Greetings, and welcome to Quaker Houghton Fourth Quarter and Full Year 2024 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Jeffrey Schnell, Vice President, Investor Relations. Mr. Schnell, you may begin.

Thank you. Good morning. And welcome to our fourth quarter and full year 2024 earnings conference call. On the call today are Joe Berquist, our President and Chief Executive Officer; Tom Coler, our Executive Vice President and Chief Financial Officer; and Robert Traub, our General Counsel. Our comments relate to the financial information released after the close of US markets yesterday, February 24, 2025. Our press release and accompanying slides can be found on our Investor Relations Web site. 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. This presentation 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 measure in the appendix of the presentation materials, which are available on our Web site. For additional information, please refer to our filings with the SEC. Now it's my pleasure to hand the call over to Joe.

Thank you, Jeff. And I'd like to welcome everyone to Quaker Houghton's fourth quarter and full year 2024 earnings call. Quaker Houghton enters 2025 in a strong position. We made progress on our enterprise strategy last year despite some contraction across our end markets and regions. Our team delivered a solid performance due to the strength of our portfolio and our focused commitment to improve our customers' operations and productivity. We also continued to manage items within our control. We further improved our margin profile and generated strong operating cash flow. We have the right long term strategy, which will build our competitive advantage and drive value for our shareholders. I will say a few words about the quarter and provide comments about my vision for the path forward and the outlook for 2025. Then I will hand the call over to Tom to discuss our financials in more detail. Fourth quarter net sales were $444 million, 5% below the prior year or 3% lower on a constant currency basis. I'd like to highlight that while market conditions were persistently soft throughout the entirety of 2024, our ability to gain new pieces of business continued to contribute to our positive performance. Our volumes in the fourth quarter were consistent with the prior year due to market share gains despite an estimated low to mid single digit decline in the aggregate end markets we serve. We continue to outperform these difficult end markets. For the past nine quarters, volumes have been stable on both a year-over-year and sequential basis due to the strength of our business model and net new business wins, which continue to trend within our targeted 2% to 4% range on a global basis. We feel good about our ability to continue to consistently deliver above market performance…

Thank you, Joe. And good morning, everyone. Fourth quarter net sales were $444 million, a decline of approximately 5% from the prior year or 3% on a constant currency basis. Selling price and product mix was approximately 4% lower, primarily reflecting the impact of our index based contracts and mix of products and services. Organic sales volumes were approximately 1% lower but were more than offset by a contribution from acquisitions of approximately 2%. Foreign exchange had a 2% unfavorable impact to net sales in the quarter. End market conditions were persistently soft in 2024. In the fourth quarter, underlying conditions weakened further, especially in the Americas and EMEA segments. New business wins across all segments, especially in Asia Pacific were the primary driver to the stability in our organic sales volumes on a year-over-year and sequential basis despite the challenging market conditions. Lower selling price and product mix was due to the wrap effect of index based contracts and the mix of products and services, which primarily reflects lower service related revenue as customers balance their operations to the external environment, particularly in EMEA. Gross margins in the fourth quarter were 35.2%. There were several factors that occurred in the fourth quarter, impacting margins, including manufacturing absorption on lower volumes and the impact of higher raw material costs in our Asia Pacific and EMEA businesses. Mix also impacted margins. As expected, we had lower sales into aerospace applications and experienced reduced production levels and customer downtime in the fourth quarter. These secondary items have largely resolved themselves in January. Excluding onetime items, SG&A decreased $4 million or 4% compared to the prior year and $2 million or 2% sequentially. The decrease reflects our cost management efforts, partially offset by costs onboarded related to our acquisitions in 2024. SG&A declined…

Thank you, Tom. I am humbled to lead this incredible organization. My leadership team and I are united around transforming Quaker Houghton, recentering the organization around the customer and returning to growth. We will advance our strategy and efficiently deploy capital to unlock our full potential. I know our success is built on the foundation of our people and I'm confident that we have the best talent in our industry to take the company forward. With that, we'd be happy to take your questions.

[Operator Instructions] Our first question is from Mike Harrison with Seaport Research Partners.

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?

I would say it's in the right ZIP code 37, 38. Those are pretty historically highs from where that margin has been, definitely saw mix factors and absorption in the fourth quarter. As you mentioned, we think in the first quarter that margin is coming back into that range, that same ZIP code of where we were last year. I think over the long term we're in competitive markets. We do put an emphasis on growth, profitable growth. And I think there's an opportunity here as we continue to get back to growth and get back to more historical volume levels, start looking at our EBITDA margins. And what we're really driving for there is getting to EBITDA margins into the high teens and eventually to the sort of 20% level. So that range you talked about, things may flex a little above or a little below at times. We have a lag in our pricing get -- we can go and get pricing but it takes time to do that. But I think that's the right ZIP code, Mike, as you think about the long term. And then we're doing things internally looking at our network, global procurement, some initiatives around there to improve our raw material buying position and just simplifying processes internally to become more efficient. So that's the right target range. I think that's in the right ZIP code for us.

And then in terms of kind of refocusing the business on growth. It really seems like Asia Pacific is kind of the bright spot for you. And you mentioned the strength that you're seeing or the faster growing opportunities you're seeing in places like India, Southeast Asia. Maybe talk a little bit more about what's going right in Asia Pacific and maybe how you start to transfer some of that success over to your other regions? Maybe help us understand what opportunities or obstacles you might see in the Americas or EMEA as you think about starting to grow a little bit faster?

We are very happy with the performance in Asia Pacific last year. And really what's driving that is new business wins. Those markets themselves have also been challenged. I think they faced some headwinds in the second quarter last year, things started to slow down a little bit. But we really did a good job winning back customers that we lost to that '22, '23 sort of pricing cycle. We've also been very successful in gaining new metals business. So whether that's in steel or aluminum, we're getting some traction with the new winners in battery electric vehicles. And China has changed a lot. There are some new suppliers there, whether they're OEMs or component suppliers and I think we've shifted our focus to make sure that we're able to grow with them. You mentioned India. I mean, India is a market between, say 2020 and 2030, maybe goes to 2035 but the manufacturing production in that country is expected to double, and we're very well positioned there. We are winning new mills and new lines in that region as well. I think translating those wins back over to Europe and the Americas, I would say a couple of things in 2024, things definitely got worse last year. We didn't think they could get much worse in Europe but they did. We feel that perhaps we're at a trough in that part of the world right now. And the other thing that was unexpected was North America really took a turn in the second half of the year. We saw a lot of capacity that idled and even in the automotive space some stuff that was absolutely running on a lower operating rate. Despite that, I think we are seeing similar share gain in those markets. I mentioned as I was talking through earlier, food intelligence. I think that's an enabler for us right now. We are -- as new mills are being built and there are some new mills coming online globally but even in the US, we're offering an equipment solution to help get that first fill and also support our service capabilities on those mills. So it's a mix of different things, Mike, making sure that we're focusing on the customer that we're enabling our people to make it easier for our customers to do business with us, all those things stacking up, I think, will help us get back on that growth trajectory in these other more challenging regions outside of Asia Pacific.

And then last question for me is just you said you expect to show revenue and EBITDA growth in 2025. I was hoping that you could talk about some of the underlying macro assumptions that play into that forecast, maybe some of the puts and takes around areas like FX. I don't know if there's an incentive comp rebuild baked into next year. What your expectations are on price cost that would kind of help us bridge to a year-over-year growth, obviously, $15 million worth of savings from restructuring would be beneficial? But any other details there would be helpful.

I'll let Tom fill in the gaps on FX and sort of incentive comp rebuild. But look, the markets we're in are uncertain. So we're committed to controlling what we can control. And I think we do feel really good about our ability to continue to win new business and reduce our churn. So the net new business gains into the cycle we feel pretty confident about. We have a healthy pipeline there. We do expect the markets that we're in to gradually improve. And I think one of the things when you look at '25 versus '24, this feeling that the second half of 2024 was a trough that gives us a favorable comp heading into next year. Overall market performance, we are anticipating markets will grow 1% to 2%. This is after a period of decline. So even stability, I think we would view as is very positive. What's giving us confidence around market growth, I mean there are some drivers like there's just new production coming online. There are things, as I mentioned, there was capacity that was taken offline as our customers manage their inventory in the second half of last year. So all of those things kind of give us confidence with our gross margins expected to be comparable to 2024 full year with the $20 million of cost on a run rate $15 million in year that should cover investments in growth and normal inflationary aspects. Net-net, as you mentioned, we expect to grow our revenue, we expect to grow EBITDA and earnings next year. And I think over the long term, our model, our algorithm there is we're in markets that will grow over the long term, 1% to 3%. We plan to continue to take net new business wins above that 2% to 4%. And we haven't really talked about M&A but I think the two deals we did in 2024 and the one we just did recently here in the first quarter are evidence that we're active in the inorganic space and we have a pipeline that we're working there that we hope will accelerate our growth as we go forward. So you don't know what you don't know. But at this point of the year, Mike, those are the assumptions that we're baking into our outlook.

Just a little bit more impact or input relative to FX. So we're viewing FX is likely to be a headwind for us in 2025. In terms of how we're thinking about it for our 2025 outlook, we took a hybrid approach, so a combination of current spot rate but with all the current market volatility, we also did look at the forward curve and so took a view sort of bringing those two pieces together at current spot and forward. In general, we're estimating it to be a low single digit percent impact to sales in 2025.

Our next question is from David Begleiter with Deutsche Bank.

Joe, what are your expectations for raw materials in 2025?

David, we're really expecting some stability in raw materials. We're not really anticipating volatility one way or another. Now there were some things that we had hit us in the fourth quarter, primarily in Asia and Europe. But as we head into 2025, we're expecting raw materials to stabilize at this point.

And just on your Americas volumes, how would you expect them to trend in '25? Would it be -- would a decline in the first half followed by growth in the second half to be consistent with what you're thinking?

I mean, I think sequentially, we're going to see improvement from fourth quarter to first quarter. And I do think as we go through the year, the overall conditions will get better. Probably the first quarter will be our lowest quarter, David. Traditionally, second, third quarter, things do get better and then you have your normal seasonal pattern. But by that point, if we get to -- when we get to fourth quarter of this year, we expect to have a lot of the new business wins also as a tailwind to the business.

And last, Joe, you mentioned some new capacity coming on. Is that mostly in Asia that you referenced?

Actually, it's not. I would say that there's new capacity in Asia, across Asia. So that would be China, India, even Southeast Asia. There's also some new capacity coming online in the US.

Our next question is from Laurence Alexander with Jefferies.

Just one quick follow-on. You mentioned in the remarks sort of secondary elements that dropped out. So does -- start in January. So is Q1 running above or below kind of how you see the overall year? Because my impression is like the easy comps really kick in, in the back half of the year.

Yes, I think as Joe mentioned, I think we have seen some of those gross margin impacts resolved here as we move into Q1. We are anticipating that the year will build as we go. So we anticipate Q1 will be our lower quarter, notwithstanding seasonal impacts in Q4, our lower quarter and will build through Q2 and Q3, which are seasonally our strongest period throughout the year.

Our next question is from Jon Tanwanteng with CJS Securities.

My first one is 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?

I think the 2% to 4% is still the right number, Jon. We expect to be and have been, I think, on the higher end, mid to high of that 2% to 4% in the face of the markets we're in. But stability and even slight growth in our markets we'll be able to see that a little bit better in the results as we go forward. And then execution of M&A is another thing to get us back to that sort of mid single digit, high single digit growth algorithm that we want to get on. There's a lot of things that we had to do internally that were very helpful for us to build out scale in critical functional support areas and to drive out costs, and there's actually still more work that can be done there. But we're really focused on making it easier for customers to do business with us. Some of those areas would be our branding. We still have some of the legacy brands from acquisitions we made, optimizing our channels, having services that make it, again, easier for customers to deal with us, looking at our portfolio and rationalizing that, that has both an external and an internal benefit and making sure that we have the right coverage out in the field. So all of these types of things, focusing our R&D around food intelligence and sort of breakthrough innovation that we're trying to achieve there, all of those things, we think, will help us maintain for several years going forward, hopefully, that 2% to 4% growth that we want to achieve.

And then could you -- Tom, maybe if you could take this one, just in the savings plan that you have detailed, how much of that comes out of COGS versus SG&A? And where do you think SG&A will end up this year, maybe relative to growth or is an absolute number?

Largely, our cost savings initiatives are targeting SG&A as we think about refocusing around customer intimacy and driving value for our customers. So we are continuing to look at opportunities to optimize our manufacturing network, particularly in EMEA, as I mentioned in our prepared remarks. In terms of overall SG&A, with the cost savings initiatives, we're anticipating SG&A to be flat to modestly up in 2025 as we've got compensation rebuild and some of those things. And again, we also are balancing the short term market dynamics that we're in versus our long term focus on making prudent investments to drive growth and enhance value for our customers.

If I could squeeze one more in. Just could you talk a little bit more about CSI and what that adds to the portfolio, number one? And if, two, there's a bias towards M&A or more share repurchases as you go forward and your debt continues to -- your leverage continues to fall?

So CSI is a business in South Africa with a few different locations down there. They serve the metalworking and metals businesses, and they also have some capabilities, what we call around operating solutions and advanced solutions. So it helps us fill out our portfolio down there. It gives us some better logistics and certainly, we want to grow in that part of the world as well. We have seen things in Africa across the continent, especially in the eastern part of Africa. New mills coming online whether they're pipe mills or construction for metals. So over the next 10, 20 years, I think consumption of metal and industrialization of that part of the world will continue, and the position with CSI in South Africa will help us serve really that part of Africa but also other parts of Africa. The second part of your question around capital allocation. I think the -- still the priority, I think what we see is the best way to enhance or increase shareholder value is investing in the business. So that would include M&A, also investing in our organic growth, making prudent investments there. And as you mentioned, funding those investments through reallocating other parts of our business. We paid a dividend continuously since 1972. We'll continue to do that. But M&A is really the best lever for us. As far as share repurchases, we did do a fair amount last year, $49 million of share repurchases. We have $100 million plus still available to do that. And if the opportunity presents itself, we wouldn't hesitate to do that again but we would balance that against all these different levers that are in the model.

[Operator Instructions] Our next question is from Arun Viswanathan with RBC Capital Markets.

First off, 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?

I mean I would say right now, we're not really actively in the market trying to increase prices unless we have to. And there are some raw materials that have increased and where that happens, we'll go and do it. There's also a natural flow with our business where we have things on index. So as raw materials kind of came down from these historic highs, we've seen some deflation there just naturally as our index contracts adjust. But overall, for next year, we're anticipating stability in the raw material space. And overall, I think the mix issues that we had in the fourth quarter should work themselves out as we head into Q1.

And then I understand that the objectives are to refocus the company on the customer and maybe that would help drive a little bit more volume. Could you just flesh that out a little bit? Would that require maybe some different CapEx levels or where you expect CapEx to go capacity additions or conversely, would it actually require maybe shutting down some noncore areas of focus and refocusing the business on India, as you noted? What are some of the specifics that you're thinking about around that strategy?

As far as CapEx goes, I mean, one of the things that we talk about making it easier for customers to do business with us, we've been adding things to our portfolio to expand that wallet that we have or that basket of products that we can sell to customers. In some cases, our production capabilities for those are generally regional, right? Like an example there would be we have ability to manufacture greases, specialty greases in the US and Europe but not really other parts of the world. So we're making some investments right now in China in building a new plant there. So there is some CapEx that is involved with that. I think the other part of this, Arun, is on the -- just sort of the regular organic or non-CapEx investments, it's making sure that we're shifting our resources around and deploying them to the point -- tip of the spear where we can grow. And that might mean that we have to increase investments in some parts, some geographies, like you mentioned, India and other parts of Asia and pull back as we have been in places like Europe as we readjust to the new realities there.

And then specifically on CapEx plan for 2025, we are an asset light business and typically target CapEx as a percent of sales in that 1.5% to 2.5% range. I would say, on a normalized basis in 2025 that's still our go forward plan. We do have a couple of items specific to 2025 that are pushing that CapEx up to 2.5% to 3.5% of sales. One is the further build out of our new China facility and then the second is we are consolidating our footprint in the Philadelphia area. We have a couple of R&D laboratories that we're bringing together along with a new administrative corporate facilities. So absent those two items, we're in that normalized range but we're a little higher in 2025 because of those specific items.

And then just lastly, if I may, just on the volume front, I know Europe has been challenging. But it does appear that some of your end markets also continue to be challenged, especially as you noted in North America as well. Is it mainly just industrial production that is going to drive a little bit better volume environment or is there anything else that we should keep in mind?

Well, I mean, look, there's some different factors, but the thing that drives our business is that industrial production, things like interest rates have an impact on it, for sure. Consumer sentiment, buying all those things. But we have a pretty diversified portfolio when you think about even if we're heavier like on metals, for instance, aluminum goes into beverage containers, it also goes into automotive and aerospace. Steel goes into construction and also visit to cars. So there's a lot of different things that drive it but I think it's really that industrial base that you would look to as you look to the environment that we operate in.

With no further questions in the queue, I would like to turn the conference back over to Joe for closing remarks.

Yes. Thanks. We really appreciate your continued interest in Quaker Houghton. And if you have any other questions, feel free to reach out to Jeff or myself and look forward to speaking to you again soon. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.