QUAKER CHEMICAL CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Strategy Refocus: Joe Berquist outlined a focus on returning to growth, reducing complexity, and deploying capital to enhance shareholder value. This includes globalizing the company, focusing on customer intimacy, and leveraging technical expertise.
• 2024 Performance: Fourth quarter net sales were $444 million, a 5% decline from the prior year. Gross margins were 35.2%. Adjusted EBITDA was $65 million in Q4 and $311 million for the full year. Operating cash flow in 2024 was $205 million.
• 2025 Outlook: Expect end markets to grow 1-2% in 2025, with gross margins comparable to 2024 levels. Anticipate revenue, adjusted EBITDA, and earnings growth in 2025, along with strong cash flow generation. First quarter expected to see seasonal demand improvement.
• Acquisitions: In 2024, the company acquired IKV, Sutai, and Chemical Solutions & Innovations (CSI), with plans to continue M&A as part of growth strategy.
• Cost Management: Identified $20 million of cost actions expected to be completed by H1 2025, driving approximately $15 million in-year savings through improved efficiency.

Segment Performance

• Asia Pacific: Net sales increased ~5% year-over-year, driven by a 5% increase in sales volumes, a 3% contribution from acquisitions, but offset by a 3% decrease in selling price and product mix. Segment earnings declined by approximately $1 million.
• EMEA: Net sales were 7% lower year-over-year. This was due to a 3% decline in selling price and product mix, a 4% decline in total sales volumes (inclusive of the IKV acquisition benefit). Segment earnings decreased by approximately $5 million.
• Americas: Net sales declined 8% year-over-year. Factors included a 3% decline in selling price and product mix, a 4% unfavorable foreign exchange impact, and a 1% decline in total sales volumes. Segment earnings dropped by $11 million compared to the prior year.

Guidance

• End markets are expected to grow 1-2% in 2025, primarily in the second half.
• Gross margins are anticipated to be comparable to 2024 levels.
• Expect revenue, adjusted EBITDA, and earnings growth in 2025, with strong cash flow generation.
• First quarter to see seasonal improvement in demand, with margins expected to improve from fourth quarter levels.

Risks

• Macroeconomic challenges impacting end markets.
• Foreign exchange fluctuations affecting net sales.
• Volatility in raw material costs impacting margins.
• Geopolitical events (e.g., tariffs) that could negatively impact growth.

Question and Answer

Q: Just looking at the gross margin performance in Q4, you're down quite a bit from where you started 2024. And I understand some of that seasonality, there's some fixed cost absorption, you mentioned mix, some raw material stuff, maybe kind of a perfect storm during the quarter. But I was hoping just looking forward you could talk about this prior 37% to 38% gross margin target that you've been using. Is that still the right target that we should be thinking about and is that a reasonable assumption for where you would expect to be in 2025?

A: Joe Berquist stated the 37-38% range is in the right 'ZIP code', expecting first quarter margin to return to that range, with long-term goals of improving EBITDA margins to high teens and eventually 20%.

Q: Just looking at the gross margin performance in Q4, you're down quite a bit from where you started 2024. And I understand some of that seasonality, there's some fixed cost absorption, you mentioned mix, some raw material stuff, maybe kind of a perfect storm during the quarter. But I was hoping just looking forward you could talk about this prior 37% to 38% gross margin target that you've been using. Is that still the right target that we should be thinking about and is that a reasonable assumption for where you would expect to be in 2025?

A: Joe Berquist stated the 37-38% range is in the right 'ZIP code', expecting first quarter margin to return to that range, with long-term goals of improving EBITDA margins to high teens and eventually 20%.

Q: What are your expectations for raw materials in 2025?

A: Joe Berquist expected stability in raw materials, with no significant volatility anticipated.

Q: What are your expectations for Americas volumes in 2025?

A: Joe Berquist anticipated sequential improvement from Q4 to Q1, with overall conditions getting better, expecting Q1 to be the lowest quarter, and improvement through the year.

Q: Just on the refocusing of the market, go-to-market strategy, I guess, as part of the restructuring. Do you think that will improve the growth over the market that you've seen versus your historical rate of the 2% to 4% or is that remain to be seen?

A: Joe Berquist stated the 2-4% growth rate remains the target, expecting to be on the higher end of that range, with M&A and internal optimizations aiding growth.

Q: On the 2025 comments. I know that there are a lot of price initiatives put in the '22, '23 period. You did have to give some of that back and share that with your customers over the last couple of years. I guess have you seen that dynamic kind of play out and/or is that -- should we expect that price dynamic to continue as you recapture some volumes as you move forward?

A: Joe Berquist stated they are not actively increasing prices unless necessary, with stability expected in raw materials and mix issues from Q4 working out in Q1.