Executive Summary / Key Takeaways

• Quaker Houghton is leveraging its global leadership in industrial process fluids and a differentiated customer intimacy model to outperform soft end markets, consistently gaining market share despite challenging macroeconomic conditions and tariff uncertainty.
• Strategic acquisitions in early 2025, including Dipsol Chemicals, Natech, and CSI, are expanding the company's advanced solutions portfolio, enhancing geographic reach, and providing significant cross-selling opportunities in attractive, high-barrier-to-entry markets.
• The company is executing a global cost and optimization program, having achieved its initial $20 million annualized savings goal and targeting an additional $20 million, expected to drive approximately $15 million in-year benefit in 2025, primarily impacting SG&A.
• Despite expecting underlying markets to decline by a low-single-digit percentage in 2025 due to tariff uncertainty and reduced sentiment, management anticipates full-year revenue and earnings to be in line with 2024 levels, supported by market share gains, acquisition contributions, and cost management.
• Quaker Houghton maintains a strong financial position with a healthy balance sheet, manageable leverage (1.9x net debt to TTM adjusted EBITDA as of March 31, 2025), and robust cash flow generation capabilities, enabling disciplined capital deployment for organic growth, M&A, dividends, and share repurchases.

A Foundation of Fluid Intelligence: Quaker Houghton's Strategic Resilience

Quaker Chemical Corporation, doing business as Quaker Houghton (NYSE:KWR), stands as a global leader in the specialized world of industrial process fluids. With a history stretching back to 1918 and significantly reshaped by the 2019 combination of Quaker and Houghton, the company has built a formidable presence across more than 25 countries. It serves a demanding clientele of the world's most advanced manufacturers in sectors like steel, aluminum, automotive, aerospace, mining, and metalworking, providing a broad range of formulated chemical specialty products and critical chemical management services known as Fluidcare™.

The industrial process fluids market is characterized by its technical complexity and the mission-critical nature of the products provided. Fluids for metalworking, lubricants, corrosion inhibitors, and surface treatments are not mere commodities; they are integral to manufacturing efficiency, product quality, and operational safety. This landscape is populated by a mix of large, diversified chemical giants and more specialized players. Giants like BASF SE (BAS), Henkel AG & Co. KGaA (HEN), Clariant AG (CLN), and Dow Inc. (DOW) compete across various chemical segments, often offering broader portfolios that include some overlapping products. In contrast, Quaker Houghton has carved out a leadership position by focusing deeply on the specific needs of heavy industrial applications, emphasizing a "customer intimate" model built on deep process knowledge and tailored solutions.

Quaker Houghton's competitive moat is significantly reinforced by its proprietary technology and technical expertise. Its advanced fluid formulations offer tangible, quantifiable benefits to customers. For instance, these fluids can provide 10-15% greater efficiency in metal removal processes, leading to faster machining speeds and lower tool wear. In high-temperature applications like forging, KWR's products offer superior heat resistance, potentially enabling 20% better performance. The company's corrosion inhibitors can offer 15% higher efficiency, translating to longer-lasting protection and reduced maintenance costs. These performance advantages contribute directly to customers' operational efficiency and total cost of ownership, differentiating KWR from competitors whose offerings might focus more on upfront material costs or broader scale.

Innovation remains central to KWR's strategy. The company is actively investing in R&D, reprioritizing resources towards initiatives like the FLUID INTELLIGENCE platform. This digitalization effort aims to revolutionize the Fluidcare™ offering by providing a step change in automation efficiency for customers through innovative sensor technology and data analytics. While specific quantifiable targets for this platform are still emerging, the strategic intent is clear: to leverage technology to enhance the value proposition, improve customer operations, and create a competitive advantage through data-driven service. The company also continues to develop sustainable solutions, aligning with growing customer demand for products with lower environmental impact, which can provide both performance and environmental benefits. This focus on specialized, high-performance solutions and digital service capabilities positions KWR favorably against larger competitors who may lack the same depth of niche expertise and tailored service model.

The company's overarching strategy is built on three pillars: returning to growth, reducing complexity, and effectively deploying capital. This strategy is being executed through a focus on globalizing the business and enhancing customer intimacy. Globalizing involves investing in faster-growing regions like Asia-Pacific, exemplified by the new manufacturing facility under construction in China, expected to be operational in the second quarter of 2026. This facility will support the "local for local" strategy, enabling KWR to supply its full portfolio more effectively in the region. Reducing complexity includes streamlining business processes, optimizing the manufacturing footprint (such as facility closures and consolidation efforts), and simplifying the brand portfolio. Disciplined capital deployment is demonstrated through strategic acquisitions and returning value to shareholders.

Performance Under Pressure: Navigating Soft Markets with Strategic Gains

Quaker Houghton's recent financial performance reflects the challenging macroeconomic environment while highlighting the resilience of its business model and strategic execution. In the first quarter of 2025, net sales were $442.9 million, a decrease of 6% compared to $469.8 million in the first quarter of 2024. On a constant currency basis, the decline was 3%. This decrease was primarily driven by a 3% reduction in sales volumes, a 3% unfavorable impact from foreign currency translation, and a 1% decline in selling price and product mix. These headwinds were partially offset by a 1% contribution from recent acquisitions.

The decline in sales volumes in Q1 2025 was a direct consequence of the continuation of soft end market conditions, exacerbated by uncertainty surrounding tariffs, particularly impacting the Americas and EMEA segments. Low steel utilization rates and soft production in automotive, transportation, and heavy machinery also contributed to the volume weakness in the Americas. However, the company successfully mitigated some of this pressure through continued new business wins across all segments and volume contributions from acquisitions in EMEA and AsiaPacific. Management noted that net new business wins are trending at the high end of their targeted annual range of 2% to 4%, demonstrating the effectiveness of their customer-focused approach even in a difficult demand environment.

Gross profit in Q1 2025 was $161.3 million, down from $181.6 million in Q1 2024. The reported gross margin was 36.4%, a decrease from 38.7% in the prior year quarter. This year-over-year decline was attributed to the timing and impact of higher raw material costs, unfavorable geographic and product mix, and lower manufacturing absorption due to reduced volumes. However, the gross margin showed a sequential improvement of 120 basis points compared to the lows experienced in the fourth quarter of 2024, indicating some stabilization in raw material costs and positive mix effects.

Selling, general, and administrative (SGA) expenses decreased by 4% year-over-year to $119.0 million in Q1 2025, reflecting disciplined cost management and reduction actions, partially offset by increased SGA related to acquisitions. Operating income saw a significant decrease, falling to $27.6 million in Q1 2025 from $55.5 million in Q1 2024. This was primarily driven by the lower net sales and gross margins, compounded by higher restructuring and related charges ($14.6 million in Q1 2025 vs. $1.9 million in Q1 2024) associated with the global cost and optimization program.

Net income attributable to Quaker Chemical Corporation was $12.9 million, or $0.73 per diluted share, in Q1 2025, a substantial decrease from $35.2 million, or $1.95 per diluted share, in Q1 2024. Excluding non-recurring and non-core items, non-GAAP net income was $28.0 million, or $1.58 per diluted share, compared to $37.7 million, or $2.09 per diluted share, in the prior year. Adjusted EBITDA was $69.0 million (15.6% margin) in Q1 2025, down from $83.3 million (17.7% margin) in Q1 2024, reflecting the impact of lower sales and gross margins, partially offset by lower SGA.

Segment performance mirrored the consolidated trends. The Americas segment, representing 48% of Q1 2025 sales, saw net sales decrease by 7% and operating earnings decrease by 12%, driven by volume declines (soft markets, tariffs) and unfavorable FX. EMEA (29% of sales) experienced a 7% sales decrease and a 21% operating earnings decrease, impacted by volume declines (soft markets, tariffs), unfavorable FX, and lower price/mix, partially offset by acquisitions. AsiaPacific (23% of sales) saw a 2% sales decrease and a 15% operating earnings decrease, with volume growth (new wins, acquisitions) offset by lower price/mix (index contracts) and unfavorable FX.

Liquidity and cash flow generation in Q1 2025 showed some pressure compared to the prior year. Net cash flows used in operating activities were $3.1 million, a decrease from $27.2 million provided in Q1 2024. This shift was primarily due to higher cash outflows from restructuring activities ($9.0 million in Q1 2025 vs. $3.7 million in Q1 2024) and working capital investments (outflows in accounts receivable and inventory), partially offset by lower cash outflow from accounts payable and accrued liabilities. Despite this, the company's balance sheet remains strong.

As of March 31, 2025, cash and cash equivalents stood at $186.2 million. Total debt was $737.0 million, resulting in a net debt of $550.8 million and a net leverage ratio of 1.9 times trailing 12 months adjusted EBITDA. The company was in compliance with all Credit Facility covenants and had approximately $417 million in unused capacity under its revolving credit facility as of quarter-end. Subsequent to the quarter, KWR borrowed $210 million from the revolver to fund the Dipsol acquisition and for other corporate purposes, demonstrating the availability of liquidity for strategic actions.

Strategic Momentum and Outlook: Building for Future Growth

Quaker Houghton is actively deploying capital and executing strategic initiatives to position itself for future growth, even as it manages through current market softness. A key element of this strategy is inorganic growth. In early 2025, the company completed three strategic acquisitions: Chemical Solutions Innovations (CSI) in South Africa (February), Natech, Ltd. in the UK (April), and the significant acquisition of Dipsol Chemicals Co., Ltd. in Japan (April). These deals, particularly Dipsol, which specializes in surface treatment and plating solutions, expand KWR's portfolio of advanced solutions, enhance its presence in key geographies (Japan, UK, South Africa), and offer substantial cross-selling opportunities. The Dipsol acquisition, valued at approximately 10.5 times its trailing 12 months adjusted EBITDA (and below 9 times post-synergy), highlights KWR's disciplined approach to M&A, targeting businesses with market-leading positions, strong margins, and growth characteristics that complement its existing strengths.

Alongside M&A, KWR is focused on operational efficiency. The global cost and optimization program, initiated in 2022, has successfully achieved its initial target of at least $20 million in annualized cost savings. Additional actions approved in Q1 2025 are expected to generate another $20 million in annualized savings, with approximately $15 million of this benefit anticipated in 2025, primarily impacting SG&A. This ongoing focus on cost structure is critical for maintaining profitability and unlocking leverage in the business model, especially in a volatile demand environment.

Looking ahead, management's outlook for 2025 reflects a cautious but determined stance. While the Q4 2024 outlook anticipated market growth, the increased uncertainty surrounding tariffs and trade dynamics has led to a revised view. Management now expects underlying market growth rates to decline by a low-single-digit percentage in 2025 compared to 2024 levels. However, despite this expected market contraction and the current state of uncertainty, KWR anticipates that its full-year revenue and earnings will be in line with 2024 levels. This expectation is underpinned by the continued strength of new business wins (outperforming the market), the contribution from recent acquisitions (expected to add a few percentage points of growth), and the benefits from the cost optimization program.

For the second quarter of 2025, management expects a modest seasonal improvement in demand across all segments and a benefit from recent acquisitions, leading to adjusted EBITDA that is modestly higher than Q1 levels. Gross margins are expected to remain comparable to recent levels. Capital expenditures for 2025 are projected to be 2.5% to 3.5% of sales, reflecting investments in the new China facility and the consolidation of the Philadelphia-area footprint. The effective tax rate (excluding non-core items) is expected to be approximately 29% for the year.

The company's strong balance sheet and cash flow generation capabilities provide flexibility for disciplined capital allocation. KWR has a long-standing tradition of paying and growing its dividend, recently increasing it by 6.6%. It also engages in opportunistic share repurchases, with over $100 million remaining on its current authorization. Management is confident that existing cash, anticipated operating cash flows, and available liquidity are sufficient to fund operating requirements, business objectives, and debt obligations for at least the next twelve months and beyond.

Risks and Competitive Dynamics

Despite its strengths, Quaker Houghton faces several pertinent risks. The most significant near-term risk is the impact of soft end market conditions and the uncertainty surrounding tariffs and trade policies. These factors can directly affect customer demand, production levels, and order patterns, as evidenced by the volume declines in Q1 2025. While KWR's "local for local" strategy and diversified supply chain mitigate most direct impacts on its cost structure, the secondary effects on customer demand are harder to predict and could negatively impact financial results. The company is also subject to the cyclicality of its core end markets (steel, automotive, etc.), which can experience downturns independent of broader economic conditions.

Competition remains a constant factor. While KWR holds a leadership position in its niche, it competes with large, diversified chemical companies like BASF, Henkel, Clariant, and Dow, who possess greater scale, broader R&D budgets, and potentially more integrated supply chains. These larger players can sometimes offer products at lower material costs or leverage their scale in logistics and procurement. KWR's competitive response relies on its deep process knowledge, customized solutions, and service model, which aim to provide superior value through operational efficiency and total cost of ownership reduction, rather than competing solely on price. However, maintaining this differentiated value proposition requires continuous investment in technology, R&D (like Fluid Intelligence), and technical expertise to stay ahead. Vulnerabilities include potential technological gaps in certain areas compared to larger rivals and the inherent cost disadvantages of smaller scale relative to chemical giants.

Other risks include potential volatility in raw material costs, foreign currency fluctuations (which negatively impacted Q1 2025 sales and earnings), and the unpredictability of effective tax rates due to various factors. Geopolitical events and supply chain disruptions also pose ongoing challenges.

Conclusion

Quaker Houghton's Q1 2025 results underscore the prevailing softness in its core end markets, exacerbated by tariff uncertainty. The decline in sales and earnings reflects these external pressures. However, beneath the surface, the company's strategic narrative remains compelling. KWR is actively counteracting market headwinds through consistent market share gains, driven by its differentiated customer intimacy model and the value proposition of its specialized fluid technologies. The strategic acquisitions completed in early 2025 significantly enhance its portfolio and geographic reach, positioning the company for accelerated growth in attractive segments.

Management's outlook for 2025, while tempered by the revised market expectations, demonstrates confidence in the company's ability to achieve results in line with 2024, supported by organic outperformance, acquisition contributions, and disciplined cost management. The ongoing cost optimization program is expected to provide meaningful in-year benefits. With a strong balance sheet, manageable leverage, and a track record of robust cash flow generation, Quaker Houghton possesses the financial flexibility to continue investing in its strategic priorities, including M&A and technology development like the Fluid Intelligence platform, while also returning value to shareholders through dividends and buybacks.

While risks related to market demand, tariffs, and competition persist, KWR's focus on niche leadership, technological differentiation, and operational efficiency provides a foundation of resilience. The investment thesis hinges on KWR's ability to continue outperforming its underlying markets, successfully integrate recent acquisitions, and leverage its strategic initiatives to drive profitable growth when macroeconomic conditions eventually improve. The company appears well-positioned to weather the current storm and capitalize on future opportunities, making it a name worth watching for investors seeking exposure to a specialized leader in the industrial chemicals sector.