Earnings Call Transcript - KWR Q2 2025

Operator, Operator

Greetings, and welcome to the Quaker Houghton Second Quarter 2025 Earnings Conference Call. 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.

Jeffrey Michael Schnell, Vice President of Investor Relations

Thank you. Good morning, and welcome to our second quarter 2025 earnings conference call. On the call today are Joe Berquist, our President and Chief Executive Officer; Tom Coler, 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, July 31, 2025. 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 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 is my pleasure to hand the call over to Joe.

Joseph A. Berquist, President and Chief Executive Officer

Thank you, Jeff, and good morning, everyone. In the second quarter, we delivered organic volume growth of 2% year-over-year, led by another strong performance in Asia/Pacific. Importantly, all segments delivered organic volume growth on a sequential basis, mitigating sustained macroeconomic pressures. We are gaining traction with our key objectives, refocusing and strengthening the organization around the customer, which is enabling us to grow our share and outpace the market at solid levels of profitability. And we have been deliberate in our actions to reduce complexity and improve our cost structure to support stronger and sustained performance over the long term. In the second quarter, we generated $42 million of operating cash flow and executed our capital allocation strategy, including repurchasing $33 million of shares. I am pleased with the team's performance in the second quarter as they continue to adapt to the dynamic external environment while keeping a clear focus on our customers' needs. Second quarter results were broadly in line with our expectations. We delivered a 4% year-over-year increase in sales, including a 2% increase in organic sales volume. This was led by an 8% increase in organic sales volume in Asia/Pacific. We also benefited from the contribution from acquisitions, namely Dipsol, which we closed early in the quarter and is performing in line with expectations. We estimate the aggregate of the markets we serve declined in the second quarter, a low single-digit percentage compared to the prior year, with regional differences. Our end markets were also largely stable with the first quarter. Uncertainty created by tariffs is impacting demand overall as well as weighing on our geographic and product mix. Share gains remain strong across the portfolio, mitigating the impact of the persistent and challenging end markets. These gains are trending at the high end of our range as we successfully convert trials and cross-sell. We remain encouraged by the business development opportunities we are generating and expect to continue to capitalize on our pipeline to drive sustained above-market growth. Gross profit dollars were in line with the prior year and above the prior quarter. Gross margins were slightly lower at 36%, but remain within our target range. Margin performance was influenced by both product and geographic mix as well as higher raw material and manufacturing costs, some of which were induced by tariffs. We generated $75.5 million of adjusted EBITDA in the second quarter, an increase of approximately $6 million sequentially, with adjusted EBITDA margins of 15.6%, reflecting our sales growth and disciplined cost management. Our resilient performance underscores the strong culture at Quaker Houghton. Our success is driven by our commitment to serving the customer. By being indispensable to our customers, we are earning the right to grow as a stronger, more profitable enterprise regardless of the end market environment. A few key areas of strength are fueling our organic growth. We believe we have the most comprehensive portfolio of solutions in our industry and our team of technical experts collectively possess unmatched industry-leading process and application knowledge. We are leveraging our financial strength and global reach by investing in new manufacturing capabilities, driving innovation through our global R&D organization and deploying resources to help our customers manufacture metals and metal-containing industrial goods more cost-effectively, safely and in more sustainable ways. We are also giving our customers a broader set of solutions in improving our manufacturing capabilities in highly competitive markets, to drive growth with strategic customers and reduce churn, which is trending back to historical levels. And we are harnessing our centers of innovation around key initiatives like FLUID INTELLIGENCE to enhance the outcomes for our customers by developing breakthrough sensor technology, digitize services and automation. We also have significant opportunities in our portfolio of advanced solutions where volumes are up a double-digit percentage year-over-year. As I mentioned in the beginning, we are winning in Asia/Pacific, where we have delivered organic growth for 7 of the last 8 quarters as we earn new business in excess of market growth rates, by capitalizing on the evolving landscape in China as well as growth regions like India and Southeast Asia. We expect further contribution as we integrate Dipsol's leading technology and capabilities into our portfolio and commercialize our new facility in China in the second half of 2026, solidifying our local-for-local strategy in the region. It is critical that we continue to invest in our growth, while maintaining a clear emphasis on controlling what we can control. In the first half of 2025, we actioned our previously announced $20 million cost program, yielding approximately $15 million of realized savings in 2025. To align with the ongoing environment, we have identified further actions to drive out complexity and enhance our competitiveness. To that end, we are initiating cost actions which we expect will deliver approximately $20 million of additional run rate savings by the end of 2026. We expect these actions will deliver $5 million to $8 million of incremental in-year savings in the second half of 2025. We have closed one facility in our Americas network year-to-date. Further actions across the network are necessary, including possible asset consolidation, to unlock the leverage in our model and support our ability to deliver adjusted EBITDA margins in the high teens as a percent of sales over time. This journey is underway and we expect to provide more details in the coming quarters. And lastly, we are executing on our disciplined capital allocation strategy. This week, the Board approved a 5% increase to our cash dividend, our 16th consecutive annual increase. We also closed on two acquisitions, and we repurchased $33 million of shares. We have approximately $68 million remaining on our current authorization. And we will continue to be opportunistic with share repurchases balanced with our growth ambitions while preserving our financial flexibility. We continue to execute our enterprise strategy with a focus on driving growth and delivering greater value to customers. Turning to our outlook. Based on indicators we track, tariffs and a significant amount of uncertainty, we forecast the end market softness we experienced in the first half will persist through the second half of 2025. Our pipeline of product trials remains healthy, and we are confident in our ability to convert them to new business with customers. This will support our ability to drive above-market growth in 2025, in line with our long-term annual expectation of 2% to 4%. Dipsol is performing in line with expectations and should also help offset some of the market softness as we progress through the year. We expect the business performance will improve in the second half of 2025. And therefore, we forecast revenue and earnings will be in the range of 2024. This is based on our current market visibility and the timing and execution of the additional cost actions I mentioned earlier. We will remain diligent and agile to navigate the current uncertainty while positioning the company to capitalize on the positive long-term fundamentals of our industry. We have conviction in our strategy and are balancing the near-term and long-term needs of the organization. We will continue to demonstrate strong execution regardless of the market environment, delivering for our customers and, in turn, creating value for shareholders. With that, I'd like to pass it to Tom to discuss the financials in more detail.

Thomas Coler, Executive Vice President and Chief Financial Officer

Thank you, Joe, and good morning, everyone. Second quarter net sales were $483 million, a 4% increase from the prior year. Organic volumes increased 2%, driven by new business wins of approximately 5% and continued strength in our Asia/Pacific segment. Acquisitions contributed an additional 6% to sales. Selling price and product mix were 4% lower than the prior year, approximately two-thirds of which stems from product, service and geographic mix. Organic volumes grew sequentially in all our segments. Adjusting for one-time acquisition-related charges, gross margins were 36%, compared to 36.4% in the first quarter of 2025. Gross margins declined when compared to the near-record levels in the second quarter of 2024, primarily due to higher raw material and manufacturing costs and the impact of geographic and product mix. Gross margins remain within our target range. Gross profit dollars increased sequentially and were in line with the prior year due to the increase in net sales. Excluding one-time items, SG&A increased approximately $8 million or 7% compared to the prior year. Excluding acquisitions, SG&A is approximately 3% lower on a year-to-date basis in 2025 compared to 2024, as we benefit from the completion of our previously announced $20 million of annualized cost and operational efficiency actions. We are managing costs in a disciplined and prudent manner without sacrificing our ability to serve customers. We delivered $75.5 million of adjusted EBITDA in the second quarter and adjusted EBITDA margins of 15.6%. The lower result compared to the prior year reflects the combination of higher sales, lower gross margins, and our disciplined cost management. Switching to our segment results. Our Asia/Pacific segment generated 3% organic sales growth in the second quarter due to a strong contribution from organic volume growth. We continue to capitalize on the momentum in this competitive region, winning trials with new entrants and existing customers, and successfully cross-selling in China and in broader Asia, including India. Sales increased 20% year-over-year as organic growth was amplified by a contribution from our acquisitions of Dipsol and Sutai, which are performing in line with expectations. Organic sales and volumes increased approximately 7% in Asia/Pacific sequentially. Segment earnings declined approximately $2 million compared to the prior year, but increased sequentially. Segment margins declined compared to both periods, reflecting higher raw material and manufacturing costs as well as product and geographic mix. We remain disciplined and have opportunities across the region to improve our profitability while continuing to outpace market growth rates. Net sales in the EMEA segment grew compared to the prior year and prior quarter. End market conditions remain the most challenged in this region. On a sequential basis, organic volumes increased 4% in the region, driven by double-digit growth in our portfolio of advanced and operating solutions. Acquisitions were additive to sales on both a year-over-year and sequential basis. Segment earnings in EMEA continue to improve, increasing sequentially driven by higher sales and stable margins despite higher raw material costs. Net sales in the Americas declined 1% year-over-year, volumes declined 2%, whereas price/mix was slightly positive. This compares to a market we estimate was down a mid-single-digit percentage. Organic volumes grew 2% sequentially, driven by growth in metalworking and advanced solutions, despite a modest contraction in our end markets. Segment earnings in the Americas declined by $5 million compared to the prior year, driven by lower sales and segment margins. Segment margins in the Americas are flat with the first quarter and trending in line with 2024. Overall, our performance reflects our ability to generate value for customers and outperform our markets regardless of the operating environment. Our growth initiatives are building momentum, and we remain disciplined on cost to enhance the leverage we have embedded in our model. Turning to non-operating costs. Our interest expense was $13 million in the second quarter. This is slightly higher on a year-over-year and sequential basis, reflecting the acquisition of Dipsol, which we funded under our existing credit facility. Our cost of debt was approximately 5% in the quarter. Our effective tax rate, excluding nonrecurring and noncore items, was approximately 28%. We expect our full year effective tax rate to be between 28% and 29%. In the second quarter, our GAAP diluted earnings per share were a loss of $3.78. This reflects a noncash goodwill impairment charge on our EMEA segment driven by persistent market volatility and geopolitical events which have increased our cost of capital in the region. We also recorded a $9 million restructuring charge in the quarter as part of our cost optimization program. Excluding these items, our second quarter non-GAAP diluted earnings per share were $1.71. Cash generated from operations was $42 million in the second quarter. Working capital was a source of cash, as expected. Cash conversion was at the low end of our targeted range due to higher restructuring costs and the lower year-over-year operating performance. We continue to expect to deliver another solid year of cash flow in 2025. Capital expenditures in the second quarter were approximately $8 million, reflecting the construction of our new facility in China, which is expected to be online in the second half of 2026. We are maintaining a balanced approach to CapEx and are slightly moderating our expectation of CapEx spending in 2025 to 2% to 3% of sales versus our previous expectation of 2.5% to 3.5% of sales due to the timing of ongoing projects. As highlighted earlier in the quarter, we completed the acquisitions of Natech and Dipsol. We also repurchased approximately $33 million of shares outstanding and have approximately $68 million remaining on our existing share repurchase authorization. Our net debt at quarter-end was $735 million. And our net leverage ratio increased to 2.6x our trailing 12 months adjusted EBITDA, reflecting the Dipsol acquisition. We are pleased with the consistent cash flow generation of the business, and our balance sheet continues to provide ample flexibility. While macroeconomic conditions remain challenged, the team is executing well, returning to growth, highlighted by the positive inflection in our year-over-year organic sales volumes, managing costs to improve our competitiveness, maintaining margins in our targeted range and efficiently deploying capital to create long-term shareholder value. With that, I'll turn it back over to Joe.

Joseph A. Berquist, President and Chief Executive Officer

Thank you, Tom. The team has responded well to the sustained challenges in our end markets by solving customer needs and improving our cost competitiveness. The resilience and progress we are making on our journey give me confidence in our ability to reaccelerate our growth and deliver value for customers and shareholders. With that, we'd be happy to address your questions.

Operator, Operator

Our first question comes from Mike Harrison of Seaport Research Partners.

Michael Joseph Harrison, Analyst

The 5% growth above market that you achieved this quarter is impressive, surpassing your target of 2% to 4%. Can you provide more details on where those market share gains are coming from, specifically regarding regions and product lines? Also, given the recurring elements of your business model, do you think you can maintain a mid-single-digit growth rate above market in the second half, or were there factors in the strength observed in Q2 that may not continue?

Joseph A. Berquist, President and Chief Executive Officer

Yes. Thanks, Mike, for the questions. I think I'll start with share gains. Look, broad-based, we had share gains in all the regions, right? So in EMEA, Americas and Asia/Pac. Asia/Pac particularly was strong. I think we're very happy there. We're winning with the new winners there, especially as automotive growth is happening in that region. So that was good. In the product mix side of things, some of the newer things that we've brought on, the advanced solutions, even the operating solutions, our specialty greases are growing pretty strongly for us. And I would say, on the sustainability side of things, we are very confident, we've got visibility to the pipeline as we head into the second half of the year. I think you've also got the benefit of business that you've won in the first half of the year that will wrap as you head into the remainder of the year. So we feel pretty confident that we should be able to sustain that 2% to 4% really over the long term no matter what happens in the external markets, right? So overall, I think Asia very strong, but seeing share gains across all of our product lines, maybe a little bit better in the specialty side of things. But really growing in all the regions as well.

Michael Joseph Harrison, Analyst

I wanted to dig in a little bit on Asia/Pacific margins. Can you just give us a little better sense of what's going on there and whether we could see some recovery from the Q2 weakness in the second half? And I guess, to what extent of the raw material headwinds that you might be seeing there related to oleochemicals and some of the plant-based inputs that are showing some spikes right now?

Joseph A. Berquist, President and Chief Executive Officer

For Asia, I want to highlight that we are successfully acquiring new business across various sectors. This sometimes leads to incentives for new business and initial fills. Over time, we expect things to stabilize and see modest improvement. There are factors related to our product mix, such as an increase in automotive and a decrease in mining. Additionally, India has been affected by raw material issues linked to oleochemicals, specifically palm oils, prompting us to implement targeted pricing strategies. We've faced some challenges in executing this due to the timing of indexes and contract arrangements. Moreover, our acquisition of Dipsol has created a bit of disruption in the Asia/Pac region, but we anticipate these issues will ease over time. Overall, I expect stability and modest improvement in the second half. Looking ahead, we have a new plant set to open in China and we've made investments in our Thai plant, including the start of ester manufacturing, which will enhance our profitability in the long run.

Michael Joseph Harrison, Analyst

All right. Last question for me is just in terms of the outlook. Clearly, you're going to need some earnings growth relative to where you were in the first half or even the second quarter here if you're going to be near 2024 earnings for the full year. Can you give us any better sense of the cadence of sequential EBITDA growth in Q3? And I guess, could Q4 be even higher? I know that typically you would see some seasonal decline in EBITDA. But what are your thoughts on the earnings cadence for the rest of the year?

Joseph A. Berquist, President and Chief Executive Officer

Yes. I mean second half we expect will be stronger than the first half from our overall perspective. But we're not really baking into that, Mike, any market improvement. Essentially, we're assuming that we're going to have flat markets heading into the second half. And where that growth is going to come from is, I mentioned wrap of new business wins and insight to how that comes on. Also visibility to our pipeline of new business as well. Dipsol, we had one quarter of Dipsol. So the acquisitions will have the benefit of an additional quarter there. I mentioned the cost actions, so $5 million to $8 million of in-year impact in the second half. I meant a wider range on that. I think it's just the timing of how we execute some of those factors. A little bit of self-help on pricing and just a continued focus on improving our operating margins in manufacturing. Yes. Mike, just your fourth quarter question. I mean, look, the seasonality of the business, generally, the third quarter is usually a stronger quarter for us. I'd say second half is better than the first half. And that's largely driven by what happens in Asia/Pac, primarily China and India, in the second half. They don't see that kind of dip that Europe and the Americas see in the fourth quarter. So I would expect our fourth quarter will be better than our fourth quarter last year. I don't know that it would be sequentially up over third quarter.

Thomas Coler, Executive Vice President and Chief Financial Officer

Yes, I would like to emphasize that as we consider the market environment for the second half, Joe described it as flat. We are not expecting any market improvement from the challenged environment we experienced in the first half. We are assuming that this environment will not be significantly affected by tariffs or geopolitical disruptions. Additionally, when considering our self-help strategies, we recognize that we lag behind index pricing by a quarter, along with some selective pricing adjustments. That summarizes our thoughts on the second half.

Operator, Operator

Our next question comes from Jon Tanwanteng with CJS Securities.

Jonathan E. Tanwanteng, Analyst

It's really nice to see the organic volume growth there. I was wondering if you could talk a little bit more about the comment you made earlier about double-digit growth in the advanced products. I assume that includes FLUID INTELLIGENCE, but I was wondering if there's any more than that in there. What percentage is that of the total revenue? And if the incremental margins there are higher than the corporate average.

Joseph A. Berquist, President and Chief Executive Officer

Yes, Jon, thanks for your comments, and it's great to hear from you. I'll start with FLUID INTELLIGENCE. This initiative is really integrated into all of our product lines, and we are experiencing strong traction. For example, we recently secured a trial with a Japanese client we've been targeting for some time, and our technology advancements have enabled us to convert this into business. This technology spans all our segments. On the advanced and operating solutions side, recent acquisitions like Dipsol and Coral, along with developments within the Norman Hay Group, such as plating and anodizing, continue to expand our existing customer base, particularly at the finishing end of manufacturing. We are enhancing products by modifying or coating their metallurgy, leading to significant growth. These offerings are relatively new to us, and as we scale them globally, we see strengths in specific regions. For instance, our activities in grease production have allowed us to establish manufacturing capabilities in Europe, and we're starting to see growth in that area. Overall, the advanced and operating solutions segment represents about 20% of our total revenues, but its growth rate is currently exceeding that of the rest of the business.

Jonathan E. Tanwanteng, Analyst

Got it. Is it fair to say that's just the old specialties business that got resegmented, or is it something different than that?

Joseph A. Berquist, President and Chief Executive Officer

That's fair to say, Jon. Yes, that's exactly how we kind of look at it.

Thomas Coler, Executive Vice President and Chief Financial Officer

Well, we've continued to grow that, Jon, right, with our acquisition of Dipsol, IKV, Sutai, right. So I think as you've seen us acquire businesses over the last year to 18 months, we've had a focus on expanding our addressable market in that area.

Jonathan E. Tanwanteng, Analyst

Okay. Great. That's very helpful. Second question is just wanted to drill down a little bit on the new $20 million cost savings program that you mentioned. One, what's the cash cost of that this year and next year? And two, how much of it is coming from OpEx versus COGS?

Thomas Coler, Executive Vice President and Chief Financial Officer

Yes. Thanks, Jon. So I would say that the way we think about it is it's sort of a 1 to 1.5 times the expected run rate savings that we'll see in terms of the restructuring charge. So once that's behind us, that sort of adds to the profile. But that's really how you should think about it. We took approximately $9 million worth of restructuring in Q2. And then in terms of mix associated with that, we're continuing to look across both our manufacturing network as well as opportunities to reduce complexity and ensure that we're positioning ourselves to the best possible way to support our customers. And so I would say in this current environment, it's probably a little bit more of G&A than it is network. But with the incremental $20 million that we announced as part of our Q2 earnings, I think you'll see us look at both G&A as well as opportunities to improve our network, particularly in places like Europe where our segment margins are lower than the Americas and Asia/Pac. And we've talked about that on previous calls.

Operator, Operator

Our next question comes from Arun Viswanathan with RBC Capital Markets.

Arun Shankar Viswanathan, Analyst

I hope you guys are well. A nice turnaround here in Asia/Pacific. I guess maybe as you look out, what does that mean for your margin growth? Would you really need maybe some recovery in the other regions as well to continue to drive that EBITDA margin closer to 18%, I think maybe some of your prior targets? Maybe I'll start with that.

Joseph A. Berquist, President and Chief Executive Officer

Yes. I think our gross margins are in the 36% range, and we believe that we are on target there. To reach 18%, we have several options on the cost side. Our SG&A as a percentage of sales, particularly G&A, is currently higher than it has been historically. Therefore, the measures we announced in the first half of the year are ongoing, and we believe we are taking reasonable steps to reduce complexity and improve costs without hindering our growth or affecting our customers. Moving from the mid-teens to 18% presents opportunities on the cost front. Additionally, regarding our manufacturing costs as a percentage of sales, we are examining how we can enhance efficiency across our operations. In the current inflationary environment, we are facing issues with oleochemicals and other tariffs. Some inflation exists on the additive side, as local suppliers are reporting challenges with tariffs and attempting to pass those costs on. We usually lag in these situations by a quarter or two, but we expect that over time, we will remain within our target range. Historically, we have shown our ability to adjust pricing, and that effort is ongoing.

Arun Shankar Viswanathan, Analyst

Great. And then secondly, your customers, I guess, what are they telling you about how they feel about the tariffs? Could it be a potential positive in North America and especially for the metals complex, whether it be steel or aluminum? What are your customers, I guess, indicating to you? And would you have to kind of build some inventory or is there anything that you need to do to prepare for that?

Joseph A. Berquist, President and Chief Executive Officer

Yes, I believe we mentioned the word uncertainty, and our customers seem to feel the same way. There is a cautious approach currently regarding inventory building, and we've noticed that inventories at our customers have slightly decreased in the second quarter. Hopefully, this indicates positive trends for the remainder of the year. In terms of North America, the situation is somewhat about shifting resources. What may be advantageous for the U.S. could be unfavorable for Mexico or Canada. We maintain a robust presence in all three countries, and in the long run, the Americas represent a significant market for us. We'll see how things develop.

Arun Shankar Viswanathan, Analyst

Okay. If I could ask one last question. You've been in your position for a while now, and it seems that you intended to focus more on the commercial strategy at Quaker. Could you share your thoughts on how you're approaching that and whether there have been any significant changes? Do you anticipate any major changes in the future, and could you describe what those might look like?

Joseph A. Berquist, President and Chief Executive Officer

Yes, we're pleased to see our churn decrease and return to historical levels, which is allowing us to benefit from the market share gains. We've made some organizational changes, though I wouldn't characterize them as significant or radical. It's more about how our product line management is structured and how we are deploying resources across different sales regions. These adjustments are operational rather than transformational, and we're currently in a strong position. We're particularly pleased with our growth in competitive markets like Asia/Pac, especially with new emerging players, which is crucial for our long-term strategy. We've implemented various measures, including cost actions that have reduced complexity, enabling continued growth. We remain strategic and careful with our capital deployment, making acquisitions and repurchasing shares in the second quarter after being unable to do so in the first quarter. We've also increased our dividend, which adds to our optimistic outlook. Regardless of market fluctuations, we're confident in our ability to continue growing and gaining market share.

Operator, Operator

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Berquist for any closing comments.

Joseph A. Berquist, President and Chief Executive Officer

Yes. Thank you. And before closing, I just want to acknowledge the collective team at Quaker Houghton for their hard work and commitment to our strategy. And we really appreciate all of you and your continued interest in our company. If you have any questions, please reach out to Jeff and we'll be happy to follow up. Thank you.

Operator, Operator

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