Greetings and welcome to Quaker Houghton's First Quarter Earnings Release 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. I would now like to turn the conference over to your host, Mr. Michael Barry, Chairman CEO and President. Please go ahead sir.

Good morning, everyone. Joining me today are Shane Hostetter, our CFO; Robert Traub; our General Counsel; and David Will, our Global Controller. 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 plants around the world are operating and we are continuing to meet our customer needs despite the increasingly challenging conditions caused by COVID as well as the current year global supply chain pressures that have impacted raw material availability. I'm very proud of what the Quaker Houghton team has done to continue to service our customers as well as continue with our integration. We are very pleased with our strong first quarter results. Overall our sales were sequentially up 11% compared to the fourth quarter with all regions and segments showing revenue growth. This was primarily driven by higher volumes as our business continues to come back from the negative impact that COVID-19 had on our end markets. The sequential increase was broad-based with all segments and regions growing between 9% and 12%. I also think it is interesting to look at our revenue changes from the first quarter of 2020, which is just when COVID-19 was starting to impact us. A year ago we primarily saw the COVID impact in China and you can see this impact in our current quarter Asia Pacific sales growth of 31%. EMEA and our global specialty businesses also showed strong growth and were up 14% and 12%, respectively from a year ago. The…

Thanks, Mike and good morning everyone. Before I get into results for the quarter I'd like to remind everyone that comments made during this call include forward-looking statements, which are based on current expectations and are subject to risks and uncertainties that could cause our actual results to differ materially. For further discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and our Form 10-Q filed with the SEC. In addition, please reference our risk factors disclosed in our 2020, Form 10-K as well as our first quarter Form 10-Q for a discussion of company risks that could also impact our forward-looking statements. In addition, Mike and I make reference to several non-GAAP measures, during this call such are consistent with the press release and call charts, filed yesterday. And also there are reconciliations between U.S. GAAP measures and non-GAAP measures provided in our call charts, on pages 10 to 21 for reference. Looking at our strong start to the year, the quarter really rounded out as Mike previously summarized. Our performance was driven by record quarterly net sales, partially offset by lower-than-expected gross margin due to higher raw material costs on significant supply chain pressures. As I begin to discuss our quarterly performance, I'll point you to slides six and seven in our call charts, which provide a further look into our financials. Our record net sales of $429.8 million increased 14% from the prior year, which was primarily driven by higher volumes including 3% from acquisitions and increases due to foreign exchange of approximately 3%. This top line performance is truly a global effort with each segment contributing nice growth year-over-year. APAC's net sales increase of 31% was the largest increase than the prior year, but this was mainly due…

Thanks Shane. We will now open it up for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Katherine Griffin with Deutsche Bank. Please proceed with your question.

Hi, good morning. Thanks for taking the question. So first, I just wanted to touch on the comment around potentially lower volumes in Q2. I think Shane you just mentioned, some market variability related to the semiconductor shortage. And I was just wondering if you could provide a little bit more color on like what that market variability is and maybe how you expect volumes to trend by region in Q2?

Sure. We – it's hard for us to be precise on this because there's so many factors playing here. But we do feel there could have been some pre-buy in the first quarter and – as well as some of our customers replenishing their – either their supply chain products into it. And – but it's really hard to get at that. We really spend a lot of time trying to analyze that trying to understand that better. And for example, there were places I think of the United States in the steel industry and the auto industry, they're really running very hand to mouth right now. So – but in other places of the world, there could have been some of these other effects. So we think that overall there could be some volume impact due to that as well as the semiconductor shortage just continues to – continue on at least for another quarter here. And so we think that will impact things as well. So it's hard for us to precisely tell on our volumes.

Okay. Thanks. And then just on the gross margins. If you could just talk a little bit more about how you expect to improve that in Q3 and Q4. I think it's – of course price increase is coming through but I'm curious if there's other actions that you're taking or could take in order to get to that previous gross margin guidance?

Sure. Yes we were – to kind of look back at where we were in the third and fourth quarters of last year, we were really improving our gross margins through a lot of the synergies that we are achieving through the integration of the company. So we saw that. And then now these large raw material price increases have come through. They started in the fourth quarter more came through in the first quarter and more coming through in the second quarter very large increases even between March and April. And really what we have to do and we are doing is continuing to do price increases in the marketplace. And we've done them and did those price increases in the first quarter. And we're going to have to do more and are doing more in the second quarter. So it's kind of just catching up. We have this lag effect that we talked about that there's a period of time between our time our raw materials go up and costs and we get price increases in the marketplace to fully offset them. So it's really kind of anticipating that we will be successful. And we do believe we'll be successful in our price increases and that raw materials will begin to stabilize mid-year. And therefore, as these price increases get fully into effect, let's say, towards the middle of the year then you'll see the sequential improvement between the second quarter to the third quarter and then third quarter to the fourth quarter.

Thanks very much.

Thank you.

Your next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.

Hi, good morning.

Good morning, Mike.

Maybe if I could take a little bit of a different tack on the raw material impact you're expecting in Q2. Consensus EBITDA numbers for Q1 were kind of in the, call it $60 million realm and you guys came in at $77 million. Is Q2 from an EBITDA perspective maybe tracking toward that $60 million number that we had been modeling, if we keep in mind the inflationary impact and maybe some of the other puts and takes you're thinking about?

Yes. We don't give too specific guidance on that. But it's – it's hard to argue with something like that. But it's – I would just say that we do feel that it will be the lowest quarter of the year for the reasons we talked about both margin and down on volume somewhat. And we were – we had said this, when we had our call last – at the end of last quarter and we have thought that our first quarter was going to be the lowest quarter of the year. And that's of course, why our analysts took our guidance on that. And it was really just this higher – this much higher demand that came through in the quarter than we expected. And then – and now the whole raw materials kind of changed it. So yes, it's definitely changed the shape of how our EBITDA is going to transpire for the quarters this year.

All right and maybe a little bit more color on the specific raw materials, where you're seeing an impact. You mentioned, that overall you've seen things increase about 20% since year-end. I think, if we look at crude-based materials, base oil has gone up pretty substantially probably more than that 20% number. But can you talk about, what you're seeing in your plant-based and animal-based raws and maybe you also give us some rough idea of how much of your raw material spend is in those three buckets crude-based, plant-based and animal-based?

Sure. I mean one thing I would say all of our raw material groups for the most part really have gone up. It's not just constrained to one area. They all have gone up. Tremendous pressure on that, put tremendous pressure on our supply chain costs freight, drums that kind of thing. So just the whole, everything is just kind of going up. And as far as – I don't have the precise numbers in front of me but certainly when you look at the key raw materials groupings that we buy between animal fats, vegetable fats and oils and the base oils that come out of crude, they definitely make up a good part of our raw material spend. There's also a whole host of other chemicals that get used in additive but pretty much across the board they all go up.

All right. And then, if I can sneak one more in here, looking at the primary metals business as compared to the metalworking business, it seems like metals is kind of lagging if I just look at the year-on-year growth rates for each of your segments. Is that typically what you would expect to see coming out of the cycle like this? Is that the metalworking business recovery is taking place more real-time and then it pulls steel and aluminum with it on more of a lag?

Not -- like last year I know we saw some pretty strong growth coming out like initially out of COVID as we were coming back in our metals business and there was more of a lag at that time in metalworking. And maybe this is just catching up or there's some -- but I don't think -- I don't quite -- when I think about our businesses, I don't quite think of it that way. I think all of them are pretty consistent have been showing good growth to what we see in the external markets for that -- these businesses.

All right. Thanks very much.

Thanks, Mike.

Your next question comes from the line of Laurence Alexander with Jefferies.

Good morning. It's Dan Rizzo on for Laurence. How everyone is doing?

Good morning Dan.

Good morning. So you mentioned -- obviously, we talked extensively about raw material costs. So I was just wondering, obviously, labor and shipping costs are also an issue. I was wondering to what extent and as important what is -- how difficult it is to pass on those costs? Because people expect costs to go higher, but I was just wondering with the others if that's more of a conversation with your customers.

It hasn't. It's not -- I would say the next biggest impact for us is besides raw material costs has been cost of drums I think freight and costs as well. So it's -- and those we consider really just the same kind of things as raw materials. So when we're having conversations with our customers around price increases we will include those in those conversations as well.

Okay. And then were there any temporary costs you took out this year in response to COVID that are coming back this year that we should kind of be cognizant of?

Well, certainly, we did a lot less travel last year Dan with COVID and the condition and so forth. So far and this year there hasn't been too much more of that kind of travel. In fact the comparisons we probably did more travel last first quarter of last year versus this year. So as this year progresses and we start to open up more that can happen, but you certainly still have a lot of places around the world that are pretty locked down right now in Brazil India and so forth. We're still locked down in the US and Europe a lot. And really the place that's kind of back at normal in some respects right now from that perspective is China. So overall, I would say as we trend through the year we will start to see some of that come back but certainly not to the levels that we had let's say had in 2019.

Okay. And then just final question. So, obviously, US and Europe are recovering. India is going through a terrible problem right now. I was wondering is that having an effect on your production in that region and to what extent?

So far we've been able -- between COVID-19 and the raw material shortage, it's really challenged us at times in our plants to meet our customer requirements, but so far we've been able to do that. We work very closely with our customers and we've been able to satisfy needs. So far we've been doing fine in that area.

Thank you very much.

Thanks, Dan.

Your next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Good morning. This is Brendan Popson on for Jon. Just want to ask real quick on you just alluded to it, but just the impact on your business from COVID in areas like Brazil and India.

Sure. It certainly has impacted us from the perspective of been challenging at times when some of our employees have come down with COVID. But it hasn't impacted us to the extent yet that we've not been able to perform and where we've shut down customers or missed -- had any kind of major issues that way.

Okay. Great. And then any update on the CEO search?

No, the search continues as planned. So we would expect that to be kind of concluded sometime as we get closer to the end of the year, but right now that search is ongoing.

Okay. Great. And then just last for me. Just how to think about your appetite for M&A today and the pipeline you're seeing out there?

Yes. Good question. We made two small acquisitions, one of the in December and one in February this year. We continue to look at smaller acquisitions. There's a number of them that are out there that we're looking at and evaluating. And we hope we would be able to complete some of that this year, but it's until some is done, it's hard to say. We've always said that from an M&A perspective, while we won't look at anything really large at this stage, because we want to get our debt levels down to the point that our net debt-to-EBITDA is going to be below the 2.5 times mark and we think that will be by the end of the year. So in the meantime between now and then we'll continue to look at these smaller ones and hopefully bring something out of there.

Okay. Thank you.

Thank you.

Your next question comes from Steve O'Hara with Sidoti. Please proceed with your question.

Hi. Good morning. Thanks for taking my question.

Good morning, Steve.

Good morning. Just going back to the, I guess, your customer inventory replenishment or kind of higher than expected purchases in the quarter, I mean, I can't recall but, I mean, were you guys talking about inventory replenishment and kind of the fact that you thought that your customer inventories were low at the end of the year last year?

No, we weren't.

Okay. I mean -- okay. So, I mean, if these inventories are being used to replenish supply chains down the line I could guess, I mean, is this something that could kind of keep rolling as that process takes time, or I mean, I guess, I'm just thinking that maybe that could keep orders maybe higher than kind of previously expected for longer if that's the case, but maybe I'm not thinking about it right.

Yes. I know you're asking and I think we have the same questions that you have. We don't have really great visibility on that because we don't -- sometimes there's a disconnect between, kind of, from what we see in external factors and what our customers are actually doing. But -- so it's hard for us to really say in this regard. It's certainly possible. And I that -- I would think for example in the US, I just see everything is just so tight right now from -- in the auto industry and the steel industry. It's -- that that should keep it longer but there's other places around the world that maybe there are some of the other stuff that's happened in the supply chain replenishment or so. It's just really hard for us to, kind of, get at that. But we think there's some there but we just don't know. We just don't know if it's a real material amount or not.

Okay. Okay. And then just, kind of, going back to the commentary about Q2. Was there -- maybe I missed it but in terms of the -- from a revenue standpoint, are you expecting a dip sequentially in revenue, or is it more in -- just in the operating income because of the cost pressures?

It's definitely going to be in the operating cost pressures. We think our volumes will be somewhat down from the first quarter. Again hard to predict after the reasons we just talked about. We are getting price increases as well. So our raw prices will be higher in the second quarter versus the first quarter. So that will be somewhat of a plus for revenue. But again our margins will be down because the costs keep escalating on a much higher rate. So hopefully that gives you at least the variables that we're talking about.

Yes. No, that's helpful. And then, I mean, throughout your pricing is it typically an indexed process where it's fairly visible to customers where you'd say this went up by this this went up by that and here's what it is to do and it's going to start the next day. Is it other industries kind of really push customers to accept these and it's more of a negotiation as opposed to a formula?

Sure. We definitely have some contracts with some major customers that are more index-based that adjusts every three months, for example, based on what's happening with raw materials. But I would say the majority of our business is really just negotiated pricing. And that's where -- when -- as raw materials go up we kind of continually have to have another conversation and say okay, I know we just went up in price recently, but we're going to have to go up in price again and here's why and this is what's happening to our various costs and make that case to it. So that's -- so the majority is what I would call the straight negotiation part.

Okay. And then -- sorry, last one. Assuming there was some inventory replenishment and that happened in the quarter, I mean how long does that typically buy a customer? I mean is there a -- is it kind of a three-month -- do they -- are they able to kind of store three months worth of product? And kind of assuming economic activity continues to improve globally, I mean is that -- I mean it seems like obviously you expect 2Q to be lower and then trend throughout the year. But I mean is there a way to think about the potential -- how long that could kind of depress volumes going forward if that was a big factor in the first quarter?

Yes. I mean most of our customers we ship very frequently. And it's kind of more just-in-time type of things can -- and so we generally don't find that our customers hold months worth of product. They generally hold a couple of weeks or a few weeks of product. So can they hold somewhat more? Yes. They could do that. But there could be for example they could be maybe producing higher amount of cars or whatever parts they're making of their own and storing their parts their products and inventory to try to replenish the supply chain. So that -- it's more probably that aspect as well that could be happening, but we just don't have perfect visibility to it.

Okay. Thanks for the time.

Thank you.

[Operator Instructions] Your next question is a follow-up from Mike Harrison with Seaport Global Securities. Please proceed with your question.

Hi. Just a couple more for me. First of all, the aerospace business, obviously, was impacted by the 737 MAX and then the sharp reduction in air travel. Any thoughts on the pace of recovery? It seems like the airlines are at least reporting that travel is starting to come back. Could aerospace be maybe a positive contributor as we start to lap some of the big declines from last year?

Yes. Good question. I mean certainly in the first quarter comparison to the first quarter last year were down. But as you said and things really bottomed down in a lot of ways in aerospace in the second and third quarter versus last year we are seeing more activity in aerospace on a sequential basis and so we are more encouraged around aerospace as we go through the year, let's say, the second quarter or so forth, third quarter versus those prior year comparison. So that will definitely be a positive. But we do feel it will be -- to me that's a great example of a sector that will be longer coming back to where we were to, let's say, 2019 type of levels. That will take a few years, I think, before we get back to those levels. But it is trending in the right direction right now. It will be a sequential positive for us.

All right. And then, over on -- within the canning business, it sounds like there's just tons of capacity coming on stream. Are you winning more than your fair share of that new business? And can you maybe talk about how much of a tailwind the canning industry could be for you in the quarters to come?

Can has been a good business for us through the -- one of the better performing businesses, as we run through the pandemic here. And as you mentioned, it's been really tight. I would just say, in general, that's a good example of the business that we have been over the past -- really two years probably, continue to take share in the marketplace. We've had a -- we've really grown the size of our can business, between combining what Quaker had as a can business, what Houghton had. And then with the Coral acquisition last year, it really strengthened our offering that we can make to customers and we have been picking up new pieces of business in can.

All right. And then, last one for me is on the Asia Pacific business. The pricing there, or price/mix I guess, looks like it was down about 4%, even as volume recovered very nicely year-on-year and looks like maybe even some sequential volume improvement. So what is driving that price lower or price/mix? And will we see that turn positive, as you guys put price increases in place to counter the raw material inflation?

Sure. So I would say, in general our -- we have lower prices. We have a lot of country mix in Asia Pacific with pricing for our different products. So sometimes when you look -- we kind of look at where India, what's really been having a tougher time certainly from the COVID perspective, but from an overall business perspective, it's been doing fine and I think that's been part of the mix issue we've had, because prices can tend to be lower there than maybe other places in Asia Pacific. So I view it more as a mix issue between countries, than I do -- really kind of anything happening, lower prices. And of course, we're getting price increases everywhere. So it really is more of that mix issue.

And should we expect that to turn positive then later in the year?

So, from a pricing perspective, I would -- it really depends upon the mix of our businesses. Again, I think, in general, I think, pricing aspects of revenue should -- we should see sequential improvement in that going quarter-over-quarter. Yet, when you look at some of the gross margins, we'll definitely be more negatively impacted in the second quarter, just because raw materials have been outstripping that.

All right. Understood. Thanks very much.

Thank you, Mike.

Your next question is a follow-up from Steve O'Hara with Sidoti. Please proceed with your question.

Hi. Thanks for taking the follow up. Maybe, just curious, if you could talk about possible impacts from any infrastructure bill that might go through or how you think about that, either from direct or through your customers' businesses?

We would think it be a positive. We don't have a way of quantifying that at this point. But certainly when there's a lot of more industrial activity happening, it should translate into a positive for us.

Okay. And is there -- in terms of maybe -- I mean, the last kind of proposal I think was much smaller. But I mean, do you have any idea of maybe what any boost you saw last time? And then, obviously, the sizes are much different, but I was just kind of curious if there's any recollection from last time.

Yes. It will help us, but I don't think it is something as a major event. It really depends, I guess, the magnitude, as you mentioned. Again, what's really going to help us more is if people buy more cars and there's just more type of metal type of products that are being sold. So it's hard for us to really quantify it at this stage.

Okay. All right. Thanks. Appreciate the color.

Thanks, Steve

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Michael Barry for closing remarks.

Okay. Given there are no other questions, we will end the conference call now. And I'm going to thank all of you for your interest today. Our next conference call for the second quarter will be in late July or early August. And if you have any questions in the meantime, please feel free to contact Shane or myself. Thanks again for your interest in Quaker Houghton.

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.