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Edited Transcript of KWR earnings conference call or presentation 1-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Quaker Chemical Corp Earnings Call

CONSHOHOCKEN Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Quaker Chemical Corp earnings conference call or presentation Wednesday, March 1, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Barry

Quaker Chemical Corporation - Chairman, President & CEO

* Mary Hall

Quaker Chemical Corporation - VP, CFO & Treasurer

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Conference Call Participants

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* Edward Marshall

Sidoti & Company - Analyst

* Mike Harrison

Seaport Global Securities - Analyst

* Jon Tanwanteng

CJS Securties - Analyst

* Laurence Alexander

Jefferies - Analyst

* Curt Siegmeyer

KeyBanc Capital Markets - Analyst

* Liam Burke

Wunderlich Securities - 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 fourth-quarter and full-year 2016 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Michael Barry, Chairman, CEO, and President for Quaker Chemical. Thank you, sir. You may begin.

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

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Thank you, Donna. 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 our conference call. You can find them in the investor relations section of our website at www.QuakerChem.com.

I will start it off now with some remarks about the fourth quarter. I am pleased we have delivered another quarter of solid earnings and strong cash flow, despite continued foreign exchange headwinds which negatively impacted sales by 3% and earnings by 5%. This marks nearly three years of consecutive quarters where foreign exchange has negatively impacted our results compared to the prior year.

I will now make some comments on the quarter's sales and I will do so in each of our respective regions. In our biggest segment, North America, we showed a sales decline of 1%, due primarily to a 2% decline from foreign exchange rates. Our European, or EMEA, region showed a 2% increase in sales, despite a 2.5% negative impact from foreign exchange rates. So, overall, a good sales quarter for EMEA.

And for the second quarter in a row, South America showed good revenue growth of nearly 20% as Brazil has begun to show signs of having hit bottom and beginning a slow recovery, with both good volume growth and improved product pricing. In our Asia-Pacific region, sales were up 15% on strong volume growth, which was partially offset by exchange rates and lower product pricing.

Despite the challenges we faced, we were able to grow our non-GAAP quarterly earnings by 9%. In a nutshell, we were able to do this based on good growth in our base markets, taking share in the marketplace, and continuing to leverage our SG&A including benefits from our 2015 restructuring program.

One way to see our market share gains is to look at the overall product volume growth in the quarter of 7% and compare that to the growth in our base markets of global steel and auto, which both grew approximately 4.5%. We believe these share gains are due to our commitment to our customer and embassy model. Specifically, we put our customers' 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.

In addition, we continue to invest in many other initiatives in our existing business lines and in each of our regions that will extend our competitive advantage and help us gain further share, including growing our recently-acquired technologies around the globe. As I mentioned in the past using a baseball analogy, I see each of these initiatives as singles. Our goal is to hit many signals to produce multiple runs and thereby show continuous growth, even in tough market conditions.

A good example of this is the Lubricor acquisition which we made late in the fourth quarter. While modest in size at $10 million in sales, we are pleased with both the technology and market position this Canadian company brings to Quaker and how we can leverage both of these aspects in our other businesses.

This is the 12th acquisition we have made since 2010. While it is our policy not to comment on specific acquisition opportunities, acquisitions will continue to be a focus for us and will be one of the key ways we believe we can create additional value for our shareholders.

Over the next quarter we expect our net sales will continue to be impacted by a strong US dollar. In the case of our raw material costs, we expect some to increase but the timing and the impact on our gross margins is not an exact science. However, to give you more direction, we expect our gross margins in the first quarter to be somewhat higher than the fourth-quarter margin which was 36.4% and to be closer to 37%.

So while there's a great deal happening around us, the bottom line is I continue to be confident in our future. We believe that we can continue to grow our annual earnings and generate strong cash flow, despite various market challenges. We will do this by executing our business strategies, which we project will lead to continued share gains in the marketplace.

Also we continue to leverage our recent acquisitions by selling our newly-acquired technologies on a global basis. And, finally, we will continue to work on new acquisition opportunities. The combination of these growth vehicles gives us confidence that 2017 will be another good year for Quaker as we expect to grow both our top and bottom lines for the full year despite continued foreign exchange headwinds.

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 the Quaker team we have in place throughout the world.

Now I will turn it over to Mary Hall, our CFO, so that she can provide you with more details behind our 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 & Treasurer [3]

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Thanks, Mike, and good morning, all. Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements 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 2016 Form 10-K filed with the SEC. These are also available on our website.

Quaker delivered another strong performance in the quarter and for the full year, driven by significant increases in volume, especially organic volume growth. While we continue to be buffeted by foreign-exchange headwinds, we have been able to overcome these with our focus on leveraging market share gains, including our past acquisitions, our cost discipline, and most importantly, our continued focus on delivering results for our customers.

As I lead us into the financial summary, please note that Quaker provides certain information, including non-GAAP earnings per diluted share and adjusted EBITDA, in an effort to provide shareholders with visibility into Quaker's operations, excluding certain one-time items which we believe do not reflect our core operations. Reconciliations are provided in charts 10 and 11 of these investor slides and they are also in yesterday's earnings release and our Form 10-K, also filed yesterday.

My following comments are based on charts 4 and 5 taken together.

Quaker reported a 9% increase in non-GAAP earnings per diluted share for Q4 2016 to $1.26 and a 4% increase for the full year to $4.60 versus analyst consensus of $1.19 for the quarter and $4.53 for the full year. We achieved these results on strong volumes and good cost discipline, despite negative foreign-exchange impacts of 5% for the quarter and 4% for the full year.

Net sales increases of 4% for the quarter and 1% for the full year were driven primarily by organic volume increases of 7% and 3%, respectively. Both the quarter and the full-year net sales experienced negative foreign-exchange translation impacts of 3%. The primary FX impacts for us were the Mexican peso, which depreciated approximately 18% in both the quarter and the year, and the Chinese RMB, which depreciated approximately 7% in both the quarter and the year.

Our gross margins declined about 1% Q4 2016 versus Q4 2015 to 36.4%, due to both changes in raw material costs and also certain one-time charges to raw material and manufacturing costs that we do not expect to repeat. Absent these costs, our gross margin for the quarter would've been closer to 37%.

For the full year, our gross margin declined slightly to 37.4% due to the pressure from changes in raw material costs, but we were largely able to adjust pricing to keep margins relatively stable.

Our operating income continued to improve as we saw the benefit of our 2015 restructuring program in the second half of 2016, as well as the benefits from our continued cost discipline which helped to offset normal increases in SG&A, primarily merit- and labor-related costs. As a result of our strong operating performance, our full-year adjusted EBITDA of $106.6 million is a record high for Quaker with our adjusted EBITDA margin improving to 14.3%.

I haven't mentioned taxes yet. As we have been indicating all year, we did receive the concessionary tax rate in one of our non-US jurisdictions in the fourth quarter as expected, which allowed us to adjust taxes for the full year resulting in a full-year effective tax rate of 27.6% as compared to the 30%-plus range we have been recording throughout the first three quarters. The full-year rate is still somewhat above our effective tax rate for 2015 of 25.3% as we not only recorded the concessionary rate benefit in 2015, but we also benefited from this timing of certain other tax adjustments that did not recur.

Overall, our strong operating performance drove solid operating cash flow, improving our year-end cash position 10% to $88.8 million, resulting in a net cash position of $22.3 million. Keep in mind that we accomplished this while paying approximately $12 million for the acquisition of Lubricor in Q4, repurchasing 84,000 shares of stock for about $5.9 million during the year, and paying dividends of $17.6 million in 2016.

Quaker remains committed to a balanced and disciplined approach and using our strong balance sheet to grow the Company and return cash to shareholders.

The next few charts give some more history and context to certain items. With respect to volume, Quaker has delivered volume growth for seven consecutive years now through a combination of organic and acquisition-related growth. In 2016, as I mentioned earlier, organic growth drove the volume increases with 7% organic growth in the quarter and 3% for the year.

Chart 7 shows our gross margin trends for the quarter and the year. Here you see the slight decline year over year and the downward trend throughout the year as prices and raw material costs continued to realign. As I mentioned earlier, there were some one-time costs which we believe impacted Q4 gross margin, and absent these, our gross margin would've been closer to 37%.

Adjusted EBITDA on chart 8 shows the continued positive trend with 2016 adjusted EBITDA a record $106.6 million and our adjusted EBITDA margin improving to 14.3%. Chart 9 highlights how our strong operating performance and cash flow translate to the balance sheet with our year-end cash increasing 10% to $88.8 million, resulting in a net cash position of $22.3 million as I mentioned earlier.

In summary, Quaker delivered another good quarter and another good year. Our earnings and adjusted EBITDA continued their positive trends and our strong balance sheet will continue to support future growth, including acquisitions.

Looking at 2017, we expect auto to show positive growth, steel to show modest growth, continued market share gains and leveraging of past acquisitions, continued volatility in FX rates with a possible negative impact of about 3% to 5% for the year, and an effective tax rate of 28% to 30%. Overall, we expect Quaker will have another year of good performance with growth in the top and bottom lines and we expect to deliver our eighth consecutive year of positive earnings growth.

Thank you all for joining us and for your interest in Quaker. Now I will turn it back to Mike.

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

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Edward Marshall, Sidoti & Company.

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Edward Marshall, Sidoti & Company - Analyst [2]

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Good morning, guys. How are you? My question is I guess when you look at the price compression that you might have seen due to raw materials -- and I think you mentioned in the prepared remarks but I missed it -- the basis points of impacts on the margin due to the raw material squeeze.

And then I guess secondarily was you look -- I know you gave some guidance into Q1. I'm thinking about for the full year maybe what that impact might be seeing. I know we've talked about it in the past that you see it coming at some point; you just can't put a fine point to it.

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

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On your first question, it was around the I think gross margin. We said if we had not had these number of one-off kind of items that were kind of unusual in nature because they all went in one direction, we would've been around 37% in our gross margin. So it would've been pretty consistent where we expected it to be.

We always have things going on in different places around the world. Some raw material is going up; some price increases, maybe falling currency issues, and so forth. We try to keep it in a certain range and there can be a three- to six-month lag at times, but it pretty much came in where we expected it other than these one-time items.

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

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As Mike said, we continue to expect to carry that expectation into the first quarter.

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Edward Marshall, Sidoti & Company - Analyst [5]

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Right. Could you comment on the full year or is it just too early to do that?

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [6]

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We don't comment, really give any guidance, with respect to the full year. We do try to -- just directionally, since we are already in the first quarter -- give you a little insight into what we're seeing. I think the message there is, excluding the one-time impacts in the manufacturing line as well as raw material costs, we would've expected to be closer to 37%. And that's what we see carrying forward into Q1.

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Edward Marshall, Sidoti & Company - Analyst [7]

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Got it. And the restructuring benefit that you talked about in the quarter, in the reverse do you know the basis points of improvement that you would have seen to the operating margin due to that action that you've done in prior quarters?

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [8]

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We actually had a slight credit in the quarter.

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Edward Marshall, Sidoti & Company - Analyst [9]

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I'm sorry, not the charge itself or the benefit itself. I'm asking from prior-quarter actions what the benefit in the particular quarter from the cost savings.

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [10]

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I think we mentioned that the total cost savings in the fourth quarter were relatively equivalent to where we were in the third quarter. Sequentially, it wasn't a big difference there between the two quarters.

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [11]

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Right. What we had talked about earlier was we expected $3 million of the restructuring charge savings benefit to flow through the second half of the year. And we did see that and it was kind of proportionately throughout that second half of the year.

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Edward Marshall, Sidoti & Company - Analyst [12]

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Got it, so about $1.5 million a quarter.

Then, finally, I guess when you talk about FX headwinds and it's 3% to 5%, I guess the euro is a big currency to pay attention to. What are you basing the 3% to 5% -- what euro conversion rate are you basing that 3% to 5% on?

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

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Really the last several quarters, and certainly this last quarter, the peso and the RMB were more impactful than the euro, as I mentioned.

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Edward Marshall, Sidoti & Company - Analyst [14]

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Could you talk about the conversion rates that you baked into that forecast on those two currencies, just to give us a sense?

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

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I think the low end of the range was really based upon current rates and then the top end of the range is really more based upon what people are projecting the rates to be on average for the year.

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Edward Marshall, Sidoti & Company - Analyst [16]

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

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Operator [17]

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Mike Harrison, Seaport Global Securities.

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Mike Harrison, Seaport Global Securities - Analyst [18]

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Mike, I was wondering if maybe you can give a little bit more detail on the one-time charges that you called out related to raw materials and some manufacturing costs. What happened there? Did you just end up with some off-spec material? And was there a particular region that that one-time charge affected?

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [19]

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Let me take a stab at that, Mike. It really was quite a fairly long list of adjustments. For example, including manufacturing yield true-ups and adjustments that normally occur and other adjustments not particular to one region at all. These are adjustments that normally happen in the quarter.

What was atypical is that normally there would be -- we would see puts and takes and in Q4 just all the stars misaligned, if you will, in the same direction.

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Mike Harrison, Seaport Global Securities - Analyst [20]

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So it was just unusually negative when usually these net out to be more neutral?

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [21]

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Exactly.

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Mike Harrison, Seaport Global Securities - Analyst [22]

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Then just kind of continuing on the raw material theme; understanding that you don't want to provide gross margin guidance for the full year. But just maybe provide your outlook on what you are seeing in terms of the raw material picture and trends in crude-based, plant-based, and animal-based raw materials.

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

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Sure. We are certainly seeing some of these trend upwards, especially the vegetable-based oils right now. You are seeing not so much on the animal fats. Mineral oils will tend to over time go up and down with crude, so it's not a big factor.

We are also seeing increases in the additives that we buy as well. So it's kind of a mixture of different things. Even though vegetable oils could be going up now, it could maybe come down later in the year and so forth. It's kind of the normal cycle of things.

We try to stay on top of these. We have, as you know, Mike, certain contracts that will automatically adjust for these type of items. And then other ones that are just more pure negotiations and go back to the customer and make our business case for the price increases. Generally, the matter of prices going up or down, there's a three- to six-month lag, but we are trying to stay on top of it and keep our margins as constant as possible.

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Mike Harrison, Seaport Global Securities - Analyst [24]

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Then wanted to ask about the strength that you are seeing in Asia-Pacific right now. Is that more on the primary metals side or on the metalworking fluids side?

Then in terms -- I think you also said that pricing was lower in Asia-Pacific. I think I get a little bit concerned when I hear about higher volumes, lower pricing, and you are gaining share. You are not in a situation where you are cutting price competitively in order to gain volume?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [25]

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No. I think, first of all, when you talk about pricing, we are comparing versus the prior quarter from a year ago, not necessarily sequentially. And so over that time period, even though raw materials might be starting to go up, they are down and, therefore, there are some price adjustments that have been made along the way. So I'm not really concerned from that perspective.

Then, on the volume side, it was pretty much even. I think we had -- we saw good auto growth in Asia-Pacific, in China in particular, but primary metals as well is doing well, including taking our shares in the marketplace.

So I think it's a combination of various things. Chinese New Year with a little accelerated this year, closer to the end of the year. So you have a number of factors in there, but overall, we feel very good about our Asia-Pacific business.

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Mike Harrison, Seaport Global Securities - Analyst [26]

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And in China right now on the steel side, are you seeing any benefit at this point from closures of less efficient steel capacity? And do you expect to see any action on this front during 2017?

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

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I think we continue, based on what we read of the government, to continue to take actions to shut it down. A lot of the mills that are shutting down tend to be older, less efficient mills and tend to be the ones maybe we are not particularly in. Hopefully that will shift production to the bigger mills where we tend to be in.

It's hard to say are we benefiting, per se, out of that. All we know is our volumes are up pretty well. And how much of that is due to export steel and how much is due to a whole of indigent demand in China, it's really hard to piece it all together. But all I know is overall our volumes are good.

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Mike Harrison, Seaport Global Securities - Analyst [28]

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Then last question for me is just on the acquisition front. There was a report out there suggesting that you might be looking at a deal potentially with one of your larger metalworking fluids competitors.

Without commenting directly on that, was just curious -- you've got a net cash position; your stock is near all-time highs so it's a strong currency right now; borrowing rates are low, but potentially going higher; and you guys have done a lot of smaller bolt-on deals. But can you just talk about your capabilities and whether Quaker is ready to do a larger deal potentially?

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

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Sure. As we've talked in the past, Mike, we're looking at acquisitions. We feel that's a key aspect to our growth. Not only do we think we're going to have really good organic growth, which we are very happy about, especially with our new technologies, but we think, like you said, we have a very strong balance sheet and we continue to grow.

We continue to look for acquisitions that can bring us new technologies, which would maybe be smaller acquisitions, and we'll also like to look at acquisitions that would be bigger companies. It's really more what's available, what's out there, who's willing to sell. As you know, it's not -- these two people or two sides to agree, so it's really hard to tell and give any kind of indication of what's going to happen.

We are always working on multiple opportunities like we have. Some fall apart, some don't and we continue to progress on that. We think no matter what the opportunities are, whether they are small ones or large ones, we feel confident that not only do we have the team in place and the people in place, but we would have the balance sheet and the financial flexibility to make them happen.

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Mike Harrison, Seaport Global Securities - Analyst [30]

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Sounds good, thank you very much.

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Operator [31]

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Jon Tanwanteng, CJS Securities.

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Jon Tanwanteng, CJS Securties - Analyst [32]

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Good morning, Mike and Mary. Thank you for taking my questions and very nice quarter.

Can you remind us what South America is as a percentage of revenue and profits? And has the recovery continued or accelerated heading into Q1, what you've seen so far?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [33]

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South America is, last I did the calculations, roughly 4% of our overall sales, so it's a relatively minor piece of our overall business.

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Jon Tanwanteng, CJS Securties - Analyst [34]

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And is business down there profitable right now?

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

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Yes. Even -- I didn't say at this time; I have said it in past conferences. Even when we are kind of in the very bottom let's say, which was probably the first half of last year and the year before, we still were generating cash and making money down there. But we are happy to see conditions improve.

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Jon Tanwanteng, CJS Securties - Analyst [36]

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Okay, great. Then, Mike, can you update us on your general competitive position? After so many years of share gain, how should we think of the ability to sustain that kind of growth? And are your competitors still standing still relative to what you guys are trying to offer?

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

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You know, we said in the past that we've been growing above the market for, on average, a little -- 2%, sometimes 3%, and even some years 4%, but --. And we give you indications each quarter of how much that is. This one we pointed out that our markets were growing 4.5%; we grew at 7% on our volumes, so you can see that spread again.

Then will that continue? Certainly no guarantees things continue, but we feel good about our competitive positioning. We feel it's pretty broad-based in different markets and in different areas and against different competitors and so forth. So we still continue to feel very good about that.

And the thing that gives me even more comfort about that going forward is these new technologies that we have purchased over the years. We've purchased seven new technologies that we weren't in six years ago or so, and now we are continuing to make efforts into selling those technologies, rolling them out globally to our existing customer base.

As I -- you've probably heard me say over time, we are still relatively early in the baseball game on that one and there's a lot of lead-way left to go. So I feel between the combination of continued share gains and these new technologies I continue to feel good about our organic growth here now.

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Jon Tanwanteng, CJS Securties - Analyst [38]

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Okay, great. Mary, can you comment on how you expect cash flow to grow relative to earnings this year? Is it going to be faster or slower in 2017? What are the puts and takes to that, whether it's CapEx or working capital or anything else?

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [39]

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We continue to, at least to date, again positive trend in EBITDA. We continue to focus on the operating margin and strive for continued improvement in that operating margin as we hope to. And as Mike said, a game plan to roll these technologies out globally and to leverage that global footprint we have and the existing infrastructure we have to continue to hopefully drive the operating margin north. So that should continue to translate into good cash flow.

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [40]

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I think also with -- you mentioned CapEx and working capital has been a little bit of a headwind for us. We are hoping some of those headwinds might calm down; that would be a plus if it did stabilize.

Then if -- the CapEx side, we always try to keep -- we are pretty CapEx-light as a company. We've been generally spending anywhere -- an average over the past several years might be $12 million or so, and this year could be a tad more, but not that much more. It could be $13 million, $14 million, in that range but --. And that's because we are building a new plant in the west side of India.

Other than that we don't have anything major going on that would -- we still think will have very strong cash flow.

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Jon Tanwanteng, CJS Securties - Analyst [41]

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Great, thank you. Finally, just if we could talk about the uncommon transaction-related charges. Are there more things shaking loose on the acquisition front in the near term? What does the pipeline look like compared to three or maybe even six months ago?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [42]

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The pipeline is -- it's like I just mentioned a few minutes ago, we are always looking at things so there's always at one time different deals we are talking to in different stages, so it's really hard to predict what's going to hit and what's not. Of course, even if we had a good understanding of something right now, it's not something we would close because we are under confidentiality agreements and we've got to complete a deal before something happens.

There's always a lot of things going on the fire. All I can tell you is we are continuing to be committed to making acquisitions happen. It's just hard to say if it's going to be later this year or two years from now or something. But if you can just look at our track record of 12 acquisitions over the past 6 1/2 years or so, then you can see that we are committed to this and we expect this to continue.

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Jon Tanwanteng, CJS Securties - Analyst [43]

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Great, thank you very much.

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Operator [44]

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Lawrence Alexander, Jefferies.

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Laurence Alexander, Jefferies - Analyst [45]

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Good morning. I just want to wrap up a few odds and ends. Can you -- so with the comp discussion earlier about the tailwind from cost-cutting and the $3 million in the back half of last year, how much tailwind net do you think you had in 2017 left to capture? And also, with the way you did the restructuring, how much of that would leak back if you had a stronger end-market? Or do you think it is like a -- or is it a structural net gain that we should just layer in going forward?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [46]

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Well, yes, that's a good question, because those were specific programs and some specific areas in that, so we look at that separately from continuing to invest in the business. And we continually do that, add people and invest in the business, and we haven't really given any guidance around that kind of thing.

But on this program in particular, we think there's about $2 million more year over year incremental benefit coming in 2016 -- sorry, 2017 versus 2016.

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Laurence Alexander, Jefferies - Analyst [47]

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Okay. Then, secondly, on the gross margins. Just looking at the commentary from about a year ago and where you are at and how you seem to be more comfortable now around the 37% level. What would it take to get back to the prior peak margins? Is that really an issue of volume recovery? Is it a regional mix? Is it raw material swings?

What do you see as the key factors that might get you back to that peak? I'm just trying to get a feel for what the scenarios are.

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

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Sure. And you mean peak, you mean when we were more around closer to 38% margins, right?

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Laurence Alexander, Jefferies - Analyst [49]

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Exactly.

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [50]

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So it would probably be a drop in raw material prices that would tend to cause that the most. We don't see any major shifts in our product unless there was something major happening in our products lines, but we don't see that happening. So it would have to be really I think a major drop in raw materials to cause that to come back at this point.

And you're right; what we didn't know --. It was such a major drop when crude was $100 and it went down to below $30 even for a while. It was such a major drop, we didn't know kind of where things would eventually shake out and we still are not what I consider great predictors of this, because there's mix issues and so forth that happen quarter to quarter. But what we have now seen a period of time where things have more stabilized around the 37%.

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Laurence Alexander, Jefferies - Analyst [51]

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Then just lastly, can you talk a little bit about what you are seeing in terms of labor cost inflation and how you are managing staff retention?

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

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Sure. First of all, we have been very fortunate with retention. We have been able to retain our key people over time and actually attract people from other companies, so we feel very good about that.

From a labor cost perspective, I think like most companies, we are going up with modest amounts in the most mature markets of the world, in the 3% type of range. And then maybe some of the more growing markets where you go into India or China, and depending upon the position levels, it could be a little greater than that.

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Laurence Alexander, Jefferies - Analyst [53]

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Okay, great. Thank you.

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Operator [54]

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Curt Siegmeyer, KeyBanc Capital Markets.

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Curt Siegmeyer, KeyBanc Capital Markets - Analyst [55]

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Good morning, guys. You mentioned in your prepared remarks some higher production in the quarter in some of your end-markets. Could you maybe give a little more color on that? How much of your 7% volume growth was due to that and what regions was it in? Was it just seasonal effects? What kind of drove it?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [56]

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Sure. Global steel certainly is a big part of our company and roughly half of our business, and global steel production went up 4.5% globally. If you look around the world what it did, Asia-Pacific went up 4.2%, Europe went up 7%, North America was up 5%, and South America was down 9%. So every region up kind of, except for South America, on steel production.

And when you look at autos, you see a similar number. Global auto production went up around 4.3%. So I think when you look at both steel and auto, you're in that 4% to 4.5% range and then you look at our volumes in the 7% range. The way I just simply look at it is that differential is probably, since we tend to be tied to production and we tend to be tied to global numbers, that differential is really what we are picking up in the marketplace above market share gains.

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Curt Siegmeyer, KeyBanc Capital Markets - Analyst [57]

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Okay. And then on South America, you mentioned 20% growth. I know it's a small piece of your overall business, but you gave the delta in total volumes versus underlying market growth. And I was wondering if you could maybe talk about that in terms of South America. How much of that 20% was underlying market growth do you think and how much of it was sort of new business wins?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [58]

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I don't have that exact breakdown in front of me, but I know we have been winning down in South America. We have been taking share in that marketplace, but we also know things are getting better down there as well.

I would say, in general, close to half of that 20%, maybe a little bit less, is related to volumes. So that can kind of gives you a sense of -- it's hard for me to give you that exact breakdown though of what's new versus just increased production, but it is a combination.

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Curt Siegmeyer, KeyBanc Capital Markets - Analyst [59]

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Okay. If I could squeeze in just one more just on capital allocation. I know people have asked a little bit about the balance sheet and acquisition opportunities with your net cash position, and your balance sheet is in the best shape it's has been in in a few years here.

How do you think about the remaining capital allocation potentially buying back more stock, given you bought back about $6 million in 2016? I know it's run quite a bit, so just wondering what your updated thoughts are on that.

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [60]

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I think we tend on the -- again, we think about capital allocation. We always say the most important way we feel we can create shareholder value is to use our capital for making acquisitions. That's, by far, the most primary use of it.

Of course, dividend. We have been making dividends for ever since we have been a public company, 45 years, and increased or maintained it every year during that time period. So those will always be kind of continuous things.

I think we view share repurchase programs more opportunistic, so I think when we saw our stock dive, be lower in January of last year, we took advantage of that opportunity to buy our stock below $70 a share. And so I think we are just much more concentrated on the acquisition as the best way of using our capital.

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Curt Siegmeyer, KeyBanc Capital Markets - Analyst [61]

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Great, that's helpful. Thank you.

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Operator [62]

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(Operator Instructions) Liam Burke, Wunderlich Securities.

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Liam Burke, Wunderlich Securities - Analyst [63]

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Thank you. Morning, Mike. Morning, Mary. Mary, you mentioned capital, that incremental capital will be needed to expand capacity in India. It is relatively large steel market, certainly not as big as China, but relative to the rest of the world it is pretty big.

Is there anything new going on there? Are you seeing any changes or is it just a natural progression of the market growth?

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [64]

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I'll make a quick comment; Mike will chime in. Currently our facility -- and we have a joint venture there. We're the majority owner there. But our current facility is more in the eastern part of the country and we see an opportunity. The growth in that industry is more in the western side, so again with our philosophy of going with our customers and staying close to our customers that is really the catalyst for the build there.

And we expect that to span over 2017 and 2018. So while, as Mike mentioned, you might see maybe a little bit of a tick up in CapEx related to that, again still within those general boundary parameters that are typical for Quaker.

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Liam Burke, Wunderlich Securities - Analyst [65]

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On the acquired technologies, Mike, some of these are complementary to what would go into a typical steel mill. Others are on the metalworking front. Is the organization in place to be able to sell these products globally?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [66]

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Yes, I mean definitely at this stage they are. Generally as we higher or we acquire a new technology in an acquisition, the good news is we have that new technology now, but we generally only have it in the country in the world that we purchased the acquisition. Then we have the higher people, product experts in that area to help us with our existing salesforce go and sell that.

So it takes a while to get up to speed with that. Once we get those people in place, then we tend to do trials. Then once we do trials, they become -- and then hopefully get this new piece of the business, they become reference accounts for us.

It's a relatively lengthy sales cycle that continues to build upon itself. I think we are feeling good because we got all the people that we need for these new initiatives around the world and we are gaining new business. We are gaining reference accounts and being successful in trial. So, yes, I feel good with the progress that we made.

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Liam Burke, Wunderlich Securities - Analyst [67]

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Great. Thank you, Mike. Thank you, Mary.

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Operator [68]

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Garo Norian, Palisade Capital Management.

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Garo Norian, Palisade Capital Management - Analyst [69]

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Maybe just to tack on to the end of what your answer was there, do you feel like you have gotten better over the last few years at taking single-country bolt-on and being able to more quickly and effectively bring it throughout your system?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [70]

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Yes, I think we have learned and benefited from the numbers of these acquisitions that we have done. Some of it depends upon the kind of technology and the kind of resource that you need to hire.

I think of the one acquisition that we did was a relatively small one where we bought our tinplating business from [McDermott]. At that time we -- they only had four tinplating mills around the world and they could use our brand and our infrastructure and people to help them. But that contained a small group of people that could go around the world and do that. So actually they have been successful and gaining and today we have 16 of those, so you can kind of see the progression.

When you going into other product areas, like specialty grease where we haven't been before, there you are having to get grease experts around the world. A little bit of different dynamic depending upon the technology that you are talking about, but overall, I do agree that I think we are gaining traction and we're getting better at it.

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Mary Hall, Quaker Chemical Corporation - VP, CFO & Treasurer [71]

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If I could add just a thought there too, I think we mentioned last year that we were implementing this customer relationship management system as well, which we did do successfully around the world. And that just allows our process engineers, what we call our salespeople, to have quicker access and up-to-date access to information, which again we believe will help facilitate that process.

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Garo Norian, Palisade Capital Management - Analyst [72]

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Got it. Then just on M&A more broadly, how important has cultural fit been with these small acquisition versus if you do something on a larger side? How meaningful might that be, a bigger organization if it's not already that consultative customer-centric focus? What risks do you see of how that may or may not fit in with your guys' culture?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [73]

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Certainly one of things we always look at on acquisitions is culture. We want to have -- we don't want to have clashes or difference of opinions or ways of approaches to the business.

To be honest, it really hasn't been that big of an issue for us in the acquisitions that we have looked at. All the ones that seem to have a pretty good -- I mean if you are successful in this business, you are concentrating on the customer and you are trying to find solutions for them and that is kind of our business. Most of the ones we've been buying and looking at are geared that way.

So culture, agree it's a really important thing and so far it hasn't been a big issue. It will be something we will just continually look for as we look at acquisitions in the future.

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Garo Norian, Palisade Capital Management - Analyst [74]

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Okay, then just one last thing. How have you guys improved, or not, with your success in kind of penetrating the Japanese auto manufacturing chain?

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [75]

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We continue to make progress on that aspect. We have -- are fortunate to have a Japanese joint venture that has been very supportive to us and helping us to provide resources to help us grow in different places around the world. We have actually added resources ourselves in different places around the world that could accelerate that effort.

It continues to be kind of one of -- I consider those one of our many little singles we try to keep hitting. We are continuing to make progress. It's not a double or triple in our things, but each year we are making incremental share gains in that segment.

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Garo Norian, Palisade Capital Management - Analyst [76]

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Great, thanks so much.

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Operator [77]

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Thank you. At this time I would like to turn the floor back over to management for any additional or closing comments.

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Michael Barry, Quaker Chemical Corporation - Chairman, President & CEO [78]

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Well, given there's no other questions, we will end our conference call now and I want to thank all of you for your interest today.

We are pleased with our results for the fourth quarter and we continue to be confident in the future of Quaker Chemical. Our next conference call for the first-quarter results will be in late April or early May. 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 [79]

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Ladies and gentlemen, today's conference has concluded. You may disconnect your lines at this time and have a wonderful day.