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Text: We have slides for our conference call.
You can find them in the Investor Relations section at our website at www.
Bfore I provide an overview of our business in the third quarter.
I do want to introduce Andy Tometich, who will become CEO on December 1 Andy joined Quaker Houghton on October 13 and we are in the midst of a detailed transition process over the seven week period until we become CEO.
Andy has over 30 years of experience in the specialty chemicals industry with a strong track record of accomplishments and a passion for the customer intimate business model.
Andy, please feel free to say a few words.
I'm very pleased to now be a Quaker Houghton and to be with you here today.
Over Mike's very successful tenure, he and the Quaker Houghton team have developed a business model with customer experience as it's true differentiator and that truly resonates with me.
After three decades and specialty chemical companies that focused on customer-based solutions, I'm really looking forward to building on the strong foundation at Quaker Houghton.
Especially as we look to grow in areas where our model add sustainable value for our customers and our stakeholders.
For now, I'll just wrap up my brief comments by saying, I'm excited about the opportunities for Quaker Houghton, Mike.
I really appreciate everything you are doing to support our seamless transition including your continuation as Chairman and I look forward to working with our analysts, investors and stakeholders, including those who are with us on the call today.
Mike back to you.
And I'm highly confident Andy will take Quaker Houghton to new heights.
And now onto the quarter, our results for the third quarter where we were, where we expected in the base.
Although how we got there was different than our original expectations.
The major headwind for the quarter was raw material costs.
They increased nearly 10% from the second quarter to the third quarter, which was considerably higher than our expectations.
However, we also had good sales growth and continued our efforts around cost control, which helped offset the raw material headwinds.
Let me now dive deeper into our performance and I'll start with sales.
Overall, our topline revenue was up percent from the prior year, with all segments showing strong growth.
We saw good organic volume growth between 7% and 9% for our three largest segments, which was the Americas, EMEA and Asia Pacific.
Higher prices of around 10% were also a major factor in our sales growth.
In addition, we saw a benefit from acquisitions of 4% and from foreign exchange of 2%.
On a sequential basis, our sales volumes were relatively flat.
While we did see growth in some of our end markets, sequential growth was muted by both seasonality and certain segments as well as the semiconductor shortage which we estimate cost us approximately 2% points of growth in the quarter.
I also want to point out that our ability to gain new piece of the business and take market share continued to contribute to our strong performance as we estimate total organic sales growth due to net share gains was approximately 3% in the third quarter of 2021 versus the third quarter of 2020.
So we continue to feel good about our ability to deliver on our historical performance of consistently growing 2% to 4% points above the market due to share gains and looking forward, we continue to feel good about delivering these levels given the opportunities we have recently won or are actively working on.
So in summary, the big picture on organic volume growth for us was approximately 3% was due to market share gains.
About 4% due to growth in our underlying markets, which we estimate would have been 2% higher, if it wasn't for the semiconductor shortage.
While sales were a positive for us in the quarter, a clear negative was the continued increase in our raw material costs.
While we knew raw materials were trending up, the last time we talked, the increases have continued longer and at a higher level than we expected.
Overall, our cost of raw materials have increased nearly 10% sequentially in the third quarter.
Further, the availability of raw materials has impacted us at times, but I'm proud to say that we've navigated this so far and have ensured that all our customers have continue to operate their business.
The increase in raw material costs did put downward pressure on our gross margins in the third quarter and the increases in raw materials will continue into the fourth quarter, although at a slower projected rate.
We have, continue to implement price increases and we will be implementing more of the next two months.
Our expectation is that we will see sequential improvement in our product margins in the fourth quarter as we make strides to offsetting raw material increases.
For the fourth quarter, we should start to see some improvement in our product margins, but we expect to have a larger improvement in the first quarter of 2022.
Our goal still remains to exit the year with enough price increases in place that we will offset raw material inflation from 2021 as we enter into 2022 and we believe this is achievable.
So overall we are pleased with the quarter, especially considering the challenges we faced with raw material pricing as well as the headwinds from the semiconductor shortage.
Our trailing 12 months adjusted EBITDA of $279 million is an all-time high as 25% higher than our $222 million from last year.
So we are experiencing a step change in our profitability that we projected as we entered into the year.
Related to our liquidity, our net debt in the quarter was relatively flat due to increases in our working capital, primarily related to raw material cost increases and availability.
However, our leverage ratio of net debt to adjusted EBITDA continues to be at 2.7 which is the low point since the combination two years ago, and down from 3.4 one year ago.
Each of them expands our technology capabilities and our geographic expansion in certain product lines.
In total, they're adding 15 million in revenue and $2 million in EBITDA.
While maybe not that meaningful given the size each provide another building block in our strategic portfolio.
This also continues our trend of buying smaller companies for an attractive multiple of approximately seven to eight times EBITDA.
As we look forward to the fourth quarter, we expect short-term headwinds from high higher raw material costs.
The power restrictions in China and the continued impact from the semiconductor shortage on the global automotive market.
But as I mentioned earlier, we expect to see some sequential improvement in our product margins.
Overall, we expect our adjusted EBITDA in the fourth quarter to be similar to the third quarter and be somewhere in the '60s.
And stepping back and looking at the year as a whole, I am more optimistic about our business now than I was at the beginning of the year.
While we will likely end up with our profitability in 2021 in the same place as we originally expected.
The way we are getting there is different.
Essentially, we are seeing higher demand in our products in most end-markets.
But at the same time this higher demand was largely offset by the very large rising input costs, which negatively impacted our margins due to the lag effect of getting price increases.
However, we are making headway in our price increases, and as I mentioned before, we remain committed to our goal of exiting the year with product margins back to our targeted levels.
So as to recover the past years raw material inflation as we enter into next year.
I believe this scenario was better than we expected entering the current year as we will exit with better demand in our end markets, coupled with getting our margins and a better place going into 2022.
As we enter 2022, the headwinds in the fourth quarter caused by high raw material costs and the semiconductor shortage, as well as the power restrictions in China are likely to last into the first part of the year, but become less of a headwind over time.
For the full year, we believe 2022 will be a strong year for us with net sales and earnings growth to be above our long-term trends.
We expect this to be driven by one good growth in our end markets as our markets continue to rebound.
Two continued market share gains and three sequential improvement in our product and gross margins over the course of the year as we recapture the raw material inflation from 2021.
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 is both critical and difficult for us given the conditions we faced this year.
People are everything in our business and by far our most valuable asset and ensuring their safety and well-being is and will continue to be a top priority for us.
So I can't help but emphasize my pride in 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 also there are reconciliations between US GAAP measures and non-GAAP measures provided in our call charts on pages 11 to 22 for reference.
Getting into our third quarter performance, the story was pretty consistent with our previous quarters this year, and that it was really a tale of a positive solid top-line performance tempered by a negative higher input costs due to the global supply chain disruption that we and the rest of the world are currently facing.
As I begin to discuss our quarterly performance, I'll point you to slide six, seven and eight in our call charts, which provide a further look into our financials.
Our record net sales of $449.1 million increased 22% from the prior year, driven by 6% organic volumes, 10% from our pricing initiatives, 4% percent from acquisitions and 2% from foreign exchange.
When looking sequentially, we were up 3% from the second quarter, largely due to increases from our pricing initiatives on flat volumes.
Turning to our gross margin trend.
Our third quarter margin ended at 32.3%, given the upward trend of generally all input costs in the world, we knew this quarter would declined compared to the 35.5% level we had in second quarter and also signaled that this quarter would be the lowest of the year.
That said, the pace of the raw material cost increases were more than we expected and our sequential gross margin declined as such.
Looking ahead to the fourth quarter, margins, as Mike mentioned, we expect to see sequential increases in our product margins on a dollar profit basis.
However, the impact of the price increases to our top line will naturally impact our overall gross margin level on a percentage basis, as we are putting in price increases to offset raw material inflation initially and retain our product margins on a per kilo basis to ensure we maintain our levels of gross profit in dollars.
We expect to achieve this by the end of the year on a going forward basis once our price increases offset raw material inflation and we protect our gross profit dollars going forward, we will then begin to put in place additional initiatives to return our gross margin more to targeted levels over time.
SG&A was up $7 million compared to the prior year, as we add additional direct selling costs due to our increase in sales and related margin higher labor and other costs that were directly impacted by COVID last year and additional costs associated with our recent acquisitions.
Sequentially, we benefited from $5 million of lower SG&A costs, which were primarily due to lower incentive compensation and some lower professional and other similar fees.
The Company also benefited from other higher income due to FX transaction gains in the current quarter compared to losses in the prior year, which was partially offset by lower performance from our equity investments, primarily in Korea.
The net of this performance resulted in adjusted EBITDA of $66.2 million for the quarter, which was up 3% compared to the prior year of $63.9 million.
As you can see in chart nine, this increased our trailing 12 month adjusted EBITDA to a record $279 million.
From a segment effective, these results were driven by significant net sales increases in each of the Company's segments year-over-year, while gross margins and higher SG&A negatively impacted all segments.
The net of these impacts resulted in a 16% increase in EMEA earnings compared to prior year generally flat performances in Americas and GSP and a decline in Asia-Pacific earnings which was due to a solid performance last year as China was less impacted by COVID 19 in the prior year, as well as a decline in gross margin in the current quarter due to the continued increases in raw material costs.
When looking at our segments sequential performance, each segment's topline was other above the second quarter, a relatively consistent, largely due to global pricing initiatives on flat volumes, which were offset by lower gross margins in all segments.
Due to continued increases in raw material costs that exceeded our pricing initiatives.
From a tax perspective, we had low effective tax rates in the current and prior year quarters of 2.6% and 8.1% due to various one-time non-cash related items.
Excluding these items in each period, our tax rate would have been relatively consistent at 25% for the current quarter compared to 24% in the prior year.
To note, we expect our fourth quarter effective tax rate to be a little higher in the range of 26% to 28%.
But our full year effective tax rate will be more consistent with past estimates in the range of 24% to 26%.
Our non-GAAP earnings per share of $1.63 grew 5% compared to the prior year as our solid adjusted EBITDA coupled with over a million of interest savings due to lower borrowing rates and average borrowings were partially offset by a slightly higher tax expense.
As we look to the company's liquidity summarized on chart 10, our net debt of $759 million was flat compared to the second quarter.
This was primarily driven by $12 million of operating cash flow, offset by $7 million of dividends paid and $6 million of additional investments in normal capital expenditures.
The quarter's low operating cash flow was driven by further investment in the company's major cash requirement, working capital.
Specifically the company, continue to see cash outflows from accounts receivable due to higher net sales and also had considerable increases in inventory, which were due to higher raw material costs, as well as restocking and bulk purchases to ensure safety stock given the disruption in the global supply chain.
The company's liquidity and leverage still remain healthy with a reported leverage ratio at 2.7 times as of the third quarter compared to 3.2 times entering the year.
I want to emphasize we are committed to prudent allocation of our capital and remain committed to reducing leverage to our target of 2.5 times, which we still are targeting to be near by year-end.
This commitment includes prioritizing debt reduction, but also continuing to pay our dividends as well as investing in acquisitions that provide growth opportunities which makes strategic sense.
This is evidenced by our most recent tuck-in acquisitions of [Indecipherable] and industries, which were acquired for 13 million or a rough multiple of seven times EBITDA and bring with them a wealth of opportunity in technology and product reach.
So to summarize Quaker Houghton had a solid quarter, that was relatively consistent with our expectations but a little different than initially expected due to continued strength in demand and good market share gains, which were partially offset by higher input costs.
Our liquidity remains very healthy, and we remain committed to our overall capital allocation and deleveraging strategy.
Before I conclude my remarks.
I just wanted to take a moment to note that this is the last call for Mike during his incredibly successful tenure as CEO.
Under his guidance Quaker Houghton has reached new heights and grown in areas that some believe could never been achieved.
And I appreciate those remarks, it's really been an honor and a privilege to work for Quaker Houghton for 23 years and to work with such a great people throughout this company that really deliver solutions for our customers every day and really make this a very special place to work.

user
compname says recent acquisitions to add fy sales about $15 million .
q3 non-gaap earnings per share $1.63.
q3 sales rose 22 percent to $449.1 million.

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