Greetings, and welcome to the Quaker Chemical Corporation's First Quarter 2014 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded..

I would now like to turn the conference over to your host, Mr. Michael Barry, Chairman, CEO and President of Quaker Chemical. Please go ahead, sir. .

Thank you, Kevin. Good morning, everyone. Joining me today are Margo Loebl, our CFO; and Robert Traub, our General Counsel. After my comments, Margo will provide the details around the financials, and then we'll address any questions that you may have. We also have slides for our conference call.

You can find them in the Investor Relations part of our website at www.quakerchem.com..

I will start it off now with some remarks about the first quarter. I'm pleased to report that we had a good quarter, as we had double-digit growth in operating income and adjusted EBITDA. .

Let me now try to give you a sense of what we experienced in the quarter, and I'll start with sales. Our overall sales were up 3% for the quarter versus 2013, with good growth in all regions, with the exception of South America. Foreign exchange rates negatively impacted sales by 2%. Overall, we had good volume growth of 6% year-over-year..

Going region by region, South America was our most challenging region. Our revenues were down 17%, with the impact of the weaker Brazilian and Argentinian currencies causing, essentially, the entire decline. .

In our Europe or EMEA region, we saw a 5% growth, as the steel and automotive industries have begun the rebound from the very depressed levels of a year ago. .

In our Asia-Pacific region, we had 10% growth, with China being the main driver. .

And in our North America region, we had growth of approximately 3%. However, we estimate that our growth would have been up 2% more or approximately 5% overall in North America had it not been for the severe weather and its impact on the industrial markets. .

That same impact on a global sales basis would have been approximately 1%. And therefore, we estimate our overall sales growth would have been around 4%, if not for the severe U.S. weather..

Overall, we continue to do well in gaining share in the marketplace throughout the world. We believe this is due to our commitment to our customer intimacy model, which puts the customer needs as our top priority and provides them with strong service and business solutions. We believe this approach continues to differentiate us in the marketplace..

As I mentioned in the past, using the baseball analogy, our goal is to score runs by hitting many singles. We have a great deal of initiatives in our base business lines and in each of our regions, as well as with growing our recently acquired technologies around the globe.

I see each of these initiatives as singles, and our goal is to hit many singles, which produce multiple runs, so we show continuous growth, despite what can be tough market conditions at times..

One question that I normally get is what are the trends we are currently seeing in industrial production around the world? And I thought I would proactively give you my take. As a general statement, I believe we have hit bottom in many parts of the world in 2013 in terms of industrial demand.

We are experiencing growth in the U.S., Mexico, China and EMEA. The most challenging countries currently for us are Brazil and India. It is not clear if we're going to see growth in 2014 in these 2 countries. However, I do believe our overall major markets of steel and automotive will grow modestly over the next year or so.

This is a refreshing change from the external environment we have experienced over the past several years..

On our gross margins, we saw them expand by 0.3 percentage points from the first quarter of 2013, as our margins are back to more acceptable levels. This modest improvement is primarily due to the stabilization of raw material prices over the past several quarters. So I'm pleased with our first quarter performance. .

While non-GAAP earnings were down slightly, this was mainly due to higher tax rate, which Margo will explain further. We saw improvement in our end markets.

We continue to take share and leverage our recent acquisitions, and we continue to expand our margins, all of which allowed us to grow our adjusted EBITDA and operating income by 11%, respectively..

The bottom line is I continue to be confident in our future.

While we operate in a very competitive world, with still challenging environments, we may -- and we may likely see some increases in raw materials, we expect 2014 to be another good year for Quaker in terms of key financial measures, such as sales, earnings, cash flow and EBITDA, as well as for our continued strategic positioning of the company..

In addition, I also believe our strong balance sheet and liquidity will continue to enable us to generate future shareholder value-creating opportunities, such as funding our strategic growth initiatives and making additional acquisitions.

I truly believe the right acquisitions over the next several years can create additional significant value for our shareholders..

In closing, I want to thank all of our associates, whose dedication and expertise helps to create value for our customers and differentiate Quaker in the marketplace. People are everything in our business, and by far, the most valuable asset. And I'm very happy with the team we have in place throughout the world..

And now, I'll turn it over to Margo Loebl, our CFO, so that she can provide you with more details behind our financials. And after that, we will address any questions you may have.

Margo?.

Thank you, Mike. Good morning, everyone. I reiterate that we are pleased with our results in the first quarter of 2014, despite the typical seasonal trends we experienced in the first quarter, as well as the challenges of uneven markets, foreign exchange and severe weather in the U.S.

Most notably, Quaker had very strong results, which were then negatively impacted by higher foreign exchange transaction losses and higher effective tax rate..

Before launching into my recap for the quarter, please note that Quaker provides a non-GAAP earnings per diluted share table in an effort to provide shareholders with visibility into Quaker operations, excluding certain items, which we believe do not reflect our core operations, starting with, but not limited to, earnings related to Primex, our investment in the captive insurance company.

Such table is outlined in Chart 9 of the investor slides, yesterday's earnings release and our Form 10-Q filed yesterday..

As referenced in Chart 5, a recap of Quaker's performance for the first quarter 2014 includes the following 5 highlights. The first highlight, we had strong volumes, which led to our quarterly net sales of $181.7 million compared to $176.2 million in the first quarter of 2013, despite impact of foreign exchange and severe winter weather in the U.S.

These volumes increased 5%, with growth in all of the regions except South America. Please refer to a summary of Quaker volumes in our Chart 4..

Net sales of $181.7 million in the first quarter of 2014 compared favorably to $176.2 million in the prior quarter, up $5.5 million or 3%.

Acquisitions contributed an additional 1% to the sales increase in the first quarter this year versus the same period last year, primarily relating to the tin plating business we acquired in the second quarter of 2013. .

These increases were partially offset by a price and selling mix decrease of 1% and a decrease related to foreign exchange rate translation of 2% or $2.7 million. The foreign exchange rate translation decrease was led by the Brazilian real and the Indian rupee, partially offset by increases in the euro.

Notably, the euro was up 4% in the first quarter year-over-year, while the real and rupee were down 16% and 12%, respectively..

Also, Mike did mention an approximate 1% revenue impact on consolidated revenue as a result of the severe U.S. weather in the first quarter of this year..

Turning from the top line growth story to margins, the second highlight in today's discussion. The stable first quarter 2014 gross margin level of 35.8% is up, but comparable to 35.5% in the first quarter of 2013.

Considering Chart 6, gross profit increased approximately $2.5 million or approximately 4% from the first quarter of 2013, which was primarily driven by the increased sales volumes noted earlier on stable gross margins. The strong gross margins in the first quarter of 2014 had been an important driver in Quaker's strong performance.

Notably, increases in raw materials costs will always be a risk. But as we have said in the past, our target is to have gross margins averaging at least 35% over time..

The third highlight of today's discussion is as follows. Quaker delivered 11% growth in operating income and adjusted EBITDA in the first quarter of 2014 versus the same period last year, due to higher volumes on stable margins and selling, general and administrative expense levels.

As an overarching comment, managing the margins and SG&A cost carefully is a key tenet of Quaker's business model. And at the end of the day, this approach, coupled with customer intimacy as a competitive differentiator, enabled Quaker to grow profitably and to take industry leadership..

In this regard, SG&A increased approximately $500,000 from the first quarter of 2013, primarily driven by higher labor-related costs on improved company performance and general year-over-year merit increases, and also, additional costs related to the amendment of the company's U.K. pension plan.

These increases to SG&A were net of lower foreign currency exchange rate translations..

While there are typically a number of factors influencing SG&A, we carefully manage stable SG&A costs as practicable. Our cost streamlining activities announced in 2013 for EMEA and South America will influence 2014 results.

South America began to realize the benefit of the cost streamlining in late 2013, while the positive impact of the cost streamlining efforts in EMEA will be recognized in the second half of 2014, and only on a full year basis in 2015..

Taking into account performance with margins and costs, Quaker reported an 11% growth in operating income to $19.4 million, compared to $17.4 million in the first quarter of 2013. Similarly, Quaker's adjusted EBITDA also increased 11% to $23.7 million in the first quarter of 2014 from $21.4 million in the first quarter of 2013..

Adjusted EBITDA remains a key metric for Quaker, and is summarized in Charts 7, 11 and 12. Similar to earnings per share, we adjust EBITDA to reflect items which are not part of our core business activity. On an annualized basis, adjusted EBITDA is $95 million for the period ending March 31, 2014.

Looking at the range of 2008 to the annualized 2014 data, the compounded average growth rate for adjusted EBITDA is 15.5%, with margins on adjusted EBITDA up 620 basis points in annualized 2014 versus 2008..

Turning to the fourth highlight of today's discussion, non-GAAP EPS of $0.95 per share exceeded analysts' consensus expectations of $0.94. Again, Quaker had a very -- had very strong operating results, which were then negatively impacted by higher foreign exchange transaction losses and a higher effective tax rate. .

Despite the strong operating results, the company's earnings per diluted share for the first quarter of 2014 were $0.96 compared to $1.04 for the first quarter of 2013. Non-GAAP earnings per diluted share for the first quarter of 2014 were $0.95, compared to $0.96 for the first quarter of 2013.

Quaker's non-GAAP EPS of $0.95 per share, again, exceeded analysts' consensus expectations of $0.94..

Higher foreign exchange transaction losses had a $0.05 per share impact in the first quarter of 2014 compared to the same quarter last year, and relates primarily to the sharp devaluation of the Argentine peso in the first quarter of 2014. This impact is reflected in the Other Income section of Quaker's P&L..

The company's effective tax rate for the first quarters of 2014 and 2013 was 34.8% and 24.1%, respectively.

The primary contributor to the increase in the current quarter's effective tax rate were lower changes in reserves related to uncertain tax provisions and certain anticipated onetime items that increased the current quarter's effective tax rate.

Notably, although the tax rate is inflated in the first quarter of 2014, we continue to estimate the full year 2014 effective tax rate to approximate 30%..

The fifth highlight and final highlight of today's discussion is that our liquidity remained strong, despite significant working capital investments in the quarter. The company had a net operating cash outflow of approximately $1.8 million for the first quarter of 2014.

The main driver of the change in cash flow was an increase in cash invested in the company's working capital during the current quarter, which was primarily the result of increased sales at the end of the first quarter of 2014; reestablishing inventory safety stock level that were low at year-end 2013; and higher annual incentive compensation payouts related to an improvement in the company's prior-year performance.

These factors impacting Quaker's working capital are consistent with first quarters of past years. .

The company's balance sheet remains very strong, with no borrowings under its credit facility. In addition, our $60.5 million cash position exceeded our debt of $18.5 million at March 31, 2014, resulting in a positive $42 million net cash/debt position as shown in Chart 8.

Overall, the company's liquidity remains its strength, positioning Quaker with the financial flexibility to pursue its stated acquisition strategy..

Again, we're pleased with our very strong operating results in the first quarter of 2014, and we believe 2014 will be another good year for Quaker. .

I would like to personally thank all of the Quaker associates around the world for their commitment to our customers and contributions to the success of Quaker..

This concludes my prepared remarks for today. Thank you, and I will now turn the call back over to Mike. .

Thanks, Margo. At this stage, we'd like to address questions from any participants on this conference call. .

[Operator Instructions] Our first question today is coming from Laurence Alexander from Jefferies. .

A couple of different questions. First, can you give a little bit more detail on, in Asia, the lack of operating leverage? I mean, your sales grew quite a bit faster than your profits.

Can you walk through what happened there?.

The -- or what's the -- I don't have the exact data in front of me for that right now, Laurence. We're still very profitable and Asia may have had some timing differences as to how we accrue different expenses throughout the year.

But there's nothing unusual going on in our business in Asia Pacific that would give us any cause for why things are changing there from our P&L structure. .

Okay.

And then secondly, can you sort of address or sort of give an update on the Board philosophy around the dividend payout ratio, which looks to be down around 20%, 25% for this year?.

Right, yes. Well, we don't really have a quoted payout ratio per se that we target, that we've mentioned publicly. The whole dividend philosophy of the company is that we've paid a dividend for 42 consecutive years now as a company. And we've increased that dividend, I believe, it's 38 out of those 42.

And we look at the dividend payout traditionally once a year with the Board. Traditionally, that is in the springtime, which will be coming up. So -- and we take into account the success that -- our earnings and the payout ratio and things like that, as well as other opportunity uses for that money.

So I think you'll be -- in the near term, you'll be hearing more about our -- what we're going to do with the dividend there. .

Okay.

And then lastly -- and lastly, could you address what you can do to get your wallet share opportunity to parity between aluminum and steel?.

To parity... .

Or at least, narrowing the gap or at least, what sort of -- I mean should we see a trend over time of you narrowing the gap between the 2?.

Do you mean, like our -- from a market share perspective?.

Well, your market opportunities, so to speak, per ton of aluminum converted per ton of steel. .

Well, with aluminum, we're much bigger in the steel business than we are in aluminum. We recently purchased, a few years ago, the -- an aluminum business, which gave us significant share in the U.S. And we're in the midst of rolling that out globally, so we expect to have good growth in the aluminum market.

The aluminum market, in general, uses less chemicals in the production of hot rolling aluminum versus what we might use, say, in cold rolling steel.

So -- but as things switch, some people would ask questions over time, what happens when some steel goes into aluminum, and if you use, like the Ford F-150 as an example, recently, that should reduce, directionally, some steel and go in aluminum. In that particular case, for example, we are picking that up on the aluminum side.

So there's not much variation there.

And plus, we are also making additional products now that will help the automakers with using aluminum more in the forming of parts for parts, for autos, which, taken together with the aluminum business, we're picking up as well, should offset any negative impact we would see from that transfer between steel and aluminum. .

From Mike Harrison from First Analysis. .

Margo, just looking at the SG&A costs and also kind of the indirect corporate expense, you ran a little bit lower this quarter than you had been in past quarters. I know we talked last quarter that Q4 had some unusual compensation catch-ups and incentive catch-ups in there.

But is something around $45 million a quarter an appropriate number for SG&A going forward?.

I think that -- a couple of things. I think you'd see a lot of timing differences. There's a lot of issues that contribute -- factors that contribute to our SG&A levels. I think you see what our typical percent of sales is -- our actual percent margin. I would keep an eye on that historically, and for you to make some assessment for leverage over time.

I don't -- we don't necessarily give that type of guidance other than that. .

Got it. And then on the EMEA cost streamlining, I know you've been reluctant to discuss the benefits there.

But if I look at the sales run rate kind of getting close to the high $100 million, almost $200 million, is it reasonable to think that you're looking to take out around $2 million of costs there that would be 1% of sales or probably closer to 4% or 5% of your SG&A cost, just as a ballpark?.

I think what I would start with -- that's a good question, I think what I would start with as a reference point is, I would go through and look at, well, what did we spend on cost savings per annum in the past and I would use that as a -- in -- for this EMEA region, and I would use that as a starting point, the 2 cost streamlining numbers that we published in that regard.

.

Okay. And last one is on the raw material expectations going forward.

Mike, is it more of a gradual increase in inflation that you're seeing out there? Or are there some key raws that are spiking? Do you have any availability issues? Or is it really just a cost issue at this point?.

Yes. We don't see availability issues. It's just more of a general increases in some raw materials in some places around the world, but we're not seeing, at this time -- of course, raw materials can change overnight, right, when some geopolitical event happens, I've seen that, and some things can spike.

But right now, we're just seeing some general increases in the raw material base. .

[Operator Instructions] Our next question is coming from Liam Burke from Janney Capital Markets. .

Mike, could you give us some sense as how the acquired company has performed during the quarter? And is it performing in line with your long-term growth expectation?.

Yes. We're very pleased with the acquisitions we made over time. We probably made small 7 smallish acquisitions over the past 3.5 to 4 years now. And each one of them has performed well to our expectations. So we routinely evaluate those and look at how they perform versus what our original expectation was.

Apparently, as a whole, they are definitely doing that. And with some of -- I think, the one that -- and first, the major goal of a lot of these was really to get new technologies, which we leverage them and break out globally.

And I would say, in one instance, like for example grease, we're doing very well in the base business of that grease business itself.

We're a little behind on maybe our expectations from the perspective of rolling that out globally because of attracting and getting a critical mass of people to help support our sales throughout the world in grease and -- but I'm happy to say now, we are at that stage, and we have now people in each region of the world working for us to develop that.

So, overall, I'm very pleased where we are in the acquisitions. .

Okay. And you have talked about your investment at sales and service at the expense of competitors, it's benefit you in the share gain area.

Are you continuing to see that? Are you seeing any kind of competitive response?.

In general, I think we're still continuing to see the same thing, Liam. We're -- as we look at the different parts of our business throughout the globe, we're still pointing and see the ability to pick up some good pieces of business in different parts of the world. So I think it's still working. .

Our next question today is coming from Summit Roshan from KeyBanc Capital Markets. .

Just a question around the M&A environment. I know last quarter, there was a comment that things were a little bit tight. Some of the assets that you were looking at just weren't available.

I was hoping you can give us an update there?.

Sure. Of course, one of the general philosophies we have, we don't tend to announce anything around an acquisition until it's completed. So it's hard to mention anything specifically, but I'll just kind of give our consistent comment for what we've said in the past. M&A is a pretty important aspect to our growth. And we have a good balance sheet.

We think we can really add value for our shareholders by making acquisitions. And we're actively working on acquisitions, we're -- throughout the globe. And it's our goal to make something happen and make sure it adds value for our shareholders. So we're continuing to work as hard as ever on it.

And it's really a matter of -- the way we look at it, it's a matter of timing of when companies become available. And certainly, you have to go through due diligence to make sure you reach agreement and everything comes together. But I'm optimistic that if you look out over the next year or 2, that we'll have some acquisitions. .

Great.

And then, if I can take a longer-term view and look at the Quaker story from a higher level and kind of just thinking about how M&A fits into there and would there be a potential to broaden the scope a little bit outside of the metals and metalworking, that your individual leverage in Quaker's technology and core competencies into certain adjacent end markets?.

I'm sorry. Could you repeat that? You were breaking up a little there. .

Sure, sure.

If I think about the longer-term story of Quaker and the technology and core competencies that you have, are there opportunities to pursue some adjacent end market application, say outside of metals and metals working?.

Yes, I think there are. For example, in the grease area, as an example, right now, we're -- we bought one grease company. Of course, so we would like to buy other companies as well, as we stated. And we want to grow in grease. It's a big market that we have not been in historically.

Our initial focus on -- in grease is to use our existing customer base and sell specialty grease into that. But grease can be used in a lot of different other industries that are non-metal related; cement industry, the chemical industry as examples. And those would be the things that we'll be looking at over time.

So we definitely see some of these technologies that we have now, especially some of the newer ones, can be used in other industries. .

[Operator Instructions] Our next question is a follow-up from Mike Harrison from First Analysis. .

Just a couple more. As I look at the segment level detail, it looks like both North America and EMEA regions saw lower price mix. I was wondering if you could give a little bit more detail.

Was it more price or mix? And if it was pricing, what was the source of that pricing pressure?.

Well, on the -- it's -- we don't break out, of course, the price and mix. And sometimes, it's actually very difficult to do because you've got 2 assets and a mixture of products that you're selling at any one point in time into the customer base.

On the pricing side of things, we continually have contracts that go -- that adjust with indexes of raw materials. So in times when raw materials could be lower than another period of time, you could -- you'll have an adjustment variable, the prices will adjust lower; and conversely, you go higher on a rising raw material environment.

So what we're really probably seeing in that part of the -- price part of that is really that adjustment mechanism in many of the index contracts that we have. .

When I think about those index contracts, Mike, is that something that adjusts monthly or quarterly? Or is it something that could adjust maybe once a year?.

It's traditionally, I'd say, the bulk of what we have might be quarterly. But we have some that might be 6 months. But it's generally more than once a year. But there also could be something that's longer, like a year as well. .

Okay. And then, the weather that you saw in North America, you mentioned probably a 2% headwind on the top line.

Was it primarily just that volume impact? Or did you guys see additional costs, either for distribution or higher energy costs or things like that during the first quarter?.

That's a good question. I mean, we did actually see some additional costs as well in North America because of the higher prices of gas and so forth. But it's -- energy is not a big component to us as it is maybe to a lot of other companies. So it had some impact, but it wasn't dramatic.

As we said, I would say the sales was, by far, one of the biggest impacts. .

Right. And then you mentioned the opportunity to expand the greases business internationally, and then referred to some adjacent markets where those lubricants are used. I think when you bought Summit, that was about a $30 million in sales business, primarily North America or maybe predominately [ph] North America.

And I guess I'm just trying to get a sense of maybe where that business is now in terms of revenues and where it could go.

I mean, could we be looking at high-performance grease as being a $100 million business someday?.

That would be our -- definitely, I mean, that's the magnitude that we'd be looking to go to, that's for sure. .

There are no further questions at this time. I'd like to turn the call back over to management for any further or closing comments. .

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

Our next conference call for the second quarter results will be in late July or early August. And if you have any questions in the meantime, please feel free to contact Margo Loebl or myself. .

Thanks again for your interest in Quaker Chemical. .

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..