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Text: We have slides for our conference call.
You can find them in the Investor Relations section of our website at www.
A great deal has changed in the world in 2020 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 34 plants around the world are operating, and we are satisfying all of our customer needs.
I am very proud of what the Quaker Houghton team has done to continuing to service our customers, as well to continue our integration efforts, which are going well.
We are pleased with our results for the third quarter when considering we were coming from such a weak second quarter.
Overall, our sales were up sequentially 28% from the second quarter and down 5% from the third quarter of last year on a pro forma basis.
Let me now give you a little more flavor on what we experienced by segment or region.
First, as we look sequentially, the Americas saw the largest quarterly net sales improvement as sales grew 48% sequentially, driven primarily by stronger volumes.
A similar story I heard in Asia Pacific, EMEA, and our Global Specialty Businesses, where volume improvement drove net sales increases of 24%, 21% and 16% respectively compared to the second quarter.
So we saw good sequential improvement in all business segments.
Another way to indicate this sequentially quarterly sales trend is to look at what happened in our three main customer industry groups on a global basis.
Metalworking increased the most and grew 39% sequentially from the second quarter, due primarily to automotive OEMs and related suppliers coming back from the prolong shutdowns or significantly reduced production rates in the second quarter due to COVID.
Our other industry groups of metals and Global Specialty Businesses also increased and showed growth of 21% and 16% respectively.
I hope these different cuts of our significant sequential sales increases help provide insight to what was happening in the quarter.
So overall, our sequential volumes were up 27% but our pro forma volumes were still down versus last year by approximately 10%, when excluding the positive impact of Norman Hay, which we acquired last October.
This approximately 10% decline was felt in all regions and segments.
However, Asia Pacific was less impacted since China actually showed modest year-over-year growth.
I also want to point out that we did continue to take market share despite the weakness in our end markets as our continued analysis shows that we have total organic sales growth due to net share gains of approximately 2% in this quarter versus the third quarter of last year.
I am very pleased to see this strong rebound from last quarter, but we're certainly not all the way back.
As we said previously, we estimate it will take at least two more years for our markets to fully return, and some markets like aerospace, which makes up about 3% of our sales, will take more time than that.
However, we expect our sales to rebound more quickly due to our projected continued market share gains, as well as our potential smaller bolt-on acquisitions in the future that we may make.
Concerning gross margins for the third quarter, they were up significantly compared to both the second quarter and for last year.
The sequential increase is primarily due to higher volumes and its impact on the fixed portion of our manufacturing costs.
The increase from last year was primarily due to the realization of our manufacturing and raw material cost synergy savings.
This pandemic and its impacts have been similar in many ways to what we went through in late 2008.
Just like then, we took fast action to save costs in numerous ways.
Essentially, all discretionary expenses have been eliminated, we stopped new hires where possible, some positions were furloughed, and our planned capital expenditures have been cut by over 30%.
And very importantly, we reviewed our integration and synergy plans in light of this situation and took additional actions as well as accelerated other synergies where possible.
This has led to additional cost synergies as we have increased our guidance on synergy achievement again this quarter.
For 2020, our current estimate is $58 million of cost synergies achieved versus our earlier estimate of $53 million.
Also, the total synergies we estimate that we will achieve in 2021 have been raised from $65 million to $75 million with '22 reaching $80 million.
In this quarter, we achieved $17 million in synergies, and we expect sequential improvement during our future quarters.
So overall, we are pleased with the quarter, given the environment in which we were operating and we were -- and we did see significant sequential improvement in our sales, gross margins, and adjusted EBITDA.
Also, our cash flow is very strong and our net debt decreased by 7% or $58 million.
The positive cash flow nature of our business during severe downturns is something we have discussed with investors in the past, and we're now seeing its positive impacts again in these tough times.
Looking ahead, we anticipate that throughout the next year or two, our markets will show gradual sequential improvement.
However, it's hard to predict that improvement by quarter, given the continued uncertainty in our operating environment.
For the fourth quarter, we expect our adjusted EBITDA to be in the ballpark of the third quarter, and for the full year, we expect our adjusted EBITDA to exceed $215 million.
Overall, our higher expected synergies, additional cost saving actions, and improvement in our product margins and our cash flow management are expected to continue to help us during this period of time when our markets are down versus pre-COVID levels.
As we look forward to 2021, we expect our adjusted EBITDA to increase by 20%-plus as we continue our integration savings, take market share in the marketplace, and benefit from an expect gradual rebound in demand.
I am so proud of how our team has performed in servicing our customers, meeting their needs, and successfully continue with our integration execution, which is both critical and difficult for us 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.
I'm 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.
I'll now hand it over to Mary so that she can review some of the key financials for you for the quarter.
These are available on our website.
Please also note that we continue to update our risk factors in our Form 10-Q to address the evolving COVID-19-related issues, and these risk factors should be reviewed along with those in our 2019 Form 10-K.
Reconciliations are provided in the appendix of this investor deck.
In this review, our comparison periods show actual and non-GAAP results, as well as pro forma sales and pro forma adjusted EBITDA as if we've been combined with Houghton throughout the periods presented.
Remember that we closed the Combination on August 1, 2019, so our actual reported and non-GAAP Q3 2019 results include only two months of Houghton.
Please see slides 6 through 10 now, while I review some highlights.
As Mike noted, we saw sales rebound of $367 million in the third quarter, up 28% from $286 million in Q2, but still down 5% from pro forma Q3 2019 sales of $386 million, due primarily to lower volumes as a result of COVID-19.
Our gross margin of 38.2% is up significantly from our gross margin of 34% in Q2 and 32.3% in Q3 of last year, which we estimate would have been about 35.5%, excluding a purchase accounting adjustment.
We also saw a benefit to our gross margin this quarter that we estimated approximately 0.5%, which we attribute to price mix that we believe was unique to the quarter.
You might remember on our last call that I commented that we expected the benefits of our procurement synergies and manufacturing optimization to be more visible as volumes pick up and this is what you see coming through as part of our sequential improvement.
In addition, our cost synergies in these areas continue to increase as reflected in our updated cost synergy estimates.
Our non-GAAP operating income of $43.2 million rebounded significantly from Q2's $11.2 million and is also up 25% from $34.5 million in Q3 of last year, primarily due to the addition of Houghton and Norman Hay and the benefits of realized cost synergies, partially offset by the negative impact of COVID-19.
Similarly, our non-GAAP earnings per share of $1.56 is up significantly from Q2's $0.21, while it is flat to last year as a result of the additional shares issued at close of the Combination.
Our effective tax rate in the current quarter was an expense of 8.1% versus a benefit of 27.6% in Q3 of last year.
We've seen significant volatility in our quarterly effective tax rates due to COVID-19-related changes in profitability as well as continued updates to the 2017 tax law.
Excluding the impact of all unusual items, we estimate that our Q3 effective tax rates would have been approximately 24% and 20% for 2020 and 2019, respectively.
For the full year, we expect our effective tax rate, excluding all unusual items will be in the range of 23% to 25%.
As Mike mentioned earlier, we're pleased to see our adjusted EBITDA almost double to approximately $64 million in Q3 from the Q2 level of approximately $32 million and increased approximately 5% compared to our pro forma adjusted EBITDA of $61 million in Q3 of last year.
This is due primarily to the benefits of our realized cost synergies in the quarter and the inclusion of Norman Hay more than offsetting the negative impact of COVID-19.
Another bright spot in the quarter was our cash flow.
As we discussed in our last call, because our business is so asset light, with most of our investment in working capital versus property, plant and equipment, when we experience a major downturn in volumes, we expect to see significant positive cash flow from releases in working capital.
Indeed, we saw this in both Q2 and Q3 and are pleased to report that our year-to-date operating cash flow more than tripled versus last year to $112 million.
In addition, our low capital intensity allows us flexibility with our capital spending, and consistent with our Q2 call, we're on pace to reduce our capex by more than 30% versus our original pre-COVID estimate.
As a result of our strong cash flow, we were able to reduce net debt by $58 million, a 7% reduction from Q2.
This improves our leverage ratio to 3.4 times from 3.7 times at the end of June, and our bank calculated leverage at the end of Q3 was about 2.9 times versus our covenant maximum of 4.25 times.
In short, our liquidity and leverage showed good improvement from already solid levels.
In addition, as Mike noted, we further increased our estimates of expected Combination cost synergies from $53 million to $58 million in 2020, from $65 million to $75 million in 2021, and from $75 million to $80 million in 2022.
In summary, our track record of navigating successfully through tough economic environments by gaining share, disciplined cost management, and generating good cash flow during major downturns all give us confidence in our ability to weather the current challenges.
This strong core operating performance is further enhanced by the cost synergies we are realizing from the Combination, and we're seeing the meaningful impact [Technical Issues] synergies have on our financial performance.
In 2021, as Mike mentioned, we expect to see a greater than 20% increase in adjusted EBITDA.
Finally, we believe the Company is well positioned to leverage the expected upswing in business activity.

user
q3 non-gaap earnings per share $1.56.
full year 2020 adjusted ebitda guidance increased to exceed $215 million.
expects reductions in headcount and site closures to continue during 2020 and into 2021.

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