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Earnings call: Quaker Houghton reports margin expansion in Q2 2024

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-07, 06:00 a/m
© Reuters.
KWR
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Quaker Houghton (NYSE: KWR), a global leader in industrial process fluids, reported a successful second quarter in 2024 with a notable expansion in margins and an increase in earnings, despite a decline in net sales. The company's strategic initiatives and operational efficiencies have contributed to an improved gross margin of 37.9% and a 5% increase in adjusted EBITDA to $84 million. The earnings call, led by CFO Tom Coler, outlined the company's focus on organic growth, dividends, and strategic acquisitions, including the recent addition of the Sutai Group in Japan.

Key Takeaways

  • Net sales decreased by 6% to $464 million compared to the previous year.
  • Gross margin improved by 200 basis points to 37.9%.
  • Adjusted EBITDA increased by 5% to $84 million.
  • Non-GAAP diluted earnings per share increased by 10% to $2.13.
  • The company announced the construction of a new manufacturing facility in China.
  • Quaker Houghton completed the acquisition of the Sutai Group in Japan.
  • The company remains committed to its financial and operational priorities.

Company Outlook

  • Quaker Houghton expects modest sequential improvement in demand across regional segments.
  • The company is focused on executing strategic initiatives to drive long-term shareholder value.

Bearish Highlights

  • Net sales declined primarily due to lower selling prices, product mix, and an unfavorable impact of foreign exchange.
  • Sales volumes were affected by soft industrial activity in the Americas and EMEA segments.

Bullish Highlights

  • Demand for metals applications improved, offsetting challenges in metalworking applications.
  • Gross margins increased due to moderating raw material costs and supply chain efficiency.
  • Earnings in the EMEA segment increased by 4% due to cost savings initiatives.
  • Net sales in the Asia-Pacific segment increased by 3% due to higher sales volumes and new business wins.

Misses

  • Net sales in the Americas declined by 12% due to lower sales volumes and selling prices.
  • The expected contribution from the recent acquisition of Sutai was not disclosed.

Q&A Highlights

  • CFO Andy Tometich discussed the impact of index-based pricing contracts on sales decline in the Americas.
  • Tometich highlighted that despite challenges, the company anticipates another year of earnings growth.
  • The company has seen positive trends in aerospace and transportation OEMs, but weakness in transportation components and industrial sectors.
  • Quaker Houghton has a rich pipeline for potential M&A opportunities.

Quaker Houghton's commitment to its financial and operational priorities, alongside its strategic initiatives, such as the construction of a new facility in China and the acquisition of the Sutai Group, positions the company to potentially outperform its end markets and continue its trajectory of earnings growth. The company's strong foundation and investment in growth initiatives are expected to generate operational efficiencies and drive long-term shareholder value.

InvestingPro Insights

Quaker Houghton (NYSE: KWR) has demonstrated resilience in its recent financial performance, with several key metrics and strategic moves that could signal strength for investors. With a market capitalization of $2.88 billion, the company's valuation and shareholder returns are of particular interest.

InvestingPro Data shows that Quaker Houghton has a Price/Earnings (P/E) ratio of 23.56, slightly adjusting to 22.06 for the last twelve months as of Q2 2024. This indicates that investors are willing to pay a premium for the company's earnings, which may reflect confidence in its future growth prospects. The company's revenue for the last twelve months stands at $1.891 billion, with a Gross Profit Margin of 37.64%, closely aligning with the reported improved gross margin in the article. Despite a decrease in revenue growth by 4.14% over the same period, the company's operational efficiency is evident in its Operating Income Margin of 11.87%.

InvestingPro Tips highlight the company's strong track record of returning value to shareholders. Notably, Quaker Houghton has raised its dividend for 17 consecutive years and has maintained dividend payments for an impressive 52 consecutive years. This consistent dividend growth, which saw a 11.49% increase in the last twelve months as of Q2 2024, is a testament to the company's financial health and commitment to shareholders. Additionally, the company's stock generally trades with low price volatility, which could be appealing to investors seeking stable investments.

InvestingPro also notes that the company's liquid assets exceed its short-term obligations, suggesting a healthy liquidity position. This financial stability, coupled with the company's strategic initiatives such as the construction of a new manufacturing facility in China and the acquisition of the Sutai Group, could provide a platform for sustained growth and profitability.

For investors looking for more detailed analysis and additional insights, InvestingPro offers a comprehensive list of tips, including further earnings revisions by analysts and the stock's recent performance. There are currently 10 additional InvestingPro Tips available for Quaker Houghton, which can be accessed at: https://www.investing.com/pro/KWR. These tips could provide valuable context for the company's outlook and help investors make more informed decisions.

Full transcript - Quaker Chemical Corp (NYSE:KWR) Q2 2024:

Operator: Greetings, and welcome to the Quaker Houghton's Second Quarter 2024 Earnings Conference Call. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. 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.

Jeffrey Schnell: Thank you. Good morning, and welcome to our second quarter 2024 earnings conference call. On the call today are Andy Tometich, 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 the U.S. markets yesterday, August 5, 2024. Our press release and accompanying slides can be found on our Investor Relations website. Both the prepared commentary and discussion during this call may contain forward-looking statements, reflecting the company's current view of future events and their potential effect on Quaker Houghton'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 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.

Andy Tometich: Thank you, Jeff, and good morning, everyone. In the second quarter, Quaker Houghton's results were highlighted by a further expansion in our margins, which drove an increase in earnings and translated into solid operating cash flow. The resilience of our business is evident as we manage through the sustained challenges of the dynamic market conditions we are facing. We continue to earn new business with our customers, execute on our enterprise priorities and improve the strength of our financial profile. We are also building momentum with the advancement of our strategy, which is focused on long-term sustainable growth. Second quarter net sales were $464 million, 6% below the prior year and 1% lower than the first quarter. Total reported volumes were once again stable on both a year-over-year and sequential basis despite soft end market conditions. This was primarily driven by our team's sustained focus on expanding our relationships with our customers through our differentiated customer intimate model and our leading portfolio of services and solutions which help our customers achieve better outcomes in their operations. Gross margins in the second quarter were 37.9%, 200 basis points higher than the prior year. Raw material costs were the primary driver of the improvement on a year-over-year basis. As expected, our raw material cost position has benefited from modest deflationary movements. We have also maintained a disciplined approach with our customer value-driven total cost of ownership model. Additionally, we are actively enhancing our capabilities and improving our manufacturing and supply chain productivity, providing avenues to support our customers and our own expectations for growth. In the second quarter, we generated adjusted EBITDA of $84 million, a 5% increase year-over-year and $2.13 of non-GAAP diluted earnings per share, a 10% increase compared to the prior year. These results emphasize our financial and operational focus, while also pursuing investments in our strategic pillars as we navigate the persistent and challenging end market backdrop. Our strong financial position is supported by our continued cash generation capabilities and incremental progress driving working capital improvements. In the second quarter, we generated approximately $46 million of operating cash flow or $74 million year-to-date, and our net leverage ratio improved to 1.7x our trailing 12-month adjusted EBITDA. Our strong balance sheet, business model and cash flow characteristics provide significant opportunities to support and accelerate our framework for long-term value creation. To that end, last week, our Board authorized an increase of 6.6% in our cash dividend, highlighting the commitment to our legacy of shareholder returns. Turning to our segments. We once again delivered improved margin performance in all of our segments on a year-over-year basis, driven by the execution on our profitable growth initiatives. This was our eighth consecutive quarter of a year-over-year improvement in our segment margins despite the soft end market conditions. Volumes in our Asia-Pacific segment increased by a high single-digit percentage and are more than 10% higher in the first half of 2024 compared to the prior year. Growth has been broad-based and amplified by new business wins for both metals and metalworking applications as well as across the region, including in China, India and Southeast Asia, helping to combat the mixed levels of underlying demand in the region. Volumes in the EMEA segment, inclusive of the I.K.V. acquisition were consistent with the prior year and improved slightly sequentially. Macroeconomic conditions in EMEA remain uneven by country, end market and customer. In the quarter, we saw improved demand for ferrous and nonferrous metal applications driven by new business wins, but metal working applications, including industrial and auto, remain challenged. We are diligently working to advance our initiatives, focusing on value-added solutions for our customers as well as our supply chain efficiency to enhance our own profitability, which will benefit the organization as economic conditions begin to improve. Volumes in the Americas segment were consistent with the prior quarter, but declined compared to the prior year. The team continued to earn new business with new and existing customers. And while metals improved, metal working applications reflect a continuation of soft industrial production activity. Our Americas segment also dealt with several unplanned customer outages in the quarter. Segment earnings in the Americas declined on a year-over-year basis, primarily driven by the decline in sales and partially offset by an improvement in margins. Our volume growth continues to be consistent or better than the aggregate performance of our underlying markets and the regions in which we operate. While industrial production remains soft globally and our end markets uneven, we continue to convert customer trials to new business wins based on the breadth and quality of our products, services and technical knowledge and value delivered to and shared with our customers. We have made substantial improvements in the profitability of each of our regional segments and believe we will further unlock the value of our model as end market conditions improve from these persistent low levels. Switching to the outlook. The dynamic market environment that we have experienced in the first half of 2024 will likely continue through the remainder of the year. Despite this uncertainty and our current visibility, we expect a modest sequential improvement in demand across our regional segments through a combination of new business wins, more stable end market conditions and continued momentum in geographies like India and China. We will continue to remain disciplined on our value-based model, and we expect adjusted EBITDA in the third quarter to be in the range of the second quarter. These results and our continued focus on execution, including deepening our relationship with customers, effectively managing our own productivity, profitability and operations and executing on our strategic initiatives we'll continue to position Quaker Houghton to outperform our end markets and deliver earnings growth in 2024 and beyond. In addition, our cash flow generation and balance sheet are strong, which supports our disciplined capital allocation priorities, including investing in our organic growth, paying dividends, advancing our M&A strategy, repaying debt and being opportunistic with share repurchases. While we continue to navigate the near-term challenges, we remain fully committed to our enterprise strategy, balanced around globalizing, digitizing and leading in sustainability. Our value-enhancing initiatives continue to gain traction with our customers, and are the drivers that we believe will augment our competitive position and further unlock long-term outperformance compared to market rates. In the first half of 2024, we have benefited from a meaningful contribution from our Asia-Pacific segment. We are taking advantage of our global scale, capitalizing on cross-selling opportunities by deploying the full breadth of our product, technical and R&D capabilities to our customers. Globally, we have several new trials underway that provide both performance and environmental benefits for our customers. complementing new business wins we have had. To support the expected opportunities in the Asia-Pacific region and consistent with our model, we broke ground on a new manufacturing facility in Zhangjiagang, China, which will be our latest manufacturing facility in this growth region. The new site is expected to be operational in the second quarter of 2026 and will be a critical part of our supply chain, amplifying our strong presence in China and across Asia-Pacific and help us to meet the increasing needs of our customers. We are also pleased to note that in July, we completed the acquisition of the Sutai [ph] Group, which is based in Japan. Sutai will complement our existing global diecasting and impregnation capabilities, enhancing our existing technical expertise and scale and further drive innovation within the industry. Like our recent acquisition of I.K.V., Sutai will accelerate the growth of our advanced and operating solutions globally, a cornerstone to our enterprise strategy. Our global scaling efforts around reducing complexity and simplifying are ongoing, two examples of which include product rationalization and implementing channel optimization strategies. We're also expanding the use of digital capabilities to drive efficiencies in our network and systems, including supply chain as well as our fluid intelligence offering, to support our ability to better anticipate and swiftly respond to our customers' needs. We have successfully launched our CB On campaign, highlighting our broad portfolio of sustainable solutions to help lead our customers and industry to achieve their targets. We're also investing in our business to enable the achievement of our 2030 sustainability goals and to develop our position as a leader in emerging and complex opportunities, like the shift to e-mobility. Our enterprise strategy is amplifying our model. It will allow us to further tailor how we most effectively and efficiently earn value with our customers, regardless of their scale or industry and unlock new opportunities for growth. Our investments in the future will embolden our strong foundation and drive long-term value for our customers and our shareholders. We have started strong in 2024, continuing to successfully navigate a challenging macroeconomic backdrop and end market environment. We remain committed to our financial and operational priorities, earning new business in all regions at improved levels of profitability by demonstrating the breadth of our products and services. We are dedicated to enhancing and expanding our leading position in this attractive industry. We continue to prudently invest in our enterprise strategy to supplement the improvements we are making in our productivity and profitability, enhance our customer intimate model and unlock attractive new opportunities, best positioning us to support the growth aspirations of our customers and our company. And our balance sheet is strong, supported by our cash generation. We are committed to our disciplined capital allocation strategy. which remains focused on maximizing shareholder value, primarily through growth. I am proud of the collective efforts of everyone at Quaker Houghton, who comes to work every day to add and earn value, solving our customers' challenges and constantly moving the company forward together. With that, I'd like to pass it over to Tom to discuss the financials.

Tom Coler: Thank you, Andy, and good morning, everyone. Our net sales declined approximately 6% from the prior year to $464 million, the primary drivers of the year-over-year change were lower selling price and product mix of approximately 4%, which primarily reflects the impact of our index-based contracts, lower sales volumes of approximately 1%, which includes the contribution of I.K.V. and an unfavorable impact of foreign exchange of 1%. Our sales volumes continue to be impacted by the soft industrial activity primarily in the Americas and EMEA segments. Demand for our metals applications has improved on both a year-over-year and sequential basis, and has been offset by continued challenges in metalworking applications. Notwithstanding the persistent and challenging end market environment, our sales volumes have been largely consistent on a sequential basis for the sixth consecutive quarter, reflecting the team's execution earning new business in all segments. Gross margins in the second quarter were 37.9%, which represents an increase of 200 basis points compared to 35.9% in the prior year, and as compared to 38.7% in the first quarter of 2024. This is the result of moderating raw material costs as well as the benefits from ongoing actions to improve our supply chain efficiency and productivity. Excluding onetime items, SG&A decreased $3 million or 3% compared to the prior year and $6 million or 5% sequentially. The decrease both periods reflects a combination of cost controls, foreign exchange and the timing and levels of incentive compensation. On a year-to-date basis, SG&A is higher by approximately 1%. We delivered $84 million of adjusted EBITDA in the second quarter, which represents an increase of $4 million or 5% compared to the prior year and an increase of $1 million or 1% compared to the prior quarter. Our adjusted EBITDA margin was 18.2% in the second quarter, an increase compared to both the second quarter of 2023 and the prior quarter. The team continues to execute on our financial and operational priorities, including restoring the margin profile of the business while balancing our profitable growth initiatives with the end market environment. Switching to our segment results. Net sales in our Asia-Pacific segment increased approximately 3% compared to the prior year, driven by a high single-digit increase in sales volumes and partially offset by an unfavorable foreign exchange impact and a slight decrease in selling price and product mix. New business wins in China and throughout the Asia-Pacific region were the primary contributor to the strong volume performance in the region for both metals and metalworking applications. Asia-Pacific segment net sales also increased approximately 1% compared to the prior quarter. Segment earnings in Asia-Pacific increased 11% compared to the prior year. The improvement in earnings was driven by higher sales and an improvement in segment gross margins. We are pleased with the performance in Asia-Pacific as they effectively balance our customer relationships with the value we provide and the cost to serve. Net sales in our EMEA segment were 4% lower year-over-year. The primary drivers were lower selling price and product mix due to the impact of index-based customers and an unfavorable impact from foreign exchange. Sales volumes, inclusive of the impacts of the I.K.V acquisition were consistent with the prior year. Overall, economic conditions remain subdued in this segment and at low levels. Net sales and volumes in EMEA were consistent with the first quarter of 2024. The EMEA segment's earnings increased approximately 4% compared to the prior year. This increase largely reflects the improvement in our profitability due to our ongoing cost savings initiatives. We expect to continue to drive productivity improvements and efficiencies in the EMEA segment as we progress through the year. Net sales in the Americas declined 12% year-over-year due to lower sales volumes and selling price and product mix. Volumes in the Americas were impacted by lower industrial activity in the region, primarily in our metalworking business as well as several unplanned customer outages in the quarter. Our selling price largely reflects the impact of our index-based contracts. On a sequential basis, net sales in the Americas were down approximately 3%. However, sales volumes would have increased if not for unplanned customer outages driven by new business wins. Americas segment earnings declined approximately 7% compared to the prior year, reflecting the lower sales and partially offset by an improvement in the segment's margins. Segment margins were largely consistent on a sequential basis as we actively manage our cost structure with the market environment. Overall, the business is performing well, especially considering the persistent and market challenges. We have made considerable progress in all our segments, aligning to the environment while continuing to best position the company to benefit as market conditions begin to improve. Turning to nonoperating costs. Our interest expense was approximately $2 million lower in the second quarter compared to the prior year, which reflects the reduction in our variable cost debt in 2023. Our cost of debt in the second quarter was consistent with the prior quarter at approximately 6.2%. Our effective tax rate, excluding nonrecurring and noncore items was approximately 28% in the second quarter. We continue to expect our effective tax rate in 2024 will be approximately 29%. Our GAAP diluted earnings per share were $1.94 and our non-GAAP diluted earnings per share were $2.13, an increase of 10% compared to the prior year, which was driven by an improvement in operating earnings and lower interest costs. Switching to liquidity, we generated $46 million of cash from operations in the second quarter and $74 million year-to-date. We remain focused on improving our working capital efficiency and delivering another strong year of operating cash flow in 2024. Capital expenditures in the second quarter were approximately $7 million, and $11 million year-to-date. We continue to expect total CapEx will be within our prior communicated range of 1.5% to 2.5% of sales in 2024. In the second quarter, we also paid approximately $8 million of dividends and opportunistically repurchased 49,000 shares for approximately $7.8 million. Additionally, and as Andy mentioned, the Board approved a 6.6% increase in our cash dividends, highlighting the confidence in our cash flow generation. Our balance sheet and liquidity are strong. Our net debt at the end of the second quarter was $549 million, and our net leverage ratio improved to 1.7x our trailing 12 months adjusted EBITDA. The second quarter was another solid quarter for Quaker Houghton as we navigated through the challenging macro environment and executed on items within our control. We remain focused on delivering on our financial and operational priorities investing in our enterprise strategy to support our growth expectations and executing on our disciplined capital allocation strategy to accelerate our growth and deliver long-term shareholder value. Lastly, I want to thank the entire Quaker Houghton team for your warm welcome and dedication to our collective success. I also look forward to meeting many of you on the call in person over the coming months. Quaker Houghton's foundation is strong and the future is bright, and I'm excited about the many opportunities ahead. With that, I'll turn it back over to Andy.

Andy Tometich: Thank you, Tom. Quaker Houghton continues to execute well, while advancing our priorities. I'm confident in our strategy and our team and believe we are well positioned to drive continued success. With that, we'd be happy to take your questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Mike Harrison with Seaport Research Partners. Please proceed with your question.

Mike Harrison: Hi, good morning.

Andy Tometich: Good morning, Mike.

Mike Harrison: Andy, I was hoping that maybe you could give a little bit more detail on what you were seeing in the Americas. You mentioned I think the volume was weakest there, but you also mentioned that there was some customer -- unplanned customer outages that impacted your volumes. And it sounded like you said that volumes would have been higher year-on-year, if not for those outages. So maybe just a little more color there. And I guess, are the outages complete at this point? And do you expect volumes to be growing as we get into Q3 and Q4?

Andy Tometich: Yes. Thanks, Mike. Really good question. Your takeaway is the right takeaway. So while we saw some positives on the primary metals business in the Americas, there was the softness that we kind of anticipated in the metal working and we anticipated some improvement on a seasonality basis, but the outages kind of canceled some of that seasonality benefit that we anticipated. And just to give you a little more color it was a combination of factors, pretty discrete events. There was a flooding in Brazil that created some challenges down there. In Central and North America, there were some discrete customer outages around their own operations and a couple of situations related to labor. So net of that, it impacted what we were hoping for on seasonality. As we look forward, we can't predict exactly when some of the benefit of the reversal on that will happen, but we are anticipating as we move through the balance of the year, there'll be some recovery related to those outages.

Mike Harrison: All right. And then on the flip side, the Asia Pacific numbers were actually quite strong. Just curious, if you could maybe disaggregate how much of that improvement there is related to what's going on in underlying markets? How much is related to new wins? And I think that's also Asia is the region where you were having the most headwind related to deselecting some lower-margin business and prioritizing pricing. So just curious if you can kind of give us a little more color on the strength that you're seeing in APAC and the outlook there?

Andy Tometich: Sure. Asia Pacific was certainly a bright spot for us in the second quarter, and it was pretty widespread, Mike. So we saw some favorable trends in metals as well as metal working, which was overall up. That was complemented with our new business wins. So we've been operating there really generating net new business wins well within our targeted range and actually even a little bit higher in that targeted range. . But the underlying markets there, too, are positive. And we've seen not only some good results in China, but India and Southeast Asia are clearly going in the right direction. So as we look forward, we anticipate that to continue as a directional trend. And of course, we're going to stay focused regardless of whatever happens in the market there on us continuing to outperform the market and generate those new business wins.

Mike Harrison: All right. And then last question for me is just kind of on the overall outlook for the full-year. I'm curious, first of all, should gross margin -- you came down a little bit sequentially, should gross margin kind of recover back up into that 38%, 39% range? And then as you're guiding to year-on-year EBITDA growth any more specific numbers or details that you could provide for your Q3 expectations would be helpful?

Andy Tometich: Yes, sure. So why don't I start with Q3, Mike. So first of all, we've started strong in 2024, and the team has really been doing a great job on execution and delivering results. And not only have we improved profitability on a margin basis, we've grown earnings and are generating strong cash flow. Third quarter specifically, we're expecting some modest sequential improvement in volumes and I touched on a little bit of that with respect to the Americas and APAC already. But the team is doing a great job across all the regions to generate new business wins, which is helping us to offset and in some cases, even outpace what's happening in the underlying market. So feel good about that. We do believe the underlying markets are still going to have some challenges as we move through the balance of the year, but we're going to stay focused on those new business wins. There's a little bit of seasonality we would anticipate in the Americas and APAC. Europe is a little bit harder to predict, it kind of continues to bounce around trough levels. So we're cautiously optimistic that some of that seasonality will benefit us in the third quarter. Gross margins, we expect to be similar to the second quarter. We're constantly balancing the value we provide to our customers against the cost to serve. And we're now continuing to operate consistently in the target range that we had talked about. On -- as we continue to deliver those margins, we're also going to be very prudent on any of our SG&A spending. We expect a little bit of an increase as we continue to focus on those things that will help us to drive longer-term productivity, as well as growth, but we're going to be really diligent with the costs associated with those investments. When I take it all together for the third quarter, we anticipate we're going to execute well and deliver earnings, as I mentioned in the pre-prepared marks in the range of the second quarter. Transitioning to then the full-year, just a couple of additional comments. We believe the volumes -- our volumes are outperforming our end markets and those end markets are likely to still be challenged as we go forward, but we will continue to focus on the outperformance with our new business wins. Gross margins on a full-year basis are not only within our target, but trending towards the higher end of our range. So we want to maintain that through the cycle and through the balance of this year. And we're going to continue to control those costs as we move through the balance of the year as I mentioned. So for the full-year, we're expecting another year of earnings growth in a very challenging end market and that's building on our success that we established in 2023.

Mike Harrison: All right. Thanks very much.

Andy Tometich: Thanks Mike.

Operator: Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank (ETR:DBKGn). Please proceed with your question.

David Begleiter: Thank you. Good morning. Andy, back to the Americas, where volumes actually down in the quarter year-over-year?

Andy Tometich: Yes. David, they were down low-single digits on a year-over-year basis. And again, it was associated with the factors that I've already covered.

David Begleiter: Got it. So the remainder was due to the index-based pricing contracts, correct?

Andy Tometich: I'm sorry, could you repeat that, David?

David Begleiter: The remainder of the year-over-year sales decline was due to the index-based pricing contracts?

Andy Tometich: Yes, sure. There was clearly an impact associated with the pricing. I mean predominantly, any of our pricing impact was related to index contracts.

David Begleiter: Got it. And EMEA margins were down sequentially from Q1 to Q2 by about 200 [ph] basis points. What drove that sequential decrease?

Andy Tometich: Yes. Again, a combination of factors there. There is index business there as well. And again, the demand of the underlying market continues to bounce around. So those two factors combined impact of your -- the remaining numbers.

David Begleiter: Thank you.

Andy Tometich: Thanks, David.

Operator: Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Dan Rizzo: Hi, it's Dan Rizzo on for Laurence. Thank you for taking my question. Outside of the express price…

Andy Tometich: Hi, Dan.

Dan Rizzo: How are you?

Andy Tometich: Good.

Dan Rizzo: Outside of the index-based pricing you just mentioned. Are you seeing any customers kind of push back on pricing where you might have to do additional concessions? Is that something that could be a headwind in the second half of the year into 2025?

Andy Tometich: Yes, Dan, I always characterize customers are always looking for better deals, right? So there's always those conversations and there has been all the time. I think we continue to engage very proactively and a good partnership with our customers against the value that we're providing to them against the cost for us to provide that service to them. And we continue to do a pretty good job of finding that right balance with them on value. . So we'll continue to do that as we go forward. The goal here is to be at our targeted gross margin level, which we've now achieved, and we want to make sure we continue to do that through the entire cycle as we go forward. So of course, there's those dialogues with customers, but I think our team is managing that very well in partnership with our customers.

Dan Rizzo: Okay. And then in China, do electric vehicles have an outsized impact on middle working demand and your demand? Is it -- does it demand more from you guys? Or not really, it's kind of its more broad-based than that?

Andy Tometich: Yes. I think in China, for sure, first of all, as I highlighted, we actually saw some real positive results, not just in primary metals, but in metalworking and it was pretty wide ranging. For sure, in China, there is an accelerated growth of electric vehicles. But as we've talked about in previous sessions, there's a number of new opportunities for us in those electric vehicles as well. So, we continue to stay focused on that and developing those opportunities, while continuing to serve the needs of the ICE (NYSE:ICE) vehicles that are still being produced not only there, but around the world.

Dan Rizzo: All right. Thank you very much.

Andy Tometich: Thanks, Dan.

Operator: Thank you. Our next question comes from the line of Arun Viswanathan with RBC (TSX:RY) Capital Markets. Please proceed with your question.

Arun Viswanathan: Great. Thanks for taking my question. Congrats on the good performance here. I just wanted to -- maybe you can just walk us through some of the end market performance. You mentioned some weakness in metalworking, I think. What would you say are conditions in maybe transportation and building and construction and some of your other end markets, if you would?

Andy Tometich: Yes. Thanks for the question, Arun. So when we think about metal working, it's kind of a tale of different segments, as you might imagine. So we've continued to see some positive trends in aerospace in particular. And when we take the totality of transportation OEMs around the world, that continues to be positive as well. Kind of on the flip side, some of the transportation components have had some weakness as customers kind of manage their operations. And then just generally in industrial where our customers are engaged in providing industrial equipment there still seems to be some latent weakness associated with that. So there's both positives in metalworking as well as some challenges. But again, we're focused -- even in those areas where the underlying markets are not necessarily strong, we're very focused on new business wins and helping customers to solve the challenges that they have in those spaces. And we're doing a good job on converting kind of across the entire metalworking and metals segments.

Arun Viswanathan: Okay. Thanks fort that. And just curious, you've called out kind of some persistent kind of sluggishness overall in volumes. Last year, I think, obviously, volumes were impacted by destocking and some other negative trends as well. So when you look at the footprint, do you think that there's any rationalization that could be necessary in certain geographies? Or are you pretty comfortable with where things are? Just curious, given your limited visibility on when a churn could happen, how you're thinking about that? Thanks.

Andy Tometich: Yes. Thanks, Arun. For sure, we're always looking, regardless of the end market conditions, on how we have the right footprint to be able to provide the service that we need for customers. Just as a reminder, we tend to set up so that we're able to plan, source, make and deliver locally, and that's a big part of our value proposition. So we balance the need to be able to do that and offer that to customers against how we can optimize it from an efficiency standpoint and we'll continue to look at that. But volumes, although they've been challenged, we're doing a good job of outperforming and we're anticipating that we're going to continue to make our own good progress there by the things we're doing and taking control of the things we can control.

Arun Viswanathan: And then just lastly, if I could, just -- maybe you can just elaborate on what you're seeing on the M&A side. I think you completed the Sutai transaction. How does that fit in? And what else should we expect in the next six to 12 months?

Andy Tometich: Sure. Yes. So first of all, capital allocation strategy remains intact. We think we have a good one here that's focused on shareholder value and balance. Of course, a big way that we unlock shareholder value is through growth, both organically and inorganically. And we just completed two bolt-on acquisitions this year, I.K.V and Sutai. In both of those cases, that's kind of right down aligned to our strategy as we're building out our capabilities on advanced and operating solutions. And when we say building out that capability, is taking advantage of our customer intimate model and adding some unique channels to customers that we might not have as much strength that we can build up, a geographic play or a technology play. And in both of those cases, we added capabilities in all three areas. The pipeline is still rich. We're continuing to move it along. We cultivate that over time. There's a range of opportunities and sizes. And we have our balance sheet in a really good spot, thanks to our cash generation that allows us to evaluate all those options. So, we're going to continue to prioritize and advance those that are best for our business aligned to our strategy and generate value for our shareholders, which the two that we've executed on already fit very nicely.

Arun Viswanathan: Thanks.

Andy Tometich: Thank you.

Operator: Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Jon Tanwanteng: Hey, good morning. Thank you for taking my questions. I was wondering, Tom, if you could talk about your goals as CFO and if you expect to drive any meaningful changes versus your predecessor?

Tom Coler: Yes. Thanks, Jon, and good morning. Yes. I would say my priorities are sort of threefold. One to the question you asked is really to build on the strong foundation that we have here at QH and continue to make in advance the good progress that's happened over the last few years. So I'm really excited about the opportunity to do that. I think another focus area for me is to support the continued investments that we have to drive growth in the enterprise and then balance that with continued focus on generating operational efficiencies where we've got opportunities to do that. And then lastly, as we talked about in our prepared remarks, I think the cash flow generation for the organization has historically been strong. And so I'm focused on further enabling cash flow generation to maintain the balance sheet flexibility we have and to overall support our capital allocation strategy.

Jon Tanwanteng: Great. Thank you. And then, Andy, I think I heard you say that the M&A pipeline was rich at this point, do you expect to be holding on your cash and balance sheet to reserve firepower for those opportunities? Or do you expect to continue more of the share repurchase that we saw in Q2?

Andy Tometich: Thanks, John. I go back to, again, we've got a pretty disciplined and balanced capital allocation strategy. And our preference is for growth and to do that through organic and inorganic, and we do have a solid pipeline. But we're not going to let cash build. We want to have the flexibility of all the tools to be able to optimize and deliver that shareholder value. And the second quarter was a great example, where we reduced debt, we increased our dividend, we invested in CapEx, we bought -- we bought Sutai, which builds on the acquisition that we had done earlier in the year of I.K.V and we bought back some shares. But for context, those repurchase shares were pretty opportunistic. It was $8 million in the second quarter. So, we're confident in our cash flow capabilities, and we believe we've got the right model and strategy to be able to deliver that shareholder value using all the tools that are available to us in our capital allocation strategy.

Jon Tanwanteng: Great. Thank you. If I could squeeze in one more. What's the expected accretion or contribution from Sutai?

Andy Tometich: Yes. So we haven't disclosed that. It's relatively minor in the overall top line. But what it really does for us is brings us some new technology that we can leverage not only within Japan, but outside of Japan and gives us really good avenues into some additional customers in Japan, where we can take more of the Quaker Houghton solutions. So we're really energized about the opportunity that it brings as well as what it will help us to do as we move forward.

Jon Tanwanteng: Perfect. Thank you.

Andy Tometich: Thanks.

Operator: Thank you. Our next question comes from the line of Charles Neivert with Piper Sandler. Please proceed with your question.

Charles Neivert: Good morning guys.

Andy Tometich: Good morning.

Charles Neivert: Just one question I mean, on considering where things stand in Europe that Asia Pacific, although getting a little bit better, is still on the weaker side as is the Americas. Have you noticed -- has there been any a quite a bit of an acceleration in your ability to make wins, since you're bringing value to companies that are, I won't say struggling necessarily, struggling, but or maybe really looking at their cost structure more carefully, and that makes your ability to win new business. I won't say easier, but more appealing. So have you seen an acceleration in that?

Andy Tometich: Yes, for sure. I think our value proposition is appealing to customers all over the world. But to your specific question, even in Asia Pacific and in China. We end up selling products, but really the value we're providing and the value proposition is helping customers to make the highest-quality products possible, reduce their scrap rates, redeploy their resources on other challenges, and really to make them successful. And that's appealing to customers really in any geography and any end market. So we continue to stay focused on that. And as more and more of our customers drive that performance themselves, we're in a very good position to be able to support it.

Charles Neivert: Great. And in terms of -- can you talk at all about in the last, let's say, couple of years or a few quarters, how many wins you guys have had? What it was maybe a couple of years ago and what it is now? And is there an expectation of sort of numbers for wins going forward?

Andy Tometich: Yes, Charlie, great question. I know we've always talked historically about outperforming our end markets. And we've said our target range is usually 2% to 4% over that level. We've actually been operating at the higher end of that level and quite often exceeding that. So our ability and our muscle to continue to add more value for customers and solve additional challenges is really represented in our ability to do that. And I anticipate, as we go forward, that's going to continue because the world is getting more challenging for our customers to deliver on some of those things I talked about just a minute ago on our value proposition.

Charles Neivert: Great. Thanks very much.

Andy Tometich: Thank you.

Operator: Thank you. And there are no further questions at this time. I would like to turn the floor back over to Andy Tometich for closing comments.

Andy Tometich: Yes. Thanks very much. We really appreciate your continued interest in Quaker Houghton, and I ask you to please reach out to Jeff if you have any additional questions for follow-up. Thank you very much, and have a great day.

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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