Quaker Chemical (KWR) Q3 2026 Earnings Call Transcript

DATE

Friday, Oct. 30, 2026

CALL PARTICIPANTS

• Director, Investor Relations - John Dalhoff
• President and Chief Executive Officer - Joe Berquist
• Executive Vice President and Chief Financial Officer - Tom Coler
• General Counsel - Robert Traub

TAKEAWAYS

• Net Sales -- $544.5 million, representing a 10% increase driven by a 7% improvement in price and mix and a 3% increase in volumes.
• Adjusted EBITDA -- $89.8 million, a record for the company reflecting improved operating leverage despite raw material inflation.
• Non-GAAP EPS -- $2.39, rising 15% year over year due to improved operating performance and lower interest expense.
• Gross Margin -- 35.5%, declining 130 basis points from 36.8% in the prior year due to product margin pressure from higher raw material costs.
• Americas Segment Revenue -- $254.0 million, increasing 14% behind strength in the metals end market and new capacity coming online.
• Asia/Pacific Segment Revenue -- $138.1 million, growing 9% as volume increases in India and Vietnam offset softening activity in China.
• EMEA Segment Revenue -- $152.5 million, up 6% primarily due to a 10% increase in price and mix despite a 2% volume contraction.
• Sales Volumes -- Increased 3%, marking the third consecutive quarter of growth driven by net share gains in the mid-single digits.
• Operating Cash Flow -- $14 million in the third quarter, down from $51 million in the prior year due to higher working capital for inventory builds.
• Transformation Savings -- Exceeding $10 million on an annualized run rate basis, resulting from structural cost reductions and network optimization.
• Total Gross Debt -- $894.6 million at quarter end, with a net debt to adjusted EBITDA ratio of approximately 2.3x.
• Full Year Guidance -- Management expects adjusted EBITDA for the full year to grow a high single-digit percentage compared to 2025.
• Americas Volume Growth -- 6% year over year, benefiting from idled customer capacity ramping back up in the metals sector.
• Asia/Pacific Volume Growth -- 5% year over year, marking the 13th consecutive quarter of volume growth for the region.
• Capital Expenditures -- $11 million in the quarter, largely focused on the construction of a new manufacturing facility in China.
• SG&A Expenses -- $136.4 million, or approximately 25% of net sales, impacted by higher incentive compensation and headquarters relocation costs.
• Interest Expense -- $10 million, remaining consistent with the prior quarter at a cost of debt of 4.6%.
• Share Repurchases -- $3.3 million in the third quarter, with $226 million remaining under the current board authorization.
• Middle East and Africa Revenue -- Grew 24% year over year, though the region accounts for less than 3% of total company net sales.
• Automotive Sector Performance -- Global light vehicle production fell 2%, with internal combustion engine vehicle production down over 10%.
• China Steel Production -- Declined approximately 2% in the quarter, reflecting softening industrial demand in the country.
• Term Loan B -- Closed after the quarter end to replace a U.S. dollar-denominated term loan and extend the debt maturity profile.
• Americas Segment Earnings -- $65.7 million, an 11% increase from the prior year due to better top-line performance amid stable operating margins.

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RISKS

• Berquist stated, "we anticipate incremental raw material inflation in the fourth quarter and do not expect a significant decline in input costs until sometime in 2027," noting dependence on a resolution of conflicts in the Middle East and Eastern Europe.
• Berquist warned that the uncertainty of the current macroeconomic situation increases the possibility of a slightly more pronounced seasonal volume decline in the fourth quarter.

SUMMARY

Quaker Chemical Corporation (NYSE:KWR) reported its fifth consecutive quarter of year-over-year profitability growth, driven by sustained market share gains and pricing actions implemented to offset persistent raw material inflation. Management reported that while global industrial end markets were flat to slightly down, the company achieved its 12th consecutive quarter of net share gains, with performance led by steel and aluminum sector strength in North America. The company is currently executing a global manufacturing network transformation, which included the transition to a new production facility in China and the closure of a site in Dortmund, Germany. Additionally, the company launched an enhanced digital software platform as part of its fluid intelligence initiative to improve data integration and analytics for industrial customers across three reportable segments.

• Management reported a shift in the Chinese market, with Berquist stating, "we are increasingly winning with Chinese automotive producers, broadening our customer base that historically relied more heavily on foreign manufacturers operating within the country."
• Operating earnings in the EMEA segment reached their highest levels in over five years, supported by network optimization and lower manufacturing costs following the Dortmund plant closure.
• The company temporarily increased inventory levels to maintain supply continuity during the transition between manufacturing sites in China and Germany, contributing to higher working capital.
• The company previewed a new generation of hardware at the 2026 ALUMINIUM Global Exhibition in Germany, designed to improve the accuracy of critical sensor technology for industrial fluid monitoring.
• Following the third quarter, the company closed on its first Term Loan B to enhance financial flexibility and reduce required debt payments over a multiyear period.

INDUSTRY GLOSSARY

• Adjusted EBITDA: A non-GAAP financial measure that represents earnings before interest, taxes, depreciation, and amortization, further adjusted for non-core or non-recurring items.
• EVA (Economic Value Added): A measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit.
• Fluid Intelligence: A proprietary service and technology offering that combines hardware, software, and data analytics to monitor and optimize industrial process fluids.
• ICE (Internal Combustion Engine): Traditional vehicle powertrains that burn fuel, as opposed to electric vehicle powertrains.
• Net Share Gains: The difference between new business wins and customer churn, used to track market share growth.
• Term Loan B: A type of institutional term loan with a longer maturity and less frequent principal repayments than traditional bank term loans.

Full Conference Call Transcript

Operator: Greetings, and welcome to the Quaker Houghton Third Quarter 2026 Earnings Conference Call. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to John Dalhoff, Director of Investor Relations. Mr. Dalhoff, you may begin.

John Dalhoff: Thank you. Good morning, and welcome to Quaker Houghton's Third Quarter 2026 Earnings Conference Call. Joining us on the call today are Joe Berquist, 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, October 29th, 2026. 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 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 Joe.

Joe Berquist: Thank you, John. Good morning, everyone. Our positive earnings momentum continued in the third quarter as we delivered our fifth consecutive quarter of year-over-year profitability growth, resulting from continued volume growth, disciplined cost management, and pricing actions to offset persistent inflation. This resulted in the highest adjusted EBITDA in our company's history for the second consecutive quarter. Sales volumes increased 3%, marking our third consecutive quarter of year-over-year volume growth. We continue to outperform the composite of our underlying end markets, which we estimate were flat to slightly down in aggregate, and achieved net share gains in the mid-single digits.

This represents our 12th consecutive quarter of positive net share gains, with all three regions reaching or exceeding the upper end of our target range. Our results were led by strong growth in the Americas and another quarter of improved operating earnings in EMEA, despite challenging operating conditions in that region. Asia Pacific continued its momentum, delivering year-over-year volume growth for the 13th consecutive quarter. Underlying market conditions remain mixed around the world. We continue to see relative strength in steel and aluminum end markets in North America, while global automotive light vehicle production remained weak, declining approximately 2% across all powertrains, including a more than 10% decline for internal combustion engine vehicles, according to GlobalData.

Most regions experienced steady demand, though China showed signs of softening economic activity throughout the quarter, counterbalanced by shifts in industrial production to other parts of Asia. Total steel production in China declined approximately 2% in the quarter, according to the World Steel Association. Our performance demonstrates the strength of our customer-intimate business model and the resilience of our global operating network. Despite continued volatility across our markets, our teams are executing consistently to deliver products to our customers, gain share, and convert top-line growth into higher earnings. Focusing on third-quarter results. Net sales increased 10% year over year, driven by a 7% increase in price and mix, resulting from successful pricing actions necessary to offset persistent inflation.

Churn remained at low single-digit levels despite multiple rounds of price increases, a testament to the thoughtful way we are working with our customers to implement tailored, data-driven pricing. Volume growth was led by the Americas, where we continued to advance our share-of-wallet initiatives, with net share gains driven by cross-selling. Industrial activity and steel production improved against the prior-year quarter, where previously idled customer capacity continued to ramp up, while new capacity coming online in metals provided an additional tailwind to volume growth. Asia Pacific delivered another solid quarter, with sales volumes increasing 5%. We continued to win business in higher-growth geographic markets like India and Vietnam, and expanded our position with electric vehicle OEMs and component manufacturers.

In China, we are increasingly winning with Chinese automotive producers, broadening our customer base that historically relied more heavily on foreign manufacturers operating within the country. This shift has been essential to our volume trajectory, as we have continued to grow throughout the year despite internal combustion engine vehicle production in China being down approximately 20% year to date, demonstrating our ability to grow with the new winners in EV. Volumes in EMEA declined sequentially with normal seasonality related to the summer holidays, and were also impacted by customer pre-buying activity from the second quarter, in line with our expectations. Excluding this timing impact, we estimate that volumes would have been flat in the region versus the prior year.

We believe the majority of the second quarter pre-buy activity worked its way through the system during Q3, with little to no impact expected in the fourth quarter. Gross margin percentage was consistent with the second quarter as expected, with higher net selling prices and improved capacity utilization offsetting raw material cost increases. SG&A declined sequentially and as a percentage of sales, as actions taken throughout the year to reduce our structural cost base continued to positively impact our results. Through the first three quarters, operating cash flow totaled $48 million, below recent periods, primarily due to higher working capital.

The timing of higher sales volumes and pricing during the second and third quarters increased receivables significantly since the beginning of the year. To maintain supply continuity, we temporarily increased inventory during the transition to our new production facility in China and the closure of our plant in Germany. Recent raw material inflation further increased the working capital and cash impact of these builds. We are taking focused actions to improve cash conversion by unwinding the inventory we built to support our network transitions as we close out the year and move into the first quarter of 2027.

Beyond these near-term actions, we continue to strengthen the business through our transformation program and our vision of operating as one Quaker Houghton. Actions taken during the year under this program will generate annualized run rate savings exceeding $10 million. Our master data initiatives are advancing, and we continue to complete foundational work supporting our business transformation strategy. These initiatives will simplify how we operate, improve the consistency of our global processes, and enhance the customer experience. I want to give a brief spotlight on our EMEA segment, which continues to demonstrate resilience and growth amid a persistently difficult macroeconomic and geopolitical environment.

Demand in the region has been weak for the past several years, but we continue to outperform underlying end markets through share gains while improving profitability in an inflationary environment. Over the past two quarters, segment operating margins reached levels not seen since the beginning of 2024, while operating earnings were the highest in over five years. This performance demonstrates that our strategy in the region is working, with network optimization and customer-intimate commercial execution translating into stronger financial results. Turning to the Middle East, the pace and intensity of the conflict in the region remains volatile, but we continue to maintain strong service levels.

While our business in the Middle East and Africa represents less than 3% of total company net sales, revenue in the third quarter grew 24% compared to the prior year. The reach and flexibility of our global network have enabled us to maintain supply continuity consistently through the conflict, translating into new business wins and stronger customer relationships. Finally, we are making exciting advancements in fluid intelligence, which combines our technical expertise with new measurement, automation, and digital service capabilities. Earlier this month, we previewed some of our new hardware at the 2026 ALUMINIUM Global Exhibition in Düsseldorf, Germany. This new generation of equipment continues to advance our offering by improving the accuracy and reliability of critical sensor technology.

Additionally, we recently launched an enhanced software platform that will reduce barriers between our customers and their data, make fluid data easier to interpret and analyze, and provide a more consistent interface for viewing information. The new platform will create a more consistent digital experience for customers today while establishing a foundation for future data integration, advanced analytics, and AI-enabled insights. Turning to the outlook. We expect to see normal seasonal demand patterns during the fourth quarter, typically marked by lower volumes in EMEA and the Americas due to the holiday season. In the Americas, new and previously idled steel capacity continues to come online, which should help support healthy demand in what is typically a slower seasonal quarter.

Asia Pacific has historically been our strongest region during this period. Activity could be somewhat softer this year in Asia, as geopolitical and economic uncertainty have tempered industrial demand in China. While global fourth-quarter volumes have declined by an average of 4% over the past five years sequentially from Q3, the uncertainty of the current macroeconomic situation this year increases the possibility of a slightly more pronounced seasonal decline. Raw material costs remain elevated around the world.

Based on our current outlook and barring any significant market disruptions, we anticipate incremental raw material inflation in the fourth quarter and do not expect a significant decline in input costs until sometime in 2027, which will largely depend on a resolution of the ongoing conflicts in the Middle East and Eastern Europe. We expect stable product margins in the fourth quarter, with targeted pricing actions tempering inflation. However, seasonally lower volumes and reduced fixed cost absorption associated with the holiday period will bring some downward pressure to gross margins. Despite this, we expect fourth quarter revenue and profitability to exceed the prior year, and full year adjusted EBITDA to improve an estimated high single-digit percentage against 2025.

Before I turn the call over to Tom, I would like to remind everyone that we will host our Investor Day on December 10th at the New York Stock Exchange. We feel confident in our growth algorithm, and we look forward to outlining the opportunities we have to sustain above-market growth in attractive industries, and deploying our strong balance sheet to create long-term shareholder value, including through strategic M&A. In closing, I am proud of our team's performance and the consistency of execution we are demonstrating across the company. We remain focused on finishing the year strong and carrying our positive momentum into 2027.

With that, I will turn the call over to Tom to walk through the financials in more detail.

Tom Coler: Thank you, Joe, and good morning, everyone. Third quarter net sales were $545 million, a 10% increase from the prior year. Sales volumes increased 3%, driven by global net share gains that exceeded the high end of our target range, with Asia Pacific once again being the largest contributor. Selling price and product mix contributed an additional 7% to net sales due to pricing actions to offset higher raw material costs resulting from the Middle East conflict. Sequentially, selling price and product mix contributed a 4% increase to net sales compared to the second quarter.

Gross margins remained flat sequentially compared to the second quarter and declined 130 basis points year-over-year to 35.5% due to product margin pressure from higher raw material costs. On a non-GAAP basis, SG&A increased approximately $7 million, or 5%, in the third quarter compared to the prior year, primarily as a result of higher incentive compensation and accelerated depreciation associated with moving our global headquarters. These increases were partially offset by impacts from the transformation actions that were taken over the past two quarters as we begin to see their impact on our results. We delivered $90 million of adjusted EBITDA in the third quarter, while adjusted EBITDA margin of 16.5% increased 50 basis points sequentially.

This performance once again highlights the operating leverage in our business, as EBITDA margins were only slightly below prior year despite significant gross margin pressure caused by raw material inflation. Switching now to our segment results, third quarter net sales in the Americas increased 14% year-over-year as 6% higher sales volumes were complemented by 8% higher selling price and product mix. Higher volumes were the result of new business wins and improving market conditions, particularly in metals, stemming from the resumption of previously idled customer production and new capacity coming online. Segment earnings in the Americas increased $7 million, or 11%, in the third quarter compared to the prior year due to better top-line performance amid relatively stable operating margins.

Asia Pacific sales in the third quarter increased 9% year-over-year, driven by another quarter of solid volume growth despite market softness in China. This is the result of new business wins that once again exceeded the high end of our total company target range of 2%-4%. Favorable selling price also contributed 3% to net sales growth, reflecting pricing actions to offset inflation, while foreign currency had a 1% favorable impact. Segment earnings in Asia Pacific were roughly flat in the third quarter compared to the prior year, as higher net sales were offset by lower operating margins resulting from raw material cost inflation.

From a competitive standpoint, Asia Pacific is our most price-sensitive market, and we continue to be thoughtful about our pricing strategy in the region. However, we remain committed and confident in our ability to increase prices to offset recent inflation in key markets such as China, India, and Southeast Asia. Third quarter net sales in EMEA increased 6% year-over-year, driven by a 10% increase in selling price and product mix, primarily related to actions taken to offset raw material inflation. Q3 net sales growth was partially offset by a 2% decline in sales volumes due to the reversal of second quarter pre-buy activity. Foreign currency also had a 2% unfavorable impact on net sales during the quarter.

Segment earnings in EMEA increased $5 million, or 18%, in the third quarter compared to the prior year as a result of improved margins and better top-line performance. Margin improvement was driven by lower manufacturing costs related to the closure of our manufacturing facility in Dortmund, Germany, along with improved product margins and mix. Turning to non-operating costs, our interest expense was $10 million in the third quarter of 2026, which was consistent with the previous quarter and $1 million lower than the prior year, while our cost of debt was 4.6%.

Our effective tax rate, excluding non-core and non-recurring items, was approximately 27% in the third quarter and 28% year to date, which is in line with our full year target range of 28%-29%. Finally, our third quarter GAAP diluted earnings per share were $1.73, and our non-GAAP diluted earnings per share were $2.39, a 15% increase over the prior year due to improved operating performance and slightly lower interest expense. Cash generated from operations was $14 million in the third quarter, decreasing from $51 million in the prior year.

The lower cash generation in the current year was driven by higher working capital outflows resulting from increased sales volume, price inflation, and increased inventory associated with opening our new manufacturing facility in China and closing our facility in Dortmund, Germany. Capital expenditures in the third quarter were $11 million, primarily related to the construction of our new facility in China. For the full year, we now expect 2026 capital expenditures to be approximately 2%-2.5% of sales. During the third quarter, we repurchased approximately $3 million worth of shares and paid approximately $9 million in dividends, returning a total of $12 million of cash to shareholders in the quarter.

Since 2024, we have returned approximately $212 million to shareholders through share repurchases and dividends. As of the end of Q3, we have $226 million available under our current repurchase authorization, and we continue to view share repurchases as opportunistic and part of our disciplined capital allocation approach. Immediately following the third quarter, we closed on the company's first-ever Term Loan B, which replaces the previous U.S. dollar-denominated term loan under our existing credit facility. The new Term Loan B provides greater financial flexibility in our capital structure by extending our debt maturity profile and reducing required debt payments. Our overall capital structure remains strong, with approximately $708 million undrawn on our revolving credit facility.

We delivered strong third-quarter results, driven by continued share gains, double-digit sales growth, and disciplined execution across our business. Despite significant raw material inflation and working capital investments associated with our manufacturing network transformation, we delivered a second consecutive quarter of record adjusted EBITDA and expanded EBITDA margins sequentially. With a strong balance sheet, enhanced financial flexibility, and continued progress on our strategic initiatives, we remain well-positioned to drive profitable growth and create long-term value for our shareholders. With that, I will turn it back over to Joe.

Joe Berquist: Thank you, Tom. Our third-quarter performance highlights the continued momentum in our business, driven by share gains, strong execution, and continued progress on our transformation initiatives. We are focused on finishing the year strong and carrying that momentum into 2027 as we continue to execute our strategy and create long-term value for our shareholders. With that, we would be happy to take your questions.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Mr. Harrison with Seaport Research Partners. Please proceed with your question.

Mike Harrison: Oh, Mr. Harrison, I sound so formal, I guess. Good morning, Mr. Berquist and company. Was hoping that we could dig in a little on the strength that you guys are seeing in the margin performance in EMEA. Just kind of wondering, with the changes that you guys have made here, despite the challenges going on in the marketplace, is this maybe a new floor for where we could expect margin to be? If we see some volume improvement or some deflation, maybe things could move a little higher from this high teens, low 20s type of margin level?

Joe Berquist: Yeah. Thanks, Mr. Harrison. As far as I may, I really point to kind of three different things that have happened there. One, on the gross margin or operating margins, we've taken some actions in our network. We've talked about the recent closure of the plant in Germany. Beyond that, I think over the past couple of years, as part of restructuring, we've really also looked at right-sizing our organization proportionally with how that market has really declined since late 2019, 2020 period. So, there's a little on the cost side, for sure. I think the other thing that happened is, coming out of the global supply chain crisis, we had some contracts that were not good, right?

We made decisions to exit those contracts and be a little more disciplined around the profitability profile with our business. The final piece is, we're winning new business there, and it's good business. We're selling our products and getting value for them. The combination of those three things, I think, are all helping. I certainly hope that we've seen the floor, Mike, and that there is potentially more upside there. We have additional things we're trying to do from the transformation side, additional actions on our network, right? Not necessarily just plant locations, but also how we move materials and how we are leveraging the network that we have more efficiently.

Mike Harrison: All right. Along with that, I noticed that you guys made some good progress on SG&A costs. You are down below 24% of sales for the first time since 2023, according to my model. Just wondering if there were any one-time factors or accruals that maybe helped you in the quarter, or should we expect that you can maintain something in that low to mid-20% range as you continue to streamline costs and hopefully leverage some further organic growth?

Joe Berquist: Yeah. The goal really is to maintain that at that level. There was nothing in the quarter that was unusual. In fact, we had to take our incentive compensation up a little bit just because of the way the year is progressing. The actions that we have taken, there has been ongoing restructuring over the past couple years, and we have had different waves even this year with exits that those things have not shown up in the P&L yet. I think that as we enter into 2027, we would expect to be in a similar range, Mike, and continue to kind of manage it. That is the target level, right?

We would like to be in that low to mid-20s percentage for SG&A going forward.

Mike Harrison: All right. Just a last question for me. It sounded like you were saying you thought that revenue might show a bigger than normal impact from seasonality from Q3 into Q4. I guess if I look at the prior year, you had a customer outage in North America that is now resolved. Just curious, are you hearing already that customers are expecting to take longer downtime during Q4? If so, what regions is that most pronounced in? I would also think that there is maybe some more price realization that should help you sequentially but maybe correct me if I am wrong on what pricing could look like sequentially. Thank you.

Joe Berquist: Yeah. Thanks. Good question. I am glad you asked it because I think there is some nuance in the comments, and just I want to be clear. We have typically seen, I think the comment I made a few minutes ago was, we have seen on average from Q3 to Q4 sequentially due to holidays that over the last five years, that sort of holiday drop is around 4%, right? Our fourth quarter does drop off from third quarter. What I would expect this year is similar, right? Similar seasonal pattern. There are a couple of things I would point out.

North America particularly seems a little bit stronger this year as compared to maybe last year, for sure, because you pointed out the capacity that has come back online and the metals business at least is showing some good demand. I do not think you will see anything really different in Europe. Where I think it could be slightly more pronounced is really Asia-Pac, and I would point to specifically China. China, for the first time in a long time, showed some weakness in steel production and even auto production there in the quarter. We are not entering into the latter part of the year, whereas typically in China, the second half of the year is much stronger for them.

In saying that, Mike, I would not overreact to that either. I think it is, as we saw in the third quarter, some of that China production has actually moved out to other parts of Asia, where India has shown more strength, and Vietnam, for an example. Overall, I think the number is probably going to be, it is going to be typically what we have seen, somewhere in that 4% range. I would not expect it to be materially worse than that or better than that.

Mike Harrison: Sorry, just to follow up on my pricing comment. Is there some incremental pricing coming in Q4, or realization on some of the index contracts as we get from Q3 into Q4?

Joe Berquist: Yes. Yeah, sorry I did not answer that part of the question. Yeah, we have some. We continue to go after pricing. It has really been a selective, kind of targeted approach there, where we are looking at the raw materials that are still inflationary and in the regions where they are most inflationary. So, there will be some index adjustments in the fourth quarter, and we are also doing, we are taking other actions. I think on balance, we are trying to temper or offset as much as we can any sort of inflationary aspects in Q4.

Mike Harrison: All right. Thanks very much.

Joe Berquist: Yep. Thank you, Mike.

Operator: Our next question is from Jonathan Tanwanteng with CJS Securities. Please proceed with your question.

Jonathan Tanwanteng: Hey, good morning. Thank you for taking my questions, and congrats on a nice quarter.

Joe Berquist: Thanks, Jonathan.

Jonathan Tanwanteng: Hey, good morning. I was wondering if you could provide a little more color on the customer restarts, how much of an impact they're having, and if that actually ends up cannibalizing some of the other business you have as they ramp production back up to what it used to be over the longer term.

Joe Berquist: Yeah. So, it's in North America. It's really a U.S. phenomenon. I wouldn't say it's going to cannibalize anything at all, but what we saw in the third quarter was steel up around 4%, aluminum production up as well, right? Overall industrial production up in North America. So, that region particularly seems to have inflected, Jonathan, and is showing some relative strength right now. It's interesting because while metal production is up, the automotive sector is down 2%. The question is, where is that going? Our hypothesis is a lot of that is probably related to data centers and infrastructure and the electrical grid, because it's not really happening in auto, and it's not happening in construction.

But I don't see that cannibalizing anything. Now, there is an overall sort of global production aspect of things, and we've typically said in the past that we're agnostic as to where the product gets made because we've got this reach in all the regions around metal production. If China's a little soft, and it might be related to tariffs, and North America is up a little bit, yeah, some of that could be offsetting. But I think with that phenomenon probably occurred in the third quarter, and we were still able to show some good growth organically in that environment.

Jonathan Tanwanteng: Got it. Thank you. I was wondering if you'd comment on the gross margin trajectory beyond Q4. I think previously you had expected to catch up a little bit on inflation exiting the year, and I'm wondering what the expectation is now, where prices are, and what the latest forecast is for input prices.

Joe Berquist: Yeah, I'll start, and maybe I'll pass that to Tom. We've been targeting, our range is 36%. We came in a little bit below that. What we saw in the third quarter was additional raw material inflation. We weren't really expecting that in the middle of the year, but things have not gotten better, and I'll leave it at that on the raw material front. Fourth quarter, I'll let Tom address. There's a typical pattern there in the fourth quarter, but going forward, we would expect to be above that 36% sustainably, but it may take us a quarter or two to get there.

Tom Coler: Yeah. Thanks, Joe. Yeah, great question, Jonathan. To Joe's point, I think the overall goal here is continue to focus on gross margins above 36%. We do typically lag from price increases and index contract resets a quarter or two, and then similar on the volume front, what we typically see from Q3 - Q4 sequentially is lower manufacturing absorption and some impact associated with the holiday season, both in Europe and the North America market.

We typically do see, on average, a point to a half a point of sequential decline in gross margin just naturally through that volume and manufacturing absorption phenomenon but fully expect as we move into 2027 to continue to focus on price and get margins into our target range of 36%-37%.

Jonathan Tanwanteng: Okay, great. Thank you so much, guys.

Joe Berquist: Thank you.

Operator: Our next question is from Pete Osterland with Truist Securities. Please proceed with your question.

Pete Osterland: Hey, good morning. Thanks for taking the questions. I wanted to start just by following up on the pricing dynamics, specifically in the Asia-Pacific region. I guess just given the relatively higher competitive intensity in the region, as well as some of the weakness that you've called out that you're seeing in China, do you expect that you can fully price through inflation without losing market share? If so, I guess, do you have a sense for what the lag will look like to fully recapture margins in the region relative to what you're seeing in the U.S. and Europe?

Joe Berquist: Yeah. Good morning, Pete. Good question. I think you point out a couple things right there. Asia-Pacific in general, not just China, is more price competitive market. It's a developing market as well. We do expect to get our margins at historical levels. That's actually one of our more When you look at the operating margin percentage, it's a very good region for us. But we have usually seen a lag of one to two quarters as inflation happens. Of the three regions that we talk about, our three segments, Asia was most challenged by inflation in the third quarter. The other two were a little bit, but Asia, it was more pronounced.

Then you couple that with a weak environment. Yeah, we're being, I guess, we're being prudent in our approach, in our approach always involves, we're not a commodity. We go in, we talk to our customers, we talk about what is happening, we show them the data, and we take a responsible approach because we want customers for life, and we want to continue to grow our market share with those customers. All that being said, I think our anticipation is this is transitory, that it will return to typical levels, that we have levers to get there, and are taking actions to do that. You asked about how much time that might take.

It is usually a quarter or two that it takes us to chase an inflationary environment.

Pete Osterland: Great. Very helpful. Just as a follow-up on raw materials, just thinking beyond just the inflationary dynamics, are there any raw materials within your basket where you have elevated concerns around security of supply as we look into 2027?

Joe Berquist: Look, I think that has been an ongoing challenge for the past few years, and even more pronounced with what has happened this year in the Strait of Hormuz. Right now, we are confident in our ability to continue to supply all of our portfolio reliably to everywhere in the world. There are things that are tight, for sure, and we are taking a lot of actions. I think the advantage that we have is we can really flex our global supply chain, and the fact that we have got this kind of global business, and we have even at times had to move product from, say, Europe to Asia, right, to cover a raw material shortage.

But right now, not looking at anything that would cause us to say we will have inability to supply any of our product portfolio in 2027. It is very dynamic, right? Even if that were to occur, I think the other thing that we could do is we look at alternative technologies, right? Sometimes you can move away from a base oil to something that is from a plant material or ester base versus a mineral oil-based type technology. So, we are very proud of the fact that we have not run anybody out, and we have not shut anybody down, and we are committed to make sure that continues to be the case.

Pete Osterland: Great. Thanks a lot.

Joe Berquist: Yeah. Thank you.

Operator: Our next question is from Laurence Alexander with Jefferies. Please proceed with your question.

Daniel Rizzo: Hey. This is Dan Rizzo for Laurence. Just to follow up to just what you just said, in terms of security of the supply, is it more pressing now than it was, say, during the kind of the post-COVID era, where logistical issues were kind of pressing everybody across the globe? Is this more acute?

Joe Berquist: Great question, Dan. I actually think it was worse in that post-COVID era. That was a really, really tough period. What happened during that period, I think a lot of companies figured out how to reroute things, like land routes or going around the bottom of Africa versus through the straits, just as an example. It is not as bad as it was during that period.

Daniel Rizzo: Okay. I just wanted to make sure. Then, this is not something that is going to be an issue in the next six months, but if prices, input costs were to flatten out and then actually decline, outside of index pricing, in the past, has price concessions been part of it, or do once you get priced, do you kind of hold it? I am just wondering how the dynamic works in a different environment.

Joe Berquist: Yeah. I mean, there is kind of two parts to that, because I think as we see the lag in an inflationary environment where we see some temporary sort of gross margin compression, we have seen in a deflationary environment some expansion in margin. It does lag for the same reasons, right? There is index pricing that protects you in a downward trend. There is also just the mechanics of price increases and price decreases. It takes time to get things in the system. We usually have a 30-day kind of notice period. The second part of your question is, do we give it all back? I mean, these are not commodity products.

I think there are other things that are happening, right, as far as input costs. Everything gets more expensive, and we do typically tend to try to manage to a margin level, a margin percentage level versus an absolute margin level. We are committed, I think, to continue to keep those gross margins above that floor.

Daniel Rizzo: Okay. All right. Thank you very much.

Joe Berquist: Yep. Thanks, Daniel.

Operator: Our next question is from Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Arun Viswanathan: Good morning. Thanks for taking my question. I guess I just wanted to give you, or reiterate the question around volumes, and maybe get some initial framework for next year. When you think about Asia, I guess you will be facing tougher comps in the first half, but do you expect to still grow through that? Then, for the Americas, where are you kind of in the share gain journey there, or share recovery? Do you think you can continue to grow, say, a couple points above the market due to continued share gains?

I think you already addressed EMEA, that unfortunately there's still a lot of uncertainty there, but if you could just reiterate your thoughts there, that would be great. Thanks.

Joe Berquist: Yeah. Thanks, Arun. I mean, look, even in this past quarter, which was somewhat challenging in an underlying market perspective, we were able to show positive growth in volume in Asia. There might be some tough comps. We will see. Not exactly sure what is going to happen there. I think our assumption would be at minimum flat, in the underlying market. But the one thing we are very confident about, and I mentioned it in the remarks up front, we have done 13 quarters in a row in Asia of net share gains above market. So we are winning business. We are still winning business. It is not just a China story.

There is India, there is the whole Southeast Asia. We have an investment in Japan. So, we would expect in 2027 to have positive volume growth, positive revenue growth, and positive EBITDA growth overall. That is what we are sort of modeling right now. We are in that budget process, so I cannot and we do not really provide specific guidance, but one thing I could say from a qualifying standpoint is we will grow our EBITDA in 2027.

Arun Viswanathan: Okay. That is helpful. Then just from a capital allocation standpoint, on the M&A front, are there maybe some better opportunities these days? Maybe you can just assess the landscape for us there. If so, is that still kind of along the lines of what you have seen in the past as far as Asia and technologies, or what are you kind of prioritizing on the capital allocation front? Thanks.

Joe Berquist: Yeah. I think the opportunity set right now, there is a robust pipeline. There are things that are actionable that we are taking a look at. I would point out that I would say that almost every quarter. So that is not anything different than I would normally say. But we are working hard. M&A is part of our growth strategy, and we are pretty disciplined around it. What we are looking for, Arun, is we are looking for things that give us capabilities. When I say capabilities, it could be a portfolio expansion. We help people manufacture things.

So if there is something that we do not have in our portfolio that we can add to our portfolio that grows that basket of products that we could sell to our customers, that is where, number one, we would look. Those things also expand our addressable market that we could sell to. Beyond that, you mentioned Asia. Asia is growing. India is growing. You want to grow where the growth is. If something were to come actionable in that area, we certainly would be very interested to take a look. There are other parts of the business that are growing as well globally in other parts of the world, right?

You talk about die-casted, just giving you some examples, like die-casting, how cars get made, how parts get made, specialty grease, fire-resistant hydraulics, things like that are things that are growing. It is not just an Asia play. I think we are looking across the landscape. Our model is when we buy something, even if it is in a strength in one region, we then want to integrate that into our portfolio, make sure we have the supply chain and subject matter expertise to sell that in every region, and roll it out that way. Other capabilities are types of innovation. We have our QH FLUID INTELLIGENCE initiatives, so technology. Sustainable materials is an area that is pretty innovative.

It could even be a channel to market, right? We have an online presence now. We are dabbling with some e-commerce in the Americas and Europe. There are things like that from a capability standpoint that we think would be interesting.

Arun Viswanathan: Thanks a lot.

Joe Berquist: Yep. Thank you.

Operator: Our next question is from David Silver with Freedom Capital Markets. Please proceed with your question.

David Silver: Yeah. Hi. Good morning. Thank you. I would just like to maybe get a clarification out of the way, but regarding variable comp or incentive compensation, from an accounting perspective, is that handled kind of with more Do you smooth it across four quarters, maybe an accrual each quarter? Or given that this is going to be a record earnings year, and I am guessing next year will probably be better, just from an accounting perspective, how should we be modeling the timing and the recognition of incentive comp?

Tom Coler: Yeah. Good morning, David. This is Tom. Good question. We do set a budget every year for annual incentive comp for our short-term incentive comp program. It is based on targets that are largely aligned with our budget, with some ranges around that. Then as we progress through the year, based on performance and our judgment and expectation based on our quarterly forecasting process of where we anticipate our trajectory is for the year, we will adjust that accrual. We typically don't do much in the way of adjustment early in the year, as it is really too early to determine full-year performance associated with those targets.

But that is how we look at it, and we tend to follow that process.

David Silver: The quarterly accruals are relatively smooth as opposed to lumpy, is what you are saying?

Tom Coler: Yeah, that is exactly right.

David Silver: Like when it went against the income statement.

Tom Coler: Yeah, it runs through SG&A and hits the income statement, and it is based on our expectation of full-year performance at a given point in the year. We want to make sure that we are appropriately accrued based on the current performance and expected performance as we go through the year.

David Silver: Okay, great. No, thank you for clarifying that. My next question would be about customer retention, your philosophy there. At a number of points in this call, Joe, I guess you have discussed kind of share gains or new customer wins above your long-term kind of 2% assumption. I guess that kind of makes me think about kind of how you want to kind of allocate your resources, I guess, a little bit going forward. In other words, I am assuming that your company has a very good sense of the value of an individual customer and how they differ based on the products and service mix that you provide.

I guess I'm just wondering whether if this continued kind of above-trend share gain trend continues, whether you are kind of taking a sharper look at how to allocate your resources and just optimize things, given that steady drumbeat of incremental new business.

Joe Berquist: Yeah. No, good question. Look, this is one that I've got a lot of passion around. I could talk a long time, but I'll try to be concise. I think when we talk about share gains, we're really talking about net share gains, right? So, we track churn pretty carefully, and our churn has typically been, except for maybe a couple-year period, it's been in this low single-digit range, and it still remains there. So, long term, we want customers for life, and we've had many of our customers for decades, right? I've been with the company almost 30 years, and I still see some familiar faces when I go and travel.

But the exercise that we've taken on over the last couple years, part of just sort of how we've reorganized our business is, we've done a real hard look at customer segmentation, right? And we recognize that there are large multinational customers, as an example, that require a certain level of service, and there are certain things that they look for and rely on us to provide. But we also have a long tail of customers, right, smaller customers, and things that are important to embedding our people on site, they don't scale on the lower end.

So, we're using increasingly things like QH FLUID INTELLIGENCE and inside sales and digital commerce to kind of tailor our service offer at each of these different customer segment levels. And we want all of our customers to have a good experience. We also know that has to scale, and we do take an approach, I would call it an EVA approach or a fully allocated top-down sort of cost approach, where we look at profitability by customer and by customer segmentation. We're really trying to make sure we are tailoring our offer in a way that's efficient for us, but also makes the customer feel like it's a good experience.

David Silver: Okay, great. Thank you for that. If you wouldn't mind, I'm going to ask just one final question, and this might be a little bit of a follow-up on, I guess, Arun Viswanathan's question about EMEA trends. I guess I would like to maybe just ask the question from maybe a longer-term perspective, maybe three to five years. But probably the last couple years and the next couple years, my guess is regional economic growth is going to be much stronger in the Americas and Asia-Pac than Europe. Your company is, I guess, you're just integrated into the region in any number of countries and industrial sectors.

Joe Berquist, thinking about where your resources are going to be, let's say, three to four years from now, I mean, is this the case where you envision I don't know, resources being reallocated from one region to another? Would you say, like, within Europe, maybe you'll be emphasizing different country by country, the emphasis and the resourcing will be shifting over time? Just managing, I guess, EMEA, if current economic growth trends kind of persist.

Joe Berquist: Yeah. I mean, look, EMEA has been a tough market, right, for six or seven years. It used to be, I remember, it was our most profitable region a long, long time ago. But there's been capacity that's just come out of that market, and the actual production there has decreased. Now, many people have said it's at a trough, and it's hit bottom, and kind of feels like that is the case. For us, at high level, I think we still have some complexity and redundancy in Europe. We got a lot of plants. We have a heavy concentration of our global R&D there.

And there, conversely, I guess, what we talk about inside the company, and we've got to have a strong presence in every region. We're not ever going to walk away from that. But we are pivoting toward Asia, and India is a market that I think has a lot of runway to grow. We've seen really very good growth in that part of the world, and we want to make sure that we are ramping up and have the same sort of capabilities there that we have in Europe and the U.S. and China.

Just as an example, I think, I'm a big fan of this sort of portfolio management of the business where, and I mentioned it earlier, this activity-based costing. Your mid-year forecast, your end of the year, you get a snapshot of where things are growing and what your profitability levels are. I think every year, we got to kind of look at that and make adjustments to our portfolio and be responsive to what's happening on the ground. Right now, it feels like there still is a sort of shift pivot toward Asia, and I think in general; we will be spending less in some regions and spending more in that part of the world.

David Silver: Okay, great. I appreciate all the color. Thank you.

Joe Berquist: Yeah, thank you.

Operator: There are no further questions at this time. I would like to turn the floor back over to Joe Berquist for closing comments.

Joe Berquist: Yes, thank you. I want to thank everybody for joining us today. Really appreciate the interest in the company. Great questions. We look forward to seeing many of you, hopefully, at our Investor Day on December 10th in New York City. Please reach out to John if you have any additional follow-up questions. Thank you.

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

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