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Edited Transcript of KWR earnings conference call or presentation 31-Jul-18 12:30pm GMT

Q2 2018 Quaker Chemical Corp Earnings Call

CONSHOHOCKEN Aug 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Quaker Chemical Corp earnings conference call or presentation Tuesday, July 31, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Barry

Quaker Chemical Corporation - Chairman, CEO and President

* Mary Hall

Quaker Chemical Corporation - VP, CFO, and Treasurer

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Conference Call Participants

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* Laurence Alexander

Jefferies LLC - Analyst

* Edward Marshall

Sidoti & Company - Analyst

* Mike Harrison

Seaport Global Securities - Analyst

* Jon Tanwanteng

CJS Securities - Analyst

* Liam Burke

FBR Capital Markets - Analyst

* Mike Gyure

Janney Capital Markets - Analyst

* Garo Norian

Palisade Capital Management - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Quaker Chemical Corporation second-quarter 2018 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host: Michael Barry, Chairman, Chief Executive Officer, and President for Quaker Chemical Corporation. Thank you, Mr. Barry. You may begin.

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [2]

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Thank you, Darren. Good morning, everyone. Joining me today are Mary Hall, our CFO, and Robert Traub, our General Counsel. After my comments, Mary will provide the details around the financials and then we will address any questions that you may have. We also have slides for the conference call. You can find them in the investor relations section of our website at www.quakerchem.com.

I will start off now with some remarks about the second quarter. I'm pleased we have delivered a strong quarter, despite some market challenges. The quarter's impressive results were largely driven by two major themes: the first being sales increases and the second was gross margin improvement.

Let me start with margin. Since mid-2016, we have been in a generally rising raw material cost environment. And as we have discussed in the past, with raw material pricing, there is a lag effect between changes in our raw material costs and adjustments to our product pricing.

On the last conference call, our expectation was that we would be catching up on this lag effect with our price increases and our gross margin would continue to increase in the second quarter. And I'm happy to report it did.

While raw materials continued to rise sequentially from the first quarter, our price increases were enough to more than turn the tide, leading to our gross margin expansion. However, we are continuing to see raw material cost increases in the third quarter, which we are addressing with additional price increases where necessary.

How exactly this all plays out in the second half of the year is hard to predict in a precise manner, but our best estimate is that our gross margins will be in the low to mid-36% range. And going forward, we still expect our gross margins to get back to our target 37% once raw material increases subside.

Now let me move on to sales. Our sales increased 10% versus prior year, with 5% of this increase coming from strong volume growth and 2% from foreign exchange. The remaining growth in revenue of 3% was primarily driven by price increases.

Let me now give you some additional color on our regions' performance. Our biggest segment, North America, showed a sales increase of 8% with volume growth and price increases both being about 4 percent. Our European or EMEA region showed a 10% increase, with price increases largely driving a 3% increase in sales and the rest being driven by exchange rates. In our Asia-Pacific region, our sales increased 16%, largely driven by 10% higher volumes. To note, some of this volume growth was higher than normal due to timing of shipments hitting this quarter versus other quarters. However, even considering this timing, we continue to see good growth in China. The remaining revenue growth in Asia-Pacific of 6% was largely driven by foreign exchange rates and higher prices in product mix.

And for the eighth quarter in a row, we are happy to report that South America showed solid revenue growth. The 5% growth in South America sales was due primarily to volume growth as well as price increases, totaling 23%, which more than offset a negative exchange rate impact of 18%.

One way to see our market share gains is to look at our overall organic product volume growth in the quarter and compare that to the underlying production growth in our base markets. Our overall volume growth was 5% as compared to the underlying growth in our base markets, which we estimate at approximately 3%. We believe this spread of approximately 2% is indicative of our share gains and is due to our commitment to our customer intimacy model. We specifically put our customer needs first as our top priority, providing them with strong service and business solutions. I believe this approach continues to differentiate us in the marketplace.

So in summary for the quarter, despite the continued challenges we faced with higher raw material costs, we were able to grow our adjusted EBITDA by 15% and our non-GAAP earnings by 26%. In a nutshell, we were able to do this by growing in our base markets, taking share in the marketplace, increasing our gross margins, and continuing to leverage our SG&A.

And are also saw an increase in our earnings per share due to favorable impacts from the US tax reform, which was the primary reason why our non-GAAP earnings growth of 26% exceeded adjusted EBITDA growth of 15%.

I'd now like to make a few remarks about our combination with Houghton International. Nothing has really changed since our July 9 press release. We continue to be in constructive discussions with both the FTC and the European Commission as well as with potential buyers of the product lines we anticipate will need to be divested. We intend to present a remedy to both commissions in the third quarter. And we expect approval and the close of the combination to be in the fourth quarter.

Overall, the magnitude of the divested product lines continues to be approximately 3% or less of the combined revenues of the companies, which is consistent with our original expectations. This additional time allows us to finalize the process with both the regulators and the potential buyers. I believe the end result will be a remedy which meets the needs of the market, the regulatory authorities, and the new combination.

As we said in the past, we are excited about this combination as it will essentially double the size of the Company. It enables continued above-market growth through good cross-selling opportunities, and provides at least $45 million in cost synergies. Our intent is to have an investor call after the closing and provide an updated view of the new Company as well as our expected synergies.

To recap, I believe 2018 will be another good year for Quaker. We expect to close the combination with Houghton, see year-over-year gross margin improvement, and realize benefits from the US tax reform. In addition, we expect to have good growth in our end markets in most regions of the world. And we expect to continue to grow above the market as we have done historically through our growth initiatives and market share gains.

In closing, I want to thank all of our associates, whose dedication and expertise helps to create value for our customers and shareholders and differentiate Quaker in the marketplace. People are everything in our business and by far our most valuable asset. I'm very happy with our Quaker team and continue to be excited about the upcoming combination with the Houghton International team.

And now I will turn it over to Mary Hall, our CFO, so that she can provide you with details behind the financials. Once Mary has completed her comments on the financials for the quarter, we will address any questions that you may have. Mary?

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Mary Hall, Quaker Chemical Corporation - VP, CFO, and Treasurer [3]

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Thank you, Mike, and good morning, all. Before I begin, please remember that comments made during this call include forward-looking statements which are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially.

For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2017 Form 10-K filed with the SEC. These are available on our website.

Please refer now to charts 4 and 5 as I review our financial performance. Quaker reported a 26% increase in non-GAAP earnings per share to $1.56 as a result of strong operating performance across the Company. In a similar theme to Q1 of this year, strong sales growth and good cost control were key drivers of performance. And in this quarter, we also saw gross margin improve both sequentially and year over year. All these factors, combined, resulted in a very strong quarter.

Our net sales increased 10% to about $222 million compared to Q2 last year, with organic volume growth of 5% leading the way and our pricing initiatives driving selling price and mix improvement of 3%.

In addition, the generally weaker US dollar year over year benefited our top line by about 2%, with the major driver being the euro, which appreciated 8% versus the dollar from $1.10 in Q2 2017 to $1.19 in Q2 2018.

Our gross margin of 36.5% is up 8/10 of a percent versus last year's 35.7% and is also up sequentially over Q1's 35.6%. This is the second quarter of sequential gross margin improvement.

In addition, Quaker continued to show good cost discipline as we further leveraged our operating costs to support our strong top-line growth. Note that our GAAP operating income and operating margin reflect $4.3 million of Houghton-related expenses.

If we look at the ratio of SG&A to sales on chart 5, the Q2 ratio of 24.4% compares favorably to 24.7% in Q2 of last year. And together with our gross margin increase drove improved operating income and operating margin.

A lower effective tax rate in the current quarter of 16.8% versus last year's 26.2% was another contributor to the strong earnings performance. In the current quarter, we adjusted our estimate of the toll tax on unrepatriated earnings related to US tax reform that we booked in Q4 of 2017. The adjustment reduced our current-quarter taxes by $1.2 million. And this, combined with the lower statutory rate in the US of 21% versus 35% last year, resulted in our relatively low Q2 effective tax rate. For the full year, we continue to expect that our effective tax rate will be between 23% and 25%, excluding the impact of Houghton-combination-related costs, and any current-year adjustments to the US tax reform charge that we booked in Q4 of 2017.

As a result of our strong operating performance, adjusted EBITDA was up 15% year over year. Operating cash flow is down a bit year over year as we invested in working capital to support the 10% increase in sales. Our liquidity and balance sheet remains strong with a net cash position of $26.1 million at June 30.

Turning to chart 6, here you can see the continued growth in volume, which is all organic volume growth for the quarter. In chart 7, we see the sequential and year-over-year increases in gross margin that I described earlier. As Mike mentioned, we see raw materials continuing to increase and now expect gross margin to be in the low to mid-36% area for the rest of the year.

Chart 8 shows our continued and consistent positive trend in adjusted EBITDA as we further leverage our operating costs while growing the Company. Also, the current trailing 12-months adjusted EBITDA of $122 million is a record. Chart 9 shows our cash and debt balances and highlights our strong balance sheet and good liquidity with a net cash position of $26.1 million, as I mentioned earlier.

In summary, Quaker continues to consistently deliver good earnings and cash flow despite various market challenges. We expect 2018 to be another good year for Quaker as we focus on delivering value to our shareholders and closing the Houghton combination.

Thank you all for your interest in Quaker. And now I will turn it back over to you, Mike.

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [4]

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Thank you, Mary. At this stage, we'd like to address any questions from any of the participants on the conference call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Laurence Alexander, Jefferies.

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Laurence Alexander, Jefferies LLC - Analyst [2]

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Good morning. Couple of questions. First, just looking at eyeballing chart 6, it looked like there's a pattern of Q3 being seasonally stronger than Q2. Are you seeing anything in terms of your end markets -- and I guess I'm thinking particularly in Europe -- that would sequentially make that more difficult?

And then I guess a second question is just with the Houghton acquisition sort of pending, have you seen any indication of talent leaving Houghton? Either resumes crossing your door accidentally or secondhand or any other kind of indication of issues with retention?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [3]

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Okay. Thanks, Laurence. On the first question around volumes and the quarterly question of whether the third quarter may be somewhat higher than the second quarter. Certainly that's been the case historically.

It's not necessarily the case all the time because you can get into these timing issues with shipments. We've seen some of that this past quarter, with both Europe being one direction and Asia-Pacific being another direction. So there's nothing fundamentally, though, that is happening in the business that we see with any major discontinuities in our volume. On the second question -- what was it?

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Mary Hall, Quaker Chemical Corporation - VP, CFO, and Treasurer [4]

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Houghton retention.

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [5]

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Oh, the Houghton retention, yes. So from the Houghton retention perspective, no. The key personnel we want to have on the Houghton team continue to be with us and engaged.

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Laurence Alexander, Jefferies LLC - Analyst [6]

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Okay, great. Thanks.

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Operator [7]

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Edward Marshall, Sidoti & Company.

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Edward Marshall, Sidoti & Company - Analyst [8]

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How are you? Good morning. So I wanted to ask -- we touched on inflation. I wanted to ask about tariff situations and whether maybe there was any pre-buy purchases from Asia-Pacific that might have drove up the significant year-over-year growth in that particular region?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [9]

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There has been some pre-buy that we try to do for cases like this. But in general, if your question is how does the tariff situation impact Quaker, I think one thing to keep in mind is Quaker generally produces its products locally and uses local raw materials. That's why we have so many blending facilities around the world.

However, there are circumstances where there are some specialty type raw materials where we have to buy from China or the US, which are used in products throughout the world. We have identified all these items that would have tariffs on them and we are in the process of taking steps to mitigate their impact.

These steps generally include buying the raw materials from another country if possible or reformulating our finished product to reduce or eliminate the tariff-related raw material costs or raising the price on our finished products. In fact, we constantly face circumstances all the time like this in the normal course of doing business with raw materials. This one is just more obviously tariff-related.

So I don't really see this differently in any way. And even if we couldn't mitigate any of the effects of the tariff, we currently estimate that the impact to our gross margins would be at most a decrease of 0.3%.

But I do think we will mitigate most or all of it and I don't see this as an issue that will have a significant adverse impact on results. So I hope this could give a little more context.

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Edward Marshall, Sidoti & Company - Analyst [10]

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Of course. And I noticed you broke out the market data on each segment in the quarter. I really appreciate the clarity. And my question, I guess, aside from anything maybe regulatory, was there anything that we should read into with the consolidation of the two businesses that might have given us a better look and maybe that's why you started breaking that out in 2Q? I'm just curious. The market --

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [11]

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No, we've always been breaking out the regional performance historically. So that has nothing to do with it.

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Edward Marshall, Sidoti & Company - Analyst [12]

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I meant it looks like there's primary metals, metal working, and coatings within each individual international segment now. Data in the quarter for both the three months and the six months, at least. We can follow up later. That's fine.

And then the total cost -- the total investment into Houghton now, including all the pieces shown shaded with regulatory and professional fees, do you kind of have a raw number as to the additional costs that were based on -- that you incurred with the delay of the transaction?

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Mary Hall, Quaker Chemical Corporation - VP, CFO, and Treasurer [13]

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So let me take that one and see if I can provide some clarity to that. So if you look at the year-to-date numbers, we've spent or booked roughly $10 million year to date. And we've said that we expect through and including close to spend another $30 million to $35 million.

The bulk of that amount is actually due and only due at close. Between $25 million and $30 million of that number. So if you think about the $10 million spent or booked year to date and then what should our run rate be for the rest of the year until we close in Q4, we estimate roughly $2 million a quarter. So some of the costs obviously that we incurred in the first half of the year, we do not expect to repeat.

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Edward Marshall, Sidoti & Company - Analyst [14]

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Appreciate it. And then finally, has Houghton Limited any investment in Quaker's traditional business, whether it's from organic or inorganic opportunities?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [15]

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Sorry; we have a connection problem here a little bit. But yes, no, nothing at all. We are continuing to do business as normal and continuing to invest as we need to, to keep the business growing very well organically.

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Edward Marshall, Sidoti & Company - Analyst [16]

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Got it. Thanks very much. I appreciate it, guys.

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Operator [17]

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Mike Harrison, Seaport Global.

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Mike Harrison, Seaport Global Securities - Analyst [18]

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Hi, good morning. Just to clarify the comments in Asia, you mentioned that there was some unusual components of the volume growth. And I think the question related to tariffs was are any of your customers doing any pre-buying in Asia Pacific in order to make purchases ahead of tariffs being implemented. Is that what's going on there or could you maybe give more details on the unusual strength there?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [19]

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I would say no, we don't believe there is any pre-buying due to tariffs in China. We feel pretty good about that. I did mention, though, that we did see some unusual or some timing issues with some shipments in this quarter, second quarter, versus being in other quarters.

Sometimes we split businesses at different plant locations with other suppliers during the year, and sometimes that can hit one quarter versus the other. So there is some of that. But even if you take that kind of out, which we estimate might be around 3% of that volume growth, you still have very strong 7% volume growth in Asia-Pacific, which we believe is true growth that we are getting in that region.

And then we are kind of seeing the opposite effect a little bit in Europe. Europe was relatively flat, but there was some timing issues with shipments there or trials. And there was also a piece of business that we gave up there that was due to profitability and credit issues. But if you kind of strip out these timing things and these kind of unusual things there, we would've had good growth as well from a volume perspective. Overall, we are very pleased with the growth throughout the Company, although you can still see these quarter-to-quarter effects within a specific region.

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Mike Harrison, Seaport Global Securities - Analyst [20]

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Understood. Appreciate the detail there. Then was also just hoping to have a little bit of a conversation regarding pricing. I know that a portion of your sales are indexed to raw material costs or have some kind of a contractual pass-through.

Can you discuss that? Is that pretty balanced by region or is there a region where more or less of your customers are indexed? And then how does the indexing work? Is it just to key raw materials or is it the total cost of raws that you are able to pass through to customers?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [21]

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We try to have indices that mimic the entire cost for the customer from a product pricing perspective. Generally, the ones we have are with larger customers. We estimate it might be in that 20% to 25% of sales range that we have these kind of contracts.

And most of those contracts tend to fall within North America and EMEA. But we do have impacts everywhere around the world with those type of contracts.

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Mike Harrison, Seaport Global Securities - Analyst [22]

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And then in addition to price increases, are there other actions that you can take to overcome the inflation that you are seeing in raw material costs and presumably freight cost as well? Are you able to shift customers to higher-value products that may be better margin for you but increase the value to the customer? Are you reformulating certain products because of raw materials taking cost actions? What other things can you do besides pricing?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [23]

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I think that those are two good examples. We are always trying to obviously generate new and improved products that can add value to the customers and add to our value and margins as well.

And then like you said, reformulation is always something that we are looking at. There is, for example, somethings historically we've done but we do in a lot of different cases is where some products might take a palm oil, some products might take a coconut oil. Depending upon what happens in the pricing of those markets can really skew the pricing and impact the pricing to a certain customer. Some customers we can approach and say if you are able to take this product and have us substitute this product for it, we can either keep the price the same or mitigate the amount of increase we have to have. And then it becomes a customer discussion.

So we kind of work with our customers all the time. It's certainly part of our fabric where we are constantly doing a lot of other things to try to minimize the price we pay for raw materials in the cost of our products.

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Mike Harrison, Seaport Global Securities - Analyst [24]

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All right. Thanks very much. I'll get back in queue.

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Operator [25]

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Jon Tanwanteng, CJS Securities.

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Jon Tanwanteng, CJS Securities - Analyst [26]

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Good morning, Mike and Mary. Nice quarter and thanks for taking my questions. If I'm reading last quarter's outlook correctly, you had expected around 36% gross margins for the year. So you are saying low to mid-36% is now, even with some additional tariffs and FX and input headwinds. So you are essentially raising your outlook. First, is that correct?

And second, is that based on the established pricing that you have out there or were there further increases in the pipeline for your customers? Thanks.

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [27]

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We've been consistently doing price increases for the past couple years. So it's been a constant process just because raw materials are continuing to go up and it looks like that's not going to stop in the near future.

Trying to predict gross margins can be tough. There's so many factors that impact it, raw materials being one of them. So we believe what we have been saying and continue to say is relatively consistent with our previous guidance, so we don't see it as a change in guidance per se.

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Jon Tanwanteng, CJS Securities - Analyst [28]

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Okay, that's fair. Then just secondly, on the impact of the tariffs, not so much on the margin perspective. But the shifting of revenues from region to region, are you seeing that at all? And where would we expect to gains and losses?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [29]

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Well, we would expect, for example, with the tariffs on steel that you would see an increase in production in the US and maybe a decrease in production in other places around the world. As we've said in the past, in some ways, we are indifferent to that because we generally have consistent market shares in the steel industry everywhere around the world. So we are somewhat indifferent to where the steel is being made.

But in this case, I would expect given the tariffs that the US, which is already seeing some modest increases in steel production and steel capacity utilization this year, we would expect most of the benefit or the change being in that region. But it could be offset in other locations that were normally coming into the US in the past.

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Jon Tanwanteng, CJS Securities - Analyst [30]

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Okay, great. Does that make a difference on an after-tax basis at all?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [31]

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Marginally. I mean, it depends where it comes from. China, we have a very attractive tax rate as well. So there is not a big difference between what we see in China versus what we see in the United States.

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Jon Tanwanteng, CJS Securities - Analyst [32]

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Okay, great. Thank you very much.

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Operator [33]

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Liam Burke, FBR Capital.

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Liam Burke, FBR Capital Markets - Analyst [34]

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Thank you. Good morning, Mike; good morning, Mary. Mike, you've got a value proposition for the steel production. And so price increases generally you are able to get through. It is just a matter of timing.

On the other hand, you have been able to consistently add share. Do you see a point where price increases may hurt your efforts to maintain those share gains that you have been having over the last several years?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [35]

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No, our philosophy on price increases is to really just be recovering what's going on from a raw material perspective. So it's really just try to maintain the profitability level that we have with a certain customer in a certain product line.

As you know, we take an EVA approach to evaluating the business. And we feel that by doing that, just keeping our margins at what we consider to be the current kind of values and just adjusting for raw materials that we can continue to do that and achieve a return that's above our cost of capital and also continue to take share in the marketplace.

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Liam Burke, FBR Capital Markets - Analyst [36]

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Okay. And on the primary metals, steel production volumes are what pretty much drive the business. That's easy to track. On the metalworking side, how is that business going? It's not as clear what the underlying -- I mean, how easy it is to track the underlying drivers. But are you still seeing healthy metalworking markets?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [37]

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Yes, our two major markets, certainly autos is a major market in metalworking and there are so many parts to it. Even if you are selling to a ball-bearing producer, there's a lot of components that go into that, too. Auto was always going to be a good measuring stick and auto is doing very well this year globally. Of course, we care about global and it's doing well.

Another market that we'd point out is tube and pipe that we are in. We sell both coatings as well as lubricants and rust preventatives in the tube and pipe market. And with oil going up, that's helping us as well. So yes, I think we are seeing good metalworking markets and generally it's been a pretty good situation in almost all our base markets that we are participating in pretty broadly around the world.

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Liam Burke, FBR Capital Markets - Analyst [38]

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Great. Thank you, Mike.

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Operator [39]

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Mike Gyure, Janney.

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Mike Gyure, Janney Capital Markets - Analyst [40]

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Yes, good morning. Can you maybe touch on I guess your forward strategy looking at acquisitions? Realizing that Houghton is expected to close here in the fourth quarter. I guess how are you looking at the market? Are you looking at more domestic, you looking at more international? Or I guess how do you view the market for potential sellers out there?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [41]

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Sure. It's our intent to continue with our acquisition strategy. What we said is once we complete the combination with Houghton, our first priority certainly is to pay down our debt to at least the 2.5 times EBITDA level. That is one of our big focuses.

But in the meantime, as we still feel we can do what we call these little bolt-on type of acquisitions, once we hit this other milestone after two years of the combination, we can then look at larger ones.

So as far as what areas we look in, I think we would look in a whole host of areas. But it's not a regional or country-specific strategy because we are pretty much everywhere we need to be around the world.

So it's really where we find we can do bolt-ons that add a new product line or bring a certain technology that we don't have. We have done a lot of those in the past. As well as ones that are more direct competitors as well. They can be somewhat regional in nature or they can be global in nature. So we have a pretty nice list of potential opportunities that we constantly evaluate.

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Mary Hall, Quaker Chemical Corporation - VP, CFO, and Treasurer [42]

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And let me just add there, too. The focus is in that metalworking space, where it continues even post our Houghton combination to be a highly fragmented space. So we continue to believe we are a natural consolidator in that larger metalworking market. And that would really be the focus of our future acquisitions.

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Mike Gyure, Janney Capital Markets - Analyst [43]

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Great, thanks very much.

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Operator [44]

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Garo Norian, Palisade Capital Management.

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Garo Norian, Palisade Capital Management - Analyst [45]

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Good morning. Just wanting to understand some potential back-half-of-the-year items. Is currency likely to switch to become a headwind from a tailwind in the first half of the year?

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Mary Hall, Quaker Chemical Corporation - VP, CFO, and Treasurer [46]

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It's certainly looking like that. That's a possibility. The dollar has shown some strength here in the last couple of months. And we are continuing to track that, but do believe that versus what we saw in the first half of the year that that could be a bit more of a headwind.

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Garo Norian, Palisade Capital Management - Analyst [47]

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Okay. And then secondly, with the Houghton combination, to try to make it a little more logical, I guess, for me. In the event it closed beautifully on September 30, so you've had it for a full fourth quarter, would it be accretive or dilutive in the first quarter or three months, so to speak, of ownership?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [48]

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Garo, I don't want to get into a specific circumstance around that. The guidance we have given around that, Garo, is that we definitely believe in the first full year that this will be accretive. It's hard to say if we have it for a week or a quarter exactly what would occur.

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Garo Norian, Palisade Capital Management - Analyst [49]

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Understood. I appreciate it. It's just going to be a messy fourth quarter. Okay, thank you so much.

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Operator [50]

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Mike Harrison, Seaport Global.

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Mike Harrison, Seaport Global Securities - Analyst [51]

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Hi, thanks for taking a couple more here. Wondering if you saw any impact in your North American automotive business. There were some supplier disruptions that I guess impacted a couple of major production facilities.

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [52]

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No, we had a very good quarter in North America. We saw no issues.

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Mike Harrison, Seaport Global Securities - Analyst [53]

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All right. And then just wondering, you mentioned that the expectation would be as tariffs are implemented that you would see better production in the US and better utilization from those steel customers in the US.

Can you talk a little bit about how improving utilization rates in a steel mill help your business? Is it just the higher volumes, or do you see them upgrade the products they are using or use more or a broader range of products as well? I guess conversely, when utilization declines, is that just a volume impact or do you see some shifts in product usage as well?

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [54]

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At a high level, I tend to view this more as just a volume driver, as our product gets consumed generally per ton of steel produced. So if they produce more tons, they will consume more of our product.

But there certainly can be circumstances when you start to get tight in capacity utilization that somebody would need maybe a product that has higher capabilities to allow them to produce more in the same capacity. So something like that is possible, but I would think in the kind of stage we are in, where capacity utilizations in the mid-70s in the steel industry, I don't view that as a major issue. I view it just more the volume that we would pick up from additional ones. And of course, we would have an offsetting impact because that steel is not being produced somewhere else around the world.

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Mike Harrison, Seaport Global Securities - Analyst [55]

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Okay. And then the last one for me is just in terms of the raw material basket, you've talked in the past about kind of mineral, plant, and animal components of raw materials. Can you talk a little bit about maybe some details on what you are seeing in each of those three pieces? And what the outlook is; maybe what you are most concerned about right now?

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Mary Hall, Quaker Chemical Corporation - VP, CFO, and Treasurer [56]

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Yes, let me take a stab at that, Mike. I think, as you accurately point out, we've got the three biggies that we talk about: the mineral oils, vegetable oils and animal fats. I would say the one we're most directly seeing rising raw material costs are most directly related to crude, which are the mineral oils.

What we've said is that over time the vegetable oils and animal fats tend to track with the mineral oils just because of substitutability and biodiesel and the like. But I think it's the mineral oil trends that are, as you said, perhaps most on our mind at this point in time.

The vegetable oils for the time being actually seem to be behaving pretty well. But again, those are points in time versus over time. So does that help answer your question?

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Mike Harrison, Seaport Global Securities - Analyst [57]

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It does. Thank you very much.

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Operator [58]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to management for closing remarks.

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Michael Barry, Quaker Chemical Corporation - Chairman, CEO and President [59]

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Okay, given there are no other questions, we will end our conference call now and I want to thank you for your interest today. We are pleased with our results in the second quarter and we continue to be confident in the future of Quaker Chemical.

Our next conference call for the third quarter of 2018 will be in late October or in early November. And if you have any questions in the meantime, please feel free to contact Mary or myself. Thanks again for your interest in Quaker Chemical.

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Operator [60]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.