Quaker Houghton

Greetings and welcome to the Quaker Houghton first quarter 2023 earnings conference call. A brief 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. I would now like to turn the call over to Jeffrey Schnell, Vice President of Investor Relations. Mr. Schnell, you may begin.

Thank you, Melissa. Good morning, and welcome to our first quarter 2023 earnings conference call. Joining us on the call today are Andy Tomatic, our President and Chief Executive Officer, Shane Hostetter, 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 the U.S. markets yesterday, May 4, 2023. Our press release and accompanying slides can be found on our investor websites. 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. The presentation also contains certain non-GAAP financial measures, and the company has provided reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in the appendix of the presentation materials, which are available on our website. For additional 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. In the first quarter, we delivered record net sales while continuing to manage through significant uncertainty and persistent macroeconomic challenges. We drove a recovery in margins and double-digit increases in adjusted EBITDA and adjusted earnings per share compared to the prior year quarter. We also generated strong operating cash flow in the quarter, driven by our improved performance and working capital efficiencies, further strengthening our balance sheet. I am very pleased with the financial and operational execution in the first quarter and excited about the momentum we have built in the organization. delivering results by controlling what we can control. Compared to the prior year, net sales in the first quarter increased 5% to a record $500 million. The year-over-year improvement in net sales was primarily driven by execution on our value-based pricing initiatives, which were implemented across all regions to offset the continued inflationary pressures impacting our cost to serve. Though volumes declined compared to the prior year, they increased sequentially. Volumes continue to be impacted by a continuation of softer end market conditions, primarily in the steel and industrial markets, and were offset by some improvement in auto. We also have declined some incremental volumes in the quarter, consistent with our ongoing margin improvement initiatives. In total, and taking into account our customer mix, we are still trending directionally in line with the specific end markets and regions we serve. We're pleased to see the benefits of the diversification of our portfolio, which continues to drive targeted and valuable new business growth, regardless of market trends. Our gross margin recovery also continues. Gross margins of 34.7% improved approximately four percentage points compared to the prior year quarter, and 2.5 percentage points compared to the fourth quarter of 2022. The sustained focus on balancing the solutions we provide and the total cost to serve are helping us to continue our journey to recover our margins and heightening our ability to deliver exceptional value to our customers. In the first quarter, we generated $79 million of adjusted EBITDA and $1.89 of adjusted diluted earnings per share, a double-digit increase in both compared to the prior year and prior quarter. This was primarily driven by the ongoing recovery in our gross margins and despite the uneven market conditions. While we have not yet recovered back to our historical margin levels, we are making good progress on this top financial priority. balancing customer relationships and the long-term profitable growth aspirations of our business. In the first quarter, we also generated $38 million of operating cash flow and strengthened our balance sheet, reducing our leverage towards our target. We continue to anticipate an improvement in cash conversion in 2023 versus recent years. These results are a solid start to the year. Turning to our segments, Once again, price capture was strong across all our segments on a year-over-year basis. Volumes declined in all segments compared to the prior year, but increased sequentially in the Americas and EMEA, which benefit from an improvement in manufacturing activity, albeit at a low base. I will quickly highlight some of the volume drivers. We continue to see softer end market activity across all regions and at varying degrees. However, our volume growth in the Americas and EMEA segments are in line with their respective market growth rates, led by new business wins. Asia Pacific segment volumes, however, are trending slightly behind the broader markets due to customer mix and our focus on services and solutions that yield the greatest benefit and value for our customers. I am very proud of our global team's resolve, strengthening our portfolio and focusing on the high value solutions for problems our customers face. We remain confident in our ability to continue to grow profitably above our underlying markets. Earnings increased in all segments compared to the prior year and prior quarter, largely due to recovery and margins in all segments, especially in EMEA, where margins have improved in the first quarter compared to the lows in the second half of 2022. This was a result of price actions which have begun to offset some raw material cost inflation as well as cost management. And while we're exhibiting momentum recovering our margins, we still need to do more to offset the total inflationary pressures on our business. Therefore, we've identified approximately $20 million of savings as part of the Global Costs and Optimization Program that was announced in the fourth quarter of 2022. These initiatives are aimed at improving our cost structure and driving a more profitable and productive organization. We expect the benefits of this program to be more heavily weighted to 2024 and will include a range of actions to improve our footprint, optimize our go-to-market strategy, simplify the portfolio and organization, and enable the company to successfully deliver its strategic plan. Turning to the outlook, the current uneven and uncertain macroeconomic environment and operating challenges that we've experienced for the last several quarters are likely to remain as we progress through 2023. Despite these headwinds, we remain committed to balancing the near-term needs of our customers and our business with our collective long-term objectives, focusing and executing on what we can control. In the second quarter, we expect adjusted EBITDA to be similar to the first quarter, translating into strong year-over-year growth. We are cautiously optimistic that demand will improve from first quarter levels, primarily driven by the reopening in China and resilience in Europe and the Americas. We anticipate some continued momentum on our margin recovery journey, balancing the value of the services and solutions we provide with the total cost to serve, including raw material costs, which remain very elevated. As expected, we will also onboard some additional SG&A expense, primarily due to labor inflation. For the full year, visibility remains limited, and despite the uncertain and uneven macro backdrop, we continue to expect to deliver earnings growth. and improve free cash flow in 2023 compared to 2022. We will also maintain our focus on strengthening the organization to be ready to capitalize on an improvement in underlying market growth rates as well as our targeted profitable growth areas. Stepping back, Quaker Houghton's growth culture is healthy with a foundation built on earning value through differentiated customer intimacy. We continue to build on our key profitable growth themes, using our global scale effectively, investing in digitization, and leading in sustainability for our customers, our company, and stakeholders. Beginning in the first quarter, we updated our reportable segments to three regional segments supported by global functions. This better reflects the alignment of our executive team and business structure. We believe our updated structure provides for deeper accountability, closer to our customers, and will help us leverage our scale and capabilities to accelerate the growth of our business consistent with our globalization theme. There is considerable value we can gain as we deepen our relationships with new and existing customers, accelerate the realization of cross-selling opportunities, and target new profitable growth areas. We are also making progress on our other growth themes. Our fluid trend platform provides opportunities to use technology to advance customer intimacy. We now have completed a phased launch of the latest iteration of the platform within our internal global fluid analysis labs, a significant milestone in a multi-year journey to transform how we deliver customer intimacy with digitization for the future of our business. Also of note, last week we published our 2022 sustainability report, which details some of the achievements and milestones since the inception of our comprehensive program in late 2021, including adopting green chemistry guidelines, investing in data management capabilities, and renewable energy. These are exciting and important achievements as we also further build out our portfolio of sustainable solutions, being a leader in the industry and enabling our customers to achieve their sustainability goals. To summarize, in the quarter, we delivered strong results, building on the progress made in 2022 and executing on our communicated priorities. As a leadership team, we continue to challenge ourselves and our colleagues to work together to deliver results, serving our customers regardless of the operating environment. We remain committed to unlocking the earnings power and cash flow generation potential of the organization. We are investing to advance our growth initiatives and develop supply chain and digital capabilities to redefine how we most effectively deliver customer intimacy. Through innovation, we are developing our portfolio of sustainable solutions to support our customers in achieving their sustainability goals. And we're being prudent with our investment. managing our costs, and improving our profitability to better position the company for future success. I am confident in our strategy, and I have continued conviction that we will continue to execute to achieve our goals. With that, I'd like to pass it over to Shane to discuss the financials.