're putting in price increases to offset raw material inflation initially and retain our product margins on a per kilo basis to ensure we maintain our levels of gross profit in dollars. We expect to achieve this by the end of the year on a going forward basis. Once our price increases offset raw material inflation, and we protect our gross profit dollars going forward, we will then begin to put in place additional initiatives to return our gross margin more to targeted levels over time. SG&A was up $7 million compared to the prior year, as we had additional direct selling costs due to our increase in sales and related margin, higher labor and other costs that were directly impacted by COVID last year, and additional costs associated with our recent acquisitions. Sequentially, we benefited from $5 million of lower SG&A costs, which were primarily due to lower incentive compensation and some lower professional and other similar fees. The company also benefited from other higher income, due to FX transaction gains in the current quarter compared to losses in the prior year, which was partially offset by lower performance from our equity investments, primarily in Korea. The net of this performance resulted in adjusted EBITDA of $66.2 million for the quarter, which was up 3% compared to the prior year of $63.9 million. As you can see in chart 9, this increased our trailing 12-month adjusted EBITDA to a record $279 million. From a segment perspective, these results were driven by significant net sales increases in each of the company's segments year-over-year, while gross margins and higher SG&A negatively impacted all segments. The net of these impacts resulted in a 16% increase in EMEA earnings compared to the prior year, generally flat performances in Americas and GSB, and a decline in Asia Pacific earnings, which was due to a solid performance last year as China was less impacted by COVID-19 in the prior year, as well as a decline in gross margin in the current quarter due to the continued increases in raw material costs. When looking at our segments, sequential performance, each segment's top-line was at or above the second quarter or relatively consistent, largely due to global pricing initiatives on flat volumes, which were offset by lower gross margins in all segments due to continued increases in raw material costs that exceeded our pricing initiatives. From a tax perspective, we had low effective tax rates in the current and prior year quarters of 2.6% and 8.1% due to various one-time non-cash related items. Excluding these items in each period, our tax rate would have been relatively consistent at 25% for the current quarter, compared to 24% in the prior year. To note, we expect our fourth quarter effective tax rate to be a little higher in the range of 26% to 28%. But our full-year effective tax rate will be more consistent with past estimates in the range of 24% to 26%. Our non-GAAP EPS of $1.63 grew 5% compared to the prior year, as our solid adjusted EBITDA, coupled with over $1 million of interest savings due to lower borrowing rates and average borrowings were partially offset by a slightly higher tax expense. As we look to the company's liquidity summarized on chart 10, our net debt of $759 million was flat compared to the second quarter. This was primarily driven by $12 million of operating cash flow offset by $7 million of dividends paid and $6 million of additional investments in normal capital expenditures. The quarter's low operating cash flow was driven by further investment in the company's major cash requirement working capital. Specifically, the company continued to see cash outflows from accounts receivable due to higher net sales, and also had considerable increases in inventory, which were due to higher raw material costs as well as restocking and bulk purchases to ensure safety stock given the disruption in the global supply chain. The company's liquidity and leverage still remain healthy, with a reported leverage ratio at 2.7x as of the third quarter compared to 3.2x entering the year. Overall, I want to emphasize we are committed to prudent allocation of our capital and remain committed to reducing leverage to our target of 2.5x which we still are targeting to be near by year-end. This commitment includes prioritizing debt reduction, but also continuing to pay our dividends as well as investing in acquisitions that provide growth opportunities, which makes strategic sense. This is evidenced by our most recent tuck-in acquisitions of Grindaix, 3-S, and Baron Industries, which were acquired for $13 million, or a rough multiple of seven times EBITDA, and bring with them a wealth of opportunity in technology and product reach. So to summarize, Quaker Houghton had a solid quarter that was relatively consistent with our expectations, but a little different than initially expected due to continued strengthen in demand, and good market share gains, which were partially offset by higher input costs. Our liquidity remains very healthy, and we remain committed to our overall capital allocation and deleveraging strategy. Before I conclude my remarks, I just wanted to take a moment to note that this is the last call from Mike, during his incredibly successful tenure as CEO. Under his guidance, Quaker Houghton has reached new heights and grown in areas that some believe could never have been achieved. I wanted to take this time to thank you, Mike, on behalf of the company for your many years of service to our company. Of course, we look forward to your continued dedication and contributions as our Board Chairman.

Thank you, Shane and I appreciate those remarks. It's really been an honor and privilege to work for Quaker Houghton for 23 years and to work with such great people throughout this company that really deliver solutions for our customers every day and really make this a very special place to work. And with that, we will now open it up for questions.

Thank you. The floor is now open for questions. Our first question is coming from Mike Harrison of Seaport Research. Please go ahead.

Good morning, and congratulations and best wishes, Mike, and welcome aboard, Andy.

Thanks Mike.

Thank you, Mike. Good morning.

Mike, there’s no rule preventing the Chairman from participating in the earnings call. You'll be back; you're interested in the questions and providing us with direct answers. The first question is for Shane regarding the SG&A figure. I know you mentioned some reductions in professional fees, but I'm curious about the sequential decline and how sustainable it is. Was there any adjustment of accruals or anything else that might lead to a return to a more typical level or an increase as we move into 2022?

Thanks, Mike, for the question. Yes, I referenced incentive compensation, professional fees, and some other items that ran through there. We've benefited $5 million sequentially compared to the second quarter. I would say, if you look at the trends over the last three quarters, we were running in the $102 million to $103 million of SG&A, and we topped out at $108 million last quarter. So I think as you look at that trend, I think that's indicative of kind of where we are on average.

All right. And then, wanted to get to this question around pricing and around margins. And I think you guys are intentionally using this term, product margins. And, Shane, you got into it a little bit in talking about kind of a dollars per kilo type of margin level. So it sounds like what your plan is to cover the dollar impact of the higher raw material costs by the end of the year. But as we think about gross margin percentage, that's something that's going to be taking longer to recover. Maybe just talk a little bit about how your product margin commentary translates to gross margin as we think about it on a percentage basis for Q4 and into Q1?

Yes, you're correct, Mike, in your description. We are focusing on improving our product margins, specifically our contribution margin per kilogram, to return to our target levels that were set at the beginning of the year, which are quite similar to those from last year. As raw material costs have increased and we've implemented price hikes, we have experienced a lag effect and have not met our target levels as the year has progressed. We expect to achieve our target product margins per kilogram by the end of the year, so that as we move into next year, we will have at least offset the inflation in raw materials. However, even if we recover from zero inflation, the gross margins will still be lower. We haven't provided guidance on this yet, but they will be reduced. Our immediate goal is to increase our gross margin over time, but first, we need to address the impact of raw material inflation.

But as we think about the gross margin percentage sequentially in Q4, that should be higher than Q3?

Yes, it could be some modest improvement in our gross margin percentage.

Okay.

In Q4, and then like I said, some bigger expense in that as we go-forward.

Okay. And then, the last question I have is on the global specialty business. Just noticed that all your other segments posted volume increases and volume decline there, can you just speak to what's happening in that business?

We had an unusual situation last year in our mining business where we shipped a major batch of products that were fully diluted, meaning they contained a lot of water. This resulted in a significant volume increase. Now, we're shipping more traditionally as a concentrate, which is the normal practice. While this change did lead to a little over a 1% decline in overall volume, it didn’t materially affect our profits. This was just a one-time anomaly, and we don’t expect to see anything like it again. Overall, we still experienced growth in many areas of our global specialty businesses, including increases in greases, cans, and metal finishing.

Thank you. Our next question is coming from David Begleiter of Deutsche Bank. Please go ahead.

Thank you. Good morning. Mike, congratulations on your retirement and best wishes for the future.

Thank you.

Andy, welcome aboard.

Thanks David.

Mike and Andy just on the guidance could you just unpack the guidance, it sounds like your guidance towards the sales growth in the high-single-digits. And this is for 2022 and EBITDA growth of low-double-digits. Am I in the right ballpark in those long-term trend directional numbers?

I might express it slightly differently, but I'm not going to debate it. When I refer to long-term trends, particularly in terms of sales, our markets generally grow by one to three percentage points. On average, we can estimate a growth of about two percentage points, plus an additional two to four percentage points from market share gains, resulting in an average of about three. Therefore, we typically expect around five percent sales growth. Currently, we anticipate that as our markets start to rebound, which hasn't fully happened post-COVID, many markets will see increases next year. We believe this growth will exceed our longer-term expectations. From a profit perspective, if we normally expect around five percent growth, we might be looking at EBITDA growth of about eight percent, benefiting from our ability to leverage that growth. We foresee this being even higher moving forward. That's essentially what I'm indicating. I'll stop there, and I hope that clarifies things for you.

That's perfect. That's perfect. And just on the selling price increases, if, and when raw material costs do roll over, what portion or how much of these price increases do you retain with your customers?

We have price increases implemented. If we see significant decreases in raw materials, we may have to reconsider some of those price increases. However, over time, we have managed to maintain and capture a portion of those prices. Currently, we are focused on recovering our raw material costs and have not yet reached our desired gross margin. As we move forward, we will be stronger in our efforts to maintain these price increases, even if raw material costs decline.

Great. And last thing just, Shane, on your working capital in 2021, what's your expectation in terms of a growth of use here?

For 2022, is it Dave or someone else?

For 2021, I'm sorry, 2021.

So if you can see for here we are sitting three quarters into 2021, we've had a pretty substantial outflow for working capital, roughly $150 million. If I am looking at rounding out the year we've indicated raw material costs will go up modestly. So we may see a little bit more in the inventory, but we're making a concerted effort to decrease some inventory that we have on stock. From a receivables perspective, top-line, Mike indicated, demand wise. So I don't foresee working capital outflows in Q4 to match what we've seen in the past quarters, but I also don't see massive inflows either.

Right now. Yes. I meant the use of cash in 2021 and source of cash in 2022 is that an appropriate forecast right now?

So sorry, David, for the source of cash in 2021, you said?

Any reversal of working capital trends in 2022 I apologize.

2022, okay. So for 2022, just in general working capital, I see potentially some release on the inventory side, as we are carrying a little bit more from a bulk perspective, just to ensure supply, given the global supply chain. And depending upon where pricing goes and sales obviously, that depends on the unlock there, but I certainly don't see the increases, I would say in working capital that we saw in 2021.

Yes, it shouldn't be, I think we would expect to have 2022 be another pretty good strong year in our cash flow.

Thank you. Our next question is coming from Jon Tanwanteng of CJS Securities. Please go ahead.

Hi, good morning. It's Pete Lukas for John. First, Jon wants to send his best to Mike. Congratulations there. And just wondered if you could talk a little bit about how much auto revenue you may have left on the table any way to quantify that. And what are your internal expectations for when you might catch-up to some of that pent-up demand?

I don't know necessarily mean what you mean by auto revenue. But have you heard any, Shane?

Yes. So we had indicated, and you may have missed this, that the semiconductor impact on auto we have roughly estimated to be 2% in the quarter. So you can say that from that perspective, that really was a negative on that side.

But as you know, so I mean, we do expect, I would say maybe autos to grow more next year than this year. I mean, based on external projections that we have. There's going to be some semi go up or headwinds as we go into next year, but over the course of the year, it should lessen up, but the autos in general feel better. So we expect better sales next year versus from autos in this year.

Oh, great. You mentioned some share gains that you're experiencing. Do you believe these are due to your superior global supply chain and procurement capabilities compared to your competitors? And do you anticipate that these new gains will result in loyal customers, as you have observed previously?

It's a really good question. I actually think these are real gains that are very sustainable for the future and not just opportunistic sales, because our customers couldn’t supply. We have been approached by people because some of our competitors, I shouldn't say competitors, competitors couldn’t supply our customers, so they're customers, so people have come to us, we have not, I'd say taken advantage of a lot of that because we want to make sure there are supply chain shortages, we want to ensure our customers are being taken care of, plus, these market share gains that we've been getting are things that we've been working on, and we want to have for the long-term. So we want to make sure we're able to supply those new gains as well. So those were our top priorities. And we haven't really had much, much hitting us as an opportunistic sale. Had we had unlimited supply chain raw materials and things like that, we could have done more of that, but we didn't, and we thought it was prudent not to do it just to keep our customers satisfied.

Yes.

And the last question from me.

Sorry, I was just going to add, I mean that's fundamental to the business model here, which we intend to continue is to have these sticky customer intimate relationships, because we're solving their problems, not just for the immediate, but by going forward. So I just reinforced Mike's comments.

Great. And the last one for me, you talked about some of the deals that you've seen on the smaller side here, just as you approach your target leverage ratio, and get to where you want to be wondering what the landscape looks like, and your thoughts on larger deals?

As we mentioned when we finalized the combination two years ago, our focus for the initial two years was on integration and reducing debt. We are approaching our targeted ratio now. In the meantime, we have pursued smaller acquisitions, and we have completed several since the merger. As we reach our targeted ratio by the end of this year, we plan to be more proactive in exploring larger deals. There are opportunities out there, but they won't be immediate; we will be working on them as we head into next year.

Thank you. Our next question is coming from Laurence Alexander of Jefferies. Please go ahead.

Hi, guys. It's Dan Rizwan for Laurence. The market share gains that we've talked about for a bit, is any of that coming from former Houghton or I should say, or recently Houghton customers and vice versa is cross-selling now a tailwind I know your sales process sometimes takes couple of years? But we are two years past the merger. And I was just wondering where we are with that process?

Thank you, Dan. You're correct that part of our 3% growth comes from cross-selling opportunities with former Houghton customers and Legacy Quaker products. We are seeing good traction from both segments and believe this momentum can be sustained for a while, though it does take time to build. The remainder of that growth is attributed to acquiring new business that isn't related to cross-selling. Our differentiated model helps us save customers money and address their issues, which is driving that business. It's really a combination of both factors.

Okay, thanks for that. And then is there a speed or pace of price increases where it might affect share gains where share gains might slow down because of progressive or price hikes?

Yes, that's a great question. Over the past year, two main factors that have impacted our ability to gain market share are COVID, which has made it more challenging to access customer facilities and pursue new opportunities, and price increases. When we focus on price hikes, it shifts the conversation away from new business and how we can help customers save money. However, despite these challenges, our net share gains show that we are still achieving good results, and it hasn’t negatively affected us so far. We'll continue with our current strategies. Regarding the pace of price increases, it varies by region and customer. We're likely on our fifth or sixth round of increases with some customers. It takes a blend of art and science to navigate these conversations with customers, and we believe we manage it well. This is an unprecedented time concerning raw materials, and we can clearly explain to our customers why these increases are necessary. So far, we've had a lot of success in this area, and we expect that to continue.

Thank you. Our next question is coming from Marisa Hernandez of Sidoti and Company. Please go ahead.

Hi, good morning, and thank you for taking my question. Congratulations on the results in a challenging environment.

Thank you, Marisa.

Thank you.

So I have a couple of questions to follow-up on the raw material cost inflation here. So this cost pressure that you're seeing, is that across all of your raw materials in a similar way, or are there differences?

Yes, so it is everywhere. And it is almost every group, whether you're talking. We have major raw material groups like base oils, vegetable oils, animal fats, additives, surfactants, and a whole host of kind of other types of chemicals. And every one of those groups are increasing and going up. And they are really doing that in every geography around the world. So it's a very broad-based increase in our raw materials.

Understood. And have you seen any signs of a slowdown anywhere just yet, whether it's a specific input or specific geography?

You mean a slowdown in the escalation of our raw material costs, yes.

Yes. So you mentioned that you were expecting the pace to slowdown in the fourth quarter. So wondering if you already started to see that somewhere?

Yes, we have seen it. It's not that it has completely stopped, but the pace is definitely lower than it was in the third quarter. We do expect it to continue to increase in the fourth quarter, but at a slower rate than in the third quarter. We anticipate that the same trend will occur in the first quarter as well, based on our current understanding.

So basically, in October, the pace of raw material price increases on average was lower than what you saw in the third quarter?

Yes, I would say where we are today. Yes, the incremental change, while still may be going up, month-over-month is considerably lower than it was when we were hitting June, July, August, and that timeframe. It's starting to slowdown.

Yes, and Marisa, if I could add. Thank you for the question. I think it's not unique to Quaker Houghton. And I think what I would like to emphasize is, regardless of what's happening with that, we're going to react to that. I think that's what this company's been doing and that's what we're going to continue to do going forward.

Excellent. If I could ask about the power restrictions you mentioned affecting your customers in China. Are these primarily impacting your steel and aluminum customers, or are all customers affected? Any insights you could share on quantifying that trend would be appreciated.

It is affecting many of our customers, varying by region and the specific areas experiencing power shortages. This is certainly impacting our primary metals business, including steel and aluminum, as well as other sectors. It's challenging to provide an exact forecast on this issue. However, we do see it as a negative factor for our business in the fourth quarter. When comparing it to the semiconductor shortage's effects on us, the impact here is less severe, possibly around half of that, but it still poses challenges for us.

That's helpful. Thank you. Finally, I want to follow up on an earlier question regarding your potential pursuit of larger deals now that you've reached your 2.5 times net debt-to-EBITDA target ratio. Does the current environment concerning raw materials affect your outlook on strategic priorities in terms of the types of businesses you’re considering? How do you factor in the situation from 2021 and the inflation of raw material costs into your M&A strategy?

I don't believe the raw material situation significantly affects us. For instance, we wouldn't consider backward integrating to secure raw materials since we purchase a wide range of raw materials that aren't difficult to source. Therefore, I don't think it impacts us much at all. We will continue to focus on the strategic acquisitions we typically pursue.

Thank you. Our next question is coming from Garo Norian of Palisade Capital Management. Please go ahead.

Hey, guys. Wanted to first ask just on the labor side of things, you guys didn't talk much about it. Some other companies have had some labor challenges. Wondering how you're managing through, and if the new kind of vaccine mandate from the government, could have any impact as we head into the next year?

Labor shortages have primarily affected our manufacturing sites, where we primarily have blue-collar roles. Attracting individuals to these positions represents a significant part of our business, as do professional and customer-facing roles. While attracting talent remains a challenge, we've managed to navigate it effectively. It's not a dominant issue within our workforce. Regarding COVID, most of our offices around the world are now operational again. We encourage vaccinations but do not mandate them, and we're aligning with the new frameworks being discussed, such as those introduced by President Biden.

Got it. And there has been obviously several questions around the raw material side of things on the cost, but I'm curious on the availability, you had mentioned that, there were certainly challenges during the quarter. Have you seen availability improving already? And do you feel like based on the course we're on, things should hopefully be normal as we start next year?

It hasn't improved as much as I expected. We still face challenges with availability. However, we do anticipate some improvement, Garo. If you had asked me three or four months ago where we would be today, I would have expected a better situation. I would have said yes. I believe we are making progress, but it continues to be challenging. I see some hope on the horizon for improvement in this area.

Yes, if I could add too, Garo, I think, there's two components to this. There's the supply side, and then there's also the logistics. And I think, there's plenty of signals out there to suggest the supply side is going to start to become less volatile, and get a little more stable. I think the logistics aspects are still being worked through. And I think getting both of those, both of those corrected is what's going to be necessary to kind of take the noise out of the system.

Got it, great. And I know, Aero is now a pretty small piece of the company. But I was just curious, are you seeing any real signs of life of improvement there?

Yes, we are. It certainly is considerably better than it was last year, but still below where it was I would say in 2019, which was a record year for us in 2019 in the aerospace business. So it's been a, I'd say we had expected to be higher this year. It's higher than our expectations are. And we expected that to continue to ramp up over the next several years as we get back to where it was.

Great. And I just say, hey, thanks so much for the many years of great stewardship, Mike; it's been a pleasure to be in communication with you.

Thank you, Garo. Appreciate it.

Thank you. At this time, I'd like to turn the floor back over to Mr. Barry for 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. It's certainly been my pleasure to be with you during these last 53 quarterly conference calls, I've been on and just remind everybody that our next conference call for the fourth quarter and full-year 2021 results will be in late February. Thanks again for your interest in Quaker Houghton and please be safe and well.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.