QUAKER CHEMICAL CORP Q3 FY2026 earnings call

• Global Performance: Delivered fifth consecutive quarter of YoY profitability growth with record adjusted EBITDA ($90 million). Global volumes grew 3%, outperforming flat-to-slightly-down underlying markets, achieving mid-single-digit net share gains for the 12th consecutive quarter.
• Regional Dynamics: Americas led volume growth (+6%) driven by steel/aluminum capacity ramp-ups. Asia Pacific maintained momentum (+5% volume) by winning EV/OEM business in India/Vietnam and Chinese domestic producers, despite China's overall economic softening. EMEA showed resilience with highest operating earnings in five years, aided by network optimization and plant closures.
• Pricing and Inflation: Implemented successful pricing actions contributing 7% to net sales growth, effectively offsetting persistent raw material inflation. Churn remained low single-digits.
• Operational Efficiency: SG&A declined sequentially as % of sales (<24%) due to structural cost reduction actions and transformation program savings (> $10 million annualized run rate expected).
• Cash Flow and Working Capital: Operating cash flow was $14 million in Q3, down from $51 million prior year, due to working capital increases from higher receivables, inventory builds for China/Germany facility transitions, and raw material costs. Management expects unwinding these inventories to improve cash conversion in Q4/Q1 2027.
• Technology and Innovation: Advancements in 'Fluid Intelligence' combining hardware sensors and software platforms for data analytics and AI-enabled insights.
• Middle East/Africa: Revenue grew 24% YoY despite geopolitical conflict, maintaining supply continuity and gaining new business wins.

Americas: Net sales increased 14% year-over-year to an absolute value implied by the segment contribution (part of $545M total), driven by a 6% volume increase and 8% price/mix improvement. Segment earnings rose $7 million (11%) due to top-line growth amid stable margins. Asia Pacific: Net sales increased 9% year-over-year, driven by 5-6% volume growth (contributing significantly to global gains) and 3% favorable price impact, offset by 1% foreign currency headwinds. Segment earnings were roughly flat year-over-year as higher net sales were offset by lower operating margins from raw material inflation. EMEA: Net sales increased 6% year-over-year, driven by a 10% increase in selling price and product mix (to offset inflation), partially offset by a 2% volume decline due to Q2 pre-buy timing reversal and 2% unfavorable foreign currency impact. Segment earnings increased $5 million (18%) due to improved margins from manufacturing cost reductions (Dortmund closure) and better product mix.

• Fourth Quarter Outlook: Expects normal seasonal demand patterns with typical sequential volume declines (~4% average over past 5 years), potentially slightly more pronounced in Asia/China due to uncertainty.
• Revenue and Profitability: Anticipates Q4 revenue and profitability to exceed prior year levels. Full-year adjusted EBITDA is expected to improve significantly.
• Margins: Expects stable product margins in Q4 via targeted pricing actions, but seasonally lower volumes will pressure gross margins slightly. Gross margin target remains above 36% sustainably, though it may take 1-2 quarters to fully recover from current inflationary pressures.
• Raw Materials: Incremental raw material inflation anticipated in Q4; significant cost declines not expected until 2027, dependent on geopolitical resolutions.
• Capital Expenditures: Full-year 2026 CapEx expected at approximately 2-2.5% of sales.
• Long-term Volume Growth: Confident in positive volume/revenue/EBITDA growth for 2027, particularly in Asia Pacific and Americas, driven by continued share gains.

• Raw Material Inflation: Persistent and elevated raw material costs globally, exacerbated by geopolitical conflicts (Middle East/Eastern Europe), impacting gross margins and working capital requirements.
• Geopolitical Volatility: Ongoing conflicts in the Middle East and Eastern Europe pose risks to supply chain continuity, input cost stability, and market conditions, though current operations remain resilient.
• Economic Softening: Weakness in global automotive production (down ~2%) and softening economic activity in China, which could dampen industrial demand.
• Working Capital Strain: Significant temporary increases in working capital due to inventory builds for facility transitions and receivables growth from volume/pricing increases, pressuring near-term cash flow.
• Currency Fluctuations: Unfavorable foreign currency impacts observed in EMEA and Asia Pacific, affecting reported sales and earnings.

Q: Analyst asked about the sustainability of EMEA margin improvements and whether they represent a new floor or have upside potential given volume recovery.

A: CEO attributed margin expansion to three factors: network optimization (Germany plant closure), right-sizing organization post-supply chain crisis, and exiting unprofitable contracts. He confirmed confidence in the new margin floor (high teens/low 20s) and indicated further upside is possible through continued transformation actions and network efficiency improvements, suggesting the bottom has been seen.

Q: Analyst inquired about the magnitude of customer restarts in North America and whether resuming steel/aluminum production would cannibalize other business lines.

A: CEO clarified that the strength is primarily in metals (steel up ~4%, aluminum up) while auto production remains weak (-2%). He stated there is no cannibalization risk, attributing metal demand to infrastructure/data centers rather than auto/construction. The company’s agnostic approach to where metal is produced allows them to capture growth regardless of geographic shifts between China and North America.

Q: Analyst asked if Quaker Houghton can maintain pricing power in the highly competitive Asia-Pacific region without losing share, and what the lag time is for margin recovery compared to the US/Europe.

A: CEO acknowledged APAC is more price-sensitive and was the most challenged region by inflation in Q3. However, he expressed confidence in returning to historical margin levels, noting a typical lag of one to two quarters to recapture margins after inflation spikes. The company uses a data-driven, customer-intimate approach to implement prices responsibly, prioritizing long-term relationships over short-term gains.

Q: Analyst questioned the outlook for raw material security of supply into 2027 and whether logistical issues are more acute now than during the post-COVID era.

A: CEO stated that while supply chains are dynamic and tightness exists (e.g., Strait of Hormuz impacts), the company is confident in supplying its full portfolio reliably in 2027. They leverage global flexibility (e.g., moving product from Europe to Asia) and alternative technologies (e.g., ester vs. mineral oil bases) to mitigate shortages, asserting no inability to supply customers is anticipated.