It is now my pleasure to introduce the next company. I am delighted to be joined by Jeff Schnell, who is Vice President of Investor Relations at Quaker Houghton. Jeff joined the company in 2022, following IR positions with several other companies. He started his career as an equity research analyst at Jefferies. Quaker Houghton is a global leader in industrial process fluids. It serves industries such as steel, aluminum, automotive, mining, aerospace, and metalworking, to name a few. With Quaker Chemical's acquisition of Houghton in 2019, the company doubled its size. The combined entities are operating within a $13 billion addressable market, to which they offer products such as continuous casting fluids, hydraulic fluids, and greases, as well as other critical oils used by metalworking shops.
Quaker Houghton has $17.8 million shares outstanding, a stock price of about $130, market cap $2.3 billion, net debt of $518 million, for an enterprise value of $2.8 billion. I will now let Jeff bring us up to date on the company's operations and talk about the recent change in management with the nomination of Joe Berquist as its new CEO. Jeff?
Yeah. This is probably easier. The green goes.
Thanks for having me here. I appreciate seeing everybody in the crowd here. I'll go pretty quickly through some slides, of course, the non-GAAP disclosures. Looking here, Quaker Houghton is the global leader in industrial process fluids. We're a specialty chemical company with a service tilt, with approximately $1.84 billion in revenues, as Rosemary said, an asset-light model, and strong free cash flow generation capabilities. We also have a proven flywheel of investing back in the business and high returns from these organic and inorganic growth investments. Looking here, we're organized into three segments. The Americas, as you can see, is the largest. Approximately half our sales with EMEA and APAC representing the rest. China is a large portion of the APAC business, but it's also very important markets like India, Southeast Asia, and elsewhere.
If you look at our industry categories on the left-hand side, we serve the metals industry. Simply put, when metal comes out of a furnace, it needs to get formed. That's where we get involved. When it gets into its original form, we call that metals. There's a whole host of processing fluids that are needed to get it into its initial shape. You have rolling oils, corrosion preventatives, acid inhibitors. We call that the metals side, which is about a third of the business. When that sheet then needs to get stamped, formed, forged, or whatever to make a hood of a car or a tractor or a refrigerator, et cetera, we have a whole host of forming fluids, metal removal solutions, you name it. We call that metalworking.
You got the metals then downstream, sort of, if you want to think of it that way, into metalworking. As part of metalworking, we also have a host of operating solutions. These are process fluids that are treating the machines that are processing the metal. Think fire-resistant hydraulic fluids, for instance, things to increase tool life and help create value for customers that way. Lastly, we have a whole bunch of advanced solutions that provide some sort of added benefit, perhaps even in the finished product. You can think of things like performance coatings or surface treatments, or even die casting and impregnation parts, which we've gotten into since 2019. That's how the business is arranged. We have three main segments and two industry categories. This slide is very vital to us.
It's pretty simple, but we pride ourselves on being the best technical expertise in the industry and having a very wide portfolio of products and services. Our biggest differentiation is our customer intimate service model. Our offerings are tailored to customers' needs. These solutions we provide are working on living organisms, if you think of it that way, in a steel mill or an auto OEM or aerospace. They constantly need to be changed so that the specs are operating in the right way so that we can increase the performance of our customers' facilities. In general, our products help to improve labor costs, improve the productivity of our customers, reduce their waste, help them to reach their sustainability goals. There's a tremendous amount of value.
We're rarely the cheaper solution on the market, but we certainly sell on a total cost of ownership model and improve customers' performance that way. In its most intimate model, we have what we call Fluid care, which is essentially, if you think of it at an auto OEM, we may have a team of individuals on site every day providing service to our customers. They wear the customer badge, but they really are our folks. Maybe 20 years ago, there were big engineering departments for a lot of these facilities. In its current state, we are that engineering arm. We are that R&D, and we are that technical expertise that's there for the customer. The next two slides really just have the range of portfolio we have, but I'll slip here to slide eight.
As I mentioned, we're the only pure play in the industry with a large and growing TAM. Our industry is extremely fragmented. Our market share, we estimate, is in the low teens, higher in metals, lower in metalworking, and advanced and operating solutions. We compete with a handful of multinationals, as you can see. There's also a large part of the market that are sort of mom-and-pops, small one technology, one product line that provides a great technology or service to a customer but doesn't have the ability to scale or have other technologies they can provide to get the full suite of products for a customer. We also have approximately 3% of our sales in R&D, which, if you think about these smaller players, that could be more than they earn in sales in a year.
We certainly pride ourselves on investing heavily in the technology of the industry. If I switch here to our end market mix, as Rosemary said in the beginning, we have steel, auto, aluminum, aerospace, general industrial, containers, generally speaking, industrial end markets. This diversification certainly happened with the combination in 2019 of Quaker and Houghton, whereby Quaker was more levered to steel and auto and Houghton was more levered to aluminum and general industrial. You bring the two together, a very diverse end market mix, very balanced. The beauty of this is that in times where one side has been down, we've seen acceleration in others. It is very balanced in terms of our overall portfolio. Maybe I'll skip ahead here through our presentation and get to, how do I go back? Maybe this one.
I just want to touch on our path forward and our growth algorithm, which I think is hugely important if you think about Quaker Houghton. We operate in markets with underlying demand that is growing. Our TAM is growing. We're getting into new products and services and constantly looking for white space. We believe our end markets tend to grow approximately 1%-3% per year over time. That's despite the environment that we've operated in the last few years. We think nothing structurally has changed in these end markets. Our aim is to grow 2%-4% above that underlying market trend. We do this through share gains and through share of wallet. If we're in a customer today and we add in another product line or two, there's very low incremental cost to serve. It's a very high-value model.
There is a lot of leverage in our portfolio to unlock this growth and return back to the algorithm that we have had. We have a healthy margin profile, and we generate a lot of earnings and free cash flow, which we use to execute on our discipline capital allocation program, which is to pay dividends, to invest in our organic growth, to invest in bolt-on M&A strategy, and to remunerate shareholders and maintain the balance sheet flexibility. With that, Rosemary, I am happy to walk through your questions. Shall I sit with you, or?
Yes, sure.
I don't know. Here we go.
Thank you, Jeff, for this overview. I realize it is still early. Joe Berquist, who had been EVP and Chief Commercial Officer since 1997, was named CEO this past November. Can you share some of the changes, if any, that the company has begun implementing? I should point out that this is a second CEO in a very short time since the first one retired a couple of years ago.
Yeah, it's a good question. Mike Barry was our Chairman and CEO from 2008 till 2021. Andy Tometich came in 2021, was here for three years. Joe has three main priorities here. Number one is to return to growth. Number two is to reduce complexity in the organization. Number three is to execute on our capital allocation strategy. We have certainly been implementing some of these changes. He's got a lot of experience in our business. He's been here approximately 28 years. He's run commercial. He's run strategy. He's run different regions for us. He has a lot of experience with our products and our service model. In our business, really understanding the customer's needs is incredibly important because of how intimate our service model is.
I would say the growth and complexity piece are fairly intertwined. We're working to globalize Quaker Houghton. We're building a new facility in China to support the needs over in the Chinese market, which is a growing market, but also a very important market from the global metals production perspective. We're being targeted with other investments, namely trying to be more responsive to customer needs. Over the past few years, we've really focused internally building some of the functional critical capabilities that we've needed. If you think two companies came together and we generated the cost synergies, but we really wanted to stand up the organization for growth while doing so in a difficult market.
The priorities for Joe are really refocusing on the customer, making it easier for customers to do business with us, simplifying the organization, and, of course, delivering growth and good results that we can invest back into the business.
Thanks. After declining 230 basis points in 2022 to 13.3%, EBITDA margin has more than recovered, reaching 16.6% in 2024, sorry, despite an almost 6% decline in revenues. Can you address the changes which contributed to this result? Can you share the company's long-term margin target?
Yeah, we've executed pretty well through this difficult market environment. Our industries have been down. Again, our algorithm to grow 2%-4% above the market has been there. We've certainly been taking share with new and existing customers from a wallet share perspective. When the inflationary period happened, the philosophy was to price to gross profit dollars. Inflation had continued, so we got more aggressive with pricing. We recovered our margin profile from a gross margin perspective to the mid-30% and EBITDA into the mid to high teens. Our margin expectations are to grow EBITDA dollars, but also to grow margin, maintain it consistently in the high teens, and push towards 20% over time.
Can you give us an overview of the aluminum and steel industries in which you operate, what the company sees in terms of the impact from the announced tariffs, and what the impact would be both directly and indirectly?
Yeah, tariffs are interesting from a direct perspective. We have facilities globally. We operate a local-for-local market in pretty much every region we operate. From a direct impact, fairly limited. We have the ability, and we've put mitigation plans in place prior when there have been tariffs on the industries we serve. We have facilities in Canada, Mexico, and China, across Europe and throughout. We think the direct impact could be fairly limited. The indirect impact is harder to ascertain, of course, depending on how the tariffs play out and how they affect our customers. Certainly, we supply the metals market, the auto markets. Depending on what ends up happening, we'll have to assess. Again, we have the ability to serve our customers in whatever region they're operating in.
If that means maybe demand comes out of one area and goes into the other, we have fairly equal share across the globe. We think we pretty much have the ability to serve our customers. The impact, of course, on global growth is one that we have to watch, and we'll see how that plays out.
Are you hearing any tidbits, for lack of a better formula on my side, but anything from your customers? What are they saying? Are they postponing buying? Are they buying ahead? What do you see?
Yeah, hard to answer. I think the uncertainty is certainly there. We have a fairly just-in-time business, so we're helping to support the demand as we see it.
When you reported the fourth quarter results, you mentioned strong aerospace and primary metals. How large are these two categories? What do you see developing in 2025? Do you see that same growth continuing, or does the current environment mean that they are going to slow down?
Metals, as you saw on the prior slide, was about a third of our business. Aerospace, five or less. Both those markets have been dealing with their own challenges. You had some labor challenges in the aerospace market last year. You also had, on the metals side, you have European metals demand or supply has been impacted by energy. We tend to be a very small part of the overall cost of goods sold for our customers, a very high value add. In this more challenging market, we've been gaining a lot of share in the metals market, very pleased with, in all regions, how the business is performing from that perspective. Aerospace, certainly, we believe in the long-term trend. We have a lot of very cool technologies that are there to help with the production process.
Both these markets, we expect we're going to continue to grow and continue to take share.
Any questions from the audience? Yes, there is one to the right. Wait. Yeah.
Thanks, Jeff. Thanks, Rosemary. Your balance sheet is fairly healthy. You put up the slide that talked about market share. It looked like, obviously, 50% of the market is dominated by moms and pops. Can you talk about your growth strategy and the M&A environment in terms of being able to grow through acquisition versus growing organically, maybe somehow challenging that very large market share that the moms and pops have?
Yeah, absolutely. It's a great question. Balance sheet right now, net leverage about 1.7 times. When we did the combination with Houghton, we levered up to approximately four times, and we've been de-levering ever since. During that period of time, we've also maintained our pension for M&A. So we've done a handful of deals over that period of time. Even over the last 18 months, we've done three deals. These are small. Last year, somewhere in the range of $40 to $50 million of cash spent on M&A. Through COVID and whatnot, I think the market itself was hard to really gauge what normalized earnings power for some of these organizations are, what the power is, how the market was going to be evolving, plus we were de-levering.
In our portfolio and our pipeline, we certainly have a range of sizes and scopes of deals, both in traditional metals, but also across metalworking, advanced and operating solutions, which we're going to continue to execute on. Timing, as you know, is very lumpy when it comes to M&A. It has to be the right time. This is a very valuable tool, we believe, in shareholder value creation. As I mentioned, the market grows somewhere in the 1% to 3%. We aim to grow 2% to 4% above that and then use M&A as an accelerant to our growth, whether it's a new technology, customer, channel to market. We have the ability to leverage it across our entire portfolio, which is a unique characteristic of what we have relative to the other side of the market.
Following up on Keith's questions, you have, as you mentioned, made two small acquisitions in 2024. One, I really insist on calling it 2025, one in South Africa and one in Japan. We also made another one since year-end, so spending about $55 million for all three of them. Can you share the rationale behind the transactions, and how much do you think they will contribute to 2025 results?
Yeah. We did IKV, which is a specialty grease player in Europe last year, as well as Sutai, which is for die-casting impregnation of parts in Japan, and then the small one we just did in South Africa. By and large, very complementary to our portfolio. If we think about both of them in the same light, this is giving us the opportunity to have great technology in IKV's sense in Europe, which is going to help us with the grease market. We don't like to ship our products across oceans. There's these liquids, high water content in some cases. You want to make sure you have local capacity, and you want to make sure you have the mix of products everywhere. In both those instances, we have the ability really to scale and cross-sell the capabilities of their portfolio with our technical expertise everywhere.
That's been the playbook now for as long as I've followed the company. It's worked really well. There's still opportunities from the combination, from cross-selling. These provide more opportunities because when we go to a customer, we want to make sure we have the whole range of portfolio to serve their needs because, again, the incremental cost to serve once you're in is fairly low. The technical aspect is important. We have to make sure we also get our technical experts everywhere, and we get all the information sharing, the R&D channels working appropriately. That's what we're focusing on. Back to your first question about what Joe's doing, Joe's really making sure that there's a streamlined communication network throughout our business and make sure we get those technical experts to help go sell.
Just finishing up on that topic, how much leverage would you be willing to take for large acquisitions? First of all, is there such a thing that you might be interested in?
The combination with Houghton took a long time to consummate. It was years in the making from what I understand. It predates me. We levered up to approximately four times during that combination, a lot of synergies in the deal, a lot of balance from an end market perspective, a lot of great technologies that both companies share. From a recent perspective, I suppose that's where we have done. We generate a lot of free cash flow. We have the ability to de-lever pretty quickly. We've stated publicly that we'd like to operate in two and a half times and lower, currently over 1.7. The pipeline has got a range of sizes and scales of deals. We're going to continue to execute throughout the sizes.
Approximately 48% of the company's revenues are generated in the Americas, 29% in EMEA, and 13% in Asia-Pacific. EMEA has by far the lowest operating margin. Is there any possibility that you can bring that margin to the North America's level, or are there specific conditions in EMEA that would prevent you to do that?
Certainly, the EMEA market is the most fragmented of the markets. There's country by country. There's rules and regulations throughout each. It's definitely a highly competitive and fragmented market to operate in with a lot of ongoing challenges right now. For instance, we exited Russia when that happened. We had some tolling business as part of the combination too. We completed a cost program, a $20 million cost program last year. Some of that targeted Europe. We announced another $20 million of cost actions we're taking for this year, 15 of which will be in year. Some of that will certainly target the EMEA market. I think, generally speaking, there's absolutely opportunity from an EMEA margin perspective. Some of this will come with further network optimization and procurement actions.
We have to wait and see how our customers are thinking about the EMEA market long term, which we certainly see will be an important market. We want to be able to serve our customers. We will adjust our size accordingly if and when those decisions get made.
Do you see, in terms of EMEA, do you see any pickup in the demand level, or are they still kind of sticking around the low, the bottom of the economic environment?
Yeah, we certainly think they're more at trough levels than anything else. I will say, though, our team has done a phenomenal job in Europe gaining share with customers in metals and metalworking, really with this value proposition of, hey, I understand it may not be the lowest price, but it's certainly the lowest cost. We help them achieve sustainability goals. We help them achieve productivity and energy savings and labor costs. Our value proposition is alive and well in Europe, even in this very challenging market.
Thanks. Excuse me. Can you share the percentage of your operations serving the automotive industry? It looks as if the tariffs in Canada and Mexico will affect production. What can you do to offset that impact, and how large could that impact be?
Yes. Total auto transportation, we say, is approximately a quarter of the business, as you saw on the end market slide before. As I mentioned, we have plants in Canada. We have a plant in Mexico and throughout the world. We have the ability to be nimble based on where the production is occurring. As I mentioned before, the difficulty will be to understand what tariffs could do to total underlying demand. We are watching carefully and again trying to gain share with customers, help them improve their operations. We think that value proposition still works well even in this environment.
Is the production in both of those countries mostly for domestic consumption, or is some of it coming back to the U.S. and therefore may affect your results?
Both.
Okay. I was wondering if you have seen any change in the demand level for your products since the end of the fourth quarter.
Seasonally, our business tends to see an improvement in North America or the Americas in general and EMEA markets in the first quarter. APAC contends with the Lunar New Year. That is kind of the rub you see in Q1 relative to Q4. I think, by and large, that is what we see playing out. That is what on our call we mentioned we would expect.
What kind of visibility have you had historically, and is it at the same level currently or given the environment, the visibility suddenly has declined substantially?
I think the visibility, there's just more uncertainty in the markets today than there have been in the past as customers and companies try to evaluate the impact on some of the tariffs and whatnot. Generally speaking, we have pretty good near-term visibility. We're so intimate with our customers that we tend to understand what's going on in their planning horizon.
By near term, what do you mean? Do you see two weeks out?
One to two quarters.
How many?
One to two quarters.
That much. Okay. Any questions from the audience? Yes, Charlie.
Jeff, is your business capable of, to some degree, being price-correlated to some of the metal markets for pricing? We're seeing something going on in the gold market that's unprecedented since the 1970s. I'm wondering if that migrates to other metal markets and to metal process chemicals like your own business, where there could be a story to your business having more financial flexibility to process industries associated with those metal industries, like metalworking that you're talking about. Or am I just hunting down the wrong path? I'm just wondering what you're thinking.
Generally speaking, we're fairly agnostic to what the price of the product our customer is producing is. We're production-based, right? How many units and therefore how much product is correlated more to that. To the indirect angle of what the customer's pricing model is and how that impacts their demand or their production levels, that could have an impact there.
Okay. I was just thinking maybe the gold market's saying something about the world. Maybe that translates to other metal sectors or inflation-hedged sectors. Your industry is basically one that facilitates the efficiency of those metal-producing markets. That's why I was just okay. Thanks, Jeff.
Are you?
Jeff, as you're looking at transactions, you've been there since 2022, but you're in the business forever as a sell-side analyst. Do you sit down and say, hey, deals are going to be easier in the next two or three years to close if we make an announcement of something that's a little more of concern because of regulation changes in Europe? What's that other country? Oh, the U.S.
It certainly feels that there's more chatter about M&A in the chemicals sector than in prior years. That's more of a general comment, right? I mean, our pipeline has been pretty healthy now for a number of years. Oftentimes, the companies we're buying on the smaller end are family-run that need succession. They look to Quaker Houghton as a company that continues their legacy, helps build and grow their business and scale it, which they couldn't do. We are going to continue to execute on them. Those are timing is really uncertain. Certainly, I think from a market perspective, it feels a healthier market than in prior times.
Thank you, Jeff. We appreciate your participation and look forward to following the progress for Quaker Houghton.
It looks like there might be one more if I have.
Are there no questions?
Oh, yeah, just a quick question. You mentioned that you're bringing your engineering team into the plant, and you basically serve like the expert engineers on some of the machinery that's used there, which is a fantastic niche. I'm wondering, do you charge explicitly for labor time of your people if you're not selling any of your products in, or is it only just feel-good customer consulting around selling actual products and fluids and everything like that?
No, there are different models, of course, for charging for it, whether it's through product sales or explicitly through the labor. It depends on the customer contract. It depends on the negotiation with them. Less the feel-good. It's more about how do we create the value for them long term and then sharing that value over time.
I think you could look at we have a product called Fluid Intelligence, which essentially is using digital tools to help do a lot of the samples and whatnot that our people do every day. I think depending on how that model shakes out, especially for the large tail of customers, you could look at it differently. For us, it's more about how do you use the service model to gain more wallet share with customers over time.
I have stolen two minutes from the next presenter.
Thanks, everybody.
Thank you so much.