Greetings, my name is Darrell, and I will be your call facilitator this morning. At this time, I would like to welcome everyone to Quaker Houghton's Fourth Quarter and full-year 2021 earnings conference call. A 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 Jeffery Snow, Senior Director of Investor Relations. Mr. Snow, you may begin.

Thank you, Daryl. Good morning, everyone. Welcome to Quaker Houghton Fourth Quarter and Full Year 2021 Earnings Call. Joining us on the call today are Andy Tometich, our Chief Executive Officer and President, and Shane Hostetter, our Senior 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, February 24th, 2022. 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. Today's discussion and materials 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 hand the call over to Andy.

Thank you, Jeff, and good morning, everyone. In 2021, we made significant progress on our priorities in a very challenging environment. As our team demonstrated resilience, navigating through a variety of headwinds. For the full-year, we delivered 24% revenue growth and approximately 13% higher volumes. We also augmented our portfolio through acquisitions and implemented strong pricing actions to mitigate persistent cost pressures. We generated record sales and record adjusted EBITDA in 2021. We delivered on our $80 million of communicated synergy targets, invested in productivity initiatives, reduced net leverage, and we delivered positive free cash flow. Turning specifically to the fourth quarter, we achieved $447 million of net sales, adjusted EBITDA of approximately $61 million, and adjusted diluted earnings per share of $1.29. Performance in the quarter can be characterized by strong revenue growth fueled by significant pricing actions and healthy demand. However, we were challenged by higher-than-expected raw material cost escalation and supply chain pressures, which in turn impacted our margins. Despite these unprecedented challenges, the team executed well. In the fourth quarter, our revenue increased 16% from the prior year, with progress in all of our segments. Our revenue growth was primarily driven by strong pricing actions throughout the year as well as the positive contribution from acquisitions. Organic volumes declined modestly compared to the prior year, despite new business wins. However, this was a function of lingering supply chain constraints, especially in automotive, as well as some shipping and logistics delays. And lower volumes from business, we divested in conjunction with the combination. Excluding the impact of these items, total organic volume growth was consistent with the prior year period. By operating segment, organic volumes increased in Asia-Pacific and in our Global Specialties business. Excluding the impact of the divested volumes, the America's organic volumes were consistent…

Thanks Andy and good morning everyone. The drivers of our fourth quarter performance were relatively consistent with the third quarter of this year. As our solid top-line growth was tempered by higher input costs. Net sales of $447 million, increased 16% compared to the prior year, driven by 15% increase in price, and 4% from acquisitions. Slightly offset by a 2% decline in organic volumes and a 1% unfavorable impact from foreign exchange. In the quarter, we continued to grow more than our underlying markets and were challenged by several items. First, the semiconductor shortages continued to weigh on the automotive owned markets. Second, supply chain constraints limited availability of certain key raw materials and caused a delay in our shipments. And third, China growth was impacted by certain policies around power restrictions. Additionally, as you may recall, we divested certain businesses in the Americas and EMEA as part of the combination and agreed to supply product to them for a defined term post-closing. As expected, these volumes are now transferring to the acquirer. And this drove an approximate 2% point decline in volumes in the fourth quarter, which will continue into 2022. As Andy mentioned, absent the impact of these divested volumes, total organic growth was flat compared to the prior year. Sequentially, net sales were consistent with the third quarter as our continued efforts around pricing were offset by typical seasonality as well as lower shipments due to the supply-chain restrictions I previously mentioned. Gross margins in the fourth quarter were 31.1%. While we had previously anticipated margins to begin to recover this quarter, the pace of raw material cost increases and other inflationary pressures were higher than we had anticipated. Exiting the fourth quarter, we have largely recovered our product margins on a dollars per kilo gram…

Thank you, Shane. Before we turn the call over for your questions, I want to thank all of our colleagues at Quaker Houghton for their tireless dedication to our company and to our customers. Our results are truly a team effort, and your ongoing commitment is critical to our success. With that, we would be happy to address your questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] One moment, please, while we poll for your questions. Our first questions come from the line of Mike Harrison with Seaport Global. Please proceed with your questions.

Hi. Good morning.

Morning, Mike.

Andy, I was wondering if you could give us a little bit more precision around the outlook and specifically what you think you can do In terms of earnings growth next year. I think when I look at potential improvement in the price cost situation, some recovery in auto production, full-years worth of benefits from synergies, some acquisition impact, it seems like you might be able to do something like 10% EBITDA growth for 2022. Maybe give us a sense of how you're seeing those earnings drivers. And also, if you could give some color on the cadence of earnings. Clearly, you've suggested that the first half is still going to see some pressure, maybe improving more in the second half. But just some additional color around the outlook would be appreciated.

Thanks for the question, Mike. Shane, why don't you start?

Sure. Thanks, Andy. Mike, as I think about the growth story, I look about our long-term trends and talk to that in light of 2022. Our markets tend to grow 1% to 3% on annum, and we tend to grow 2% to 4% above that. And additionally, we demonstrated a pretty good operating leverage, which translate into earnings growth. And there's no long -- there's no change in that long term expectation, but as I think about 2022, we do expect flattish volumes as the underlying market growth will be at the low end of that long-term range that I just mentioned. And some of our end markets, particularly auto and aerospace, have just not returned yet from pre-COVID levels. This market growth and also we'll have additional business wins next year. We'll be offset by some of the couple one-off items that you heard on the script. Some related to the divested volumes we talked about. There's going to be further impacts related to China and lower volumes due to just some strategic pricing initiatives that we have from a profitability perspective. And on the top-line side, that will be coupled with our pricing actions, which we will benefit from as those that we already put in last year, as well as the items that we'll put in to use 2022 as we continue to try to offset the raw material cost increases, and really price for the value of our products. On margins, in 2022, we do continue to contend with, call it unprecedented raw material cost increases and supply chain disruptions, and we expect these to be really more impactful in the first half than the second half especially given the lag that everyone knows between our pricing initiatives and the cost changes. So taken together, we…

Yeah, I just would like to reinforce, I think that there's nothing different here about the long term, it's not changing. I think we're dealing with a number of unique factors as Shane has characterized for us and I believe the team and our strategies are on top of that to continue to focus on our customer intimate strategy and what's required in this particular period. But the long term we continue to drive towards the growth that we've seen previously.

All right. Very helpful. Thanks. And then in terms of the auto production situation, it seems like you were managing through that pretty well and didn't see a whole lot of impact from the chip shortage over the last couple of quarters and now it's showing up with a more pronounced impact in Q4. Was there some sort of inventory correction or anything that helps to explain why there seems to have become a bigger issue in Q4?

Maybe I'll start, Mike. I think the automotive chip shortage issue started earlier in 2021, but it's well publicized that it continued to get worse and lingered. Even recent publication suggest that it can continue into 2023. I think that it's a matter of working its way through the supply chain and we started to see the impact, as Shane indicated, in Q4, and that impact kind of continues.

All right. And then, the last question for now is on the Ukraine situation. I'm not going to ask you to forecast what's going to happen there, but can you talk about how much exposure you have in Eastern Europe generally and in Russia and Ukraine specifically? And I guess at this point, are you expecting the conflict and some of the sanctions that have been put in place to have a fairly broad impact on your EMEA business? Any color there would be helpful. Thanks.

Yeah, I'll start and then Shane can give some specifics. First and foremost, we do have customers and employees in the affected regions and we're staying on top of their conditions and circumstances. We're in regular contact with them and of course, we're all hoping for a peaceful resolution here and as soon as possible. We do have a crisis management team in place to manage through what's happening there as well as the broader impact. So with that as context, then I'll let Shane give some color to the details.

Thanks, Andy. So yeah, the direct impacts might, just from an overall materiality perspective. Business in Russia, Ukraine, Eastern Europe, it's rough, it's less than 2% of the business from a direct perspective on a sales perspective, and we don't source anything directly in that side of things as well, which is an important point. The indirect FX, obviously, are tough to quantify right now and obviously depend upon sanctions and other items. But surely the impact to oil, given we do have some products that are made with mineral oil derivatives could be impacted, but we've been able to execute on pricing to get back any of those increases in the past and we will continue to do such. And then there's obviously other indirect impacts that we're facing as well, depending upon how things go with automotive or any other indirect benefit -- indirect items related to it.

All right. Thanks very much.

Thanks, Mike.

Thanks, Mike.

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

Hi. Good morning. This is Maria Molina, for Laurence. I just have a couple of good questions. 1. Can you comment a bit on your appetite for acquisitions in 2022, and if there's one, what areas you're most interested in, and anything about the size of acquisitions, potential acquisitions?

Sure. I will go into the sizing. So you might have seen in our press release. So we were to execute in the fourth quarter two acquisitions as well as early in 2022, two additional acquisitions. Exciting on the technology and other product breadth they bring. Even though the sizing of such is not too large, they bring roughly $4 million of adjusted EBITDA to the year. Andy, would you want to talk about anything with the product stuff?

I would just say that the additional technology is reinforcing our customer intimate model and having more solutions available for our customers, so this is a continuation of the strategy. And we believe these accretive deals are going to be very beneficial for us and for our customers.

Thank you. And the second one, do you have any comments on the working capital expectations in 2022?

Yes. Sure, Maria. In my script, I mentioned the given year was quite an investment in working capital due to high increases in sales as well as inventory cost increases, as well as restocking due to some of the global supply chain pressures. We don't anticipate this to recur. We do anticipate probably a usage as we have sales going up in next year as well as slight cost increases, but nowhere near the level that we had this past year. So in general, we anticipate another strong year of free cash flow in line with prior years to this.

Thank you.

Maria.

Thanks Maria.

Thank you. Our next questions come from the line of Marisa Hernandez with Sidoti. Please proceed with your questions.

So this is Marisa Hernandez from Sidoti. Hopefully, [indiscernible]

I'm [indiscernible]

[Indiscernible] So a couple of questions here. First, on the [indiscernible] itself. You mentioned 2% lower volumes year-over-year. Can you give us a little bit of color on other end market? I suspect that was with [indiscernible] but did volumes also go down in your other end markets?

Hi, Marisa. Yes, sure. Why don't I just give it a little bit more color on that volume side, right? So overall our volumes actually increased about 2% but that did include acquisition volume at 4%, so I think the 2% decline you're mentioning is that number, right? And so with that, if I think about kind of the drivers of that, we did have decent healthy demands in most of our end markets with the exception, as you mentioned, automotive and certain pockets of other market segments, aerospace and a couple of other items. But also it had some onetime items that we were incurring related to supply chain constraints. Namely raw material availability and logistics that delayed some shipments that we estimate roughly at 2%. Also, we talked about the volumes that we divested in the given quarter, which also had another 2% impact. And then China, just the overall demand there, had an impact as well. So all in all, I would say automotive was probably the main driver on the market side of things, but also the one-time items that we -- the other uncommon items that I've talked about.

So by end-market, was auto the only one that declined year-over-year?

I would say that was the primary driver, yes, Marisa.

Okay. Did your shipments to metal customers go up and to what extent?

So as I think about the metal side of things, they did, I'll correct myself, have a downward pressure into the fourth quarter as well, but that was mainly in the sequential side. From a steel perspective, the capacity in the Americas maintained pretty well, but they was offset in certain other regions having downward pressure in the fourth quarter. The aluminum side of things I think stayed a little bit strong globally. So those are just [indiscernible] on the other segments.

Got it. Thank you, Shane. So the other issue I wanted to explore on the quarter itself is on the drivers for the gross margin. Of course, you mentioned the raw material cost inflation, the mix and logistics issues. So to what extent was each of those driver there? You can elaborate on that?

Yeah. So maybe I'll start by highlighting the single biggest factor impacting, obviously, is the raw material escalation and then our ability to then capture that in our value pricing model with our customers as part of our customer intimate approach. So the biggest driver comes in that balance between raw materials and how we implement our pricing strategy. I think to a lesser degree, the mix in some of the supply chain challenges impact. But it is impacted regionally, so bigger impact in some areas than other. It's a little bit difficult to generalize.

Thank you, Andy. So looking into 2022, are you thinking that autos will see some recovery in volumes throughout the year or that's being pushed out more than that?

Yeah, I think -- I wish I had a clearer crystal ball on that one, Marisa, because there seems to be a lot of discussion about this in public information. There are some theories that things will start to recover later in the year. However, there are new factors coming into the mix now with the Ukraine situation. So I think it's unlikely to be able to say right now how it's going to play out but we know that some of the headwinds that have been there continue earlier in the year.

Okay. On the transportation side of things, the pressure that you may have had in your difficulty to deliver and difficulty to receive things in the fourth quarter, are you seeing any alleviation there or not yet?

Yeah. Marisa, I would say, just a reminder, right, we tend to source and use products in each of the individual segments, so Europe and Asia-Pacific. So we're talking rail, and car, and private, then over ocean or a plane side of things. So I would say overall, we're not seeing -- we're seeing a little bit of ease, but not overall alleviation.

Okay. And on the pricing side of things, obviously, there's a lot of room to cut chip on, and that's the same for everybody. But are you getting from -- is it getting increasingly difficult to pass on prices?

I would say, Marisa, the more times you go to talk with a customer about a price increase, the less receptive they are to enjoy that conversation with you. But I think our team is working very hard. Again, we reinforced the value we bring to the customer, not just the raw material costs. So we're trying to bring that package of information to the customers as we're moving forward with them on pricing. I would say that in certain cases where we may be a little less intimate, it becomes a little more of a challenge and obviously competitors will continue to look for opportunities. But for the most part, we've been able to, because of our customer-intimate model and the value we bring to customers, with the time and the conversation with customers, we've been able to pass those price increases that we targeted on.

Thank you so much.

Thank you, Marisa.

Thank you and my apologies on that firm name. [Operators instruction]. Our next questions come from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi. Good morning, everyone. Just wanted to clarify. I think if I'm hearing you correctly, volumes will be down in Q1. I was wondering, could you talk about how much you expect pricing to be increased year-over-year on Q1 just given all the cumulative increases you've done over the last three or four quarters?

Hey, John, I actually didn't comment on the first quarter on that side from a volume perspective, but I mean, from a pricing side, as I think about going into this year, we had 8% price and mix in the year-to-date, year-over-year. I'm not going to give the first quarter versus the year-to-date, but I would say you probably see something in the same area going into 2022. And depending upon -- where raw materials go, really, will depend upon the additional pricing on that side of things. So as I mentioned in my script, we're currently engaging in additional pricing for 2022 to offset the raw materials that continue to escalate.

Okay. Got it. And I was wondering, do you have any specific expectations for exchange rate impacts you're going to see this year?

Yes. So just in general, as I think about year-over-year, right? The euro trailed at the end of the year compared to the U.S. dollar from a strong perspective. So we'll definitely see an impact year-over-year primarily related to the euro, and potentially the RNB depending upon where China goes, but Europe is definitely the most impactful one from our perspective.

Okay. And then last of all, just the investments you're making in SG&A. Can you talk about those? What are you expecting to get out of that? What are some of the projects you're thinking about?

Yeah. Maybe I'll start off with that one. In general, it's all around continuing to advance the strategy on customer intimacy, but doing it at an upgraded and scaled way. So I think we're looking at opportunities in our R&D space to be able to take advantage of the capabilities we have more broadly that came together as part of the combination to benefit more customers around the world. We're looking at our IT infrastructure and our ability to really connect in an instantaneous and comprehensive fashion not only internally, but with our customers. And we're going to continue to invest in our sustainability efforts in ways that we can help our customers in their own operations be more sustainable, but even in the ways that we're producing things and the types of raw materials we're sourcing and so forth. So those are the key areas.

Got it. Thank you very much.

Thanks, Jon.

Thank you. There are no further questions at this time. I would now like to turn the call back over to management for any closing comments.

Okay. Well, the future of Quaker Houghton really has never been brighter and I truly believe we are just getting started. We're committed to executing on delivering sustainable value for our shareholders. And I'm really looking forward to meeting with many of you during the course of the year. Thank you for your interest in Quaker Houghton. And of course, please reach out with any follow-up questions.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.