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Transcript Summary

Quaker Houghton reported Q1 2026 net sales of $480 million, an 8% year-over-year increase, driven by 3% organic volume growth and sustained market share gains. The Asia Pacific region outperformed with a 10% organic volume increase, offsetting softer performance in the Americas and EMEA. Adjusted EBITDA grew 5% to $73 million, with gross margins reaching 36.8%. However, management cautioned that hostilities in the Strait of Hormuz are driving significant raw material and logistics inflation. This is expected to cause a temporary 200 to 300 basis point decline in gross margins during Q2 2026 as pricing adjustments lag. In response, the company launched a new Transformation Program targeting $20 million to $30 million in sustainable structural cost savings over the next three years. This program focuses on streamlining global processes and optimizing the manufacturing network, including a transition to a more efficient facility in China. Additionally, the company extended its debt maturity to 2031 and increased its liquidity through a new credit agreement. Despite near-term inflationary headwinds, Quaker Houghton maintains its full-year guidance for revenue and EBITDA growth, banking on continued share gains and seasonal demand recovery in the second half of the year.

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QUAKER CHEMICAL CORPORATION: M&A Roll-up Mechanics Masking Poor Cash Conversion

Full Earnings Call Transcript — Q1 • 2026-05-01

Operator: Greetings, and welcome to the Quaker Houghton First Quarter 2026 Earnings Conference Call. [Operator Instructions]  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 First 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, April 30, 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.
Joseph Berquist: Thank you, John, and good morning, everyone. We delivered a strong first quarter with organic volumes up 3% year-over-year, resulting in our third consecutive quarter of adjusted EBITDA growth. Our performance was driven by new business wins in all regions, highlighted by double-digit organic volume growth in Asia Pacific, where we continue to gain traction across the region. Adjusted EBITDA increased 5% compared to the prior year, building on net share gains that enabled us to outperform our end markets, which we estimate were down approximately 1% in the quarter. Gross margins improved from the fourth quarter, increasing 150 basis points sequentially and 40 basis points year-over-year. The sequential improvement in margins was bolstered by higher utilization of fixed assets and improved operational performance. Market conditions remain soft overall, with pockets of incremental industrial gains tempered by weak automotive production. The hostilities in the straight of our moves are creating inflationary pressure on raw materials and input costs. But so far, it has not had a significant direct or indirect impact on demand. Strong commercial execution from our team and contributions from our recent acquisitions helped offset the underlying sluggish markets, enabling us to deliver organic volume, revenue and EBITDA growth in the quarter despite headwinds and volatility. Turning to the first quarter results. Net sales increased 8% year-over-year, fueled by net share gains of 4% at the top of our target range, along with the contribution from recent acquisitions. This marks the 10th consecutive quarter of net share gains, while our end markets have been consistently sluggish. Organic sales volumes in Asia Pacific grew for the 11th consecutive quarter. While our business in China continues to grow above end market rates, we are also achieving outsized growth in emerging markets such as India, Thailand and Vietnam. Operating margins have expanded in the region as we are benefiting from recent organic investments in localized manufacturing. In EMEA, organic volumes grew 2% in the first quarter as new business wins outpaced persistently tough end markets. Volumes in the Americas declined slightly year-over-year, driven by a lingering customer outage, tariff uncertainty and weather-related disruptions. Despite these challenges, March had the highest volume in the Americas in the last 16 months, signaling improved momentum as we exited the quarter. EBITDA margins declined 50 basis points year-over-year, primarily because of higher SG&A expenditures related to acquisitions, foreign currency and incentive compensation. I would like to provide more color on the ongoing conflict in the Middle East and how we are managing its impact on our business. Immediately after the conflict began, we established an executive level task force to monitor developments, assess potential impacts and coordinate our response. Our top priority was to ensure the safety of our more than 4,700 employees, particularly those living and working in the region. We also took swift action to confirm supply continuity to customers in the affected region. Since then, the task force has remained actively engaged, tracking conditions closely and addressing emerging pressures. From a business perspective, we have proportionately low direct sales exposure to Middle East countries near the conflict area. Our sales to North Africa and the Middle East in 2025 were less than 2% of total company net sales. While first quarter results were largely insulated, we expect higher raw material and shipping costs in the second quarter. To address this, we implemented pricing actions across all regions with some taking effect in April. There will be a typical lag between rising costs and price realization, which we expect will create temporary gross margin pressures in the second quarter. Based on the actions we have taken and additional increases planned for this quarter, we expect to recover margins within 1 to 2 quarters. Meanwhile, we are committed to ensuring products reach our customers without disruption. We have not yet seen a meaningful impact on customer demand, but a prolonged conflict could begin to influence broader economic activity, including forward demand and further cost inflation. With this backdrop, we are focused on what we can control. Today, we are announcing the launch of a new transformation program that will reduce cost and complexity across the organization, optimize our manufacturing network, strengthen sales and technical capabilities and simplify global processes. We will pace investments over the coming months to unlock productivity in a disciplined manner. The first phase is underway through a comprehensive business process review focused on finding cost opportunities and improving master data management. The program will fundamentally change the way we work, and we are looking to modernize the employee and customer experience. In the first quarter, we took steps to streamline our executive leadership structure to sharpen customer focus and accelerate decision-making. This program is central to achieving adjusted EBITDA margins at or above our target of 18%. We expect to exit this year with approximately $10 million in new run rate savings. Over the next 3 years, we see a clear path to delivering at least $20 million to $30 million of sustainable structural cost improvement with much of that target already identified. We have a clear line of sight to a robust set of initiatives, giving us confidence in our long-term transformation path. This new program complements actions that are already underway. The closure of our manufacturing facility in Dortmund, Germany remains on track, and we are beginning to realize the associated financial benefits. We continue to expect approximately $2 million in cost savings from the closure in 2026 and $5 million in annual run rate savings beginning in 2027. We also recently announced the planned closure of our manufacturing facility in Songjiang, China, which will coincide with the start-up of our new facility in Zhongjuang later this summer. Production from Songjiang will transition to the new site as it comes online, enabling more efficient operations and enhanced capabilities. This modern facility will strengthen our ability to serve customers across Asia Pacific and manufacture recent portfolio additions more competitively at the local level. Turning to the outlook. Our view on macro trends is consistent with prior expectations. End markets declined modestly in the first quarter as expected. And while we still continue to predict flat end market conditions for the full year with normal seasonal improvement and a slightly better demand environment in the second half, we expect sequential volume and revenue growth in Q2, driven by seasonal improvement and wrap effect of new and recent business wins. Visibility through the first part of the quarter indicates steady demand. At the same time, we anticipate temporary gross margin pressure related to higher input costs stemming from the Middle East conflict, which is expected to push gross margins below our target range in the second quarter. The situation remains dynamic due to the prevailing market uncertainty. We expect these gross margin headwinds to be temporary, lasting no more than 1 to 2 quarters. Our current estimate is that second quarter gross margins will be 200 to 300 basis points below quarter 1 on a sequential basis. Through pricing actions we are taking, we expect to fully recover gross margins within our target range of 36% to 37% as we exit the year. With the rapid raw material cost escalation in recent weeks above what we experienced at the end of the first quarter and the ongoing uncertainty of the situation, we are in the process of implementing further price increases, which we expect will be in place before the end of the second quarter. We are recovering the cost impact from inflation in a responsible way and collaborating with our customers to successfully navigate the complexity of the current situation. As mentioned previously, the company is also taking action to improve our cost structure. Our long-term earnings profile continues to be resilient. Our local-for-local operating model and deep customer relationships differentiate us and enable new business wins. As a result, even amid heightened uncertainty, we continue to expect revenue and adjusted EBITDA growth in 2026, assuming no significant further deterioration in our end markets because of the Middle East conflict. In closing, I am incredibly proud of our team and their consistent execution in a challenging environment. We are making substantial progress across key priorities, including pursuit of new business, cost structure optimization, while also diligently executing our strategy to create long-term value for our customers and shareholders. 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. First quarter net sales were $480 million, an 8% increase from the prior year. Organic volumes increased 3%, driven by global net share gains of 4% across all regions, with Asia Pacific being the largest contributor. Acquisitions contributed an additional 4% to net sales, primarily related to Dipsol, which will become part of our organic base beginning in Q2. We also had a 4% benefit to net sales from favorable foreign currency translation, primarily due to the euro strengthening against the U.S. dollar. Partially offsetting these items was unfavorable selling price and product mix, which was 3% lower than the prior year associated with lower index pricing, regional and geographic mix. As expected, gross margins improved on both a year-over-year basis as well as sequentially to 36.8%, near the high end of our target range. This was driven by product margin improvement and more favorable manufacturing absorption. On a non-GAAP basis, SG&A increased approximately $16 million or 14% in the first quarter compared to the prior year. This increase was primarily due to acquisitions and the impact of foreign currency. Excluding these items, organic SG&A was approximately 6% higher in the first quarter, mainly due to higher incentive compensation and accelerated depreciation related to our corporate headquarters and lab consolidation in the Philadelphia area. We delivered $73 million of adjusted EBITDA in the first quarter, while adjusted EBITDA margin of 15.1% declined year-over-year due to higher SG&A costs. Switching now to our segment results. Our Asia Pacific segment continues to be a growth engine with organic net sales increasing in 10 of our 11 last quarters and new business wins far exceeding the high end of our total company target range. Asia Pacific sales in the first quarter increased 25% year-over-year as the impact of our acquisition of Dipsol complemented organic volume growth of 10% and a favorable foreign currency impact of 3%. These drivers were partially offset by unfavorable price and mix, which declined 2% in the quarter. Segment earnings in Asia Pacific increased approximately $8 million or 32% in the first quarter compared to the prior year. This was driven by higher top line growth as well as improved product margins and more favorable manufacturing absorption. First quarter net sales in EMEA increased 10% year-over-year, partially due to favorable foreign currency impacts. Higher net sales from organic volume growth and the impact of acquisitions were offset by lower selling price and product mix. Segment earnings in EMEA increased approximately $2 million or 9% in the first quarter compared to the prior year. First quarter net sales in the Americas were in line with the prior year as favorable impacts from our acquisitions and foreign currency were offset by lower organic sales volumes and selling price and product mix. Lower volumes were attributable to a continued customer outage, regional tariff uncertainty and weather impacts early in the quarter, while lower selling prices were primarily the result of our index contracts as raw material costs declined in the quarter compared to the prior year. Segment earnings in the Americas decreased approximately $5 million or 8% in the first quarter compared to the prior year. This was driven by higher SG&A related to selling expense and incentive compensation as well as unfavorable product mix that negatively impacted margins. Turning to nonoperating costs. Our interest expense was $10 million in the first quarter, which was consistent with the prior year and the past few quarters. Our cost of debt remained approximately 5% in the quarter. Our effective tax rate, excluding noncore and nonrecurring items, was approximately 28% in the first quarter, which is slightly lower than the prior year and in line with our expectations for the full year effective tax rate in the range of 28% to 29%. And in the first quarter, our GAAP diluted earnings per share were $1.13 and our non-GAAP diluted earnings per share were $1.63, a 3% increase over the prior year due to improved operating performance. Cash generated from operations was $4 million in the first quarter, increasing from a use of cash of $3 million in the prior year. The first quarter is typically our lowest from a cash generation perspective due to incentive compensation payments, working capital investments and the seasonality of our business. The improvement over the prior year was primarily the result of better operating performance and lower cash restructuring costs, which totaled $4 million in the first quarter. Capital expenditures in the first quarter were approximately $11 million, primarily related to the construction of our new facility in China. We anticipate capital expenditures to increase in the remaining quarters as we complete construction in China and finalize the build-out of our new corporate headquarters in Pennsylvania. We still expect full year 2026 capital expenditures to be approximately 2.5% to 3.5% of sales. During the first quarter, we paid approximately $9 million in dividends. We remain focused on our capital allocation priorities and balancing investments for growth with returning cash to shareholders, and we'll continue to weigh opportunistic share repurchases in a prudent manner that optimizes shareholder value. In April, we announced that we entered into an amended credit agreement in which we extended our nearest debt maturity by almost 4 years from June 2027 to April 2031, while also increasing our revolving credit facility availability by approximately $300 million and improving our overall credit terms. The amended agreement also provides us with the right to increase the revolving credit facility by approximately $331 million for additional liquidity. The improvement in our credit terms and increased availability under this new agreement reflects the strength of our balance sheet and are clear indicators of the underlying health of our business and the durability of our cash flows. The new agreement provides increased financial flexibility that will allow us to execute our strategy, achieve our capital allocation priorities and continue investing in growth. We delivered strong first quarter results, continuing to gain share and driving organic volume growth despite ongoing macroeconomic and geopolitical challenges. With a strengthened balance sheet and increased financial flexibility, we are well positioned to continue executing our strategy and creating value for shareholders. With that, I will turn it back over to Joe.
Joseph Berquist: Thank you, Tom. We are executing a clear set of priorities to strengthen the business, simplifying how we operate, enhancing our capabilities and putting the right cost structure in place to support sustainable growth. With that, we would be happy to answer your questions.
Operator: Our first question comes from the line of Mike Harrison with Seaport Research Partners.
Michael Harrison: I wanted to start with just kind of the raw material picture. I think you did a good job kind of articulating the expectation of 200 or 300 basis points of margin pressure next quarter. But maybe just give us some details on what you guys are seeing in terms of raw material costs. I assume that the biggest pressure you're seeing is in crude-based materials, but maybe comment also on what you're seeing. I know we're just getting past an oleo chemical spike, and I think some of those materials also continue to be kind of volatile. And also, if you can cover whether you're having any issues with raw material availability in any parts of the world.
Unknown Executive: Yes. Thanks, Mike. Good question. So talking about the general situation. If you think about our raw materials, there's really 3 buckets, right? It's base oils, it's additives and then it's oleochemicals. And right now, as is typical in an inflationary environment like this, everything sort of keys off of what's happening with crude oil, right? And so all 3 of those buckets are higher. In the sort of when hostilities broke out, as I mentioned just a few minutes ago, we put a task force together that day, right, that Saturday, we started looking at what impacts this is going to have on supply, first of all. and then also cost. And I think from a supply standpoint, to your last part of your question, we've been very fortunate to not have any issues. I think the flexibility of our supply chain, the fact that we have this local-for-local approach and really as one of the leaders in the space, I think our relationships and our ability to get product around the world is very good. Overall trend in those 3 buckets or raw materials in general, what we had thought sort of the increase was going to be toward the end of Q1, I would say in the recent weeks, that has gone up more. So we put an increase out at the end of Q1. Some of that became effective in April, more will become effective here in May. And we've already started on another round of price increases just because the cycle is pretty inflationary right now. Will that go further? I personally have my own thoughts on that. I don't believe so. But it all depends. If it does, I think as we did in the past, we have pretty good ability to go out and get pricing, but there is this lag. And so our view of is, as I said, we think it's going to be somewhere between 200 basis points, maybe a little bit more than that. We have index agreements as well. And those index agreements tend to adjust on a quarterly basis. So that's why there's that lag. It's just not something that we can go out and press a button and do immediately.
Michael Harrison: All right. Very helpful. And then I wanted to ask about the new transformation program that you guys announced in the press release and in your prepared remarks. Kind of what was the genesis of this program? And maybe just give a little bit more detail on what kind of actions you're taking that are beyond what you got -- the actions that you've announced with previous cost programs that are, I believe, still in mid-flight.
Unknown Executive: Yes. We've sunset or I mean I guess there's a few lingering things with prior cost programs. But this is a new program. And the genesis of the program really is, I believe our EBITDA margins need to be above 18% and pushing 20% eventually. And we're in the sort of mid-teens space right now. And I've been in the role now for about 18 months. And I think visibility overall to how the company is operating, some things that kind of jump out to me are spans and layers. We had maybe added some layers of management that weren't there before. One of my philosophies was to bring the decision-making closer to the customer. I really would like to have our culture be one of working managers or hands-on working managers. So -- so just some general like bringing clarity to the org structure and looking at areas where there's redundancy, maybe there's a little bit of load.  We've addressed that and are addressing that. I mean this is also about Mike, there's tremendous complexity still lingering from when Quaker and Houghton came together in 2019. That was a huge transformational deal. And while we've integrated very well, we've had great customer retention, and we're able to aspire our customers, I think -- there's also the reality that our master data is a little messy that creates a lot of inefficiency, that creates a lot of manual work. We looked at our business processes and just certain things like how we process intercompany charges amongst ourselves and how many times our customer service people have to touch an order before it gets to the customer; it's really inefficient. And so the key thrust of this is around business process optimization and making sure that we have a Quaker Houghton way of doing things, tied very closely to that is our master data. And we have a very good line of sight to where that's going. And actually think that there's efficiency that's at the end of that process that will -- we can start to leverage things like AI and shared services type program. to make the business more competitive. This is not a reaction to what's happening in the Middle East. This is something that I feel we need to do. It's the right thing to do for the business. We've got to be more efficient. We got to have a more modern employee and customer experience. And it's time to kind of bring the company forward and so we can really start to take advantage of a more modern set of tools.
Michael Harrison: That makes sense. And then I guess last question for now is just -- as always, I'm trying to get a little bit of a sharper view on how you guys are thinking about EBITDA for the next quarter? You mentioned the gross margin pressure. Typically, you guys would see some seasonal improvement in EBITDA, but it sounds like maybe that could be completely offset by gross margin pressure. So is it fair to say we're probably looking at an EBITDA number in the second quarter that's pretty similar to what you guys just reported in Q1?
Unknown Executive: Mike, I think that's fair. I do think the volume aspect of this surprisingly, in the market that we're in, you would think as volatile as it is, our volume is very strong. So I feel -- I do feel confident that second quarter volumes will sequentially improve, that even where I sit today, I would expect year-over-year improvement. There's visibility to our order book. There's visibility to business that we've won and sort of the wrap effect of that, what's in the pipeline. I mean we have a couple of parts of our business where we're actually adding labor to boost up some of our off shifts to keep up with demand. So the demand aspect of it is very good. And we're putting price in. That price will not all be in, in the second quarter, and there's another phase coming. But I do think from a volume perspective, we expect it to be better and seeing some of that normal seasonality that you see but there will be the slide of gross margin. And I think the math would say we're going to be within range, right, of where we landed in Q1.
Operator: Our next question comes from the line of Jonathan Tanwanteng with CJS Securities.
Jonathan Tanwanteng: I was wondering if you could talk about the expanded credit agreement you did recently and your thoughts maybe on capital allocation from here. Did you update that? I know that it was becoming current, but the expanded size, did you do that to accommodate your expected operational organic growth? Or did you see more of an opportunity maybe to do share repurchases or M&A here? Maybe just give us a little more color on the opportunities that you see going forward and how you're addressing that? .
Tom Coler: Yes. John, this is Tom. I'll share some thoughts on that. I would say, first and foremost, the update to the credit agreement was really about an opportunity to extend maturities, right? So we were going current here in June of this year with maturity of our existing facility in June of 2027. So this gave us an opportunity to extend that out to April of 2031 and add some additional years with respect to the facility. It does add additional capacity for us to really continue to be flexible and use all the available tools from a capital allocation standpoint. We continue to be focused on investing in growth, both from an inorganic standpoint as well as organic growth, things like our new plant in China. And then I think, as I said in my prepared remarks, we continue to weigh how we deploy capital for growth as well as return capital to shareholders through opportunistic share buybacks and continue to pay dividends and those sorts of things. And so I think it's a combination of extending our maturities, some additional capacity, which gives us more flexibility from a capital allocation standpoint. We also improved terms as part of this refinancing of the facility and we have a great and supportive bank group that enabled us to accomplish those things in terms of the maturity and the additional capacity in the improved terms.
Jonathan Tanwanteng: Got it. And maybe just to be a little more focused here, do you see opportunity just given the market volatility, whether it's in your own shares or in potentially acquiring tuck-ins or larger players? .
Unknown Executive: Yes. I'd say, John, yes to both, right? I think we have done -- it's been a couple of quarters since we've done anything meaningful on share repurchase. But we're not going try to do that. Balance sheet is in a good position. So if the opportunity presents itself, we expect we will do that. I would also say that the M&A pipeline as always, remains active. There are a number of sort of bolt-on tuck-in type of opportunities out there that we think will give us more things in the portfolio that we could sell to our existing customers and those types of deals have been very accretive for the company in the past. And part of our strategy -- it will be part of our strategy going forward. So I would say yes to both questions. And we're really happy we got the financing on it. When we got it done and that the terms and additional flexibility that came with it.
Operator: Our next question comes from the line of Laurence Alexander with Jefferies.
Daniel Rizzo: It's Dan Rizzo on for Lawrence. A couple of things. As you aim for your 18% to 20% EBITDA margins, once I guess, some of this volatility may be kind of subsides and your restructuring is in place, how should we think about incremental margins kind of in the mid-cycle? I mean it's obviously increasing. I was wondering how we should kind of -- how we could quantify it.
Tom Coler: Yes. Dan, it's Tom. Thanks for the question. I think as we're thinking about driving towards that 18% plus EBITDA margin. I think our assumptions relative to our targeted gross margin range remain consistent in that 36% to 37%. I think what you heard us talk about in our prepared remarks and some of Joe's comments is really around this opportunity from a transformational and restructuring program to focus on cost and complexity reduction with respect to our G&A functions, our manufacturing and sledging network. And so as we look out over the next couple of years, where we see some leverage is really as we think about SG&A as a percent of sales, those G&A functions and driving some of that cost and complexity out of the business. And that's really the pathway towards that 18% as well as volume growth and continuing to work around net share gains and some of the things that we've been able to successfully execute.
Daniel Rizzo: I'm sorry, did you mention that I not hear what the cash cost of the plan is, the new plan?
Tom Coler: No, we didn't mention anything specific about the cash cost of the plan. I think the -- what I said was we will pace this out over time. So for instance, we're not planning to put a big new ERP system in, right? So it's not going to be a huge outlay. I think what's typical here is 1 to 1.5x to achieve the types of synergies that we're looking at. So we're not planning any sort of extraordinary type of investment to get there, Dan. Hopefully, that answers that question.
Daniel Rizzo: No, that does. That's helpful. And then my final question. So you guys have done a good job, obviously always of increasing market share. But you have a lot of new products from Houghton and Dipsol. I was wondering how much of your share growth is increased sales to existing customers versus going into like kind of different customers? And how that kind of breaks out?
Tom Coler: It's a really great question, Dan. -- it's much easier to go in and what we say is grab a share of the wallet versus opening up a new door with someone that you don't have a relationship with. So proportionately, most of the gains that we're getting are coming from share gain within existing customers, growing that share of wallet, right? It's the customer who may be buying a lubricant from us that we could sell them, grease, specialty grease, fire resistant hydraulic, finishing -- metal finishing type of chemical. So it's really the majority -- high majority is coming from that growing with existing customers, new parts of the portfolio.
Daniel Rizzo: That's very helpful.
Operator: Our next question comes from the line of Arun Viswanathan with RBC Capital Markets.
Arun Viswanathan: Yes, sorry about that. I hope you guys are well. Congrats on the quarter. I guess, I understand the couple of hundred basis points of gross margin compression, maybe that you're expecting for Q2 because of the lag in pricing for us. I would have 2 questions. So first off, do you expect to fully recover that in the second half, which -- and does that imply that you have to actually price above inflation? And then secondly, I know you guys were successful in recouping inflation in the last inflationary cycle in '22, '23, and you were able to price seemingly above inflationary levels. . But is the demand picture now maybe slightly choppier or less robust and would make that a little bit more difficult or take longer to recoup those margins? Or how should we think about that?
Tom Coler: Yes. No, good question, Arun. Thanks for those. I would say, the goal overall is we have these target gross margin ranges. I've talked about the 18% EBITDA, and we're pretty committed to that, right? So that would imply in this type of environment that you've got to stay ahead of inflation a little bit. That being said, we volume to make sure we retain and we don't have a lot of churn and we can continue to stack the wins and the growth that we're seeing going forward is also part of it. About 1/4 of our pricing is on index. So it takes away a lot of the emotional aspects of this. Our customers, I think, understand the situation that we're in right now. And we've also said, look, if things recess. In the cost side, we will act accordingly. And we're not trying to gorse them in any way, we're trying to be very responsible about it, as I said previously. The demand environment right now, surprisingly, is very strong. And will that change? It's possible it will in any type of inflationary environment like that, it could happen but through, say, the first 4 months of the year and visibility to where we are with our demand currently, we're not seeing that. We think will be okay. And then the margin question specifically, we do think by the end of the year that we would get back into the 36% to 37% range. And that's our goal.
Arun Viswanathan: Okay. Great. And then I guess a follow-up, maybe I can just ask about the volumes. You said that the volume environment is -- the demand environment is quite strong. Maybe you can just kind of describe that a little bit more in detail because is it steel utilization rates are really holding up and aluminum maybe as well, automotive? Maybe you can just touch on some of the end markets. And also regionally, it seems like, obviously, Asia Pacific has remained relatively strong, and you're benefiting from some wins. But North America and Europe, are you also seeing some improvement? Or how should we think about that?
Tom Coler: Yes. No. Look, I think the main takeaway here is we're really punching above our weight. And let's focus on Asia because -- the results are very, very strong, double-digit volume growth. I mean, that's against a backdrop of industrial production actually declined in China in the first quarter and we've seen light vehicle builds really in all regions down between 2% and 4%. So we are outperforming the markets that we're in. We've seen some improvement on the metal side, steel and aluminum production, that can, at times, be a precursor that automotive is going to swing back, right? -- end of Q1, I think, as I mentioned, North America seemed to pick up and little bit in North America will drive our Americas segment? And then typically, as you head out of Q1 in areas like Asia, you put the Lunar holiday behind you and you get into normal seasonality patterns. And I think they had a tough first part of the year, China especially, but areas outside of China; India, Vietnam, Thailand, actually, they had pretty good performance. And so that offsets a little bit what's happening in China. So all in all, like as we head into the second quarter, as I said, I think this sort of normal seasonality returns. That's what it feels like right now. And then us taking share, consistently taking share above market, we would expect that would continue into the year.
Operator: Our next question comes from the line of David Silver with Freedom Capital Markets.
David Silver: Yes. Good morning. Thank you. a couple of questions. I have a couple of questions. First one, tactical, second one, maybe a little bit longer term. But on the tactical one, and I apologize in advance that this sounds very naive. But I'm leaning on your long experience on the commercial side, Joe. And I'm sure that your company has a very detailed playbook for operating in conditions such as the one we're facing now with volatile feedstock cost pressures. And I'm just kind of scratching my head and I'm saying, why not a surcharge, I guess? In other words, something that can be pegged to something clearly visible to both sides. It might halt some of that 200 to 300 basis point erosion on the way up and the customer gets the assurance that when the relevant cost pressure abates that the pricing that persisted before this will quickly return. But I'm sure your company has a long playbook. Maybe if you could just share some of your thinking about how quicker typically goes about recouping cost pressures in fast-moving markets, such as the one here.
Tom Coler: Yes. No, good question. So we do use surcharges. That is something that we do -- and really, you're able to put some of that in immediately, especially when it comes to things like freight. Other parts of the business, I mean, we have to go in and really show the data to the customer. just as our suppliers come to us, we push back and say, well, why is this going up? And I'm going to shop it around and that happens when we talk to our customers as well. So I think the nature of how we in our relationship. We're not a commodity, right? We are really kind of embedded in these plants. We're sitting in the morning meeting. We are part of the really -- become part of their operations in some cases. So we have to bring the data. We have to give them justification. And a lot of times, we have to give them options about what we're going to do about it, right? Can we do something to offset it in other ways through service or bundling a product. So it's a laborious process, but it's also very, very necessary. I think if you're going to have long-term trusting relationships with your customers, that's really the only way we can kind of approach it. We would love to be able to be more efficient and quicker with these things, but it's extremely volatile. And then you run into these situations where every Friday, something changes, right, and have to kind of adjust to that as well. But I think over the long term, David, our goal is to get back to this target range gross margin. That's something that we've always done and have also been pretty open about the fact that it does take us a quarter or two lag to catch up.
David Silver: Okay. Great. I have a longer-term question or a question about a longer-term topic. But one of the trends that's going to become increasingly apparent, I guess, over the next couple of years, we'll be reassuring and onshoring of heavy industry here. So with your global footprint, I'm guessing that Quaker has about as good a view on automakers and primary metals activities that might be showing up in the U.S. from some offshore companies. And I was just wondering, does Quaker have a playbook currently to maybe capture a little more than your share of this new investment coming to, let's say, the United States. Is there a process? Do you have to qualify 12 or 18 months in advance? Just -- what is the playbook that Quaker is developing to maybe take full advantage of the coming wave of large investments in automotive and other kind of heavy industry assets here?
Tom Coler: Yes, great question. We do have a playbook. And I think that playbook is pretty consistent regardless of what region new capacity is coming online. Look, we are seen as the industry leader. We participate in industry technical groups and forums. And when -- and we maintain relationship with the mill builders in the equipment suppliers. And so when a new installation comes on and you rightly point out that there's a lot of investment in North America right now. We generally know about it in the early phases. We try to be involved on the front end in the design of those systems and more often than not when new capacity comes online, we're the incumbent supplier. So that is something that is part of our playbook. How do we make sure that, that's a valuable approach for our customers. We have our own CNC machines. We have a pilot rolling mill in the company, and we can really do some things on the front end to test and ensure that we're going to have success when they start these mills up and that's something that's really important. I think the other aspect of this is there's been a shift, right? I mean if you look at metal production in China, I think more steel is made there than the rest of the world combined. And when you look at the trends just in the past few years, automotive production in China is starting to really take off. And you're seeing the Chinese brands be more prominent in Africa and Southeast Asia and even in Europe and not so much here yet, but -- but we've always said we're kind of agnostic of where it gets me. And I think just my point is, as that part of the business grows, I think we're very pleased with our ability to kind of grow in a differential way right now in that part of the world. That's something that's been very intentional.
David Silver: Okay. Great. I appreciate all the color.
Operator: Our next question comes from the line of Jon Tanwanteng with CJS Securities.
Jonathan Tanwanteng: I apologize if you already addressed this, but I was wondering if you could talk about the potential for demand destruction or disruption at your customers and what you planned for in your scenario analysis as you consider what would happen if you run or the mid compute was extended. Have you talked to your customers about them? And what contingencies might be and what your earnings profile and the revenue profile might look like if that would happen? .
Tom Coler: Yes, John. I mean, look, we talk to our customers every day about that. We're watching that as closely as we can. I think it's a tough thing to predict. I would say right now, there's an equal chance that this thing is prolonged or not prolonged. There's -- I would also say there's an equal chance that there is going to have some impact on demand that could be very, very disruptive or it's going to have no impact, right? And so when we talk about our sort of our model and how we're looking at the year, I'm basing it upon what the most -- the information I have today, which is, as we head into -- we're now well into the second quarter, visibility on what we have, I'm not seeing that  sort of catastrophic demand disruption on the horizon. We're not hearing that from our customers, so we're not expecting it at this point. Is it possible it happens? Absolutely. The longer this thing goes on, and the higher inflation goes, it's not necessarily good for anyone's business, right, if that continues. But I think we can't necessarily bake that scenario in although, as I said earlier, there's probably an equally likely chance that happens or it doesn't happen right now. So based upon that, our outlook is kind of like with all the information we have today, the best thing we know and looking at all the empirical evidence we have, we're not seeing that yet. So we didn't bake that into our guide.
Operator: And we have -- there are no further questions at this time. I would like to turn the floor back over to Joe Berquist for closing comments.
Joseph Berquist: Thank you. Yes, we, again, really appreciate the interest in Quaker Houghton. I want to thank all of our employees for what they continue to do in these really volatile times and especially our employees that were impacted in this -- the region close to the conflict and the amazing work that they've done to keep our customers supplied. So -- appreciate the questions. If there's any follow-up, don't hesitate to reach out to John Dalhoff, and we'll be happy to answer any additional questions you have. Thanks.
Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.