奎克好頓 (KWR) 2026 年第三季法說會：調整後 EBITDA 創新高且營收成長

Quaker Houghton (NYSE: KWR) 在 2026 財政年度第三季持續展現獲利動能，主要受惠於價格上漲、銷量成長與市占率擴大。原料價格通膨對毛利率與營運資金帶來壓力，但調整後 EBITDA 連續第二個季度創下公司歷史新高。

重要亮點

• 淨銷售額年增 10% 至 5.45 億美元，其中價格與產品組合貢獻 7%，銷量增加 3%。
• 調整後 EBITDA 創下 9,000 萬美元的新高。調整後 EBITDA 利潤率為 16.5%，季增 50 個基點。
• Non-GAAP 稀釋後 EPS 年增 15% 至 2.39 美元，GAAP 稀釋後 EPS 為 1.73 美元。
• 毛利率為 35.5%，與上一季持平，但年減 130 個基點，主因原料通膨抵銷了產品定價調漲與產能利用率提升的效益。
• Quaker Houghton 創下連續第 12 個季度淨市占率成長的紀錄。亞太地區銷量則實現連續第 13 個季度的年成長。
• 管理層預計第四季營收與獲利能力將超越去年同期，並預測 2026 全年調整後 EBITDA 將較 2025 年實現高個位數百分比的成長。

關鍵財務數據

業務與營運表現

美洲地區引領成長，淨銷售額年增 14%。銷量成長 6%，而價格與產品組合帶來 8% 的貢獻。該部門獲利增加 700 萬美元，增幅 11%，反映出新業務競標成功，以及先前停產的客戶恢復生產與新產能上線帶動金屬活動走強。

亞太地區銷售額成長 9%。銷量成長 5%，主要得益於印度與越南的新業務取得，以及在電動車製造商與供應商領域的布局擴大。管理層表示，公司在中國汽車製造商的業務也有所斬獲。該部門獲利大致持平，主因銷售額增長被原料通膨及營運利潤率下降所抵銷。

歐洲、中東及非洲 (EMEA) 地區銷售額成長 6%，主要由價格與產品組合增加 10% 所拉動。由於第二季客戶提前拉貨效應消退，銷量下降 2%，匯率因素亦使銷售額減少 2%。受惠於關閉德國多特蒙德工廠、產品利潤率改善與組合優化，該部門獲利增加 500 萬美元，增幅 18%。

全公司銷管費用 (SG&A) 環比下降，占銷售額比重亦有所調降。管理層表示，2026 年實施的重組與轉型措施將創造超過 1,000 萬美元的年化跑率節省額 (run-rate savings)。展望未來，公司目標是將 SG&A 占銷售額比率控制在 20% 低至中段的範圍內。

應收帳款與庫存增加壓抑了營運現金流。公司暫時增加庫存，以支援過渡至中國新生產設施及關閉德國廠房。管理層計畫在年底前至 2027 年第一季消化這些庫存。

管理層業績指引

管理層預計第四季將出現正常的季節性趨軟，因假期因素，美洲與 EMEA 地區的銷量通常會在該季下降。過去五年來，全球第四季銷量平均季減約 4%，管理層目前預期將呈現大致相似的走勢，疲軟情況可能集中在中國。

針對性的定價與指數調整預計將減緩通膨影響並維持產品利潤率穩定。然而，季節性銷量減少與固定成本分攤效益降低，預期將對毛利率帶來連帶的季減壓力。管理層指出，基於上述原因，歷史上第四季毛利率通常比第三季下滑約 50 至 100 個基點。

公司預計第四季營收與獲利能力將高於去年同期。在沒有重大市場動盪的前提下，預計全年調整後 EBITDA 將較 2025 年成長高個位數百分比。

展望 2027 年，管理層預期銷量、營收與 EBITDA 將實現正成長，並明確表示 EBITDA 應會增加。公司持續以超過 36% 的永續毛利率為目標，長遠目標區間為 36% 至 37%，儘管定價舉措可能需要一至兩個季度才能跟上通膨腳步。

預計 2026 全年資本支出約占銷售額的 2% 至 2.5%。

風險與觀察重點

原料成本居高不下，管理層預計投入成本要到 2027 年某個時間點才會有顯著下降。時間點很大程度上取決於中東及東歐的局勢發展。

亞太地區是公司對價格最敏感的區域。管理層希望能透過定價轉嫁通膨，但表示該過程通常存在一至兩個季度的滯後期。中國在第三季的鋼鐵與汽車產量亦表現疲軟，增加了年底工業需求的不確定性。

營運資金增加降低了現金轉換效率。應收帳款隨銷售量與價格上漲而增加，而庫存則在製造網路過渡期間及原料通膨推升下有所成長。

管理層表示供應狀況仍具動態變化，包括與霍爾木茲海峽相關的限制，但目前預計 2027 年不會出現無法供貨的情況。公司指出，目前的供應鏈壓力遠不如疫情後時期嚴峻。

分析師 Q&A 亮點

管理層將 EMEA 地區的利潤率改善歸因於網路重組、組織規模最佳化、退出缺乏吸引力的合約以及獲得有利可圖的新業務。管理層認為該地區可能已建立新的獲利底線，未來透過進一步轉型與網路效率提升措施，仍有進一步上升空間。

關於北美需求，管理層表示鋼鐵與鋁產量的提升可能與資料中心、基礎建設及電網投資有關，而非汽車或建築活動。管理層預計客戶重啟的產能不會侵蝕現有業務。

在定價方面，公司在通膨最嚴重的市場採取選擇性調漲及合約指數重新設定。管理層表示，在物價下跌期間利潤率也可能暫時擴大，因為降價與指數調整通常具有滯後性。

Quaker Houghton 形容其併購（M&A）儲備案源強勁，但強調會維持審慎紀律。優先領域包括投資組合擴展、技術、永續材料、數位能力以及印度與更廣泛的亞洲等成長型市場。截至第三季末，公司股票回購授權剩餘 2.26 億美元，旋轉信用額度尚有約 7.08 億美元可用。

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完整財報電話會議逐字稿

管理層陳述

Operator

Greetings, and welcome to the Quaker Houghton Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Unknown Speaker

Thank you. Good morning and welcome to Quaker Houghton's third quarter 2026 earnings conference call. Joining us on the call today are Joseph Berquist, our President and Chief Executive Officer, Thomas 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. The 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.

The 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.

Joseph 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 global data. Most regions experienced steady demand, though China showed signs of softening economic activity throughout the quarter, balanced 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 wallet initiatives with net share gains driven by cross-selling. Industrial activity in 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 entrants 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 the 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. And 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. 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 Aluminum Global Exhibition in Dusseldorf, 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 a possibility of a slightly more pronounced seasonal decline. Raw material costs remained 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. 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 growth in the last year 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 results of the U.S. 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% to 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% to 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% to 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. 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.

Joseph 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.

Operator

With that, we will be happy to take your questions. Thank you.

Operator

We will now be conducting a question and answer session. [Operator Instructions] Our first question is from Mr. Harrison with Seaport Research Partners. Please proceed with your question.

分析師問答

Michael Harrison

Oh, Mr. Harrison, I sound so formal, I guess. Good morning, Mr. Berquist and company. I was hoping that we could dig in a little bit 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? And if we see some volume improvement or some deflation, maybe things could move a little bit higher from this high teens, low 20s type of thing.

Joseph Berquist

Of margin level. Yes, thanks, Mr. Harrison. As far as EMEA, I'd 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. You know, 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, you know, declined since, you know, late 2020, the 2019-2020 period. So there's a little bit on the cost side for sure.

I think the other thing that happened is, you know, coming out of the global supply chain crisis, we had some contracts that were, uh, we're not good, right? And we made decisions to exit those contracts and be a little bit more disciplined around the profitability profile with our business. And then the final piece is, you know, we're winning, we're winning new business there and it's good business. We're selling our products and getting value for them. So the combination of those three things, I think, all helping. I certainly hope that we've seen the floor, Mike, and that there is potentially more upside there. I mean, 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, you know, are leveraging the network that we have more efficiently.

Michael Harrison

All right. Along with that, I noticed that you guys made good progress on SG&A costs. You're down below 24% of sales for the first time since 2023, according to my model. I'm 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?

Joseph 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's progressing. Any actions that we've taken, I mean, you know, there's been ongoing restructuring over the past couple of years, and we've had different waves even this year with exits that those things haven't shown up in the P&L yet. So I think that as we enter into 2027, we would expect to be in a similar range, and continue to kind of manage it. That's the target level, right? We'd like to be in that low to mid-20s percentage for SG&A going forward.

Michael Harrison

All right. And then 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. Year you had a customer outage in North America that's now resolved. I'm just curious, are you hearing already that customers are expecting to take longer downtime during Q4? And if so, what regions is that most pronounced in? And then I would also think that there's maybe some more price realization that should help you sequentially, but maybe correct me if I'm wrong on what pricing could look like sequentially. Thank you.

Joseph Berquist

Yeah, yeah, thanks. Good question. I'm glad you asked it because I think there's some nuance in the comments and just I want to be clear. You know, we've typically seen, I think the comment I made a few minutes ago was we've seen on average from Q3 to Q4 sequentially, due to holidays that, you know, 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's 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, you the capacity that's come back online and and you know the metals business at least is is showing some some good demand. I don't think you'll 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, right? China, you know, for the first time in a long time, showed some weakness, right, in steel production and even auto production there in the quarter. And, you know, so we're not entering into the latter part of the year, whereas typically in China, the second half of the year is much stronger for them. So now, in saying that, Mike, I wouldn't overreact to that either. I think it's... 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 example. But overall, I think, um, the number is probably going to be typically what we've seen somewhere in that 4% range. I wouldn't expect it to be materially worse than that or better than that.

Michael Harrison

And 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?

Joseph Berquist

Yes. Sorry, I didn't answer that part of the question. We have some, we continue to go after pricing. It's really been a selective kind of targeted approach there where we're looking at the raw materials that are still inflationary and in the regions where they're most inflationary. So there will be some index adjustments in the fourth quarter. And we are also doing, we're taking other actions. And I think on balance, right? We're trying to temper or offset as much as we can any sort of inflationary aspects in Q4. All right. Thanks very much.

Operator

Yep, thank you, Mike. Our next question is from Jonathan Tanwanteng with CJS Securities. Please proceed with your question.

Jonathan Tanwanteng

Good morning. Thank you for taking my questions, and congrats on the nice quarter.

Joseph Berquist

Thanks, Jon.

Jonathan Tanwanteng

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.

Joseph Berquist

Yeah, I mean, it's really, you know, so it's a North America, it's really a U.S. phenomenon, and I wouldn't, I wouldn't say it's going to cannibalize anything at all, but, like, 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, Jon, and is showing some relative strength right now. And, it's interesting because while metal production is up, the automotive sector is down 2%. And so the question is, where is that going? And 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. 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. You know, if China's a little soft and it might be related to tariffs, uh, and North America is up a little bit. Yes. Some of that could be offsetting, but, um, I think, you know, with that, that phenomenon probably occurred in the third quarter and we were still able to show some good growth organically in that environment. So.

Jonathan Tanwanteng

Got it. Thank you. And then 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, what prices are, and what the latest forecast is for input prices. Thank you.

Joseph Berquist

Yeah, I'll start and maybe I'll pass it pass that to Tom. So, yeah, I mean, we've been targeting, you know, our range is 36 percent. We came in a little bit below that. So, you know, 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. And then, you know, their fourth quarter, I'll kind of Tom address that there's a typical pattern there in the fourth quarter. But going forward, we would expect to be above that 36 percent sustainably. But it may, you know, may take us a quarter to get there. Yes.

Tom Coler

Yes, great, great question Jon. You know, to Joe's point I think the overall goal here is continue to focus on gross margins above 36 percent. You know, 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 is a see from Q3 to Q4 sequentially is um lower manufacturing absorption and um some impact associated with the holiday season, both in Europe and uh the North America market. So we typically do see, on average, a you know a point to a half a point of sequential decline in gross margin just naturally through through that volume and and manufacturing absorption phenomenon, but fully expect as we move into 2027, um to continue to um, to focus on price and get uh, get margins uh into our target range of 36% to 37%.

Jonathan Tanwanteng

Okay, great. Thank you so much, guys.

Joseph Berquist

Thank you.

Operator

Our next question is from Peter Osterland with Truist Securities. Please proceed with your question.

Peter Osterland

Good morning. Thanks for taking the questions. So 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? And if so, 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?

Joseph Berquist

Yes, good morning, Pete. Good question. I think you point out a couple of things right there. Asia-Pacific in general, not just China, is more of a price competitive market. It's a developing market as well. You know, we do expect to get a lot of our margins uh at historical levels, right? And uh that's actually one of our more, you know, when you look at the operating margin percentage, it's a very good uh region for us, but you know, we have usually seen a lag of one to two quarters as inflation happens. And 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 was more pronounced. And then you couple that with a weak environment.

Yes, we're being, I guess, we're being prudent in our approach, in our approach always involves, you know, we're not a commodity, right? We go in and we talk to our customers, we talk about what's happening, we show them the data and we take a, you know, a responsible approach because we want customers for life and we want to continue to grow our market share with those customers. So all that being said, I think, you know, our hiccup is transitory that it will return to typical levels that we have levers to get there and are taking actions to do that. It's about how much time that might take. It's usually a quarter or two that it takes us to chase an inflationary environment.

Peter Osterland

Great, very helpful. And then 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?

Joseph Berquist

Sure. Look, that's been a, I think that's been an ongoing challenge for the past few years and even more pronounced with what's happened this year in the Strait of Hormuz. We are confident in our ability to continue to supply 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... We've got this kind of global business, and we've even at times had to – We even at times had to move product from, say, Europe to Asia to cover a raw material shortage.

But right now, not looking at anything that would cause us to say we'll have inability to supply any of our product portfolio in 2027. It's very dynamic, right? And 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's from a plant material or ester base versus a mineral oil based type technology. So we're very proud of the fact that we've not run anybody out and we've not shut anybody down and we're committed to make sure that that continues to be the case.

Peter Osterland

Great. Thanks a lot.

Joseph Berquist

Yes, thank you.

Operator

Our next question is from Lawrence Alexander with Jefferies. Please proceed with your question.

Unknown Speaker

Hey, this is Dan Rizwan for Lazard. Just to follow up to 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?

Joseph Berquist

Great question, Dan. I actually think it was worse in that post-COVID era that that was a really, really tough, tough, uh, period. Um, and what, what happened during that period, I think a lot of companies figured out how to reroute things, you know, like, uh, land routes or going around the bottom of Africa versus through the Straits, just as an example, but it's not as bad as it was during that period.

Unknown Speaker

Okay. I just wanted to make sure. And then this is not something that's going to be an issue in the next six months, but if 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 once you get priced, do you kind of hold it? I'm just wondering how the dynamic works in a different environment.

Joseph Berquist

Yeah, I mean, there's 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 the deflationary environment some expansion in in margin. And it does lag for the same reasons, right? It, it, there's, there's index pricing that protects you in a downward uh trend. There's 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, you know, do we give it all back? I mean, these are not commodity products. I think there are other things that 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 percentage level versus an absolute margin level. And, you know, so we're committed, I think, to continue to keep those gross margins above that floor. Yes.

Operator

Okay. All right. Thank you very much.

Joseph Berquist

Yep. Thanks, Dan.

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. So when you think about Asia, I guess you will be facing tougher comps in the first but do you expect to still grow through that? And then, um, for the Americas, where are you kind of in the in the share gain journey there, share recovery journey? Do you think you can continue to grow, say, a couple points above the market, due to to continue to 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.

Joseph Berquist

Yeah, thanks, Arun. Yeah, 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. And yes, there might be some, some tough comps. We'll see. I'm not exactly sure what's going to happen there. I think our assumption would be at minimum flat, right, in the underlying market. But the one thing we're very confident about, and I mentioned it in the remarks up front, we've done 13 quarters in a row in Asia of net share gains above market. So we're winning business, we're still winning business. And it's not just the China story, right? There's India, there's 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. And that's what we're sort of modeling right now. We're in that budget process. So I can't, and we don't really provide specific guidance, but I would say one thing I could say, you know, from a qualifying standpoint is we will we will grow our EBITDA in 2027.

Arun Viswanathan

And then just from a capital allocation standpoint, on the M&A front, uh are there maybe some better opportunities these days? Maybe you can just assess the landscape for us there. And if so, is that uh still kind of along the lines of what you've seen in the past as far as Asia and technologies? What are you kind of prioritizing on the capital allocation front? Thanks.

Joseph Berquist

Yeah, I think the, you know, just the, the opportunity set right now is, there's a robust pipeline, right? There are things that are actionable that we're taking a look at. Now, I would point out that I would say that almost every quarter, right? So that's not anything different than I would normally say, but working hard, you know, M&A is part of our growth strategy and we're pretty disciplined around it and what we're looking for, Arun, is, you know, we're looking for things that that give us capabilities. And when I say capabilities, it could be a portfolio expansion. We help people manufacture things. And so if there's something that we don't have in our portfolio that we can add to our portfolio that that grows that basket of products that we could sell to our customers, that's where number one, we would look and those things also expand our, you know, our addressable market that we, that we could sell to beyond that, um, you mentioned Asia, Asia is growing, India is growing. And so, you wanna grow where the growth is. And so if something were to come actionable in that area, we certainly would be very interested to take a look. But there are other parts of the business that are growing as well globally in other parts of the world, right? You talk about, you know, die-cast, 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.

So it's not just an Asia play. I think we're looking across the landscape. And our model is when we buy something, even if it's in a strength in one region, we're 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. And, you know, other capabilities are types of innovation. We have our food intelligence initiatives, so technology. Sustainable materials is an area that is pretty innovative. And, uh, it could even be a channel to market, right? Like we are looking at, you know, we have an online presence now. We're dabbling with some e-commerce in the Americas and Europe. And so there's there there's things like that from a capability standpoint that we think would be interesting.

Operator

Thanks a lot.

Joseph Berquist

Yep, thank you.

Operator

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

David Silver

Yes, 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, an accounting perspective, is that handled, you know, 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'm 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

Yes, good morning, David. This is Tom. Good question. So we do set a budget every year every year for annual incentive comp for our short-term incentive comp program. It's based on targets that are largely aligned with our budget with some ranges around that. And then as we progress through the year based on performance and our judgment and expectation based on our, you know, kind of quarterly forecasting process of where we anticipate our trajectory is for the year, we'll adjust that accrual. We typically... We don't do, you know, much in the way of adjustment early in the year as it's really too early to determine full year performance associated with those targets. But that's how we look at it, and we tend to follow that process.

David Silver

So the quarterly accruals are relatively smooth as opposed to lumpy is what you're saying?

Tom Coler

Yeah, that's exactly right. Yeah, it runs through SG&A and hits the income statement. And it's based on our expectation of full year performance at a given point in the year. And we want to make sure that we're appropriately accrued based on the current performance and expectations.

David Silver

That's exactly right. Okay. Performance as we go through the year. Okay, great. No, thank you for clarifying that. My next question would be about uh customer retention your philosophy there. So, you know, at a number of points in this call, Joe, I guess you've discussed kind of, you know, share gains or new customer wins, you know, above your long-term kind of 2% assumption. And 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'm 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. So I guess I'm just wondering whether, if this continued kind of above trend shift 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 uh, you know, steady drumbeat of uh, you know, incremental new business.

Joseph 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 of year period, it's been in this low single digit range, and it still remains there. So, you know, to long term, you know, we want customers for life and we and we've had many of our customers for decades. Right. I've been with the company almost 30 years and, and, and, uh, you know, I, I still see some familiar faces when I go and travel, but the, the, uh, the exercise that we've taken on over the last couple of years, part of, you know, just sort of, uh, how we've reorganized our businesses, we've done a real hard look at customer segmentation, right? And we recognize that, you know, there are large multinational customers, as an example, that require a certain level of service. And there are certain things that they look for, rely on us to provide.

But we also have a long tail of customers, right? Smaller customers and things that are important to, you know, embedding our people on site, you know, they don't scale on the lower end, so we're using increased increasingly things like 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 that has to scale. And we do take an approach, I would call it an EVA approach or a fully allocated um top-down sort of cost approach where we look at profitability by customer and by customer segmentation. And 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's question about EMEA trends. And I guess I would like to maybe just ask the question from maybe a longer-term perspective, maybe three to five years. Probably the last couple years and the next couple years. My guess is regional economic growth growth is going to be much stronger in uh the Americas and Asia-Pac than Europe. And, you know, your company is, you know, I guess you're just integrated into the region in any number of countries and industrial sectors. Joe, thinking about where your resources are going to be, let's say, you know, three, 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? Or would you say like within Europe, you know, so maybe you'll be emphasizing different country by country, the emphasis and the resourcing will be shifting, you know, over time, just managing, I guess, in the uh, you know, if a current economic growth trends kind of persist. Thank you.

Joseph Berquist

Yes. I mean, look, EMEA has been a tough market, right, for six or seven years. It used to be, I remember, it was the 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 the 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. Got a lot of plants. Uh, we have a heavy concentration of our global R&D there.

Uh, you know, in there, conversely, I guess, you know, what we talk about it inside the company, and we've got to have a strong presence in every region. We're not, we're not ever going to walk away from that. But we are pivoting toward Asia. And it's, it's, it's 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, have, the same sort of capabilities there that we have in Europe and the U.S. and China. And just as an example, I think.

I'm a big for this sort of portfolio management of the business where, and I mentioned it earlier, this activity-based costing, you know, your mid-year forecast, your end of the year, you look at, you get a snapshot of where things are growing and what your profitability levels are. And I think every year we've got to kind of look at that. make adjustments to our portfolio and be responsive to what's happening on the ground. So right now it feels like, you know, 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.

Joseph Berquist

Yes, thank you.

Operator

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

Joseph 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. And 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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