Welcome to Quaker Houghton Fourth Quarter and Full Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce Chairman, CEO and President, Michael Barry. Michael you may begin.

Good morning, everyone. Joining me today are Mary Hall, our CFO; Robert Traub; our General Counsel; and Shane Hostetter, our Head of Finance and Chief Accounting Officer. We have slides for our conference call. You can find them in the Investor Relations section of our website at www.quakerhoughton.com. A great deal has changed over the past year with the COVID-19 pandemic. For us, our top priority is and has been to protect the health and safety of our employees and our customers, while ensuring our business continuity to meet our customers' requirements. All of our 31 plants around the world are operating and we are continuing to meet our customers’ needs. I am very proud of what the Quaker Houghton team has done to continuing to service our customers, as well to continue our integration. We are pleased with our results for the fourth quarter. Overall, our sales were up sequentially 5% with all regions or segments showing revenue growth which was primarily being driven by higher volumes as our businesses continue to come back from the negative impact that COVID-19 had on our end markets. The sequential increase was strongest for us in EMEA as we saw an increase in sales of 13% compared to the third quarter. I think it is interesting to look at our revenue changes from the fourth quarter 2019, which was pre-COVID of course. Overall our sales were down only 1% and our volumes were relatively flat but there was a difference when looking at this by region or segment. The only area that showed an increase in volume sold was Asia-Pacific which had an increase of 8% versus prior year primarily being driven by higher sales in China and India. EMEA was relatively flat on volumes mainly due to the fourth quarter of…

Thank you, Mike and good morning all. Before I begin. Let me remind you that comments made during this call include forward-looking statements which are based on current expectations, estimates, projections and assumptions that are subject to risk and uncertainties which may cause actual results to differ materially. For our discussion of these risks please review the cautionary statements regarding forward-looking statements included in our earnings release and in our previously filed 2019 Form*10-K and third quarter 2020 Form 10-Q filed with the SEC. These are available on our website. Please also note that updated risk factors will be included in our 2020 Form 10-K which we plan to file next week. As we disclosed in our press release filed last night all 2020 numbers we are presenting our preliminary unaudited and subject to change as we finalize our audit. In our press release and in this presentation, we have provided certain information including non-GAAP earnings per diluted share, non-GAAP operating earnings and adjusted EBITDA as well as certain pro forma items and an effort to provide shareholders with better visibility into the company's core operations excluding certain items which we believe do not reflect our core operating performance. Reconciliations are provided in charts 15 to 23 of this investor deck and some are in the press release as well. We followed a similar review format for this deck is the one we used for our Q3 call where our comparison periods show actual and non-GAAP results and also pro forma sales and adjusted EBITDA as if we'd been combined with Houghton throughout the periods presented. Our Q4 comparisons of 2020 and 2019 in this deck reflect actual results not pro forma as we completed the combination with Houghton in Q3 of 2019. For the full year comparisons, I will…

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

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

Hi. Good morning.

Good morning, Mike.

And congratulations on a nice finish to the year and congrats as well on your retirement, Mike. It's been an impressive run and well deserved.

Thank you, Mike. And we've still got another bulk of the year here to do. So we're focusing on that, but I appreciate it.

Understood. So, I wanted to ask you a question about the guidance. You previously, on the Q3 earnings call, had said that you expected 20%-plus EBITDA growth in 2021. So you kind of reiterated that, but at the same time, you ended up with a little bit more EBITDA in 2020 than you may be had been expecting. And then you also announced a couple of acquisitions that are adding, call it, 5% to EBITDA this year. So, can you help us understand whether your underlying expectations around 2021 earnings have improved, stayed the same or maybe gotten a little bit more conservative in the meantime?

I'd say, it's a good question. Overall, nothing has really changed from our views of organic growth. I think, part of the 20% that we're imagining here is meant to be really a floor because we said over 20%. And I think, as you know, generally we've been a historically conservative company in that and of course there are still uncertainties out there. Raw materials are going up and we're still in some COVID situations here, so it's never a perfect world. But when I think of our position now and where we were at the end of the quarter, I still feel we're going to have really good organic growth, and now, we've added these acquisitions. So, I feel good and I think what you're seeing -- and just to give you an example, our conservatism or so is, we also said we thought we'd be at least $215 million of EBITDA for the full year last year and we came in $222 million. So, it's probably just -- we're just kind of setting a floor for that.

All right. And in terms of the acquisitions, the Coral deal is a little bit bigger, sounds like it's focused on tins and general industrial finishing fluids. And there was also a tin-plating deal. Can you maybe give a little bit more color on what those deals bring to the product portfolio? And I think you mentioned the cost synergy number, but how do you see the cross-selling opportunity going forward for these businesses?

So, I think, the -- for this, I'll start with Coral. It really strengthens -- we have -- Quaker had a can portfolio, Houghton had a can portfolio and actually, Houghton had a historical relationship with Coral, and there was a licensing agreement with certain aspects. So, actually adding kind of Quaker Houghton legacy's portfolio with Coral really gives us a very complete portfolio of products to sell to the can industry and really I think strengthens our presence in that industry. And of course that's been an industry that even during COVID times has been one of the stronger end markets that we have. So, we feel really good about the strength of that and how that means that our ability to maybe take share in the future in that market. And the tin-plating is really just -- is kind of our -- we already had a tin-plating product that we bought many, many years ago from McDermott. This asset came up for sale. And we thought that was a good addition to go in our portfolio as well. And we believe these technologies that we have in this area compete against other technologies. And we think the kind of technologies that we now have between these two sets of technologies we'll have will be growing faster than the market and we will be penetrating into these other technologies that are getting used for tin-plating. So we're encouraged with the ability to grow in those markets as well.

Okay. And are those acquisitions going to be going into the regions or are they going to be parked in global specialties for the time being?

It's a great question. Coral actually will be separate, the can will be -- we operate our beverage can business and global specialties, so that piece will be put into global specialties. And then the other aspect will be put into the Americas region and in the general industrial piece. And then the tin-plating will be -- it's being managed out of global specialties as well, but certainly hits parts of the regions as well.

All right. And then, last question I have for now is on the EMEA business. Really looks like you had a nice step-change in the margin performance there. And I'm aware you were coming off an easy prior-year comp. But were there some unusual dynamics that contributed to the strength there or do you see this 28%-plus number as a sustainable margin level in EMEA?

We are very pleased with our EMEA regions. I see it as sustainable. It's really what you see kind of popping there is the combination of sequentially volumes picking up and getting more back to, what I call, normal level. At the same time, we're getting the benefits of the synergies from the integration. And so, when you put those two things, that showed nice sequential improvement throughout the year. And we do expect that to continue on at that kind of level. Now, in the first quarter of the year, we do expect to see pressure on margins because of this raw material issue that we're having. But we are putting in place price increases, but there is a lag effect that goes with that. But absent that kind of short-term nature, I do expect these to be sustainable.

All right. Thanks very much.

Thanks, Mike.

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

Thank you. Good morning. And I'll also echo congratulations on a strong end to the year and on a well-deserved retirement to you, Mike.

Thank you.

First, I just wanted to ask, on the 4% net market share gains this quarter, can you highlight any regions or industries where you're having the most success with new business wins?

It's pretty broad-based. It's -- these things are made up of kind of pieces of business that we're picking up in all different kind of product lines and all different areas. So, we're actually -- it's pretty broad-based. So it's not just really one major area or another. And so, it's pretty well-distributed.

Okay. Thank you. And then, I mean, just kind of related to that, I know you talked a little bit about this in answering my question. But could you just talk more about your bolt-on M&A strategy going forward? Are you focusing more on expanding into core end markets like steel and metal finishing, looking at cross-selling opportunities that are similar to the two recent transactions or are there opportunities to get into more differentiated or specialized applications that you also have interest in?

Yes, it's really a combination. So, in the short-term, we are exclusively only looking at smaller acquisition opportunities until our leverage ratio is at the place we want to be, which we think that will be at the end of the year. Then, we'll look at larger opportunities. So, in the short-term, these bolt-ons tend to be various technologies that we feel will be good additions to our portfolio. And these are two good examples at once [indiscernible]. Most of the time, in most of these discussions that we have or these acquisitions that we're working on, we tend to have and develop relationships with companies over time. So when they come to market, they are generally talking to us about that. And we can kind of come to a conclusion on the acquisitions at an attractive price. So we still feel there is a number of these opportunities out there, relatively small companies that can really add something to us from a product perspective or maybe it's a technology or a service application perspective too that we've done a couple of those as well that can really add to our whole offering for our customer base.

Great. Thanks so much.

Thanks, Katherine.

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

Hey. Good morning, guys. Thank you for taking my questions. And Mike, congratulations on your retirement. I know it's a way off, but it's been a real pleasure working with you and your team and you've done a great job.

Thank you, Jon.

I was wondering if you could first talk about your gross margin expectations just for the first quarter. Given the rising input prices, maybe some volume headwinds from these logistics shortages and headwinds that are out there, I'm just wondering what your expectations are for the first quarter and when you might expect them to recover as you pass pricing through.

Yes. So, yes, we're not going to kind of give the specific number guidance, but they're definitely going to be impacted for the reasons that you just stated, just raw materials and things in general that are going on, like our container costs and things like that are going on. And we are in the process of getting price increases in the marketplace. There is generally a lag effect in that that our prices go up first and then we get our price increases. So there will be some impact on margins. And if it was absent that kind of a thing, we would expect to be in this 37% to 38% range margins, but they probably would be somewhat depressed in the first quarter. But as we get through the year, we get our price increases through and so forth. As Mary kind of mentioned in her remarks, we do expect to be getting back into that 38% area, which is where we think we're more longer-term at this stage once raw materials kind of line out.

Got it. Okay. Thank you for that. And I was wondering if you had a total synergy realization target for the year. I know you've done better in the past couple of years. Just wondering if you had a target for this year and when -- is there a phase and a schedule for that?

Sure. Our synergies for this year target is $75 million. I believe we announced that a quarter or two ago when we kind of upped our guidance and we expect to ultimately get $80 million, but -- so by the end of this year, if you look at kind of the run rate we expect to be at, we will probably be more at that $80 million going forward. It's just that you get the full year effect in 2022.

Okay. Great. And then, just a quick question for Mary. Do you expect cash flow to improve to the same degree as EBITDA this year or is it going to be held back a little bit more by maybe capex returns and you're investing in working capital as revenues grow?

Yes. That's a fair question. Certainly the answer depends on how quickly the rebound picks up steam. Again, we threw off a lot of working capital in 2020. If the rebound picks up quickly, we would expect to have some reinvestment in working capital, but we would expect that to be more than offset by earnings improvement if that's the situation as well. So, a little bit difficult to call. From a capex perspective, I should point out, post the onslaught of COVID, we announced that we scaled back our capex from our original expectations last year and we would expect to invest a bit more in capex this year. So, a very long-winded way of saying, I expect cash flow to remain healthy, but we'll see the progress of the rebound this year and talk more in later quarters.

Okay. Fair enough. Thank you, guys.

Thank you.

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

Hi. Good morning and thanks for taking the question.

Good morning, Steve.

Yes. Just, I guess, first, echo the -- congratulations again. And though there is still a lot of green here left in the year, but hopefully a little bit [smoothish] this year than last year after [[indiscernible]. I guess, just on the -- and I had some connectivity issues, but you talked about the EBITDA growth that you're forecasting. And can you talk about what the impact was from the headwinds you kind of expect in the first half of the year? And then, with the typical process for passing through raw material prices, is it -- kind of it sounds like maybe there is two-quarter lag, is it pretty straightforward with customers and things like that?

That's a great question. So, in some ways, I wish I had a crystal ball because some of these -- sometimes it really depends upon -- because we have kind of seen a step-change in raw materials costs. And a question to me is, is this going to kind of happen once and then kind of line out or is this going to be something that evolves in a different way. But based on what we are today, we are putting our price increases to our customers kind of as we speak. Most of the price increases will go in kind of in the back half of the quarter. And yet, the price increases have been hitting us and continue to hit us throughout the quarter. So you do see some -- but we were not -- we haven't given any guidance, and generally don't give guidance around anything kind of specific like that. And then, to your question of like what we find over time on this is that generally there is a three-month lag and sometimes it can take up to six months at times dependent upon the customers before we kind of fully capture everything. So it is a timing issue and it is not something that we sit there and worry or get concerned about from a longer-term perspective. It's just more of a short-term, got to get through it and then hopefully things will just line out and we'll go on from there.

Okay. That's helpful. And then, maybe just from kind of sticking with raw materials, inflation things like that, I mean, is there any -- would you guys have a more favorable impact than competitors on the inflation side or is there a negative or positive, or do you feel like you'd be kind of on the same footing as everyone else if you see a continued move in prices?

Yes, yes. I don't think we're at a competitive advantage or disadvantage relative to raw materials. I think it would generally -- if raw materials go up or down, it's generally hitting people throughout the whole industry.

Okay. And then, maybe lastly, just -- I mean, in terms of the search for your replacement, I mean, what are the things that people tend to mention when I talk to them about you guys, the strength of your management team. And I'm just -- I mean it seems like you have a pretty good bench of talent. Is there something you think that somebody from outside the company might bring in that you're missing currently or is it just something where it's the right thing to do where you have to explore all options and you will thrive for shareholders right for the company, etc?

Right. I think, the way our Board looks at it is, it's good governance to kind of look at all options. Myself -- I speak for myself, but I know the Board as well is very happy with our management team. And we have very good strong candidates to be considered as part of the process there. And so, it's really -- I wouldn't read into anything that says that we're not going that direction, it's more around we just want to look at all options and make sure we're doing good governance.

Okay. All right. Great. Thanks for the time.

Thank you.

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

Good morning. Mike, I guess, an unfair question, but again be patient with it, can you talk a little bit about what challenges or what's sort of the unsolved problem is that you're leaving for your successor or that? And also, can you speak a little bit about the culture of Quaker Houghton and the status of the culture and where you think that either limits or creates opportunities for acquisition outside what just sort of straight -- just expanding in the existing sort of skillsets? I mean it just seems as if the cultural element is going to be a real challenge. And it's been something that you've managed well in terms of finding the right assets to bring into the business. So, can you just talk a little bit about those two things?

Sure. On your first question, a big challenge -- again, part of my rationale is -- of the timing around now is that I think it's a -- I really, really didn't want to leave and the company had a good place. And I really do believe we are in a very strong place right now. So, to me having the integration in place, our profitability at will certainly be, we believe, at all-time high this year and then we have our debt capacity down to the target area we want. I really think those are kind of good foundations in which to lease [indiscernible]. And we still have -- I mean I really do believe in our strategy, our Board believes in our strategy, and we are not looking for any major changes in our strategy. So, we feel we can continue to grow above our market organically. We are going to continue to look at acquisition opportunities within our market. And so, I think it's really looking for a CEO that will continue on executing the strategy that we've put out. As far as the culture aspects, the culture is something we really are very cognizant of when we make acquisitions. And it's something we believe is a core fabric to our company. As I've mentioned, people are most valuable asset. We really want to have collaboration, teamwork, inclusiveness, diversity in our -- as part of our fabric and is something that we're highlighting and trying to continue to improve upon throughout the whole organization. So, we spend a lot of time and energy on the kind of culture we want to have and that's something we put probably more time than anything into -- and making sure Quaker Houghton now as a combined company has a good culture. And so, I'm very happy with the progress we're making there. And just, I guess, I'm not -- I didn't know if I read into your question, but are there other acquisitions -- we always look at, make sure there is a good fit from a people perspective, from acquisitions and that will always be a key component going forward just to make sure we have that. We wouldn't want to do something that negatively impacts our culture.

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

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

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

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

Sure. We're seeing pretty broad-based increases in raw materials. Certainly, some of the bigger groups of our raw material increases, Garo, are in base oils as you see crude continue to progress up over time. And then -- and we also are seeing our vegetable or animal fat type-based raw materials also increase up as well. And like you said, there is a connection there in some ways, but it can't get too far out of line because of biodiesel and kind of bring them back into line. And then we're also seeing other groups like additives go up. We don't have a perfect crystal ball on this. The last time we took a very detailed look at this, we thought things should stabilize for a period of time, but as we know, the world changes, so we'll see. But regardless, it's kind of our mindset is, raw materials will continue to go up or down on us over time and we'll continue to adjust our prices and maintain our margins as appropriate.

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

I think we ended the year actually spending on capex even a bit below what we had guided early last year. So, I don't -- I think our expectation is in that kind of mid to low-$30 million area, Garo.

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

Yes. We have with some continue to evolve and look at and study. We haven't shared that lately. We will take a look at that. I would say, the overall conclusion from Investor Day and looking at the impact of electric vehicles on us is still the same kind of conclusion that it's not I mean really major in that for the C, because we -- while there in certain areas there can be reductions of use of our chemicals, in other areas we are picking up pieces of business and we believe they over time will be offsetting one another. So I think our overall conclusions from Investor Day are still valid, but we have kind of updated our view on it.

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

Sure. We are putting -- and thanks for asking that. We are putting a lot of effort into ESG. That is something that's certainly getting a lot of attention throughout our Company. We established a Board Committee on sustainability about a year ago. We are in the process to come out later in March. We will be putting out our sustainability report around March 23. We will come out. You will see more things in our annual report that will come out around this. We did a material assessment for the whole company last year of where we can make the greatest impacts and we took in and got feedback from customers, investors, and a lot of stakeholders, as well as people for us the company as well. So you'll be seeing more material around us on that. We are adopting the FASB framework and GRI in our principles. We are going to be issuing a letter of support for TSFD. So there are -- and you'll be seeing very material goals coming out from us around the whole aspects of the ESG later this year.

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

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

Sure. So, so far, the issues in Texas and what happened to the supply chains around that hasn't been a real big event for us. So, so far so good on that front. From the automotive perspective and the semiconductors, we are definitely seeing certain plants around the world may be where we are supplying some products that may be reducing production or so for a period of time. So it will have some impact on us. We think it's -- and from everything we read, Mike is, this is something that will clear up in the spring. And then maybe this is more of a temporary issue now that will be made up with volumes later in the year. So, it could be some -- certainly there would be some impact to us again in the kind of the first quarter or maybe into the second quarter. But then, hopefully, that'll all be made up in the second half of the year.

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

So, as we think about Asia-Pacific, it's a great business for us. I think what you saw in that quarter was really a timing issue relative to some of our costs. And we had certain costs that were more back-end loaded. For example, bonuses within China. China really had a great year for us last year. And as they hit certain thresholds, you have to accrue more for bonuses. So you had certain things like that that kind of back-ended into that year. That was unusual in nature and I think lowered that, but we don't expect anything -- that was more, I would say, a fourth quarter aberration. We don't expect something like that to be seen in the first quarter, for example. So it's not going to be something that carries forward.

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

Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.