Greetings and welcome to the Quaker Houghton Third Quarter 2023 Earnings Conference Call. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Jeffrey Schnell, Vice President of Investor Relations. Mr. Schnell, you may begin.

Thank you. Good morning and welcome to our third quarter 2023 earnings conference call. On the call today are Andy Tometich, our President and Chief Executive Officer; Shane Hostetter, our Executive Vice President and Chief Financial Officer; and Robert Traub, our General Counsel. Our comments relate to the financial information released after the close of the U.S. markets yesterday, November 2, 2023. Our press release and accompanying slides can be found on our Investor Relations website. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on Quaker Houghton's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. This presentation also contains certain non-GAAP financial measures, and the company has provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measure in the appendix of the presentation materials, which are available on our website. For additional information, please refer to our filings with the SEC. Now, it's my pleasure to hand the call over to Andy.

Thank you, Jeff and good morning everyone. The third quarter was another strong quarter for Quaker Houghton; we achieved consistent top line performance and further enhanced the profitability of our business. Delivering another consecutive quarter of double-digit increases in adjusted EBITDA and non-GAAP earnings per share. Cash flow was also higher in the quarter; we generated approximately $200 million of operating cash flow year to date, a record for the company providing significant balance sheet optionality for the enterprise. Net sales were $491 million in the third quarter, similar to the prior year. We continue to benefit from our value-based pricing actions and cost management, which helped offset sustained soft end market activity in a challenging operating environment. Volumes declined approximately 3% compared to the prior year after excluding the impact of the wind-down of tolling for products divested as part of the combination. However, sequentially, volumes improved slightly and have been largely stable as we progressed throughout the year. We are encouraged by demand in our aerospace, automotive, and China businesses, but we are being impacted by softer steel and industrial activity, as well as customer order patterns, primarily in the Americas and Europe. Positively, we continue to gain additional business with new and existing customers, and we are pleased that these gains are trending at the high end of our long-term range. This drives us to outperform our end markets as we are doing in 2023. The diversification of our broad portfolio is also providing resilience in the current dynamic market environment and our people are continuing to deliver, supporting the productivity, sustainability, and growth of our customers and our company. In the third quarter, pricing increased an additional 2% compared to the prior year and has increased 11% year to date. We remain focused on earning value with our customers for the products and services we provide. While we continue to implement targeted actions that are balanced with our cost to serve, the pace of pricing gains is anticipated to slow in the coming quarters. Throughout 2023, we have made significant progress recovering our margin profile while balancing customer relationships and the long-term aspirations of our business. Gross margins in the third quarter were 37.4%, nearly 5 percentage points higher than the prior year and our fifth consecutive quarter of year-over-year margin improvement. This was a result of a combination of our value-based pricing actions, product mix, and cost management, as well as a slight moderation in raw material costs that still remain at historically elevated levels. In the third quarter, we generated adjusted EBITDA of $84 million and $2.05 of non-GAAP diluted earnings per share, a 20% increase compared to the prior year. Our financial results are primarily driven by consistent execution, driving a recovery in our margins by focusing on solutions our customers value as we manage the ongoing unsettled and complex market environment. Despite these challenges, we continue to control what we can control. We generated $83 million of operating cash flow in the third quarter and approximately $200 million year-to-date. This is a testament to the strong cash generation capabilities of Quaker Houghton. The year-over-year improvement in our cash generation reflects not only the increase in our earnings but also improved working capital management. We have continued to further strengthen our financial position and we have paid down $127 million of debt in 2023. With this performance, the company is well positioned to capitalize on the organic and inorganic opportunities ahead. Turning to our segments, we once again delivered earnings and margin performance in all of our segments on a year-over-year and sequential basis. We continue to contend with a soft demand environment compared to the prior year, especially in the EMEA and Americas segment. Volumes in the Asia-Pacific segment increased due to a broad improvement in underlying demand. Notwithstanding, our results are generally in line with our underlying markets. On a sequential basis, overall volumes improved, comprised of an increase in Asia Pacific; a decline in EMEA; and flat volume in the Americas. We are pleased to see above-market volume performance in Asia Pacific, led by new business wins in China in both metals and metalworking. We expect to continue to grow from these current low levels in Asia Pacific in the fourth quarter and in 2024. Sequentially, volumes in the Americas remained steady in the third quarter, despite some incremental headwinds in the packaging and industrial markets. The impact of the UAW strike was not a significant driver in the quarter. That said, we have continued to increase our share of wallet in 2023 in the Americas. EMEA continues to be impacted by soft market conditions and uncertainty; we expect demand in the EMEA market to remain at trough-like levels through the end of the year. We have continued to improve our cost position and financial performance in EMEA and are cautiously optimistic that markets in the Americas and EMEA will begin to recover in the coming year. We have executed very well in 2023 despite a considerable amount of uncertainty, difficult market conditions, and limited visibility in many of our end markets and regions. Looking to the fourth quarter, we are encouraged by improvement in some products and end markets. We expect the current tepid demand environment will likely continue through the balance of the year. We also anticipate some increased variability in customer order patterns in the fourth quarter as companies manage their own working capital. If ratified, the three recently announced tentative agreements with the UAW will lessen the impact in the fourth quarter. By region, we expect a sequential improvement in the Asia Pacific region led by China and for demand to remain at lower levels in the Americas and the EMEA regions. We anticipate the fourth quarter will follow a more normal seasonal trend compared to recent years. However, we continue to expect to deliver another quarter of year-over-year improvement in adjusted EBITDA. We also expect another quarter of solid cash generation. In summary, we are on track to deliver a meaningful improvement in margins and a strong double-digit increase in earnings in 2023. Additionally, throughout this year, we have generated significant cash flow invested in our business, increased our dividend, and strengthened our overall financial position. Looking towards 2024, we are squarely focused on profitable growth by advancing our strategy, including contemporizing the organization and enhancing the value we provide to our customers. While macro and end market visibility remains limited, we believe that destocking impacts our customers face are largely behind us, and we are cautiously optimistic on many of our end markets for 2024, including automotive and aerospace, as well as our China and emerging markets businesses. Taken together, we expect to grow volumes above our market rates in 2024. We are also making progress on our cost and efficiency actions and remain laser-focused on earning share of wallet through additional customer-valued solutions. We have built momentum in our business and we are well positioned heading into 2024. As we continue to manage the immediate realities of the world, the leadership team at Quaker Houghton remains fully committed to our enterprise growth strategy and driving long-term value for stakeholders. Much of our focus over the past two years has centered around mitigating the top financial and operational risks the company faced and driving efficiencies to further optimize our delivery of customer-valued services and solutions. Our strong business model and financial position have also enabled us to simultaneously continue investing in developing future opportunities. As I’ve highlighted in previous quarters, our strategic pillars are centered around leveraging our global scale, deploying digital capabilities, and leading in sustainability. These pillars are positioning Quaker Houghton to continue to meet the current and long-term needs of our customers and deliver value for our company and our shareholders. One area of focus is to leverage our scale to advance the intimacy of our model. There are several commercial initiatives underway, and I am pleased with the early progress. For example, we are optimizing our current direct and indirect channel strategy, we are advancing our capabilities and partner strategy to effectively and efficiently deliver the level of service and support that customers value more exactly. This will be further enhanced with our fluid intelligence offering as we deploy digital capabilities to complement our service model, which will in turn provide openings to both deepen relationships with our customers and improve the productivity of our people as well as our customers' operations. We are also working to accelerate opportunities to increase wallet share supported by our scale. One example is through better leveraging our full global technology portfolio, including expanded sustainability options into new and existing markets. This is especially true with our portfolio of advanced and operating solutions whether for developed or emerging geographies. We have added talented local leaders and experts who are working closely with our global strategy, R&D and other teams to advance our efforts, many of which were made possible by the combination. We expect to realize some additional benefit from these ongoing efforts, which are making good use of our global scale in 2024 and beyond. These important initiatives are just some of the ongoing activities that are bringing our enterprise strategy to life. They are natural extensions of our differentiated approach building on the foundation of providing customer intimacy. In summary, we are focused on capitalizing on the positive momentum we have built and we are fully committed to further unlocking our potential. We have a strong market position in our industry, which in turn has attractive long-term growth characteristics. We are making meaningful progress on our financial and operational priorities and have significantly improved our margin profile, strengthened our balance sheet, and are demonstrating the strong cash generation capabilities of Quaker Houghton. We are focused on driving success for and with our customers and earning new business supporting our customers as they pursue new opportunities as well as manage through the challenges impacting their business. We continue to prudently invest to advance our growth initiatives, building on our strong foundation. It is through our strategic pillars that we will deliver profitable, above-market growth in 2024 and beyond. I'm proud of our execution through 2023, delivering on our financial, operational, and strategic objectives while managing through a myriad of challenges that have impacted us and our customers. I am confident in the Quaker Houghton team who continue to develop and deploy our leading portfolio of products and services in our differentiated customer intimate solution-based business model. And I remain excited about the opportunities we have together to enhance the value of our customers and our business as we generate long-term value for shareholders. With that, I'd like to pass it over to Shane to discuss the financials.

Thanks, Andy, and good morning everyone. In the third quarter, we delivered net sales of $491 million, which was consistent with the prior year. The primary drivers of our sales performance were an increase in our selling price and product mix of 2% and a favorable impact from foreign currency, up 2%, offset by a 4% decline in sales volumes. The decline in our volumes was driven by softer market conditions, primarily in the Americas and EMEA segments, at approximately 1% due to the wind-down of previous tolling on volumes we divested as part of the combination. Sequentially, volumes increased in the third quarter by 1%, but were offset by a slight decline in price, mix, and foreign exchange. Gross margins in the third quarter were 37.4%, which represents an increase of 470 basis points compared to 32.7% in the prior year and 150 basis points compared to 35.9% in the second quarter of 2023. This improvement reflects continued execution on our pricing actions, as well as the low single-digit decline in our raw material costs sequentially. Excluding one-time items, SG&A increased $12 million or 10% compared to the prior year and $3 million or 2% sequentially. These increases reflect the year-over-year inflationary impact on our labor costs, the timing and levels of our annual incentive compensation, as well as impacts due to foreign exchange. We delivered $84 million of adjusted EBITDA in the third quarter, which is an increase of 20% compared to the prior year and our fifth consecutive year-over-year increase. Our adjusted EBITDA margins expanded to 17.2%, an increase of 290 basis points compared to the prior year and an increase of 100 basis points sequentially. These improvements reflect the progress we've made, advancing our strategy while balancing our near-term priorities with delivering our long-term profitable growth initiatives. Switching to our segments. Net sales in the Americas declined approximately 3% year-over-year, driven by lower volumes and partially offset by higher selling price and product mix and foreign exchange. The decline in sales volumes was primarily due to softened market activity compared to the prior year, as well as some declines due to our value-based pricing strategy, which were offset by new business wins. Volumes were impacted by lower metalworking demand, including the direct and indirect impact of the UAW strike. On a sequential comparison, volumes were flat in the Americas. Our EMEA net sales increased 4% compared to the prior year, primarily due to increases in selling price and mix and foreign exchange, partially offset by a decline in sales volumes. We continue to contend with soft end market conditions in India, especially metals, but these were partially offset by improvements in automotive and new business wins. The wind down of the tolling for business divested as part of the combination also contributed to the decline, and we will lap this beginning in the first quarter of 2024. Volumes declined sequentially in the EMEA segment due to the soft market conditions noted earlier. Net sales in Asia Pacific increased compared to the prior year, as we experienced broad-based improvements in both metals and metalworking in China, as well as broader Asia Pacific. Also, new business wins contributed to the improved performance, while foreign exchange was a modest headwind to this segment's sales in the quarter. Volumes also increased in Asia Pacific compared to the second quarter, as expected, due to a modest improvement in underlying demand across many end markets. During the third quarter, we continued to make progress on our margin recovery across all segments, having increased on both a year-over-year and sequential basis, and we delivered strong year-over-year increases in operating earnings in all of our segments. Overall, we continue to build on the strong performance we delivered in the first half of 2023, and we are making significant progress improving the profitability of our business. Below the line, our interest expense was higher in the third quarter compared to the prior year, but flat sequentially. Our cost of debt in the third quarter was approximately 6%, which is in line with where we exited the prior quarter. Our effective tax rate, excluding nonrecurring and noncore items, was approximately 29% in the third quarter. Our GAAP diluted earnings per share were $1.87 and our non-GAAP diluted earnings per share were $2.05. This represents an 18% year-over-year increase and a 6% sequential increase, both driven by the improvement in our operating earnings. Switching to liquidity, we generated $83 million of cash from operations in the third quarter. Year-to-date, we have generated $200 million of operating cash flow. This year-over-year improvement reflects our solid earnings and improvements in working capital efficiency. Year-to-date, we have invested $26 million in capital expenditures, paid $23 million to shareholders through dividends, and reduced our debt by $127 million. Our balance sheet and liquidity remain strong. Our net debt at the end of the third quarter was $628 million, and our net leverage ratio improved to 2 times adjusted EBITDA compared to 2.3 times at the end of last quarter and 3 times at the beginning of the year. Our capital allocation priorities remain consistent: return on capital through dividends, strengthening our balance sheet, and investing to grow the business both organically and inorganically. For the full year 2023, our anticipated CapEx spend remains unchanged at approximately 1.5% to 2% of net sales. We have ample opportunities to drive growth, and we have conviction in the cash flow generation of our business. We will continue to balance the current macroeconomic environment and short-term outlook with our long-term strategy to deliver shareholder returns. To summarize, we've executed well in 2023. We've delivered strong earnings growth and record cash flow thus far despite a very difficult macroeconomic backdrop. We are committed to our growth strategy and remain confident in the earnings power and cash generation capabilities of this company. With that, I'll turn it back over to Andy.

Thank you, Shane, and I'd like to thank the entire organization for their dedication and commitment to our company and our customers for their trust and partnership. I'm excited with the opportunities ahead. And with that, we'd be happy to address your questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning.

Good morning, Mike.

Congratulations on another strong quarter here. Andy, you've kind of told us that we shouldn't assume that you guys keep delivering these step changes in gross margin, but that's exactly what you're doing. Has the pace of gross margin expansion exceeded your expectations this year? And I guess, can you walk through some of the drivers that may have materialized more quickly than you might have anticipated?

Yes. Thank you, Mike. We value your feedback. We've been discussing margins in our journey for a while now, and as I mentioned, the progress isn't always going to be straightforward. However, we've made significant strides, especially in 2023. Looking at the year-to-date figures, we're at about 36%, which is getting closer to our target, but we're not consistently there yet. We believe there's still room for improvement. Achieving that consistency will require us to utilize all available strategies. While we'll keep collaborating with our customers to enhance our value, we also need to drive efficiencies and focus on acquiring new business that will have the greatest impact in this area. We have been successfully executing on all those fronts, and we will continue to do so moving forward, aiming to achieve our objectives throughout the entire cycle.

You performed particularly well regionally, with impressive margins in Europe. I understand this is an area where you've been focusing on your cost structure. Can you explain what has changed to achieve such margin improvement despite ongoing volume challenges?

Yes. Thanks. So for sure, Europe continues to be weak. Overall, the underlying markets have continued to struggle a little bit as we highlighted; kind of the steel and industrial are still operating near the bottom. We characterize it as kind of trough-like, but we've focused our efforts, again, where we're adding the most value for customers and working with them. We've continued to move forward on our cost program, and that's contributing as well. And we are at a better position from a profitability standpoint, but we still have a journey in front of us, and we look forward to the position we're creating as underlying demand does improve; we believe we'll be in a very good position to serve our customers.

I'm curious to get more detail on how EBITDA might compare to what you reported in Q3. You mentioned that you expect it to be up year-over-year, but you've had three consecutive quarters where you've been more than 20% better year-on-year. Could you walk us through some of the key factors and also discuss the potential impact from the UAW strike in the Americas, which we hope is nearing a resolution?

Yes, Mike, I have a couple of questions to address. In the fourth quarter, we expect to build on the momentum established in 2023. While there is still market uncertainty, we note that the fourth quarter often experiences seasonality, particularly in the Americas and Europe. Additionally, we anticipate some changes in order patterns this year as customers manage their working capital closely. Regarding the UAW situation, we are pleased with the potential resolution but are still assessing the indirect impacts. Overall, we expect our EBITDA to increase year-over-year in Q4, supported by strong cash flow generation. Although you didn’t specifically ask about 2024, it is still early, and we are in the budgeting phase, which limits our visibility. However, we believe we will continue to build on our 2023 progress. We have advanced our enterprise strategy with targets for profitable growth, and we are committed to expanding this business. Currently, we are observing some positive signals in the automotive and aerospace markets, and we expect to grow at rates above those of our underlying markets. Lastly, it's worth noting that there is still potential for margin improvement, and we will continue to focus on cost management. We intend to carry forward the positive momentum built in 2023 into 2024.

All right, very helpful. Thanks very much.

Thanks, Mike.

Our next question is from Vincent Anderson with Stifel. Please proceed with your question.

Yeah, good morning everyone. Echoing Mike, I mean, really nice job on the quarter, particularly in pricing, which is where I wanted to start. I'm guessing raw material index products actually turned into a headwind on that front this quarter. And if that's correct, I'm curious if you're willing to comment on more of the magnitude of your pricing improvement, excluding those raw material indexes.

Yes. Thanks, Vincent. For sure, pricing is related to not only the raw material cost, but also, more importantly, the value we're providing to our customers. Generally speaking, we are not giving back pricing because of our focus on that value and use approach. But you're correct, there's a portion of our business, about a quarter of our business that is related to index on raw materials. It's rarely on a single raw material though. So it's a mix. We continue to focus on working with our customers, delivering the most value and balancing that against our cost to serve. The team has done a really nice job on their execution. So while pricing has been a key component of what we've been talking about, and it will continue to be a component, it's not the only one as we move forward.

Sure. Okay. Fair enough. And then you spoke a bit about this in your prepared remarks, but I just kind of wanted to clarify what's going on in Asia Pacific. So you mentioned broader market improvements in APAC driving volumes, though results in the first half of the year did seem to be trailing what limited indicators we have, at least for China. So I was hoping you could kind of square your first half volumes relative to those data points like steel product production, aluminum production versus the improvement that you saw specifically in this quarter.

Yes. Thanks, Vincent. In Asia Pacific, and obviously, China is a key component of it, although comments really apply across. We have seen improvements in the second half. We're seeing kind of general improvements both in metals and metalworking. Now from relatively low levels, as you indicated in the first half, we see that being a function of both what's happening with our customers and their business. And also, I think we're doing a differentiated job of targeting the right business to grow with them. So it's a combination of factors, but it's encouraging, and we're hopeful that's going to continue.

Thanks. And if I could sneak a quick one in here. Just given the continued improvement in cash flow and the balance sheet health overall, I'm curious how the tuck-in M&A market is looking these days and your appetite for playing in that again next year through maybe a couple of different macroeconomic scenarios.

Yes. Thanks, Vincent. For sure, M&A is a key part of our capital allocation strategy, and we continue to be focused on where we're going to add shareholder value. We also line it up in a disciplined fashion with our enterprise growth strategy. So while we invest in organic growth, we want to align that with inorganic opportunities. We have an active pipeline. We're continuing to make progress with a number of opportunities. We've had a lot of success at Quaker Houghton over the years with bolt-ons that take advantage of our service model to provide even more solutions for our customers as we expand our position in their overall spend, and we'll continue to move those forward and make use of a balance sheet that will reinforce our ability to do it.

Alright. Thanks again. That's all from me.

Thanks.

Thank you. Our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi, this is Justin on for John. Good morning.

Good morning.

So leverage has come down substantially. So I think you can be a little more flexible on the capital allocation you were mentioning. So can you just kind of rank your priorities between further debt paydown, M&A, repurchases, dividend, internal investments? And how might that change as rates go up or your share price changes?

Yes. Why don't I start with the capital strategy, and then Shane can add some details at the end here on your question. But I mean our capital allocation strategy remains consistent, focusing on shareholder value. First and foremost, we've been a committed dividend payer throughout our history. We increased our dividend again 5% this year. We've also been paying down debt over $125 million year to date, and we're investing in our organic growth, as I highlighted a little bit earlier, focusing on where our innovation can be even more successful and how we can deliver that as efficiently as possible to our customers. M&A with the bolt-ons, as I just highlighted, is extremely important. And then if there are other levers for us to provide shareholder returns if the opportunities are appropriate, we'll pursue those.

Yes. I think Andy hit on the most important factor, and in the end, it is shareholder value. As we think about items we consider as M&A, definitely, hurdle rates have changed a bit due to interest rates improving, and we have other levers similar to what Andy was talking about buybacks that we may consider. Overall, we'll balance what is the most appropriate avenue to return value to our shareholders.

Alright. That's helpful. And then one more, if I may. What are your expectations for inflation, deflation in the near term and the ability to pass through or hold on to price?

Yes, inflation has been a significant factor for quite a while. In the fourth quarter, we are looking at a diverse range of over 3,000 raw materials. Some of these are increasing in price, while others have stabilized. However, overall, we do not anticipate any fundamental changes based on our current observations. We do not expect significant directional shifts.

Alright, thanks. I appreciate you taking the questions.

You're welcome.

Thank you. Our next question is from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Great, thanks for taking my question. Good morning. Hope you are well.

Good morning.

So first off, I guess just going back to the Q4 outlook, most of the quarters this year, like you've been in the double-digit gain year on year of growth in EBITDA. Is that kind of the magnitude you're still thinking of in Q4? I know there's some seasonality that may play into that. There's maybe some lingering impacts of destocking, but then maybe you hold on to, as you did this quarter, some strong pricing efforts and some mix. So maybe you can just kind of size kind of the impact of growth that you see in Q4 year on year.

Yes, Arun, we usually don't provide detailed guidance on that. However, as I mentioned, seasonality in the fourth quarter, particularly in Europe and the Americas, plays a role. Typically, we expect growth to be in the low to mid-single digits compared to other quarters. Additionally, I want to point out that the order patterns along with some working capital management we anticipate from our customers will likely contribute to this.

Okay, thanks. And then similarly on 2024, it sounds like you do expect it to grow. Again, we have maybe a little bit more modest growth in 2024, modeled right now versus what we saw year on year in 2023. Again, in 2023, you had some nice recovery of margin. I know that you're still targeting some margin growth for next year, but would you agree that the growth that you expect in EBITDA next year will be more modest than 2023 growth?

I would like to emphasize that it's still quite early for 2024. Currently, we have demonstrated our ability to win new, valuable business beyond what's occurring with our customers' core operations. We anticipate maintaining this momentum. There are some positive indicators, and we will monitor how they develop. Specifically, markets such as aerospace, automotive, and our Asia Pacific operations show promise. We will continue to manage our overall service costs. Additionally, regarding margins, we believe there is still some potential for improvement. We expect ongoing growth for the business, although we are not providing specific figures at this time.

Lastly, how do you view working capital and cash flow within Quaker? There has been significant volatility in the supply chain, with inventory dynamics varying by region. Is working capital expected to require more attention next year? Do you foresee a need to potentially increase inventory levels? How might this impact free cash flow?

Yes. Thanks, Arun. As you imagine, we were carrying a little bit more inventory due to safety stock and just security of supply over the last couple of years. Coming into this year, it was a focus to improve working capital, and you see on our cash flow that some of those efficiencies have come. As we've done a good job this year and really continued to focus on improving inventory and receivables for the rest of this year and into next year. So as I think about our working capital percentage at roughly 27% now, we'll continue to improve that into historical levels.

Thanks.

Thank you. Our next question is from David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. On raw materials, I believe you said they were down low single digits in Q3 quarter-over-quarter. Would you expect a similar decline in Q4? And I think you mentioned maybe not a big impact next year, but should they be down next year as well?

Hi, David. I pointed out that in the third quarter, we experienced a slight decrease in raw material costs. As we look ahead, we are seeing a mixed situation. Some of the 3,000 raw materials we purchase are increasing in price, while others remain relatively stable. At this time, we anticipate the fourth quarter will be mostly stable with no significant changes. Beyond that, we don't have clear visibility, but currently, there is nothing to indicate that we will see a major change.

Andy, which areas are you seeing being up sequentially right now?

Yes, for sure; some of the oil-based products and derivative products related to that are the ones that are having the pressure at the moment. And the whole basket is incredibly high versus where it's been historically.

Understood. And next year on pricing. Would you expect pricing to still be up next year, year-over-year?

So I think we're going to focus in on what value we're providing to customers and understanding what's happening on our cost to serve, which will influence exactly what that looks like. So we're not necessarily forecasting any significant movements. But I think value-based pricing has always been part of the model at Quaker Houghton, and we'll continue where we are adding value to share in that value with our customers.

Thank you.

Thank you.

Thank you. Our next question is from Mike Harrison with Seaport Research Partners. Please proceed with your question.

Hi, good morning again. A couple more for me. First of all, Andy, you talked in your prepared remarks about one of the areas that you're looking at for efficiency is optimization of your direct and indirect channel strategy. Can you give us a little more color on what you're looking to do there and what that might entail?

Yes. Thanks, Mike. For sure, when we do talk about channel, we're referencing both the direct and indirect channel partners that we work with. It's really about the customer journey and fully understanding on an intimate level each of our customers' different journeys, how they're choosing, using, and repeating their purchase and use of our products. We're working to align the organization to be able to match that exactly with the right service levels and deploy digital capabilities to support that on an efficient basis. And really, I mean, the goal here is we want to make sure we're servicing our customers exactly the way they need to be serviced, not over-serving them and not underserving them.

All right, thank you. And then a quick one for Shane. You mentioned that the blended interest rate right now is 6%. Can you tell us what the fixed versus floating mix of your debt looks like today? And I guess what that means for expectations about your cost of debt into next year?

Yes, sure. We have roughly 30% fixed and the rest is variable. At the moment, like you mentioned, our cost of debt is roughly 6%. Obviously, this depends on where the Fed goes from an increase or decrease in the future. But for now, it seems to be steady on that side as I think about the next quarter. However, as we continue to focus on debt paydown, that will obviously impact our interest expense as well going for the fourth quarter as well as into 2024.

Is it fair to say that your debt paydown focus is going to be on the variable portion?

It's fair, Mike, yes.

Thank you very much.

Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Andy Tometich for closing comments.

Yes. Thanks very much. I just want to extend my appreciation for everybody and their interest in Quaker Houghton. I think we're well positioned with the performance and execution and, really looking forward to the opportunities that we have in front of us. Thanks for your continued interest, and we look forward to the next opportunity of talking.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.