雅虎香港財經 Quaker Chemical Corporation (NYSE:KWR) Q1 2023 Earnings Call Transcript
Quaker Chemical Corporation (NYSE:KWR) Q1 2023 Earnings Call Transcript May 5, 2023
Operator: Greetings, and welcome to the Quaker Houghton First 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.
Jeffrey Schnell: Thank you, Melissa. Good morning, and welcome to our first quarter 2023 earnings conference call. Joining us 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 US markets yesterday, May 4, 2023. Our press release and accompanying slides can be found on our investor 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. The 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 measures 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 turn the call over to Andy.
Andy Tometich: Thank you, Jeff, and good morning, everyone. In the first quarter, we delivered record net sales while continuing to manage through significant uncertainty and persistent macroeconomic challenges. We drove our recovery in margins and double-digit increases in adjusted EBITDA and adjusted earnings per share compared to the prior year quarter. We also generated strong operating cash flow in the quarter, driven by our improved performance and working capital efficiencies, further strengthening our balance sheet. I am very pleased with the financial and operational execution in the first quarter, and excited about the momentum we have built in the organization, delivering results by controlling what we can control.
Compared to the prior year, net sales in the first quarter increased 5% to a record $500 million. The year-over-year improvement in net sales was primarily driven by execution on our value-based pricing initiatives, which were implemented across all regions to offset the continued inflationary pressures impacting our cost to serve. Though volumes declined compared to the prior year, they increased sequentially. Volumes continue to be impacted by a continuation of softer end market conditions, primarily in the steel and industrial markets, and were offset by some improvement in auto. We also have declined some incremental volumes in the quarter, consistent with our ongoing margin improvement initiatives. In total, and taking into account our customer mix, we are still trending directionally in line with the specific end markets and regions we serve.
We're pleased to see the benefits of the diversification of our portfolio, which continues to drive targeted and valuable new business growth regardless of market trends. Our gross margin recovery also continues. Gross margins of 34.7% improved approximately four percentage points compared to the prior year quarter, and 2.5 percentage points compared to the fourth quarter of 2022. The sustained focus on balancing the solutions we provide and the total cost to serve, are helping us to continue our journey to recover our margins, and heightening our ability to deliver exceptional value to our customers. In the first quarter, we generated $79 million of adjusted EBITDA, and $1.89 of adjusted diluted earnings per share, a double-digit increase in both compared to the prior year and prior quarter.
This was primarily driven by the ongoing recovery in our gross margins and despite the uneven market conditions. While we have not yet recovered back to our historical margin levels, we are making good progress on this top financial priority, balancing customer relationships and the long-term profitable growth aspirations of our business. In the first quarter, we also generated $38 million of operating cash flow, and strengthened our balance sheet, reducing our leverage towards our target. We continue to anticipate an improvement in cash conversion in 2023 versus recent years. These results are a solid start to the year. Turning to our segments, once again, price capture was strong across all our segments on a year-over-year basis. Volumes declined in all segments compared to the prior year, but increased sequentially in the Americas and EMEA, which benefit from an improvement in manufacturing activity, albeit at a low base.
I will quickly highlight some of the volume drivers. We continue to see softer end market activity across all regions and at varying degrees. However, our volume growth in the Americas and EMEA segments are in line with their respective market growth rates, led by new business wins. Asia Pacific segment volumes, however, are trend slightly behind the broader markets due to customer mix and our focus on services and solutions that yield the greatest benefit and value for our customers. I am very proud of our global team’s resolve strengthening our portfolio and focusing on the high value solutions for problems our customers face. We remain confident in our ability to continue to grow profitably above our underlying markets. Earnings increased in all segments compared to the prior year and prior quarter, largely due to a recovery in margins in all segments, especially in EMEA, where margins have improved in the first quarter compared to the lows in the second half of 2022.
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This was a result of price actions, which have begun to offset some raw material cost inflation, as well as cost management. And while we are exhibiting momentum recovering our margins, we still need to do more to offset the total inflationary pressures on our business. Therefore, we've identified approximately $20 million of savings as part of the global cost and optimization program that was announced in the fourth quarter of 2022. These initiatives are aimed at improving our cost structure and driving a more profitable and productive organization. We expect the benefits of this program to be more heavily weighted to 2024, and will include a range of actions to improve our footprint, optimize our go-to-market strategy, simplify the portfolio and organization, and enable the company to successfully deliver its strategic plan.
Turning to the outlook, the current uneven and uncertain macroeconomic environment and operating challenges that we've experienced for the last several quarters, are likely to remain as we progress through 2023. Despite these headwinds, we remain committed to balancing the near-term needs of our customers and our business with our collective long-term objectives, focusing and executing on what we can control. In the second quarter, we expect adjusted EBITDA to be similar to the first quarter, translating into strong year-over-year growth. We are cautiously optimistic that demand will improve from first quarter levels, primarily driven by the reopening in China and resilience in Europe and the Americas. We anticipate some continued momentum on our margin recovery journey, balancing the value of the services and solutions we provide with the total cost to serve, including raw material costs, which remain very elevated.
As expected, we will also onboard some an additional SG&A expense, primarily due to labor inflation. For the full year, visibility remains limited, and despite the uncertain and uneven macro backdrop, we continue to expect to deliver earnings growth and improve free cash flow in 2023 compared to 2022. We'll also maintain our focus on strengthening the organization to be ready to capitalize on an improvement in underlying market growth rates, as well as our targeted profitable growth areas. Stepping back, Quaker Houghton's growth culture is healthy, with a foundation built on earning value through differentiated customer intimacy. We continue to build on our key profitable growth themes, using our global scale effectively, investing in digitization, and leading in sustainability for our customers, our company, and stakeholders.
Beginning in the first quarter, we updated our reportable segments to three regional segments, supported by global functions. This better reflects the alignment of our executive team and business structure. We believe our updated structure provides for deeper accountability closer to our customers, and will help us leverage our scale and capabilities to accelerate the growth of our business, consistent with our globalization theme. There is considerable value we can gain as we deepen our relationships with new and existing customers, accelerate the realization of cross-selling opportunities, and target new profitable growth areas. We are also making progress on our other growth themes. Our fluid trend platform provides opportunities to use technology to advance customer intimacy.
We now have completed a phased launch of the latest iteration of the platform within our internal global fluid analysis labs, a significant milestone in a multi-year journey to transform how we deliver customer intimacy with digitization for the future of our business. Also, of note, last week we published our 2022 sustainability report, which details some of the achievements and milestones since the inception of our comprehensive program in late 2021, including adopting green chemistry guidelines, investing in data management capabilities and renewable energy. These are exciting and important achievements as we also further build out our portfolio of sustainable solutions, being a leader in the industry, and enabling our customers to achieve their sustainability goals.
To summarize, in the quarter, we delivered strong results, building on the progress made in 2022, and executing on our communicated priorities. As a leadership team, we continue to challenge ourselves and our colleagues to work together to deliver results serving our customers regardless of the operating environment. We remain committed to unlocking the earnings power and cashflow generation potential of the organization. We are investing to advance our growth initiatives and develop supply chain and digital capabilities to redefine how we most effectively deliver customer intimacy. Through innovation, we are developing our portfolio of sustainable solutions to support our customers in achieving their sustainability goals. And we're being prudent with our investments, managing our costs, and improving our profitability to better position the company for future success.
I am confident in our strategy, and I have continued conviction that we will continue to execute to achieve our goals. With that, I'd like to pass it over to Shane to discuss the financials.
Shane Hostetter: Thanks, Andy, and good morning, everyone. In the first quarter, we delivered net sales of $500 million, which was a 5% increase compared to the prior year. This was driven by a 19% increase in price and mix, partially offset by 11% decline in total sales volumes, and a 3% unfavorable impact from foreign exchange. Similar to recent quarter themes, our value-based pricing initiatives were the primary driver to increased net sales. Compared to the prior year, the decline in volumes was primarily driven by softer market conditions and our value-based pricing actions, as well as the ongoing conflict between Russia and Ukraine, the winddown of previous tolling of volumes we divested as part of the combination, and the direct and indirect effects of the pandemic in China.
On a sequential basis, sales increased approximately 3%, including an increase in volumes of 1%, and a benefit from foreign exchange of 2%. Volumes increased in our Americas and EMEA segments, but were offset by continued soft conditions in Asia Pacific. Further, we have continued to implement targeted price actions, consistent with our value-based pricing initiatives. Gross margins in the first quarter increased to 34.7%. This was compared to 30.8% in the prior year, and 32.2% in the fourth quarter of 2022. The 400-basis point improvement year-over-year and 250-basis point improvement sequentially, reflects continued execution on our pricing actions and relatively stable raw materials. Overall, our raw material costs still remain at historically elevated levels, and while supply chain and logistic challenges have improved, they remain delicate.
Therefore, we will remain agile, implementing additional actions and efficiencies as necessary. Looking at our SG&A, excluding one-time items, we had an increase of approximately $10 million or 10% compared to the prior year period. This primarily reflects year-over-year inflation on our labor costs, as well as the timing and levels of our annual incentive compensation. We've continued to expect mid-single-digit inflation on our labor costs in 2023. As mentioned last quarter, we've implemented a range of targeted cost actions and operational efficiencies to further improve our profitability and productivity. We have identified approximately $20 million of annualized improvement actions, which will be implemented by the end of 2024. We expect to incur restructuring cash costs of approximately 1x to 1.5x the annual savings over the course of the program.
We delivered 79 million of adjusted EBITDA in the first quarter, which was an increase of 30% compared to the prior year, and 16% compared to the fourth quarter of 2022. Adjusted EBITDA margins also expanded to 15.8% or 300 basis points over the prior year, and approximately 180 basis points compared to the fourth quarter. This positive result primarily reflects the ongoing recovery in our gross margins. Switching to our segments. As a reminder, beginning this quarter, we changed our reportable segments to better reflect the alignment of our new executive management and business structure. Our updated structure consists of three regional segments, which includes the results of the previous global specialty businesses within those respective geographies.
The Americas segment delivered double-digit year-over-year sales growth, driven by a double-digit increase in present mix, but partially offset by a modest decline in volumes. The EMEA segment also delivered positive year-over-year sales growth, driven by a double-digit increase in price and mix, but partially offset by a decline in volumes and a mid-single-digit foreign currency headwind. In the Asia-Pacific segment, sales did decline due to lower volumes, which reflect softer end market conditions, a slower than expected recovery following the lunar New year, as well as impacts due to our ongoing value-based pricing initiatives. We also had a mid-single-digit headwind from foreign currency translations. All of these impacts more than offset our continuing pricing momentum, as well as positive new business wins.
Sequentially, net sales increased 3%. Our volumes increased compared to the fourth quarter, which was driven by an increase in the Americas and EMEA segments, partially offset by a decline in Asia Pacific. Price and mix were consistent with the prior quarter, while foreign currency was a low single-digit tailwind to our net sales compared to the fourth quarter. We delivered a strong double-digit year-over-year increase in operating earnings in all sectors, primarily as a result of our ongoing margin recovery efforts. The recovery thus far demonstrates that we are on the right path to recovering our margins globally, but we have more work to do, especially in EMEA. Compared to the fourth quarter, segment earnings increased in the Americas and EMEA segments, but declined in the Asia-Pacific segment.
While momentum from our ongoing margin recovery efforts continued in off segments, Asia-Pacific earnings was impacted by overall softer volume. Below the line, both our interest expense and other expense were higher in the first quarter compared to prior year, but were largely in line sequentially. To manage the company's interest rate sensitivity during the first quarter, we entered into $300 million notional amounts of three-year interest rate swaps, converting about a third of the company's variable rate borrowings into an average fixed rate obligation. All told, our cost of debt was approximately 5.8% for the first quarter. Our effective tax rate, excluding non-recurring and non-core items, was approximately 27% in the first quarter, consistent with our expectations and in line with our full year 2022 tax rate.
We continue to expect our 2023 adjusted effective tax rate to be roughly in line with our full-year 2022 adjusted rate, pending any changes to domestic or foreign legislation. Our first quarter GAAP diluted earnings per share was $1.64, and our non-GAAP diluted earnings per share was $1.89, which is an increase of 33% year-over-year, reflecting the improvement in our operating earnings. Switching to liquidity, we generated $38 million of cash from operations in the quarter. This was a strong result, especially when considering that the first quarter is typically impacted by seasonal working capital cash outflows. We're off to a good start with our cashflow generation and conversion due to our strong earnings and improved working capital efficiencies.
We invested $6 million in capital expenditures in the quarter, and we also paid $8 million in dividends. Our anticipated CapEx spend remains unchanged in the range of 1.5% to 2% of net sales for the full-year 2023. We will be prudent with these investments, balancing the macroeconomic environment with our overall strategic outlook. Our balance sheet and liquidity remain strong. Net debt at the end of the fourth quarter was $753 million, and our net leverage ratio improved to 2.7x adjusted EBITDA. While significant uncertainty exists, we are well positioned with ample opportunities within our various end markets to drive sustainable long-term profitable growth. We are confident in the earnings power of this organization, and we will continue to emphasize margin recovery through price and cost actions to deliver improved earnings and cashflows in 2023 and beyond.
With that, I'll turn it back over to Andy.
Andy Tometich: Thank you, Shane. The positive momentum in our business is evident, and the entire Quaker Houghton team is very focused on executing, for our customers and our company. With that, we'd be happy to address your questions.
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