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.

Thanks, Mary. And now we will open it up for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Mike Harrison with Seaport Global Securities. Please proceed with your questions.

Hi, good morning. Morning, Mike. And congratulations on a nice finish to the year, and congrats as well on your retirement, Mike. It's been an impressive run and well-deserved.

Thank you, Mike. But we've still got another bulk of the year here to do, so we're focusing on that, but I appreciate it.

Understood. So I wanted to ask a question about the guidance. You previously on the Q3 earnings call had said that you expected 20% plus EBITDA growth in 2021. So you kind of reiterated that, but at the same time, you ended up with a little bit more EBITDA in 2020 than you maybe had been expecting. And then you also announced a couple acquisitions that are adding, you know, call it 5% to EBITDA. this year. So can you help us understand whether your underlying expectations around 2021 earnings have improved, stayed the same, or maybe gotten a little bit more conservative in the meantime?

I would say that's a good question. But overall, nothing has really changed from our views of organic growth. I think part of the 20% that we're mentioning here is meant to be really a floor because we said over 20%. And I think, as you know, generally we've been a historically conservative company in that. And of course there are still uncertainties out there, right? You know, raw materials are going up and there's, you know, we're still in some COVID situations here. So it's never a perfect world. But when I think of our, you know, position now, and where we were at the end of the quarter, I still feel we're going to have really good organic growth, and now we've added these acquisitions. So I feel good, and I think what you're seeing, just to give you an example of our conservatism or so, is we also said we thought we'd be at at least $215 million of EBITDA for the full year last year, and we came in 222.

so it's probably just we're just kind of setting a floor for that all right and uh in terms of the acquisitions uh the coral deal is is a little bit bigger sounds like it's focused on cans and in general industrial uh finishing fluids uh and there was also a tin plating uh deal can you uh maybe give a little bit more color on what those deals bring to the product portfolio And I think you mentioned the cost synergy number, but how do you see the cross-selling opportunities going forward for these businesses?

So I think for the, if I start with Quarrel, it really strengthens, you know, we have a, when, you know, Quaker had a CAM portfolio, Halton had a CAM portfolio, and actually Halton had a historical relationship with Quarrel. And there was a licensing agreement with certain aspects. So, so actually adding kind of Quaker Houghton legacies portfolio with coral really gives us a very, uh, complete, uh, portfolio products to sell to the, to the can industry. And, uh, and really I think strengthens our presence in that industry. And of course that's been an industry that even during COVID times has been one of the stronger end markets that we have. So, So we feel really good about the strength of that and how that means that, you know, our ability to maybe take share in the future in that market. And the templating is really just kind of our, you know, we already had a templating product that we bought many, many years ago from McDermott. This asset came up for sale And we thought that was a good addition to go in our portfolio as well. And we believe these technologies that we have in this area compete against other technologies. And we think the kind of technologies that we now have between these two sets of technologies we'll have will be growing faster than the market and will be penetrating into these other technologies that are getting used for templating. So we're encouraged with the ability to grow in those markets as well.

Okay. And are those acquisitions going to be going into the regions or are they going to be parked in global specialties for the time being?

It's a great question. A quorl will actually be separate. The can will be, we operate our beverage can business in global specialty. So that piece will be put into global specialties. And then the other aspect will be put into the Americas region. And then the general industrial piece. And then the tin plating will be It's being managed out of global specialties as well, but certainly hits parts of the region as well.

All right. And then the last question I have for now is on the EMEA business. Really looks like you had a nice step change in the margin performance there, and I'm aware you were coming off an easy prior year comp. But were there some unusual dynamics that contributed to the strength there, or do you see this 20% plus number as a sustainable margin level in EMEA?

We are very pleased with our EMEA regions. I see it as sustainable. It's really what you see kind of popping there is the combination of sequentially volumes picking up and getting more back to what I call normal level. At the same time, we're getting the benefits of the synergies from the integration. And so when you put those two things, it showed nice sequential improvement throughout the year. And we do expect that to continue on at that kind of level. Now, in the first quarter of the year, we do expect to see pressure on margins because of this raw material issue that we're having. But we are putting in place price increases. But, you know, there's a lag effect that goes with that. But absent that, absent that kind of short-term nature, I do expect these to be sustainable.

All right. Thanks very much.

Thanks, Mike.

Thank you. Our next question has come from the line of Catherine Griffin with Deutsche Bank. Please proceed with your question.

Thank you. Good morning. And I'll also echo a congratulations on a strong end to the year and on a well-deserved retirement to you, Mike.

Thank you.

First, I just wanted to ask, on the 4% net market share gains this quarter, can you highlight any regions or industries where um, you're having the most success with new business wins?

It's, it's, uh, it's pretty broad based. It's, it's, um, these things are made up of, uh, kind of pieces of business that we're picking up in, in all different kinds of product lines and all different areas. So we're, we're actually, it's, it's pretty broad based. So it's not just, uh, really, um, one major area or another. So it's pretty well distributed.

Okay, thank you. And then, I mean, it's kind of related to that. I know you talked a little bit about this in answering Mike's question, but could you just talk more about your Bolton M&A strategy going forward? Are you focusing more on expanding into core end markets like steel and metal finishing, looking at cross-selling opportunities that are similar to these two recent transactions, or Are there opportunities to get into more differentiated or specialized applications that you also have interest in?

Yes, it's really a combination. So in the short term, we are exclusively only looking at smaller acquisition opportunities until our... leverage ratio is at the place we want it to be, which we think that will be the end of the year. Then we'll look at larger opportunities. So in the short term, these bolt-ons tend to be various technologies that we feel will be good additions to our portfolio. And these are two good examples of ones. Most of the time, too, most of these discussions that we have or these acquisitions that we're working on, we tend to have and develop relationships with companies over time. So when they come to market, they're generally talking to us about that and we can kind of come to a conclusion on the acquisitions and track the price. So we still feel there's a number of these opportunities out there, relatively smaller companies that can really add something to us from a product perspective, or maybe it's a technology or, you know, a service application perspective, too, that we've done a couple of those as well that can really add to our whole offering for our customer base.

Great. Thanks so much.

Thanks, Catherine.

Thank you. Our next questions come from the line of John Tonwentang with CJS Securities. Please proceed with your questions.

Hey, good morning, guys. Thank you for taking my questions. And Mike, congratulations on your retirement. I know it's a way off, but it's been a real pleasure working with you and your team. And, you know, you've done a great job.

Thank you, John.

I was wondering if you could first talk about your gross margin expectations just for the first quarter. You know, given the rising input prices, maybe some volume headwinds from these logistics shortages and headwinds that are out there. I'm just wondering, you know, what your expectations are for the first quarter and when you might expect them to recover as you pass pricing through.

Yeah. So, yeah, we're not going to get kind of give a specific number guidance, but they're definitely going to be impacted for the reasons that you just stated, just raw materials and things in general are going up, like our container costs and things like that are going up. And we're in the process of of getting price increases in the marketplace. There's generally a lag effect in that, that their prices go up first and then we get our price increases. So there will be some impact on margins. And, you know, if it was, you know, absent that kind of a thing, we would expect to be in this, you know, 37 to 38% range, you know, margins, but they, They probably will be somewhat depressed in the first quarter. But as we get through the year, we get our price increases through and so forth. As Mary kind of mentioned in her remarks, we do expect to be, you know, getting back into that 38% area, which is where we, you know, think we're more longer term at this stage once raw materials kind of line out.

Got it. Okay. Thank you for that. And I was wondering if you had a total synergy realization, you know, target for the year. I know you've done better in the past couple of years. Just wondering if you had a target for this year and when, you know, if there was a phase in the schedule for that.

Sure. Our synergies for this year target is 75 million. You know, I believe we announced that a quarter or two ago when we kind of upped our guidance. and we expect to ultimately get 80 million. So by the end of this year, if you look at kind of the run rate we expect to be at, we will probably be more at that 80 million going forward. It's just that you get the full year effect in 2022.

Okay, great. And then just a quick question from Mary. Do you expect cash flow to improve to the same degree as EBITDA this year, or is it going to be held back a little bit more by, you know, maybe capex returns and your investing in working capital as revenues grow?

Yeah, that's a fair question. You know, certainly the answer depends on how quickly the rebound picks up steam. Again, we threw off a lot of working capital in 2020. If The rebound picks up quickly. We would expect to have some reinvestment in working capital, but we would expect that to be more than offset by earnings improvement if that's the situation as well. So a little bit difficult to call from a CapEx perspective. As you point out, post the onslaught of COVID, we announced that we scaled back our CapEx from our original expectations last year, and we would expect to invest a bit more in CapEx this year. So a very long-winded way of saying I expect cash flow to remain healthy, but we'll see the progress of the rebound this year and talk more in later quarters.

Okay, fair enough. Thank you, guys. Thank you.

Thank you. Our next question comes from the line of Steve O'Hara with Sudoku. Please proceed with your question.

Hi, good morning, and thanks for taking the question. Good morning, Steve. Yeah, just I guess first echo the congratulations again. I know there's still a lot of green here left in the year, but, you know, hopefully it's a little bit smoother sailing this year than last year. I'm sure everybody hopes that. I guess just on the, and I had some connectivity issues, but, you know, you talked about the EBITDA growth that you're forecasting. And can you talk about what the impact was, you know, from the headwinds you kind of expect in the first half of the year? And then, you know, what's the typical process for passing through raw material prices? Is it, you know, kind of, it sounds like maybe it's a two-quarter lag. Is it, you know, is it, pretty straightforward with customers and things like that?

Yeah, it's a great question. So, in some ways, I wish I had a crystal ball because some of these, you know, sometimes it really depends upon, because we have kind of seen this step change in raw materials, FOSS, and a question to me, is this going to, is this going to kind of, you know, happen once and then kind of line out? Or is this going to be something that evolves in a different way? But, But based on what we are today, you know, we are putting out price increases to our customers kind of as we speak. Most of the price increases will go in kind of in the back half of the quarter. And yet the price increases have been hitting us and continue to hit us throughout the quarter. So you do see some – but we're not – we haven't given any guidance and generally don't give guidance around anything kind of specific like that. And then – To your question of like, you know, what we find over time on this is that generally there's a three month lag and sometimes can take up to six months at times, depending upon the customers before we kind of fully capture everything. So so it is a timing issue and and it is not something that we. uh, sit there and, you know, worry or get concerned about from a longer term perspective, it's just a more of a short term, got to get through it. And then, and hopefully things will just line out and, uh, we'll go on from there.

Okay. Uh, that's helpful. And then, um, maybe, um, just from a, you know, uh, kind of sticking with raw materials, inflation, things like that. I mean, is there any, um, you know, would you guys have a, you know, a more favorable impact than competitors on the inflation side or, you know, is there a negative or positive or do you feel like you'd be kind of on the same footing as everyone else if, you know, you see a continued move in prices?

Yes, I don't think we're at a competitive advantage or disadvantage relative to raw materials. So I think it would generally, if raw materials go up or down, it's generally hitting people throughout the whole industry.

Okay. And then maybe lastly, just, I mean, in terms of the, you know, search for your replacement, I mean, one of the things that, you know, people tend to mention, you know, when I talk to them, you know, about you guys is, you know, the strength of your management team. And I'm just, I mean, it seems like, you know, you have a pretty good bench of talent. Is there something you think that somebody from outside the company might bring in that you're missing currently? Or is it something where it's the right thing to do where you have to explore all options and it's right for shareholders, right for the company, et cetera?

Right. I think the way our board looks at it is it's good governance to kind of look at all options. I speak for myself, but I know the board as well, is very happy with our management team. And we have very good, strong candidates to be considered as part of the process there. And so it's really, I wouldn't read into anything that says that we're not going that direction. It's more around we just want to look at all options and make sure we're doing good governance.

Okay. All right. Great. Thanks for the time.

Thank you.

Thank you. Our next question has come from the line of Lawrence Alexander with Jeffrey. Please proceed with your question.

Good morning. Mike, I guess an unfair question, but, you know, be patient with it, is can you talk a little bit about you know, what challenges or what sort of the unsolved problem is that you're leaving for your successor or that? And also, can you speak a little bit about the culture of Hawton, Quaker Hawton, and the status of the culture and where you think that either limits or creates opportunities for acquisition outside what, you know, just sort of straight, you know, just, you know, expanding in the existing sort of skill sets. I mean, you know, it just seems as if the cultural element is going to be a real challenge and it's been something that you've managed well in terms of finding the right assets to bring into the business. So can you just talk a little bit about those two things? Sure.

On the, your first question, a big challenge, again, part of my rationale is, is of the timing around now is that I think it's a, I really, really didn't want to leave and, and the company had a good place. And, and I really do believe we are in a very strong place right now. So, so to me, having the integration in place, our profitability at a, We'll certainly be, I believe, at an all-time high this year. And then we have, you know, our debt capacity down to the target area we want. I really think those are kind of good foundations in which to leave something to them. And we still have, I mean, I really do believe in our strategy. Our board believes in our strategy. And, you know, we're not looking for anybody major changes in our strategy. So we feel we can continue to grow above our market organically. We're going to continue to look at acquisition opportunities within our market. And so I think it's really looking for a CEO that will continue on executing the strategy that we've put out. As far as the culture aspect, The culture is something we really are very cognizant of when we make acquisitions, and it's something we believe is a core fabric to our company. As I mentioned, people are our most valuable asset. We really want to have collaboration, teamwork, inclusiveness, diversity in our is part of our fabric and is something that we're highlighting and trying to continue to improve upon throughout the whole organization. So we spend a lot of time and energy on the kind of culture we want to have. And that's something we put probably more time than anything into making sure Quaker Houghton now as a combined company has a good culture. And so I'm very happy with the progress we're making there. And just, I guess, I'm not, I didn't know if I read into your question that is other acquisitions, you know, we always look at make sure there's a good fit from a people perspective, from acquisitions, and that will always be a key component going forward just to make sure we have that. We wouldn't want to do something that negatively impacts our culture.

And then also, can you talk a little bit about sort of staff turnover or churn? You know, what happened in 2020? And then do you see any sort of pent-up churn at either yourselves or potentially at competitors, whereas things normalize, people become more willing to take risks and move? Just give us a sense for where we are at on kind of the migration of talent within the industry.

Sure. I mean, over time, with, you know, just kind of historical perspective, you know, Quaker went from having 1,200 people to over 2,000 people before the combination with Houghton. And we tried to really attract talent because we were growing above the market. We need good people. Again, people are the most valuable. part of our company and having people that understand customers' processes and so forth is really critical. And now we've doubled that size and now we have 4,200 people in Quaker Houghton today. And we continue to make sure we want to keep it and retain our key people and attract new talent to the organization. That's something we'll constantly work on. Our Retention rate is something that we look at. It's, you know, our voluntary retention rate where somebody chooses to leave us is relatively low, and I don't have the exact numbers on it, but it's definitely below 5% in that range. So it's something that we definitely put a lot of time and effort on in making sure we can retain and attract key talent.

Thank you.

Thanks, Lawrence.

Thank you. Our next questions come from the line of Garo Norian with Palisade Capital Management. Please proceed with your questions.

Hey, good morning, guys. I wanted to just ask on the raw material side, as you look at what's driving that, you know, could you talk about kind of both the fossil fuel related and the non-fossil fuel related as far as what the drivers might be and kind of how sustainable, and I'm particularly curious if global regulations, whether it's around biodiesel or something, might be more of a secular driver of costs that you'll have to contend with.

Sure. We're seeing pretty broad-based increases in raw materials. Certainly, some of the bigger groups of our raw material increases, Gara, are In base oils, as you see, crude continue to progress up over time. And we also are seeing our vegetable or animal fat type based raw materials also increase up as well. And like you said, there is a connection there in some ways. They can't get too far out of line because a biodiesel can kind of bring them back into line. And then we're also seeing other groups like additives go up. We don't have a perfect crystal ball on this. The last time we took a very detailed look at this, we thought things should stabilize for a period of time, but as we know, the world changes, so we'll see. But regardless, it's kind of our mindset is raw materials will continue to go up or down on us over time, and we'll continue to adjust our prices and maintain our margins as appropriate

Okay, great. Thanks. And this may be more for Mary. I think at the beginning of last year, you guys had talked about maybe a 35 million CapEx number for the year. Is that a good starting place to think about for this year?

I think, you know, we ended the year actually spending on CapEx even a bit below what we had guided early last year. So... I think our expectation is in that kind of mid to low 30s area, Gero.

Got it. Okay. And then just lastly, I feel like since you guys had done your investor day, there's been very possibly a bit of an accelerated move in the electric vehicle world compared to maybe where thoughts were at that time. I'm just curious if you've refined your thoughts on the impact of that on the company in any way.

Yes, we have. It's something we continue to evolve and look at and study. We haven't shared that lately. We'll take a look at that. I would say the overall conclusion from Investor Day and looking at the impact of electric vehicles on us is still the same kind of conclusion that it's It's not a really major event for the company because while they're in certain areas, there can be reductions of use of our chemicals. In other areas, we are picking up pieces of business, and we believe they tend, over time, will be offsetting one another. So I think our overall conclusions from Investor Day are still valid, but we have kind of updated our view on it.

Got it. And then just lastly, you know, seems like most investor events and calls these days have some sort of update on ESG-related things and didn't know if there was anything you could highlight there.

Sure. We are putting – thanks for asking that. We are putting a lot of effort into ESG. That's something that's certainly getting a lot of attention throughout the – Our company, we established a board committee on sustainability about a year ago. We are in the process. They'll come out later in March. We'll be putting out our sustainability report around March 23rd. We'll come out. You'll see more things in our annual report that will come out around this. We did a material assessment for the whole company last year where we can make the greatest impacts and we We took in and got feedback from customers, investors, and a lot of all stakeholders as well as people throughout the company as well. So you'll be seeing more material around us on that. We are adopting the SASB framework and GRI in our principles. We're going to be issuing a letter of support for TSFD. So there are, and you'll be seeing very material goals coming out from us around the whole aspects of ESG later this year.

Great. Thanks so much.

Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Rejoining the queue is Mike Harrison with Seaport Global Securities. Please proceed with your questions.

Just a couple more. Mike, in terms of some of the near-term impacts you're seeing, obviously you talked about the raw materials. Can you maybe touch on the impact of the unusual winter weather and maybe some of the logistical challenges or outages that you saw from maybe some of your suppliers? And then maybe a related temporary thing. You mentioned some uncertainty around the auto business and the semiconductor shortage. How serious of a concern do you see that as? And do you view it as just a timing issue that you'll make up in the rest of the year?

Sure. So far, the issues in Texas... and what happened to the supply chains around that hasn't been a real big event for us, so far so good on that front. From the automotive perspective and the semiconductors, we are definitely seeing certain plants around the world, maybe where we're supplying some products that may be reducing production or so for a period of time. it will have some impact, you know, on us. We think it's, and from everything we read, Mike, is this might something that will clear up in the spring. And then maybe this is more of a temporary issue now that that'll be made up with volumes in later in the year. So it could be some, certainly it'd be some impact to us again in the kind of the early first quarter, maybe into the second quarter, but then hopefully that all be made up in the second half of the year.

All right, and then I wanted to ask also about the APAC margin. It looks like it weakened quite a bit sequentially. Can you talk about what was impacting that in Q4? And I guess as we look into 2021, is that a business that should see operating margin up into the high 20s or even 30% level like it was in the first three quarters or more like the mid-20s like it was before?

So as we think about Asia Pacific, it's a great business for us. I think what you saw in that quarter was really a timing issue relative to some of our costs. And we had certain costs that were more back-end loaded. For example, bonuses within China. China really had a great year for us last year. And as they hit certain thresholds, you have to accrue more for bonuses. So you had certain things like that that kind of back-ended into that year that was unusual in nature, and I think lowered that. But we don't expect anything. That was more, I would say, a fourth-quarter aberration. We don't expect something like that to be seen in the first quarter, for example. So it's not going to be something that carries forward.

All right. Thanks very much.

Thanks, Mike.

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

Okay. Given there are no other questions, we will end our conference call now. And I want to thank all of you for your interest today. Our next conference call for the first quarter will be in late April or early May. And if you have any questions in the meantime, please feel free to contact Mary or myself. Thanks again for your interest in Quaker Houghton.

Thank you for your participation today. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.