Quaker Houghton (KWR) Q2 FY26 earnings call: guidance and Q&A

Can you provide more color on specific raw material baskets, their volatility, and the timing of their P&L impact, including expectations for Q3 and Q4?

Base oil-related raw materials (2/3 of bucket) remain volatile and elevated. Oleochemicals show some softening. Raw material container costs peaked in June/early July. Gross margins are expected to be flat in Q3 from Q2, then improve towards year-end, influenced by pricing actions, index adjustments, and inventory valuation effects.

“Raw material container costs pretty significant for us in the quarter. We think that those impacts really peaked in June and even early this month in July. As we go forward, I think there's different elements at play, right? We have certainly pricing that came on during the quarter. We have index adjustments that happened at the end of the quarter and even in the middle of this quarter.”

asked by Michael Harrison · answered by Joseph Berquist

Asia's strength was expected, but EMEA was surprisingly strong. Can you discuss the sustainability of this strength in both regions?

EMEA's strength was largely due to self-help (share gains) rather than market growth, with some Q2 pre-buy activity. The company is confident in maintaining 2-4% share gains. Asia Pacific's double-digit growth is also driven by share gains, particularly in EV manufacturing. While double-digit growth may normalize, Asia is expected to remain a strong growth engine.

“I mean the underlying markets in EMEA were steel was up and industrial production was up slightly. But conversely, the auto ice production, we think, was down double digits, mid-teens. So in composite, we'll say market was flat to slightly up, most of the growth that we're seeing is really what I would call self-help. It's the share gains that we've been delivering from our pipeline they were on the higher end of our range.”

asked by Michael Harrison · answered by Joseph Berquist

Americas operating margin was down 250 bps YoY due to higher manufacturing and operational costs. Can you elaborate on the drivers and how it might trend in H2?

The Q2 decline included some one-time inventory disposal costs and higher operational costs related to increased inventory and 24/7 operations at a primary plant. Management expects these issues to improve, and operating margins should return to traditional levels for the region.

“So the second quarter specifically, we had some inventory disposal costs related to quality related to kind of things we're working through at one of our plants. On the flip side, good problems to have. I think we had some higher inventory as we work off backlog and we're trying to catch up some of our Greece orders and then one of our primary plants there in Middletown, we've gone to a 24/7 operation right now.”

asked by Michael Harrison · answered by Joseph Berquist

Gross margin decline was less severe than anticipated. To what extent was this due to faster pricing? Do you see upside to the 36-37% target exiting the year?

The less severe decline was due to better top-line performance from higher volumes and solid execution of price increases, partially offset by inventory valuation. While not modeling upside, the company is confident in reaching above 36% by year-end, noting that deflationary environments have historically allowed for higher margins.

“We modeled a 200 to 300 basis points kind of impact to gross margins in Q2. The volume was a nice surprise for us, right? And that capacity utilization in our plants was helpful. We're also starting to see the benefits of plant closures, right? We made a decision to close a plant in Europe, and you saw the Europe operating margins improved in the quarter.”

asked by Pete Osterland · answered by Joseph Berquist

How should we think about the cadence of buybacks given the new authorization, and how do you weigh share repurchases against M&A opportunities?

The company maintains flexibility with its new buyback authorization and refinanced credit facility. Capital deployment prioritizes growth investments (organic and inorganic). Share repurchases are considered opportunistic, balancing dividend payments, capital structure, leverage ratio, and M&A pipeline, rather than being programmatic.

“First and foremost, we want to deploy capital to help the business grow, whether that's through organic investments like our new plant in China or inorganic opportunities through continuing to work our M&A pipeline. So I think we'll continue to be opportunistic as we think about share repurchases, balance that with dividend payments.”

asked by Pete Osterland · answered by Tom Coler

Are Asia's share gains from many small wins or a few large customers? How does Fluid Intelligence act as a 'toehold' for future penetration, especially in India vs. China?

Asia's share gains are broad-based across industrial sectors and geographies (China, India, Southeast Asia), mostly 'singles and doubles' with occasional 'triples' like new mill installations. Fluid Intelligence is a service model enhancement that enables product sales and helps penetrate new customers, acting as a growth engine. India offers significant growth potential due to projected industrial production doubling, while China continues to grow, especially in the EV segment.

“It's really broad-based in Asia. China is the biggest aspect, biggest country of the Asia, but landscape, but really, our growth in India has been very good as well as Southeast Asia. So -- and it's across all product lines, though I think it's a lot of singles and doubles.”

asked by Daniel Rizzo · answered by Joseph Berquist

You've been above your 2-4% share gain target. What are the competitive dynamics, and should we recalibrate expectations for your ability to continue gaining share?

The strong share gains are due to cross-selling new technology from acquisitions, leveraging local teams in growing markets, and enhanced service models like Fluid Intelligence. The company is highly focused on share gains, incentivizing employees. Reduced churn also contributes to higher net share gains. While the 2-4% target is carefully considered, the current momentum is strong.

“Why is that happening? I think it's a combination of things. Cross-selling, we've been acquisitive and we brought on some new technology that adds to our portfolio. It increases the size of our addressable market. So we're going into existing customers who are happy with us and saying, hey, we have some additional things you can buy from us now.”

asked by Jonathan Tanwanteng · answered by Joseph Berquist

Given strong incremental margins and volume growth, does this indicate underutilized skilled labor capacity? How much more growth can be handled before significant investment in new talent is needed?

The company previously had skilled labor spending too much time on internal complexities. Efforts over the last 18 months focused on reducing complexity and improving processes to free up commercial teams. This allows handling more business with existing capacity. The long-term strategy is to invest in commercial talent and become more efficient in back-office areas, aiming for sustainable EBITDA margins above 18% with current capacity.

“I think we went through a period, and we're still kind of going through a period where because of the complexity of our systems, master data, just a complex network in our manufacturing space. Our skilled labor, right, our subject matter experts that are touching the customer probably spent too much time on internal things, right?”

asked by David Silver · answered by Joseph Berquist