Michael Barry – Chairman, Chief Executive Officer and President Mary Hall – Chief Financial Officer.

Edward Marshall – Sidoti & Company Pete Lukas – CJS Securities Liam Burke – FBR Capital Markets Nick Cecero – Jefferies Mike Harrison – Seaport Global Securitie.

Greetings, and welcome to the Quaker Chemical Corporation Third Quarter 2017 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Thank you. You may begin..

Thank you, Dana. 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'll 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’ll start off now with some remarks about the third quarter. I’m pleased that we have delivered another good quarter despite some market challenges. The quarter’s results were largely driven by two major factors.

First was strong sales and the second lower gross margins due primarily to higher raw material costs. Let me start with margins. For the past five quarters, we have been in a rising raw material cost environment.

And we have discussed in the past with the raw materials, there’s a lag effect between changes in our raw material costs and adjustments to our product pricing. During our last conference call, we had expected a stabilization of raw material costs and we anticipated our third quarter gross margins would start to improve.

However, we did not see the stabilization for a variety of reasons, and we saw some regional and product mix differences as well, which when combined, declined in our gross margins. The good news is that we do expect our gross margins to trend upwards over the next few quarters, gradually heading back to our 37% target.

So now let me move on to sales, and I'll do so in each of our respective regions. Our biggest segment, North America, showed a sales increase of 5%, due primarily to the Lubricor acquisition last year as well as price increases. Base volumes declined somewhat partially due to a more prolonged automotive-related shutdowns this summer versus last year.

Our European or EMEA region showed an 18% increase, due primarily to an 8% growth in volumes and a 6% positive impact from foreign exchange rates. In our Asia-Pacific region, our volumes were very strong, driving a sales increase of 18%. And for the fifth quarter in a row, we were happy to report that South America showed good revenue growth.

The 11% growth in South America sales was due to a combination of higher pricing and volume growth. One way to see our market share gains is to look at our overall organic volume growth in the quarter of 5% and compare that to the underlying production growth in our base markets, which we estimate grew 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. Specifically, we put our customer needs first as our top 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 in each of our regions that will extend our competitive advantage and help us gain further share, which includes growing our recently-acquired technologies around the globe.

As I've mentioned in the past, using the baseball analogy, I see these initiatives as singles, and our goal is to hit many singles to produce multiple runs, and thereby, show continuous growth even in challenging market conditions.

Despite the challenges we face with higher raw material costs, we were able to grow our non-GAAP quarterly earnings per share by 6% and our adjusted EBITDA by 4%. In a nutshell, we were able to do this by growing in our base markets, taking share in the marketplace and continuing to leverage our SG&A.

So while there is a great deal happening around us, the bottom line is I continue to be confident in our future. We believe that we continue to grow our annual earnings to 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 past acquisitions by selling our newly-acquired technologies on a global basis.

The combination of these growth vehicles gives us confidence that 2018 will be another good year for Quaker, as we expect to grow our non-GAAP earnings and adjusted EBITDA for the eighth consecutive year, despite the raw material headwinds. I would like to now make a few remarks about our combination with the Houghton International.

Since our announcement in April, we have been proceeding down numerous paths to close the deal. The one path that largely determines the timing of the close is the regulatory review process. So far, all the reviews around the world are progressing as expected. To date, we have received approval from China and Australia. The U.S.

Federal Trade Commission and European Commission are still in the process of their reviews. We do expect to divest a small number of products in the U.S., but the revenue impact is not significant. Overall, we still expect the remaining reviews will be finalized and closing will occur towards the end of the year or of in the first quarter of 2018.

Another item that we've been working on is the special shareholders meeting to approve the deal. That meeting was held in September, and our shareholders overwhelmingly approved the deal.

Our financing for the combination is also completed with an expanded syndicate that includes 16 banks, and provides us with great deal of flexibility to pay down debt as we generate cash. The other major activity we have been involved with is the integration planning.

We have hired several key consultants such as McKinsey and EY to help us plan appropriately before the close, so that we can hit ground running on day one and make it a seamless event for our customers, while we put the two companies together and achieve our expected synergies.

So all-in-all, we are being very disciplined and thoughtful as we plan the combination of these two strong organizations. 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'll turn it over to Mary Hall, our CFO, so that she can provide you with more 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?.

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 2016 Form 10-K filed with the SEC. These are available on our website. Please now refer to Charts 4 and 5, as I review our financial performance.

Quaker reported a 6% increase in non-GAAP earnings per share to $1.32 this quarter versus analyst consensus of $1.26. And a continuation of the theme from the prior two quarters, our improved results benefited from strong volumes and good cost discipline, while our gross margin continue to reflect some pressure due to increased raw material cost.

Also, for the first time in four years, foreign exchange had a positive impact on the top line of about 2%.

Our net sales of about $213 million for Q3 grew 12% over Q3 last year, with strong volume growth of 7%, the primary driver; and reflecting good organic growth of 5% and acquisition growth of 2%, primarily from the Lubricor acquisition Q4 of last year.

Other key contributing factors were a 3% increase from price and product mix and the positive 2% impact from foreign exchange that I just mentioned. The foreign exchange benefit was due primarily to the stronger euro, which has appreciated about 5% versus Q3 last year.

As Mike discussed, we did not see our gross margin expand in the quarter as we had expected when we talked at the end of Q2. In fact, our gross margin of 35.1% is down a bit on a sequential basis from Q2's 35.7%, and down just over 2 percentage points from last year's 35.2%.

When we spoke last quarter, we expected raw material cost would decline in Q3. In fact, overall raw material cost continue to rise in Q3, resulting in the gross margin compression. As Mike mentioned, we continue to expect gradual gross margin improvement beginning in Q4 and trending up over the next several quarters to the 37% area.

Quaker continued to show good cost discipline as we leverage our infrastructure to support the strong top line growth, helping to offset the gross margin decline. Note that our GAAP operating income and our operating margin reflect $9.7 million of Houghton-related combination expenses.

If we look at the ratio of the SG&A line to sales on Chart 5, the Q3 ratio of 24% compares favorably to the 25.2% Q3 of last year. Please also note that our effective tax rate in Q3 of 22.1% is down from last year's rate of 28.3%, which was inflated due to the timing of the concessionary tax rate at one non-U.S. subsidiaries.

In addition, the relatively low Q3 rate is due to the current year adoption of an accounting standard regarding equity-related compensation and the timing of the Houghton-related combination expenses. We continue to expect the full year effective tax rate to be in the 26% to 28% range.

As a result of our strong operating performance, adjusted EBITDA was up 4%, and Quaker's liquidity and balance sheet continued to strengthen with our cash on hand exceeding debt by $36 million. Turning to Chart 6. Here you see the continuing trend of increasing volume, which began in Q1 of 2016.

In Chart 7, we see the gross margin pressure reflected as overall raw material cost continue to rise in the quarter. As discussed, we believe we will see improvement in Q4 and a gradual return to the 37% area over the next several quarters.

Chart 8 shows our continued growth in adjusted EBITDA and our trailing 12 months adjusted EBITDA of $111.3 million, is our highest to date. Chart 9 depicts our cash and debt balances with the net cash position of $36 million as I mentioned earlier.

In summary, Quaker continues to consistently deliver good earnings and cash flow, despite various market challenges. We continue to expect that 2017 will be our eighth consecutive year of positive growth in non-GAAP earnings and adjusted EBITDA. And I want to thank you all for your interest in Quaker. And now, I’ll turn it back over to you, Mike..

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

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Edward Marshall of Sidoti & Company. Please go ahead..

Hey guys, good morning..

Good morning, Ed..

So I wanted to ask about gross margin targets. First, I think, historically looking back in the model, it looks like the spread typically is between 35% and 36%, which suggests that you’re doing a pretty good job now.

I think over the last couple years, you had a pretty decent spread over raw materials and that gave you that 37% or higher on a gross margin basis.

Has something strategically changed within the business that allows you to kind of maintain that 37% to 38% natural target? Or should we kind of longer tail expect that 35%, 36% to kind of be where you’re headed?.

I think the major driver of the – when we were in the 35% to 35.5% type of range as a target was when crude was at a much higher level. So crude was $90, $100 a barrel. And when crude came down as you said, for a while temporarily, it puts at this lag effect. It gave our margins to be higher and was over 37%, 38% for a while.

And then we kind of – as we evaluated everything at the new crude levels, which is, let’s say, today in the $50-type range, that we would expect just because of the math, it’s really nothing more than the math that we’re doing, it’s – when you’re comparing gross profit dollars versus the gross margin percentage.

And – so a 37% – 36.5%, 37% type of number is equivalent more towards a 35% back when crude was a lot higher. So it's – there's really nothing more than that..

Got it. Got it. And then you're spending a bit on consulting fees for the consolidation, and I appreciate that.

I'm curious, do you have an all-in number year-to-date that you can kind of talk about from the consolidation – from the expected consolidation of the two businesses?.

So what we have spent year-to-date or what we have shown in expenses year-to-date, through the first half of the year, we had the $13 million – $13.1 million or so of expenses, $9.7 million that we reported in this quarter.

And then what we have said and disclosed in the Q is that, we expect an additional $5 million to $10 million in Q4 of this year..

Got it. Thank you very much. I appreciate your time..

Thanks, Ed..

Thank you. Our next question is coming from Jon Tanwanteng of CJS Securities. Please go ahead..

Hi, good morning. It’s actually Pete Lukas for Jon. Congratulations, guys, on another great quarter. Just like to ask, if you could expand a little on synergies from the Houghton merger.

And are there any new insights to share on the potential for cross selling?.

So in the synergies, while there is nothing on the cross-selling side, we definitely to share, we have chosen not to share that on purpose.

We feel those cross-selling synergies are real, but because of the uncertainty, timing of how that's get achieved and because a lot of people discount them anyway, it was really hard to kind of give a finite range. It's something we're definitely putting a lot of effort in and planning around, especially in our integration teams.

So we believe it's real, but nothing to disclose on that. And as far as the cost synergy side, we've disclosed that at the time of the announcement that we're going to have synergies of around $45 million over 3 – achieved by exiting the second year. And we're still – that's still our guidance around the synergies.

Obviously, we're doing a lot of work right now on the – doing the integration planning to achieve the synergies. That work is [indiscernible] I haven't seen anything to date that would suggest that the $45 million is not a good number. So we feel very confident in the $45 million.

And I would anticipate as we get to the close, again, where we expected the end of the year or first quarter that we’ll be through our more thorough analysis around that, and we can probably give some updated guidance at that point..

And then – sorry, with regards to getting back to the 37% gross margin range that you spoke about, do you expect any push back in terms of passing pricing through to your customers?.

There is – no customers love to have price increases. I think we’ve tried to treat customers very fairly on the way up and way down. And it’s just a process we have to go through based on our historical – what we’ve done historically, we’ve been able to do it. So there’s no reason to believe going forward, we’re doing and we’re not.

And a lot of this is relatively minor level of the increases. It’s not we’re going from a uptime when crude’s going from $50 to $100 a barrel, like maybe it did back in 2007 to 2008 time frame. So yes, we still have confidence that we’re going to continue to get there. It’s just a matter of time..

Great. That’s it from me. Thanks guys..

Thank you, Pete..

[Operator Instructions] Our next question is coming from Liam Burke of FBR Capital Markets. Please go ahead..

Thank you. Good morning, Mike good morning, Mary..

Hi, Liam..

Mike, you had margin improvement in Asia-Pacific as opposed to the other two regions of the world where – what created that difference?.

There’s really no – just mix effect going on there. It’s nothing too dramatic effect. There’s a lot of mix especially in sequential quarters. You can have a lot of things going on in different product lines. So nothing fundamentally change – happening there..

Okay. And in the overall gross margins, you mentioned product mix as some of the negative effects for the quarter in addition to the raw materials cost. The – I mean, what’s in that mix? Generally, I would think that the acquired revenue generated from acquisitions, which is higher margin, would be driving more of the growth.

Did I mix up that concept?.

Sure. It would. Yes, there is like – things we point to is around product mix, in particular with the things like mining and Asia-Pacific has ticked up, and China specifically more than it was a year ago and those products can be lower margin. We had some unusual higher sales in Europe from a lower margin product as well. That's more of a timing issue.

It hit more in the third quarter versus being more spread out over the year. So it's – it can be things like that, that we're talking about. And then there's also [Audio Dip] our highest – one of our highest regions for margins is North America. And they have – the other regions grew faster. So you can kind of get a mix that way as well..

Great. Thank you, Mike..

Thank you. Our next question is coming from Laurence Alexander of Jefferies. Please go ahead..

This is Nick Cecero on for Laurence.

How are you?.

Good.

How do you do?.

Good. So I just had a quick question. If you could just maybe provide a little bit color on the regional breakdown for demand trends for the auto and steel end markets..

Sure. Yes. The trends in general have been – first half of the year have been pretty strong in steel. We do – so I guess steel has been much more strong than we had anticipated the first part of the year. And then same with auto. So I think auto is as good globally.

And again, we're concerned more globally because that's how we kind of equal shares around the world, and we tend to think about things globally versus say U.S. centric or you might think that the auto industry being down. So both of them have been doing well.

I think everything we've read is tends to project that those markets will be slowing down, but still growing going forward. So I was looking at our World Steel Association report from mid-October, and they project that the overall steel demand this year to be 2.8% in growth, and that's after they had some.

If anybody – I know some of the people on the call follow World Steel Association that came out and said, "There are some things going on with the China numbers." And when they adjust for that and try to make it more an apples-to-apples comparison basis, that the true growth is going to be about 2.8% this year, and they project next year to be closer to a 2% growth.

So – and I've kind of seen some more things around auto, auto being higher in the first part of the year and then going down more towards the 2% range..

Okay. Thank you very much..

[Operator Instructions] Our next question is coming from Mike Harrison of Seaport Global Securities. Please go ahead..

Hi, good morning..

Good morning, Mike..

Mike, can you remind us why Asia as a region has higher margins than your other regions? And a lot of companies in Asia is a structurally lower margin business due to competitive dynamics and regional competitors as well as maybe some lower end products that are sold there, but you guys seem to have the opposite..

I think on a – when I think of the product margin level, they have similar product margins as say North America type of business, but the cost structure is lower. So their cost of manufacturing and their cost of SG&A is lower, so it's more highly profitable from that perspective..

All right. And with regard to the volume strength you saw in Asia, was just wondering if we can disaggregate a little bit how much of a contributor was the mining business. I know that was very weak a year ago and has gotten better. And then also wondering if you can comment on the steel industry there.

We're hearing from some of the other companies that serve the steel industry that China has actually started to close some of its less efficient steel capacity. And obviously, you guys serve the most efficient producers there.

How much are you benefiting from that?.

Yes. It's hard to – it's really hard to get at that – that's a great question. And it's really hard to get at that exact answer. But we do feel we're benefiting from that because our products tend to be higher end. Products that are more valued on a more efficient newer mill. So definitely, I think we had some benefit, but that's not the whole thing.

And on the mining thing, it's hard. I don't have those numbers right in front of me, but that wasn't a major driver. I mean, Asia-Pacific, in general though, I would just say was kind of everything really hit right from the perspective of here in the marketplace in both all of our business line as well as pretty good growth in those markets.

So it's been – it was kind of a perfect storm in a good way a lot of positive things happening.

And one of the things I would always say is, it's hard to look at things on a quarter-to-quarter basis, too, because you can really see some things that one month can really be bad and you're next to another quarter that has a really good month and month before let's say or something. You're always going to have those type of effects that's why.

I think if you attend the spread and look at more of the year-to-date stuff, you get a better truer picture..

So it sounds like what you're saying is that, we shouldn't bake in kind of a 20% growth number going forward. Just – I guess, just curious to wrap up this question on Asia volumes.

Was there anything unusual? Any timing or any unusual product sales that led it to be stronger? Or was it just kind of, as you everything hitting at once?.

Well, you always have – in the third quarter, you always have this effect Golden Week in China, which is the first week of October, and they tend to wither a lot in September and – to prepare for that. But that’s a – year- over-year that should be relatively consistent, but it seemed like we got more effect this year.

But it’s really not – it’s really hard to tell. Some – there is always kind of seasonality with some customers as well and some things as well. So again, I wouldn’t take, yes, the 18% and say that’s going to happen every quarter or anything like that.

But I do believe we have true growth there, true market share gains, feel very good about Asia-Pacific. But I think you got to look at it over a long period of time. But even when you look at it over year-to-date, it’s still a very strong picture for us..

All right. And then last one from me, is, Mary, you mentioned the SG&A as a percent of sales is down to 24%. You even noted though in your press release that there were some increases in compensation and in the incentive accruals.

On a stand-alone basis, how much lower could that 24% number go? And can you maybe talk a little bit about what the gross margin and SG&A structure look like within the Houghton business? Is that pretty similar to what you guys have? Or are there some key differences?.

Yes. I really can’t – on your latter part of your question, Mike, I really can’t address that. Certainly, not to that level of that specificity. What I can tell you with respect to our SG&A is, as we continue to grow that top line and leverage and use our existing infrastructure to leverage that top line, we are seeing the benefit of that.

And that is one of the stories or positive notes that we have mentioned. When we talk about the combination with Houghton as well, it’s just that increased size and scale being able to double the size of the company on the top line, but having that global infrastructure and footprint in place to support that.

So we continue to focus on SG&A, operating margin improvement in the company. And that’ll be a strong focus in the company without combination as well..

And I would say just one other comment on that is, that I think the – back in April when we announced the acquisition or the combination of these two companies here, that I think it’s really going to – you look at the EBITDA of where we are today, EBITDA margins around that 14% range.

And when we get the full amount of the synergies eventually, it will go – the new combined company will be around 18%. So you kind of see that impact of leveraging and putting these two companies together..

And why we’re kind of on that topic, I know I’m segueing a little bit here, but I did want to clarify a comment that I made in my prepared remarks. When I talk about that tax range, effective tax rate range in the 26% to 28%, that is excluding the impact of the Houghton-related expenses.

And I wasn’t clear on that, and I wanted to make sure I reiterated that..

I appreciate that that’s good color. Thank you..

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

Given there are no other questions, we’ll end our conference call now. And I’m going to thank all of you for your interest today. We have pleased with our results in the third quarter and we continue to be confident in the future of Quaker Chemical. Our next conference call for the fourth quarter results will be in late February or early March.

And if you have any questions in the mean time, please feel free to contact Mary or myself. Thanks again for your interest in Quaker Chemical..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may disconnect your lines at this time. And have a wonderful day..