Quaker Houghton, the combination of Quaker Chemical and Houghton International and a global leader in industrial process fluids, reported better than expected first quarter overall results despite the impacts of COVID-19 and Boeing’s decision to temporarily stop production of the 737 Max aircraft. The company said they estimate that these two events negatively impacted sales by 4% and 1%, respectively.
However first quarter results benefited from estimated share gains of 2%, the prior quarter Norman Hay acquisition, USD10 million of integration synergies and the additional cost savings measures put in place due to COVID-19, which collectively drove a 10% increase in pro forma adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) year-over-year despite the current market challenges.
Quaker Houghton, which is headquartered in Conshohocken, Pennsylvania, U.S.A., said all of its 34 plants around the world are operational, “and we have been able to meet our customers’ needs.”
“Looking forward, we expect the second quarter to be the most challenging quarter of the year, as many customers have shut down or significantly reduced their production, especially in the first half of the quarter. We do expect to see a gradual sequential improvement as we progress through the second half of the year. However, providing any guidance is very difficult given the current economic uncertainty caused by the COVID-19 pandemic, so we are not providing specific guidance at this time,” said Michael F. Barry, chairman, chief executive officer and president of Quaker Chemical Corporation (NYSE:KWR), also known as Quaker Houghton.
First quarter net sales were USD378.6 million, which increased 79% compared to USD211.2 million in the prior year first quarter. The increase was driven by additional net sales due to the company’s August 1, 2019 combination with Houghton International, Inc., as well as its October 1, 2019 acquisition of the operating divisions of Norman Hay plc.
Current quarter net sales declined approximately 3% compared to the prior year first quarter pro forma net sales of USD391 million, which are adjusted to include the results of Houghton, as well as certain other pro forma adjustments including the elimination of results associated with divested product lines.
Excluding Houghton and Norman Hay net sales, current quarter net sales would have declined 11%, primarily driven by a decrease in sales volumes of 5%, a negative impact from foreign currency translation of 3% and a decline from price and product mix of 3%. The largest driver of the volume decline in the current quarter was the negative impact of COVID-19, most notably on lower volumes in the company’s Asia-Pacific market, as well as a decrease in volume driven by Boeing’s decision to temporarily stop production of the 737 Max aircraft.
Gross profit in the first quarter of 2020 increased USD58.1 million compared to the first quarter of 2019 primarily due to Houghton and Norman Hay sales. The company’s gross margin in the current quarter was 35.4% compared to 35.9% in the first quarter of 2019. This decrease in gross margin quarter-over-quarter was primarily the result of price and product mix largely due to lower gross margins in the legacy Houghton business, partially offset by certain cost of goods sold decreases as a result of the company’s progress on initial combination-related logistics and procurement cost savings initiatives.
The company initiated a restructuring program during the third quarter of 2019 as part of its global plan to realize cost synergies associated with the merger. The company expects reductions in headcount and site closures to continue to occur during 2020 and into 2021 under this program. During the first quarter of 2020, the company recorded additional restructuring and related charges of USD1.7 million related to this program. There were no comparable restructuring charges in the prior year first quarter.
In order to give some sense of direction for the remainder of the year, Barry said Quaker Houghton expects second quarter adjusted EBITDA to be down by nearly half of the first quarter adjusted EBITDA and full year adjusted EBITDA to be more than USD200 million.
“Overall, our higher expected integration synergies, additional cost savings actions, improvement in gross margins, and the expected release of cash via working capital are expected to continue to help us during this challenging time. As we look forward to 2021 and 2022, we expect to achieve significant increases in our adjusted EBITDA as we complete our integration cost synergies, continue to take share in the marketplace, and benefit from a projected gradual rebound in demand in our end markets over this period,” Barry said.