Quaker Chemical Corp
NYSE:KWR
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Quaker Chemical Corp
Earnings Call Analysis
Q3-2023 Analysis
Quaker Chemical Corp
In the tale of Quaker Houghton's third-quarter performance, the protagonist is a company showing stability in the face of adversity, with net sales maintaining at $491 million, mirroring the previous year's figure. This constancy arises from a delicate balancing act: a positive shift in selling price and product mix, coupled with foreign currency impacts, just manages to offset a 4% dip in sales volumes. Despite a softening in the Americas and Europe, Middle East, and Africa (EMEA) markets, there's a silver lining with volumes inching up by 1% sequentially thanks to increased demand in Asia Pacific region.
In the arena of profitability, the company's gross margins have swelled impressively to 37.4%, up by 470 basis points from the previous year, showcasing the effective execution of pricing actions and a slight downtrend in raw material costs. This surge trickles down to an adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of $84 million, marking a robust 20% year-over-year increment and solidifying Quaker Houghton's reputation for prudent financial management.
Investors would take comfort in the company's financial backbone, fortified by a substantial cash flow from operations amounting to $83 million in the third quarter, accumulating to a year-to-date total of $200 million. The net leverage ratio has improved, anchoring at 2 times adjusted EBITDA, reflecting a sturdy balance sheet that underscores the company's commitment to delivering dividends, reducing debt, and investing in organic and inorganic growth.
While the company is coy on providing exact guidance for the fourth quarter and beyond, they imply a trend of low to mid-single-digit seasonality effects, especially in Europe and the Americas. Yet, they maintain an optimistic attitude towards margin expansion and growth, hinting at continuation in their legacy of value-based pricing and sharing profits with customers. The commentary around raw material costs points towards stability with no significant shifts anticipated, nurturing hopes for continued margin benefits in the foreseeable future.
Efficiency isn't taking a back seat, as evidenced by Quaker Houghton's intent focus on honing its working capital. The company has made commendable strides in trimming inventory and receivables, which is expected to further enhance cash flow and operational efficiencies well into the next year.
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Greetings, and welcome to the Quaker Houghton Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the call over to Jeffrey Schnell, Vice President of Investor Relations. Mr. Schnell, you may begin.
Thank you. Good morning, and welcome to our third quarter 2023 earnings conference call. On the call today are Andy Tometich, our President and Chief Executive Officer; Shane Hostetter, 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, November 2, 2023. 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 of these non-GAAP financial measures to the most directly comparable GAAP financial measure 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 Andy.
Thank you, Jeff, and good morning, everyone. The third quarter was another strong quarter for Quaker Houghton. We achieved consistent top line performance and further enhanced the profitability of our business, bringing another consecutive quarter of double-digit increases in adjusted EBITDA and non-GAAP earnings per share.
Cash flow was also higher in the quarter. We have generated approximately $200 million of operating cash flow year-to-date, a record for the company, providing significant balance sheet optionality for the enterprise. Net sales were $491 million in the third quarter, similar to the prior year. We continue to benefit from our value-based pricing actions and cost management, which helped offset sustained, soft end market activity in a challenging operating environment.
Volumes declined approximately 3% compared to the prior year after excluding the impact of the wind down of tolling for products divested as part of the combination. However, sequentially, volumes improved slightly and have been largely stable as we progressed throughout the year. We are encouraged by demand in our aerospace, automotive and China businesses, but we are being impacted by softer steel and industrial activity as well as customer order patterns, primarily in the Americas and Europe.
Positively, we continue to gain additional business with new and existing customers and we are pleased that these gains are trending at the high end of our long-term range. This drives us to outperform our end markets as we are doing in 2023. The diversification of our broad portfolio is also providing resilience in the current dynamic market environment. And our people are continuing to deliver, supporting the productivity, sustainability and growth of our customers and our company.
In the third quarter, pricing increased an additional 2% compared to the prior year and has increased 11% year-to-date. We remain focused on earning value with our customers for the products and services we provide. While we continue to implement targeted actions that are balanced with our cost to serve, the pace of pricing gains is anticipated to slow in the coming quarters.
Throughout 2023, we have made significant progress recovering our margin profile, while balancing customer relationships and the long-term aspirations of our business. Gross margins in the third quarter were 37.4%, nearly 5 percentage points higher than the prior year and our fifth consecutive quarter of year-over-year margin improvement. This was a result of a combination of our value-based pricing actions, product mix and cost management as well as a slight moderation in raw material costs that still remain at historically elevated levels.
In the third quarter, we generated adjusted EBITDA of $84 million and $2.05 of non-GAAP diluted earnings per share, a 20% increase compared to the prior year. Our financial results are primarily driven by consistent execution, driving a recovery in our margins, by focusing on solutions, our customers value as we manage the ongoing unsettled and complex market environment.
Despite these challenges, we continue to control what we can control. We generated $83 million of operating cash flow in the third quarter and approximately $200 million year-to-date. This is a testament to the strong cash generation capabilities of Quaker Houghton. The year-over-year improvement in our cash generation reflects not only the increase in our earnings, but also improved working capital management. We have continued to further strengthen our financial position and we have paid down $127 million of debt in 2023. With this performance, the company is well positioned to capitalize on the organic and inorganic opportunities ahead.
Turning to our segments. We once again delivered earnings and margin performance in all of our segments on a year-over-year and sequential basis. We continue to contend with a soft demand environment compared to the prior year, especially in the EMEA and Americas segment. Volumes in the Asia Pacific segment increased due to a broad improvement in underlying demand. Notwithstanding, our results are generally in line with our underlying markets.
On a sequential basis, overall volumes improved comprised of an increase in Asia Pacific, a decline in EMEA and flat volume in the Americas. We are pleased to see above-market volume performance in Asia Pacific, led by new business wins in China in both metals and metal working. We expect to continue to grow from these current low levels in Asia Pacific in the fourth quarter and in 2024.
Sequentially, volumes in the Americas remained steady in the third quarter despite some incremental headwinds in the packaging and industrial markets. The impact of the UAW strike was not a significant driver in the quarter. That said, we have continued to increase our share of wallet in 2023 in the Americas. EMEA continues to be impacted by soft market conditions and uncertainty. We expect demand in the EMEA market to remain at trough like levels through the end of the year. We have continued to improve our cost position and financial performance in EMEA and are cautiously optimistic the market in the Americas and EMEA will begin to recover in the coming year. We have executed very well in 2023 despite a considerable amount of uncertainty, difficult market conditions and limited visibility in many of our end markets and regions.
Looking to the fourth quarter, we are encouraged by improvement in some products and end markets. We expect the current tepid demand environment will likely continue through the balance of the year. We also anticipate some increased variability in customer order patterns in the fourth quarter as companies manage their own working capital. If ratified, the 3 recently announced tentative agreements with the UAW will lessen the impact in the fourth quarter.
By region, we expect a sequential improvement in the Asia Pacific region, led by China, and for demand to remain at lower levels in the Americas and the EMEA regions. We anticipate the fourth quarter will have a more normal seasonal trend compared to recent years. However, we continue to expect to deliver another quarter of year-over-year improvement in adjusted EBITDA. We also expect another quarter of solid cash generation.
In summary, we are on track to deliver a meaningful improvement in margins and a strong double-digit increase in earnings in 2023. Additionally, throughout this year, we have generated significant cash flow, invested in our business, increased our dividend and strengthened our overall financial position.
Looking towards 2024, we are squarely focused on profitable growth by advancing our strategy, including contemporizing the organization and enhancing the value we provide to our customers. While macro and end market visibility remains limited, we believe the destocking impacts our customers have faced are largely behind us, and we are cautiously optimistic on many of our end markets for 2024, including automotive and aerospace as well as our China and emerging markets businesses. Taken together, we expect to grow volumes above our market rates in 2024.
We are also making progress on our cost and efficiency actions and remain laser focused on earning share of wallet through additional customer valued solutions. We have built momentum in our business and we are well positioned heading into 2024.
As we continue to manage the immediate realities of the world, the leadership team at Quaker Houghton remains fully committed to our enterprise growth strategy and driving long-term value for stakeholders. Much of our focus over the past 2 years has centered around mitigating the top financial and operational risks the company faced and driving efficiencies to further optimize our delivery of customer valued services and solutions. Our strong business model and financial position has also enabled us to simultaneously continue investing in developing future opportunities.
As I have highlighted in previous quarters, our strategic pillars are centered around leveraging our global scale, deploying digital capabilities and leading in sustainability. These pillars are positioning Quaker Houghton to continue to meet the current and long-term needs of our customers and deliver value for our company and our shareholders. One area of focus is to leverage our scale to advance the intimacy of our model. There are several commercial initiatives underway, and I am pleased with the early progress. For example, we are optimizing our current direct and indirect channel strategy.
We are advancing our capabilities and partner strategy to effectively and efficiently deliver the level of service and support that customers value more exactly. This will be further enhanced with our fluid intelligence offering as we deployed digital capabilities to complement our service model, which will in turn provide openings to both deepen relationships with our customers and improve the productivity of our people as well as our customers' operations.
We are also working to accelerate opportunities to increase wallet share, supported by our scale. One example is through better leveraging our full global technology portfolio, including expanded sustainability options into new and existing markets. This is especially true with our portfolio of advanced and operating solutions, whether for developed or emerging geographies. We have added talented local leaders and experts who are working closely with our global strategy, R&D and other teams to advance our efforts, many of which were made possible by the combination. We expect to realize some additional benefit from these ongoing efforts, which are making good use of our global scale in 2024 and beyond. These important initiatives are just some of the ongoing activities that are bringing our enterprise strategy to life. There are natural extensions of our differentiated approach, building on the foundation of providing customer intimacy.
In summary, we are focused on capitalizing on the positive momentum we have built, and we are fully committed to further unlocking our potential. We have a strong market position in our industry which, in turn, has attractive long-term growth characteristics. We are making meaningful progress on financial and operational priorities and have significantly improved our margin profile, strengthened our balance sheet and are demonstrating the strong cash-generating capabilities of Quaker Houghton.
We are focused on driving success for and with our customers and earning new business supporting our customers as they pursue new opportunities as well as manage through the challenges impacting their business. We continue prudently investing to advance our growth initiatives, building on our strong foundation. It is through our strategic pillars that we will deliver profitable, above-market growth in 2024 and beyond. I'm proud of our execution through 2023, delivering on our financial, operational and strategic objectives while managing through a myriad of challenges that have impacted us and our customers. I am confident in the Quaker Houghton team who continue to develop and deploy our leading portfolio of products and services in our differentiated customer intimate solution-based business model. and I remain excited by the opportunities we have together to enhance the value of our customers and our business as we generate long-term value for shareholders.
With that, I'd like to pass it over to Shane to discuss the financials.
Thanks, Andy, and good morning, everyone. In the third quarter, we delivered net sales of $491 million, which was consistent with the prior year. The primary drivers to our sales performance was an increase in our selling price and product mix of 2% and a favorable impact from foreign currency up 2%, offset by a 4% decline in sales volumes. The decline in our volumes was driven by softer market conditions, primarily in the Americas and EMEA segments at approximately 1% due to the wind down of previous tolling on volumes we divested as part of the combination.
Sequentially, volumes increased in the third quarter by 1%, but were offset by a slight decline in price and mix and foreign exchange. Gross margins in the third quarter were 37.4%, which represents an increase of 470 basis points compared to 32.7% in the prior year and 150 basis points compared to 35.9% in the second quarter of 2023. This improvement reflects continued execution on our pricing actions as well as a low single-digit decline in our raw material costs sequentially. Excluding onetime items, SG&A increased $12 million or 10% compared to the prior year and $3 million or 2% sequentially. These increases reflect year-over-year inflationary impact on our labor costs, the timing and levels of our annual incentive compensation as well as impacts due to foreign exchange.
We delivered $84 million of adjusted EBITDA in the third quarter, which is an increase of 20% compared to the prior year and our fifth consecutive year-over-year increase. Our adjusted EBITDA margins expanded to 17.2%, an increase of 290 basis points compared to the prior year and an increase of 100 basis points sequentially. These improvements reflect the progress we've made advancing our strategy while balancing our near-term priorities with delivering our long-term profitable growth initiatives.
Switching to our segments. Net sales in the Americas declined approximately 3% year-over-year, driven by lower volumes and partially offset by higher selling price and product mix and foreign exchange. The decline in sales volumes was primarily due to end market activity compared to the prior year as well as some declines due to our value-based pricing strategy, which were offset by new business wins.
Volumes were impacted by lower metal working demand, including the direct and indirect impact of the UAW strike. On a sequential comparison, volumes were flat in the Americas. Our EMEA net sales increased 4% compared to the prior year, primarily due to increases in selling price and mix and foreign exchange, partially offset by decline in sales volumes. We continue to contend with soft end market conditions in EMEA, especially in metals, but these were partially offset by improvement in automotive and new business wins. The wind down of the tolling for business divested as part of the combination also contributed to the decline, and we will ramp beginning in the first quarter of 2024.
Volumes declined sequentially in the EMEA segment due to the soft market conditions noted earlier. Net sales in Asia Pacific increased compared to the prior year as we experienced broad-based improvements in both metals and metal working in China as well as broader Asia Pacific. Also, new business wins contributed to the improved performance, while foreign exchange was a modest headwind to this segment sales in the quarter. Volumes also increased in Asia Pacific compared to the second quarter as expected due to a modest improvement in underlying demand across many end markets.
During the third quarter, we continued to make progress on our margin recovery across all segments, having increased on both a year-over-year and sequential basis, and we delivered strong year-over-year increases in operating earnings in all of our segments. Overall, we continue to build on the strong performance we delivered in the first half of 2023, and we are making significant progress improving the profitability of our business.
Below the line, our interest expense was higher in the third quarter compared to the prior year, but flat sequentially. Our cost of debt in the third quarter was approximately 6%, which is in line with where we exited the prior quarter. Our effective tax rate, excluding nonrecurring and noncore items, was approximately 29% in the third quarter. Our GAAP diluted earnings per share were $1.87, and our non-GAAP diluted earnings per share were $2.05. This represents an 18% year-over-year increase and a 6% sequential increase, both driven by the improvement in our operating earnings.
Switching to liquidity. We generated $83 million of cash from operations in the third quarter. Year-to-date, we have generated $200 million of operating cash flow. This year-over-year improvement reflects our solid earnings and improvements in working capital efficiency. Year-to-date, we have invested $26 million in capital expenditures, paid $23 million to shareholders through dividends and reduced our debt by $127 million. Our balance sheet and liquidity remains strong. Our net debt at the end of the third quarter was $628 million, and our net leverage ratio improved to 2x adjusted EBITDA compared to 2.3x at the end of last quarter and 3x at the beginning of the year.
Our capital allocation priorities remain consistent: return capital through dividends, strengthen our balance sheet and invest to grow the business both organically and inorganically. For full year 2023, our anticipated CapEx spend remains unchanged at approximately 1.5% to 2% of net sales. We have ample opportunities to drive growth, and we have conviction in the cash flow generation of our business. We will continue to balance the current macroeconomic environment and short-term outlook with our long-term strategy to deliver shareholder returns.
To summarize, we've executed well in 2023. We've delivered strong earnings growth and record cash flow thus far despite a very difficult macroeconomic backdrop. We are committed to our growth strategy and remain confident in the earnings power and cash generation capabilities of this company.
With that, I'll turn it back over to Andy.
Thank you, Shane, and I'd like to thank the entire organization for their dedication and commitment to our company and our customers for their trust and partnership. I'm excited with the opportunities ahead. And with that, we'd be happy to address your questions.
[Operator Instructions] Our first question is from Mike Harrison with Seaport Research Partners.
Congratulations on another strong quarter here. Andy, you've kind of told us that we shouldn't assume that you guys keep delivering these step changes in gross margin, but that's exactly what you're doing. Has the pace of gross margin expansion exceeded your expectations this year? And I guess, can you walk through some of the drivers that may have materialized more quickly than you might have anticipated?
Yes. Thanks, Mike. We appreciate your comments. For sure, we've been talking about margins in our journey for quite some time. And as I highlighted, it was not necessarily going to be linear. But we've made considerable progress in particular in 2023. If you look at it on a year-to-date basis, we're at about 36%, which is getting closer, but we're still not at our target consistently. So we still think there's some upward mobility there.
Obviously, that constant delivery is going to require us to use all levers. So while we'll continue to work with customers on our value and use, we're going to continue to drive efficiencies and be focused on new business wins that are the most accretive in that space. So I think it's continuing -- we've continued to execute on each one of those levers. We'll do that going forward, and our goal is to deliver that over the entire cycle.
All right. You were particularly strong, I guess, from a regional standpoint. The margin was particularly impressive in Europe. I know that, that's been an area where you're working -- you've been working on the cost structure. But can you talk about what's changed there to generate such margin improvement despite continued volume challenges?
Yes. Thanks. So for sure, Europe continues to be weak. Overall, the underlying markets have continued to struggle a little bit as we highlighted kind of the steel and industrial are still operating near the bottom. We characterize it as kind of trough like, but we've focused our efforts, again, where we're adding the most value for customers and working with them. We've continued to move forward on our cost program, and that's contributing as well. And we are at a better position from a profitability standpoint, but we still have a journey in front of us, and we look forward to the position we're creating. As underlying demand does improve, we believe we'll be in a very good position to serve our customers.
I'm just kind of curious for your -- maybe a little bit more detail on and how EBITDA might compare to what you just delivered in Q3. I know you said you expect it to be up year-over-year, but you're coming off 3 straight quarters where you've been 20% better year-on-year or more. But maybe just walk us through some of the key puts and takes and maybe also touch on how much impact we could see in the Americas from that UAW strike, which hopefully is on its way towards resolution.
Yes. A couple of questions there, Mike. So let me try to come at them in sequence. So in the fourth quarter, we think we're going to build on the momentum that we've developed over 2023. There still is uncertainty in the market. And we highlight that typically the fourth quarter has some seasonality associated with it, particularly in the Americas and in Europe. We also think there could be some order pattern impacts this year as customers are watching their working capital very, very closely.
UAW, it's a little bit unclear. We're happy about the resolution that appears to be on the horizon, but we're not quite clear on all the indirect impacts associated with that. But in total, we think that leads us to Q4 where our EBITDA grows year-over-year with again strong cash flow generation. And then I think you didn't ask necessarily about beyond Q4. But I think as we start to look at 2024, it's still early, and we're in our budgeting process. So we have limited visibility. But we think, again, we'll continue to build on the progress that we've made in 2023. We've advanced our enterprise strategy here with our targets where we believe there will be profitable growth and, look, we always expect to grow this business.
There are some encouraging signs as we see it now. We're seeing end markets showing some signals that could be improving on automotive and aerospace. And we believe we'll continue to -- as we've done, operate and execute by growing above the market rates that are happening in our underlying markets. So last thing I'll highlight, too, is, as I mentioned on the margins, there's still room to grow on our margins. We think there will be some improvement for us, and we'll keep executing on our cost management. So some positive momentum we've built here in 2023 that we intend to continue in 2024.
[Operator Instructions] Our next question is from Vincent Anderson with Stifel.
Yes. Echoing Mike, I mean, really nice job on the quarter, particularly in pricing, which is where I wanted to start. I'm guessing raw material index products actually turned into a headwind on that front this quarter. And if that's correct, I'm curious if you're willing to comment on more of the magnitude of your pricing improvement, excluding those raw material indexes.
Yes. Thanks, Vincent. For sure, pricing is related to not only the raw material cost, but also more importantly, the value we're providing to our customers. Generally speaking, we are not giving back pricing because of our focus on that value and use approach. But you're correct, there's a portion of our business, about 1/4 of our business that is related to index on raw materials. It's rarely on a single raw material though. So it's a mix.
We continue to focus on working with our customers, delivering the most value and balancing that against our cost to serve. The team has done a really nice job on their execution. So while pricing has been a key component of what we've been talking about, and it will continue to be a component. It's not the only one as we move forward.
Sure. Okay. Fair enough. And then you spoke a bit about this in your prepared remarks, but I just kind of wanted to clarify what's going on in Asia Pacific. So you mentioned broader market improvements in APAC driving volumes, though results in the first half of the year did seem to be trailing what limited indicators we have at least for China. So I was hoping you could kind of square your first half volumes relative to those data points like steel product production, aluminum production versus the improvement that you saw specifically in this quarter.
Yes. Thanks, Vincent. In Asia Pacific and obviously, China is a key component of it, although comments really apply across, we have seen improvements in the second half. We're seeing kind of general improvements both in metals and metal working. Now from relatively low levels, as you indicated in the first half, we see that being a function of both what's happening with our customers and their business. And also I think we're doing a differentiated job of targeting the right business to grow with them.
So it's a combination of factors, but it's encouraging, and we're hopeful that's going to continue.
All right. And if I could sneak in a quick -- one quick one in here. Just given the continued improvement in cash flow and the balance sheet health overall, I'm curious how the tuck-in M&A market is looking these days and your appetite for playing in that again next year through maybe a couple of different macroeconomic scenarios.
Yes. Thanks, Vincent. For sure, M&A is a key part of our capital allocation strategy, and we continue to be focused on where we're going to add shareholder value. We also lined it up in a disciplined fashion with our enterprise growth strategy. So while we invest in organic growth, we want to align that with inorganic opportunities. We have an active pipeline. We're continuing to make progress with a number of opportunities. We've had a lot of success at Quaker Houghton over the years with bolt-ons that take advantage of our service model to provide even more solutions for our customers as we expand our position in their overall spend, and we'll continue to move those forward and make use of a balance sheet that will reinforce our ability to do it.
Our next question is from John Tanwanteng with CJS Securities.
This is Justin on for John. So leverage has come down substantially. So I think you can be a little more flexible on the capital allocation you were mentioning. So can you just kind of rank your priorities between further debt pay down, M&A, repurchases, dividend, internal investments? And how might that change as rates go up or your share price changes?
Yes. Why don't I start with the capital strategy, and then Shane can add some details at the end here on your question. But I mean our capital allocation strategy remains consistent, focusing on shareholder value. First and foremost, we've been a committed dividend payer for -- throughout our history. We increased our dividend again 5% this year. We've been also paying down debt over $125 million year-to-date, and we're investing in our organic growth, as I highlighted, a little bit earlier, focusing on where our innovation can be even more successful and how we can deliver that as efficiently as possible to our customers.
M&A with the bolt-ons, as I just highlighted, is extremely important. And then if there are other levers for us to provide shareholder returns if the opportunities are appropriate, we'll pursue those.
Yes. I think Andy hit on the most important fact and that is shareholder value. As we think about items we consider with M&A, definitely, hurdle rates have changed a bit due to interest rates improving, and we have other levers similar to what Andy was talking about buybacks that we may consider. So overall, we'll balance what is the most appropriate avenue to return value to our shareholders.
All right. That's helpful. And then one more, if I may. What are your expectations for inflation, deflation in the near term and the ability to pass through or hold on to price?
Yes. Well, certainly, inflation has been a big part of the story for quite some time. When we think about raw materials, in the fourth quarter, we've got a very mixed bag with over 3,000 different raw materials, and there's some that are moving up, some that are -- have kind of stabilized. But I mean, overall, we don't see a fundamental shift based upon what we see at the moment. We're not expecting it to necessarily move directionally in a significant fashion.
Our next question is from Arun Viswanathan with RBC Capital Markets.
Yes. So first off, I guess, just going back to the Q4 outlook, most of the quarters this year, like you've been in the double-digit gain year-on-year of growth in EBITDA. Is that kind of the magnitude you're still thinking of in Q4? I know there's some seasonality that may play into that. There's maybe some lingering impacts of destocking, but then maybe you hold on to as you did this quarter some strong pricing efforts and some mix. So maybe you can just kind of size kind of the impact of growth that you see in Q4 year-on-year.
Yes. Arun, we don't typically provide any detailed guidance on that. But as I highlighted, seasonality in the fourth quarter, in particular, in Europe and the Americas as part of the equation and typically, that's kind of low to mid-single digits relative to other quarters. We also -- I would highlight the order pattern with some of the working capital management we expect our customers to do will probably contribute to that.
Okay. And then similarly on '24, sounds like you do expect it to grow. Again, we have maybe a little bit more modest growth in '24, modeled right now versus what we saw year-on-year in '23. Again, in '23, you had some nice recovery of margin. I know that you're still targeting some margin growth for next year, but would you agree that the growth that you expect in EBITDA next year will be more modest than '23 growth?
I think what I would highlight, it's still pretty early for 2024. But as we see it right now, we have proven that we're able to continue to win new business, valuable business over and above what's happening with our customers' underlying business. We expect to continue to do that. There are some encouraging signs. We'll see how those continue to play out. But in markets like aerospace and automotive and in our Asia Pac business that we think is encouraging. And we're going to continue to manage the costs to serve overall. So we think -- and sorry, I missed the margins. We still think there's a bit of room to go with respect to our margins. So we're anticipating and we're always going to expect to grow this business, but we're not quantifying it at this stage.
And then just lastly, how do you think about working capital and cash flow within Quaker itself? I think, again, there's been a lot of volatility in the supply chain. There's been inventory restocking or destocking, regional differences. So is working capital likely to be a greater use next year? Do you see the need to maybe build a little bit of inventory? And so how -- and what would that kind of portend for free cash flow?
Yes. Thanks, Arun. As you imagine, we were carrying a little bit more inventory given to safety stock and just security of supply over the last couple of years. Coming into this year, it was in a focus to improve working capital and you see on our cash flow that some of those inefficiencies have come through. As we've done a good job this year and really continuing to focus on improving inventory and receivables for the rest of this year and into next year, so as I think about our working capital percentage at roughly 27% now, we'll continue to improve that into historical levels.
Our next question is from David Begleiter with Deutsche Bank.
On raw materials, I believe you said they were down low single digits in Q3 quarter-over-quarter. Would you expect a similar decline in Q4? And I think you mentioned maybe not a big impact next year, but should they be down next year as well?
David, yes, I did highlight that in the third quarter, there was kind of a low single-digit deflation in raw materials. We've continued. As we move forward, though, we continue to see a mixed bag. There are some of the many raw materials and there are 3,000 that we buy that are moving up while others are a little more stable. So we're -- as we see it at the moment, we're seeing -- we expect fourth quarter to be relatively stable without any significant shift. Beyond that, there's just not clear visibility, but there's nothing right now to suggest that there will be a major deviation.
Andy, which raws are you seeing being up sequentially right now?
Yes, for sure, some of the oil-based products and derivative products related to that are the ones that have the pressure at the moment. And the whole basket is incredibly high versus where it's been historically.
Understood. And next year on pricing, would you expect pricing to still be up next year, year-over-year?
So I think we're going to focus in on what value we're providing to customers and understanding what's happening on our cost to serve, which will influence exactly what that looks like. So we're not necessarily forecasting any significant movements. But I think value-based pricing has always been part of the model at Quaker Houghton and we'll continue where we are adding value to share in that value with our customers.
Our next question is from Mike Harrison with Seaport Research Partners.
A couple more for me. First of all, Andy, you talked in your prepared remarks about one of the areas that you're looking at for efficiency is optimization of your direct and indirect channel strategy. Can you give us a little more color on what you're looking to do there and what that might entail?
Yes. Yes. Thanks, Mike. For sure, when we do talk about channel, we're referencing both the direct and indirect channel partners that we work with. It's really about the customer journey and fully understanding on an intimate level each of our customers' different journeys, how they're choosing, using and repeating their purchase and use of our products. We're working to align the organization to be able to match that exactly with the right service levels and deploy digital capabilities to support that on an efficient basis. And really, I mean, the goal here is we want to make sure we're servicing our customers exactly the way they need to be serviced, not overserving them and not underserving them.
All right. And then a quick one for Shane. You mentioned that the blended interest rate right now is 6%. Can you tell us what the fixed versus floating mix of your debt looks like today? And I guess what that means for expectations about your cost of debt into next year?
Yes, sure. We have roughly 30 -- 1/3 is fixed and the rest is variable. At the moment, like you mentioned, our cost of debt is roughly at 6%. Obviously, this depends on where the Fed goes from an increase or decrease in the future. But for now, it seems to be steady on that side as I think about the next quarter. However, as we continue to focus on debt paydown, that will obviously impact our interest expense as well going for the fourth quarter as well as into 2024.
Is it fair to say that your debt paydown focus is going to be on the variable portion?
It's fair, Mike, yes.
There are no further questions at this time. I'd like to hand the floor back over to Andy Tometich for closing comments.
Yes. Thanks very much. I just want to extend my appreciation for everybody and their interest in Quaker Houghton. I think we're well positioned with the performance and execution and really looking forward to the opportunities that we have in front of us. Thanks for your continued interest, and we look forward to the next opportunity of talking.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.