Greetings, and welcome to Quaker Houghton first quarter 2022 Earnings Conference Call. A brief question and answer session will follow the formal presence presentation. [Operator Instructions] As a reminder this conference is being recorded, I'd now like to turn the call over to Jeffery Snow, Senior Director of Investor Relations. Mr. Schnell, you may begin.

Thank you, [Indiscernible]. Good morning, everyone. Welcome to Quaker Houghton first quarter 2022 Earnings Conference Call. Joining us today are Andy Tometich, our Chief Executive Officer and president. 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 May 5th, 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 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. This presentation also contains certain non-GAAP financial measures. The company has provided reconciliations to the most directly comparable GAAP financial measures in the appendix of the presentation materials, which are available on our website. For more 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. Quaker Houghton delivered first quarter results that were in line with our expectations, despite another quarter with an extremely challenging backdrop, we delivered record net sales and growth of approximately 10% compared to the first quarter of 2021. This was driven by strong price capture aimed at mitigating the significant inflationary pressures on our margins. In the quarter, we expanded our portfolio of leading technical capabilities through 2 small acquisitions. We also invested in productivity initiatives. And we remained focused on providing best in class products and solutions to better serve our customers. In the first quarter of 2022, we achieved $474 million of net sales. Adjusted EBITDA of approximately $60 million and adjusted diluted earnings per share of $1.42. Results in the quarter can be characterized by strong revenue growth, fueled by significant pricing actions, and broadly favorable demand environment. But we were challenged by a high degree of uncertainty caused by inconsistent raw material availability, persistent and significant inflationary pressures, and ongoing supply chain disruptions that limited our ability to capitalize on additional growth opportunities. This was further amplified by geopolitical events that posed even greater challenges. Nonetheless, the team executed well and despite the degree of the cost headwinds that we faced, we delivered stable gross margins compared to the prior quarter. Our revenue increased 10% compared to the prior-year period with price lead growth in all of our segments. And while selling price and product mix increased 17% compared to the prior year, organic volumes declined. This was in line with our expectations and was primarily attributable to the difficult comparison to a very strong first quarter of 2021. Sequentially, the company's organic sales volume increased approximately 3% as continued new business winds were partially offset by sequentially lower…

Thanks, Andy. And good morning, everyone. First quarter net sales were 474 million, which increased 10% compared to the prior year, and marked another record sales quarter for our company. The increase in sales was driven by a 17% increase in price and mix and 2% growth from acquisitions, which was slightly offset by a 6% decline in organic sales volumes and a 3% unfavorable impact from foreign exchange. Consistent with recent quarters, we experienced strong increases in net sales, which was directly related to our strategic price initiatives that Amy discussed. These were implemented across all of our businesses in response to the significant global raw material increases that began last year and have continued into this year. The decline in sales volumes was attributable to several factors. Most significant was the difficult comparison to a strong double digit growth in the first quarter of 2021 as customers replenished their supply chains due to the continued economic recovery from COVID-19. These high prior year volumes were primarily seem the automotive markets ahead of the well publicized semiconductor chip shortage. And also, China was stronger last year due to higher production levels as they had limited Lunar New Year shutdowns due to travel restrictions. Comparatively, China production was reduced in the current quarter by power restrictions and shutdowns around t Olympics. Overall, we estimate about half of the 6% decline in our volumes year-over-year was attributable to these items. Additionally, our volumes decreased due to reduction in totaling related to the products that we previously divested as part of the combination as we spoke about in the fourth quarter. This accounted for approximately 2% of the volume decline. Furthermore, we faced our other global economic impacts that reduced our volumes, including the zero COVID policy in China and the war…

Thank you, Shane. Before we turn the call over for your questions, I want to take a moment to highlight once again that our people are the backbone of the company. I want to extend my gratitude to all of our global colleagues that are focused on executing our goals. We appreciate your continued dedication to our company, our customers, and our success. With that, we'd be happy to address your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instruction]. One moment, please, while we poll for questions. Our first question is from David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. Andy --

Good morning, David.

Thank you, guys. Just on China, is your guidance assuming these lockdowns persists through the entirety of the quarter or that they do end at some point during the quarter?

I think -- David, thanks for the question. I think the one thing that certain is that there's uncertainty in China at the moment. It's still evolving. It's our best estimation of the overall impact for the quarter. But we're going to continue to monitor it. So we believe that's the full quarter impact.

Got it. And just on price versus raws, were you -- I know you exited at a neutral basis. We'd behind for the entirety of quarter, and Q2, do you expect pricing to offset raws for the quarter? Thank you.

Yeah. So we will continue to use our strategy of recovering all the costs of raw materials through our pricing actions that has not changed. We continue to do that through the second quarter. But as we highlighted, we're also going to be exiting the quarter with some additional pricing increased actions to attempt to get in front of inflationary pressures to start to improve that raw material margin going forward.

Thank you.

Thank you. Our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi, good morning. It's Pete Lucas for John, just a couple of quick questions. First on the bigger front, how should we think about your appetite for larger M&A today, given the slight sequential increase in leverage and rising interest rate environment?

Yeah, maybe thanks for the question and I'll start and maybe Shane will add a bit. We continue to apply our capital allocation strategy. We feel like we're in a good position to be able to do that acquisitions along with dividend and debt down payment are critical aspects of that. We have a portfolio that ranges from small to medium to large sized deals. And we believe we're in a position to be able to execute on any of those when the moment is right.

And just for your latter point around our leverage, we were anticipating an outlook in cash flow perspective given the working capital constraints as well as our first quarter tends to be the seasonally lowest quarter from a cash flow perspective. We anticipate paying down debt this year and still believe our leverage in our overall profiles on a capital side is very healthy.

Great, thanks. And then just a follow up on the cash flow, I think you touched on it and I apologize if I missed it but I think you said remain elevated in 2022. Do we see that normalize going forward or do you still expect to grow working capital to support sales and maybe, I think you did mention also adding to safety stock?

Sure. It's a great question. I compared it to last year, right? And last year, as you might remember, we had a pretty significant working capital outflow and that really depressed some of our operating cash flow. What I said was we did have some working capital investments this quarter, anticipate further working capital investment given the rising raw material costs as well as pricing side of that but not in the level of last year and I anticipate still strong operating cash flow in the given year.

Great. Thanks. I'll jump back in the queue.

Thanks you.

Thank Pete.

Thank you. Our next question is from Mike Harrison with Seaport Research. Please proceed with your question

Hi, good morning.

Good morning Mike.

Good morning Mike.

Wanted to ask what you guys are seeing on the raw material front. Obviously, if you can give some color on how you're seeing those costs trend compared to the 40% year-on-year increase that you saw in the first quarter. And it sounds like you guys are still experiencing some issues with availability of some of your key inputs you referenced building safety stock, but also referenced that your volumes could have been better if you had gotten all the materials you need. Maybe just comment as well on the availability issue and whether that's improving.

Sure. Thanks, Mike. Great question. I think what we have seen is a continuation of the trend on raw material increases. There was some belief that there was a path towards that starting to decline in the increase rates into 2022. I think we've not seen that occur. It's been exacerbated by the uncertainty with the Ukraine war, as well as the situation in China. We're still seeing raw materials continuing to increase, which is why we're still moving forward with our pricing actions and as I mentioned, trying to get in front of some of the inflationary impacts as we move forward through the quarter. As far as availability goes, I think we indicated we feel like we may be missed on about 1% to 2% of sales on an opportunity basis if we would have had a few more key raw materials. It was really in targeted areas. I don't believe that that's going to be a long-term impact, but the supply chains have continued to be volatile and these are the situations that we continue to deal with.

Just to add to what Andy to said Mike and you were looking to kind of have a little bit guidance on raw materials as we look to the rest of the year. Just if you look at what we did in the first quarter, we mentioned that our raw materials increased over 5%. If I looked at the second quarter, we believe it's going to be at least that as well. So that gives you a barometer, so to speak, of what we're looking at and to go into the second quarter.

Alright. Thank you. That's helpful. And then -- was also hoping you could talk a little bit about these productivity initiatives that you referenced. I believe it sounds like maybe this is a new set of initiatives. Maybe you can talk about the costs associated with those initiatives and what benefits you expect to see and when?

Yeah. I'll start, and Shane, if you want to add anything. But this is part of overall strategically how we can temper rise the business and continue to refresh our customer intimate model, which is still the key to our growth in our differentiation. That's why customers buy from us and we're going to continue that. But as we look forward on new ways to be able to contemporize our business and increase the productivity in the way we provide that intimacy, the way we produced materials, thinking about our network and where we can optimize and maybe add some capabilities from a CAPEX standpoint. So that we can take advantage of some of the growth in those areas that are under served by us now, those are the areas where we think we're going to get additional productivity as well as growth from the investments we're making.

And Mike, you might have remembered in the fourth quarter, we did talk a little bit about these initiatives and we anticipated higher operating spend related to such, mainly in the R&D, IT, and sustainability areas. From a number of perspective and numerics side, we did not give guidance on that side of things, but just wanted to note that they will be going forward.

All right. Thanks. And just wanted to see if I could get a little bit more precision on the gross margin guidance. If we just go ahead and say that the first quarter was 31% gross margin number. You're guiding that the Q2 is going to be down and then improvement in the second half. And I was wondering if that improvement compared to the below 31% level that you expect in Q2, is that improvements on a year-over-year basis where last Q3 was a little bit over 32%? Again, I understand you don't want to give a lot of precision, because there's a lot of uncertainty out there. But any additional color would be very helpful for us.

Yes. Thanks, Mike. Yeah. As we look and try to paint that picture, you probably -- you nailed it pretty much on the head with below or right around 31% in Q1. We talked a little bit about it declining in Q2, mainly due to the China impact on our overall margins, whether that be fixed cost absorption, whether that be the fact that we're not getting the volumes on some of our pricing initiatives coming through or for the matter, simply that China tends to be higher gross margins. As I look to then Q3 on a sequential basis, we were building that and guiding that. We have putting -- we're going to be putting in place aggressive price actions to really try to recover to pre-pandemic levels from a margin perspective in Q2. So we see in Q3 a growth in our margins on that side. So sequentially will be an easier answer to you to -- to your question, Mike.

Alright, thanks very much.

Thanks, Mike.

Thank you. Our next question is from Laurence Alexander with Jefferies, please proceed with your question.

Hi, guys. It's Dan Rizwan in place of Laurence. How are you?

Hi, Dan.

Hi, Dan.

So with the pricing -- I mean, how much of your pricing is automatic pass through based on contracts versus negotiated.

Yeah. So I think we've indicated before about 25% of our business is tied to contractual indices. And so those tend to have a lag of approximately 30 to 60 days depending upon the specific deal. So 75% of our businesses is continuously negotiated. That's the activity where our primary pricing actions have been focused. And that will continue as we go forward.

And then -- So, I mean, I know we are where we are now, but when places do start to ease, how does it work? I mean, given that 75% is negotiated, will we be able to, I guess, hold onto a portion a bit longer as things go down, or how should we think about it just down the future?

Dan great question. I think that's one of the beauty -- beauties of our customer intimate model and the fact that we value price. So just like there's sometimes a bit of a lag for us to move with inflationary costs and pass that through, it also provides some stickiness as we go forward because we price based upon value. We've proven that in multiple cycles and we've proven in the current cycle, even with increasing prices that we're gaining new business. So I think our model reinforces that we do truly add value and that that stickiness of that price overhang with raw material start to roll it's something we're going to look forward to.

Okay. And then finally, you mentioned 2% growth from new business wins but left some on the table because of supply chain and logistics constraints. So, just to reiterate, this is something you said in the past, generally, you'll do 3% to 4% growth above market from new business wins as we look out over the next few years, correct?

Yeah, that's consistent and really I think what we were highlighting is the current issue with a few raw material availability, supply chain issues. The point being, if we had had those we would've been right in that spot that we've been communicating all the time.

One thing I would just add to that, Dan, though, and I really want to emphasize is, we had a strong performance from net new business wins of 2% because that was despite some strategic volumes from a pricing action perspective. So if you look going forward, we will be further emphasizing our emphasis on strategic pricing which may result in some of those volume declines. But we do feel very good on the net new business wins still but it may be a little bit lower than the traditional side of things.

All right, thank you very much.

Mr. Tometich --

Thank you, Dan.

-- there are no further questions at this time. I would like to turn the floor back over to Andy Tometich for closing comments.

Well, thank you very much. I'll just end with the future of Quaker Houghton is bright and we are committed to executing and delivering sustainable, long-term value for our shareholders. And I really want to thank you for your interest in Quaker Houghton and please do reach out to Jeff with any follow-up questions. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.