Quaker Houghton

Greetings and welcome to the Quaker-Hawton fourth quarter and full year 2020 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Chairman, CEO, and President Michael Barrett. Michael, you may begin.

Good morning, everyone. Joining me today are Mary Hall, our CFO, Robert Traub, our general counsel, and Shane Hostetter, our head of finance and chief accounting officer. 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 31 plants around the world are operating and we are continuing to meet our customers' needs. I am very proud of what the Quaker Houghton team has done to continue to service our customers as well as continue our integration. We were pleased with our results for the fourth quarter. Overall, our sales were sequentially up 5%, with all regions or segments showing revenue growth, which was primarily being driven by higher volumes as our businesses continued to come back from the negative impact that COVID-19 had on our end markets. The sequential increase was strongest for us in EMEA, as we saw an increase in sales of 13% compared to the third quarter. I think it is interesting to look at our revenue changes from the fourth quarter of 2019, which was pre-COVID, of course. Overall, our sales were down only 1% and our volumes were relatively flat. But there was a difference when looking at this by region or segment. The only area that showed an increase in volume sold was Asia Pacific, which had an increase of 8% versus prior year, primarily being driven by higher sales in China and India. EMEA was relatively flat on volumes, mainly due to the fourth quarter of 19 being an unusually weak quarter. Americas was down 2% of volumes, primarily due to our end market still being impacted by COVID. And our global specialty business volumes were down 9%, primarily driven by lower aerospace mask and sales. I also want to point out that our ability to gain new pieces of business and take market share contributed significantly to our performance as our analysis shows that we had total organic sales growth due to net share gains of approximately 4% in the fourth quarter of 20 versus the fourth quarter of 19. So while we were overall relatively flat in our volumes, the 4% net share gains made a big difference, as did our Asia-Pacific growth, helping to offset the negative COVID impact on our end markets. I am very pleased to see the continued improvement from last quarter, but we're certainly not all the way back. As we said previously, we estimate we'll take approximately two more years for our end markets to fully return, and some markets like aerospace, which makes up about 3% of our sales, may take up more time than that. However, we expect our sales to rebound more quickly due to our projected continued market share gains, as well as making acquisitions, which I'll now talk more about. As you may have noticed since our last conference call, we did make two small bolt-on acquisitions. The first was a private company called Quorl Chemical, based in the U.S., that we purchased in mid-December for $53 million net of cash acquired. Quorl provides technical expertise and product solutions for pretreatment, metalworking, and waste treatment applications to the beverage can and general industrial end markets. Coral had approximately $37 million in net sales and approximately $5.5 million of adjusted EBITDA in 2020. For this acquisition, we also expect to achieve annualized synergies of approximately $3 million over the next two years. Also in February, we bought assets related to templating solutions, primarily for the steel and markets, for $25 million, which will add full-year net sales of approximately $8 million and and approximately $4 million of full-year adjusted EBITDA going forward. So we are pleased with these strategic additions to our product portfolio, which we estimate will add about $11 million of EBITDA in 2021, which equates to an approximate seven times EBITDA multiple purchase price for the combination of these two acquisitions. So overall, we were pleased with the quarter given the environment we were operating in, and we saw good sequential improvement in our sales and adjusted EBITDA. Synergy achievement also was a factor in our results as we achieved $18 million in this quarter compared to $5 million in the fourth quarter of last year. In addition, our strong operating cash flow of $66 million in the quarter allowed us to reduce our net debt by another $24 million for the full year, And for the full year, we reduced debt by about 12%, in addition to making the Coral acquisition. The positive cash flow nature of our business during severe downturns is something we have discussed with investors in the past, and we have seen this positive impact again over the past year. In reflecting upon the full year, the past 12 months have been challenging due to COVID-19, but I'm very pleased with our overall performance. Over the past year, we continue to service and supply our customers despite difficult economic conditions. We continue to gain share in our markets, and we completed a significant part of our integration activities, and we were able to realize $58 million of cost synergies, which exceeded our previous estimate of $35 million. We also made these two additional bolt-on acquisitions, which will add approximately $11 million to our adjusted EBITDA in 2021, And even with those acquisitions, we were able to reduce our debt by 12% or $94 million. So in short, we are delivering on the powerful benefits that we anticipated for our combination of talent. As we look forward to 2021, we expect some short-term headwinds from higher raw material costs and lower than expected volumes to the automotive market due to the semiconductor shortage. Hopefully, these are just timing issues and will impact mainly the first half of the year. Despite these short-term headwinds, we feel positive about 2021 and continue to expect a step change in our profitability with over a 20 percent increase in our adjusted EBITDA from 2020 as we complete our integration cost synergies, continue to take further share in the marketplace, benefit from a projected gradual rebound in demand in our end markets, and see the positive impact of our recent acquisitions. As you may have read in our press release, I've announced that I will retire from my role as CEO at the end of the year, but I will continue in my role as chairman of the board. As we mentioned in the press release, the board is committed to a strong orderly process and transition with a comprehensive search that will include internal and external candidates. As far as the timing and why I made this decision now, I really wanted Quaker Houghton to be in a strong position when we made this transition, and we are. This year, we will take a step change in our profitability. We will essentially complete our integration, and we will pay down more debt and reach our targeted leverage ratio. We have the right strategy in place, a strong management team, tremendous people throughout the whole organization, and strong opportunities for above-market growth in our businesses for the foreseeable future. So to me, our future is very bright, and this is the right time to make this transition. And I look forward to continuing to be involved in the company's bright future as chairman of the board following my retirement. In closing, I want to thank all of our colleagues at Quaker Houghton, whose dedication and expertise helps to create value for our customers and shareholders and differentiate us in the marketplace. I am so proud of how our team has performed in servicing our customers, meeting their needs, and successfully continuing with our integration execution, which was both critical and difficult for us this past year. People are everything in our business, and by far our most valuable asset, ensuring their safety and well-being is and will continue to be a top priority for us. I am proud of and very happy with our Quaker Houghton team, and what we have and will be able to accomplish for our customers and investors both now and going forward. And that concludes my prepared remarks. I'll now hand it over to Mary so that she can review some of the key financials for you. Mary?

Thank you, Mike, and good morning, all. Before I begin, let me remind you that comments made during this call include forward-looking statements, which are based on current expectations, estimates, projections, and assumptions, that are subject to risks and uncertainties which may cause actual results to differ materially. For discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and in our previously filed 2019 Form 10-K and third quarter 2020 Form 10-Q filed with the SEC. These are available on our website. Please also note that updated risk factors will be included in our 2020 Form 10-K, which we plan to file next week. As we disclosed in our press release filed last night, all 2020 numbers we are presenting are preliminary, unaudited, and subject to change as we finalize our audit. In our press release and in this presentation, we've provided certain information, including non-GAAP earnings per diluted share, non-GAAP operating earnings, and adjusted EBITDA, as well as certain pro forma items, in an effort to provide shareholders with better visibility into the company's core operations, excluding certain items which we believe do not reflect our core operating performance. Reconciliations are provided in charts 15 to 23 of this investor deck, and some are in the press release as well. We followed a similar review format for this deck as the one we used for our Q3 call, where our comparison periods show actual and non-GAAP results, and also pro forma sales and adjusted EBITDA, as if we'd been combined with Houghton throughout the periods presented. Our Q4 comparisons of 2020 and 2019 in this deck reflect actual results, not pro forma, as we completed the combination with Houghton in Q3 of 2019. For the full year comparisons, I will generally compare 2020 to pro forma 2019 results so that you can see the periods on an apples to apples basis. As Mike mentioned, the gradual recovery in our business that we began to see in Q3 of 2020 continued through Q4. Q4 net sales were up 5% sequentially as all segments benefited from a gradual increase in volumes. And net sales were down only 1% compared to Q4 2019. Recall, however, that Q4 2019 was a relatively weak quarter that was negatively impacted by a widespread slowdown in industrial production, especially in Europe. For the full year, reported net sales increased 25% in 2020 due to the inclusion of Houghton and Norman Hay, but on a pro forma basis, sales were down 9%, primarily on lower volumes due to the global downturn in economic production as a result of the COVID-19 pandemic. Gross margin of 36.8% in Q4 is up from 34.8% in Q4 of 2019, which was deflated somewhat due to inventory adjustments for purchase accounting for Norman Hay. Excluding these adjustments, we estimate Q4 of 2019's gross margin would have been about 35.3%. The increase in gross margin, Q4 over Q4, is primarily a result of our progress in achieving combination-related synergies in logistics, procurement, and manufacturing. Our sequential gross margin was down somewhat from Q3, reflecting a one-time benefit to gross margin in Q3 of approximately 0.5 percent and current quarter pressure from rising raw material costs and product On a full year basis, gross margin was 36.2% versus 2019's 34.6%. Excluding similar COGS adjustments as Q4, we estimate our gross margins in 2020 and 2019 would have been 36.3% and 35.7% respectively. Looking ahead. We expect to realize additional combination cost synergies throughout 2021, which should result in a gradual improvement to gross margin. We expect to head towards the 38 percent gross margin area later this year as we further realize our combination synergies and manage prices to offset rising raw material costs. Please refer to slide 10 for a snapshot of certain key financial measures On both a GAAP and non-GAAP basis, our Q4 operating income improved significantly, and our non-GAAP operating margin of 11.3% is up 1.7% versus Q4 last year, reflecting the sequential recovery in sales this year and our combination synergies and the cost-saving actions we took to mitigate the impacts of COVID-19. Full-year gap and non-gap operating income also improved significantly. However, full-year operating margin declined due to the COVID-related steep decline in sales and volumes in Q2 and the resulting pressure from fixed cost absorption, which we discussed in our Q2 earnings call. Our reported effective tax rate was an expense of 4.9% in Q4 of 2020, versus a benefit of 18.2% in Q4 of 19. Excluding various one-time items, our Q4 effective tax rates would have been approximately 30% and 24% respectively. For full year 2020 and 2019, we estimate that our effective tax rates, excluding non-core and one-time items, would have been approximately 25% and 22% respectively in line with our guidance for this year. For 2021, we expect our full year effective tax rate will be in the range of 24 to 26%. Our non-GAAP BPS of $1.63 for Q4 is up 22% from $1.34 in Q4 of 19 due primarily to the improved operating income I discussed earlier. Our full-year non-GAAP EPS of 4.78 was down from 5.83 last year, but ahead of consensus of 4.67. On slide 11, we show the trend in our pro forma adjusted EBITDA. Our Q4 adjusted EBITDA of 65 million is up 4 million from Q4 last year, and up 1 million sequentially. And our full-year adjusted EBITDA of 222 million is ahead of consensus. Also, our adjusted EBITDA margins improved for both the quarter and the full year. Our Q4 adjusted EBITDA margin of 17% is up 1.5% versus 15.5% last year. And on a full year basis, our adjusted EBITDA margin increased to 15.7% from our 2019 pro forma margin of 15%. The improved margins are primarily due to the combination-related synergies we've realized, partially offset by the impact of lower sales due to COVID-19. On slide 12, we provide an update on our leverage and liquidity. As Mike noted, cash flow was a star in 2020. We frequently talked about how the asset-like nature of our business helps us to weather downturns as our main investment is in working capital versus property, plant, and equipment. And we release working capital and generate increased cash flow and economic downturns. We saw this in 2020 during the financial crisis, and we saw it this year during the COVID pandemic. Operating cash flow for the full year was a record $178.4 million, allowing us to reduce net debt by 12% to $717.3 million, pay $53 million for the coral acquisition net of cash acquired, and pay approximately $7 million in dividends. We're delivering on our commitment to prudently allocate capital by prioritizing debt reduction while continuing to pay our dividends, and seizing growth opportunities which make strategic sense. As a result of our prudent capital allocation, our primary leverage covenant of net debt to trailing 12 months adjusted EBITDA continues to improve and was 3.2 times at year-end 2020 versus 3.5 times last year. We expect to be at our target level of 2.5 times net debt to adjusted EBITDA by the end of 2021. In addition, our cost of debt continues to benefit from the current interest rate environment with our borrowing costs under 2%. In summary, Quaker Houghton continues to deliver on its commitments in 2020, despite the very challenging market conditions we face. I said during this call last year that my crystal ball was murky. At that time, we were in the very early stages of the pandemic with no way of knowing what was to come. It certainly turned out to be a very difficult year, but we focused on what we can control. We kept our integration, execution, and synergy capture on track and, in fact, ahead of schedule. We implemented additional cost savings actions to mitigate the fall-off in sales, and we continued to deliver market share gains. As a result, we achieved record cash flow during the year and were able to reduce debt while continuing to execute on strategic acquisitions that make financial sense. In 2021, we expect to see a greater than 20% increase in adjusted EBITDA and further expansion of our margins as we realize the full synergy benefits towards the end of the year. Thank you all for your interest in Quaker Hatton. And now back over to you, Mike.