Greetings, and welcome to the Quaker Chemical Corporation Fourth Quarter and Full-Year 2018 Results Conference Call. A brief 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, Michael Barry, Chairman, Chief Executive Officer and President for Quaker Chemical Corporation. Thank you. Mr. Barry, you may begin..

Thanks, Melissa. Good morning, everyone. Joining me today are Mary Hall, our CFO; and Robert Traub, our General Counsel. After my comments, Mary will provide details around the financials, and then we'll address any questions that you may have.

We also have slides for the conference call, you can find them in the Investor Relations section of the website at www.quakerchem.com. I'll start off now with some remarks about the fourth quarter. I’m pleased with that we’ve delivered another good quarter, despite some market challenges.

The primary challenges we faced were greater foreign exchange headwinds, a slowdown in automotive in Europe and China, and some higher than normal manufacturing costs which impacted our gross margins. Let me now expand on each of these areas.

Foreign exchange, negatively impacted our revenues by 3%, which led to our flat sales for the quarter, despite volume growth of 2% and price mix improvement of 1%. While our overall volumes grew, our underlying markets were negatively impacted by lower automotive sales, especially in Europe and China.

Specifically, global car production was down approximately 5% in the fourth quarter of 2018 versus the fourth quarter of -- which highlights a sizable challenge we overcame through our market share gains in the quarter. Gross margins are both positive and negative story.

While we were up to 35.4% in the current quarter compared to 35.1% in 2017, we were below our expectation of being around 36%. As I mentioned, the shortfall from expectations was largely driven by our manufacturing costs and variances being higher than normal, rather than higher raw material costs which were relatively stable sequentially.

We expect that these manufacturing costs will normalize in the first quarter and our gross margin is expected to be in the 36% range next quarter. Let me now give you some additional color on our regions performance for the quarter.

Our biggest segment, North America had a very strong quarter and showed a sales increase of 5% with 2% volume growth and 4% due to price increases and mix, partially offset by a 1% negative impact due to foreign exchange. Our European or EMEA region showed a 5% decrease, primarily due to negative foreign exchange impact of 3% and lower volumes of 2%.

You may recall that in the middle of 2018, we stopped selling a piece of business to a nonstrategic customer, primarily due to its low profitability. This impacted volume growth by about 1% and therefore it was half of EMEAs volume decline. In our Asia-Pacific region, our sales increased 1% as we continue to see good volume growth of 8%.

But this was partially offset by foreign exchange of 5% and negative price mix impacts of 2%. So our Asia-Pacific region continue to show good organic growth and pretty strong results for us even with the slowdown in China's automotive market.

For South America, we showed a decline in revenue of 9% despite positive volume growth of 2% and a price mix improvement of 3%. So the sales decline was all due to the year-over-year negative foreign exchange impact of 14%.

Overall, volume growth continues to be a consistent theme for us and increases in our market share continues to be a large driver of this lion growth.

One way to see our market growth and market share gains is to look at the overall organic volume growth in the quarter and compare that to the underlying production growth in our base industrial end markets.

Our volume growth was 2% in the quarter as compared to the underlying growth in our base markets, which we estimate as flat at best with steel up and automotive down. 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 priority, providing them with strong service and business solutions. I believe this approach continues to differentiate us in the marketplace.

So, in summary, despite the challenges we faced in the quarter including foreign exchange and lower automotive production in China and Europe, we were able to grow our non-GAAP earnings by 19%. For the full-year 2018, we grew our adjusted EBITDA by 9% and our non-GAAP earnings by 21%.

In a nutshell, we were able to do this by taking share in the marketplace, increasing our gross margins and continuing to leverage our SG&A. I would now like to make a few remarks about our combination with Houghton International.

1since our update on January 8, we continue to be in productive discussions with the FTC, although the progress was somewhat delayed by the government shut down. Our expectation is that we will be able to receive regulatory approval and close within the next few months.

Overall, the magnitude of the divested product lines continues to be about 3% of the combined revenue of the companies. As I said in the past, we're excited about this combination as it will double the size of the company, enable continued above market growth through good cross-selling opportunities and provide at least $45 million in cost synergies.

Our intent is to have an investor call after the closing where we will provide an updated view of the new company including our expected synergies. Looking forward, I’m very pleased with the future outlook for Quaker.

We had a very strong 2018 and we expect 2019 to be another good year for us despite challenging market conditions as we expect our current Quaker business to continue year-over-year growth in non-GAAP earnings and adjusted EBITDA despite currency headwinds and low growth in our base markets of automotive [technical difficulty].

We will do this by continuing to grow above the market as we have done historically for our growth initiatives and market share gains. And of course, we also expect to begin realizing the benefits from combining with Houghton. So all in all, I continue to be confident in our future.

In closing, I want to thank all of our associates whose dedication and expertise helps to create value for our customers and shareholders and differentiate Quaker in the marketplace. People are everything in our business and by far our most valuable asset.

I’m very happy with our Quaker team and continue to be excited about the upcoming combination with the Houghton International team. And now I will turn it over to Mary Hall, our CFO, so that she can provide you with 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 2018 Form 10-K filed with the SEC. These are available on our website.

In addition, please note that Quaker provides certain information including non-GAAP earnings per diluted share and adjusted EBITDA in an effort to provide shareholders with better visibility and to Quaker's core operations excluding certain one-time items that we believe do not reflect our core operation.

Reconciliations are provided in chart 10 through 12 of this investor deck and they're also in yesterday's earnings release and filing of Form 10-K with the SEC. Also please note that we’ve added Chart 13 in the appendix to summarize segment performance.

Q4 performance continued to demonstrate Quaker's resilience and consistency in the face of volatile markets. In Q4, we faced several market challenges including generally weaker industrial production, particularly in automotive Q4 over Q4, as well as continued FX headwinds that surfaced in Q3.

Despite these challenges, our non-GAAP earnings per diluted share increased 19% in Q4 to $1.51 with the full-year increasing 21% to $6.04. And our full-year adjusted EBITDA of $125.6 million was a record. Please now refer to Charts 4 and 5 as I review our Q4 and full-year 2018 financial performance in more detail.

Net sales were up slightly Q4 over Q4 to $11.5 million as volume growth of 2% and price mix improvement of 1% were largely offset by a 3% negative impact from foreign currency translation as we saw stronger dollar across the globe.

For the full-year, net sales were up 6% due to volume increases of 3% and price mix improvement of 2% with a slight positive impact from foreign exchange.

Our gross margin improved Q4 over Q4 to 35.4% from 35.1%, but was down sequentially from Q3s 36.5%, as we experienced certain elevated costs in Q4, largely related to manufacturing that negatively impacted gross margin and that we do not expect to repeat. On a full-year basis, we delivered an improved gross margin of 36% compared to 35.5% in 2017.

In Q1 of 2019, we expect our gross margin to be near 36%. The combination of improved gross margins and continued cost discipline drove operating margin improvement of Q4 over Q4 and for the full-year. This solid operating performance led to the record adjusted EBITDA I mentioned earlier.

With respect to taxes, 2018 have lot of moving parts as we adjusted our estimates to fully reflect the impacts related to U.S tax reform. In Q4, Quaker finalized its accounting for tax reform in accordance with the 1-year measurement period allowed by the SEC and took a related charge of approximately $8 million.

When we look through the noise and exclude the impact of U.S tax reform and certain nondeductible combination expenses, our full-year effective tax rate of 22% is in the 22% to 24% range we estimated last quarter for our full-year rate. For full-year 2019, we expect an effective tax rate of 22% to 25%.

However, please note that in 2019 we will be reapplying for a concessionary tax rate for one of our non-U.S subsidiaries. This process occurs every three years and its usually not concluded until later in the year of application.

As a result, we expect our Q1 through Q3 effective tax rate will be elevated and that our Q4 expected tax rate will be low to adjust to the full-year expected rate of 22% to 25%. We currently expect our Q1 effective tax rate will be in the range of 24% to 27%. Please remember that these numbers exclude the impact of nondeductible combination expenses.

Overall, our solid performance drove record net operating cash flow of $79 million, up approximately 22% from the prior year. Our cash on hand of about $104 million, increased 16% over the prior year, despite a significant pay down of debt of about $27 million and a 4% increase in dividends paid year-over-year.

As you can see, Quaker continues to deliver strong and consistent cash flow and prudent management of the balance sheet. Turning to the next few charts, which will give more history and contacts to certain key metrics.

On Chart 6, you can see volume trends and here you can see that 2018 is our ninth consecutive year of volume growth, which was up 3% in 2018. Chart 7 shows our gross margin trends.

Here you can see the sequential decline I mentioned earlier from Q3 to Q4, and the improvement for the full-year to 36%.As Mike indicated, we currently expect our gross margin in Q1 will be near 36%. Chart 8 shows our continued decline in adjusted EBITDA as we ended 2018 with a record $125.6 million, up 9% from 2017.

Our adjusted EBITDA margin of 14.5% is also a new high. Chart 9 reflects our continued discipline in managing the balance sheet with our year-end net cash position improving significantly to $67.5 million compared with $23.1 million at year-end 2017.

In summary, Quaker continues to deliver solid and steady operating performance for its shareholders despite various market challenges. Looking into 2019, we expect continued market volatility and low growth in our base markets of automotive and steel as Mike mentioned.

However, we continue to expect market share gains and leveraging of our past acquisitions to drive above market growth. In addition, we expect to close the combination with Houghton within the next few months, doubling the size of the company.

As always, our primary focus is to continue to deliver the good performance our shareholders expect of Quaker. Thank you all for joining us this morning and for your interest in Quaker. And now back to you Mike..

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

Thank you. [Operator Instructions] Our first question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your question..

Hi, Mike, Mary. How are you? Good morning..

Good morning, Ed..

So you made reference to several manufacturing costs that did slow the results in the quarter.

I am curious could you talk about maybe what occurred, where it occurred, how you resolve the issue?.

Sure. The elevated costs were largely due as we said to manufacturing and largely labor related, including third-party contractor costs, over time, some severances in those numbers, also some higher than expected maintenance. And the cost primarily affected North America and EMEA..

Got it. Okay.

And then historically we’ve been talking about getting back to that 37% gross margin range and it seems like the conversation shifted and I’m curious, is that a temporary shift to 36% or has something structurally changed in the business, or is it because we are trending below 36% in the fourth quarter that you just kind of use that as a reference point.

Just trying to get a sense as to where the longer tail in the gross margin is going to be?.

Yes, I don’t think anything is changed from our longer-term position, that we expect to be about 37% really. It is more of a timing issue.

I think we are just more concentrating on our comments here because we were below where we expected to be in the fourth quarter, where we are expected to be in this low 36% range and now we expect to kind of get back to that area in the first quarter.

But longer-term we will continue to strive to be in that 37%, but really depends upon the exact timing of raw material changes and so forth..

Got it. And I wanted to get a sense also finally just seeing what you -- maybe you’re just getting from some of the OEMs, the auto OEMs. And then maybe if you can even comment slightly on Houghton's combination with the automotive suppliers? I’m curious as they start to slow and you said you saw at the end of the fourth quarter.

Mike, my sense is, there's been a lot of price pressure in that industry, we’ve seen it across a lot of the suppliers. OEMs are really pushing back. I am curious what -- how you think or what you think your success rate and price will be in that environment as we move into 2019? Thank you..

Yes, I think in general as a statement for prices and margin, maintenances that we continue thing o expect to be able to as raw materials go up, we would expect to be able to capture that back. And we historically we’ve been able to do that.

So I guess I don't really see any changes, I see most of the softness in the automotive markets really impacting our volumes more than the margin side of things..

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

Thanks, Ed..

Thank you. Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question..

Hi. Good morning..

Good morning, Mike..

Just continuing on the gross margin discussion, I was wondering if you can comment in a little bit more detail on what you're seeing in raw material trends and maybe give us a sense of when raw materials may be -- could potentially become neutral or even a margin tailwind at some point during 2019?.

Yes, I mean, sort to exactly know when what’s going to happen in the longer-term with raw materials, medium to longer-term. But from a short-term perspective, they were -- again, they were relatively stable. There were certainly some increases that we saw in raw materials in the fourth quarter, more specific in the Asia-Pacific and EMEA area.

But, overall, relatively stable for us in fourth quarter as we go into the first quarter, early days it's relatively stable as well, although [indiscernible] has been since the beginning of the year trending up a little bit.

And so we'll see what happens there if anything happens, but so far there hasn’t been any major discontinuities in the raw material market..

Okay,. And then you mentioned Asia-Pacific is an area where you saw some of this manufacturing cost overrun as well as some increases in raw materials, yet the margin performance in Asia-Pacific was very good and the volume was very good, despite some challenges.

So can you just maybe go through what you were seeing in that business to make it much stronger than people might have thought going into the quarter?.

Sure. First of all, on the manufacturing side of things that was mainly in North America and EMEA kind of thing. But you’re right, Asia-Pacific was continues to be a really good story for us and even despite China automotive being negatively impacted, we still see -- saw very good growth in Asia-Pacific.

It was pretty broad-based growth other than in the automotive. So we saw -- in our primary metals area, we saw good growth and whether its China or in India, for example, we saw very good volume growth in our business. So, overall, just pretty broad-based growth, continue to take share in the marketplace, pick up new pieces of business.

It's kind of -- just kind of the things we've been doing pretty consistently and just happened to be continue to offset what we saw in the automotive sector..

And just maybe a couple of questions related to your auto exposure in Asia-Pacific.

Is -- are you relatively less exposed to Chinese automotive than you’re to automotive in other countries? And also wondering, are you better positioned with domestic players or are you better positioned with kind of the U.S and European -- the Western auto makers that are producing in China?.

Both. Our exposure is in both. We have both local automotive suppliers and we also have the more international ones. And as far as our exposure, I don’t have that exact thing, but we do have a significant automotive business in China.

It's -- but, obviously our primary metals business is a good size there too because steel production in China is greater than other places around the world. I don’t have the exact splits on that, but it's still a significant piece of what we do in China..

All right. And then the last one from me.

Do you feel that you gained share and outperformed the Chinese automotive market in Q4?.

Yes..

Okay. Thanks very much..

You're welcome. Thanks, Mike..

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question..

Good morning, guys. It's Dan Rizzo on for Laurence.

How are you?.

Good, Dan. Thank you.

How are you?.

Just a clarification on the tax code you are referring to for -- or the tax results for 2018. I think you indicated that it's 22 -- it was 22%. But I -- maybe I'm doing this wrong, but it seems to me with the exclusion of the one-time charges related to the change in U.S tax code that it's actually -- probably a couple hundred basis points lower.

And I was wondering if I'm maybe looking at it wrong..

Well, you have to exclude the 22% that we called out as a more normalized rate excludes both the Houghton combination expenses and U.S tax reform..

Okay. I just want to make sure I was thinking about that correctly..

Yes..

And then, so going forward with the 22% to 25% that you expect for 2019, I mean would there be similar charges like that that would be excluded from the adjusted results?.

The Houghton combination expenses..

Okay. And then, thanks for the clarification.

And then as we look at 2019 and what we are expecting in the regional trends, I mean do you expect them to kind of stay where they are expecting acceleration or deceleration anywhere? Is there anything that's weak right now that I mean was surprising and should kind of rebound?.

Well, all we can go on is -- in some ways is what our experts are predicting for global auto production as well as global steel production, big picture of those two things is that we expect to see relatively flat, maybe modest growth in automotive production.

The major services LMC and IHS are still predicting maybe slight growth in global auto production and that’s kind of what we are tied to. Same with steel, we are talking probably a new order of maybe for steel 1%, maybe a little over 1% for growth. So we are going to be in definitely lower growth businesses.

The trends I’ve seen mainly in the automotive sector. Of course, automotive was much -- was higher in the first half of '18 last year versus the second half.

So, the comparisons that we expect that I’ve seen and people are projecting for auto production are negative comparisons in the first half of the year, but then as we go into the second half of the year, expecting to see that turn around in the second half of the year be higher in production versus the second half of '18..

Okay. Thank you very much..

Thanks, Dan..

Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question..

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

Good morning, Jon..

Mike, the commentary regarding the Houghton close within a few months. Is that any -- is there any change from when you last spoke about that? I think the last time it was smack in the middle of the government shutdown.

To that end, sooner than anticipated and did it pick back up where you thought it would?.

We didn't know exactly where the government shutdown would end or anything. But, so, yes, but I would say that it kind of progressed longer than we had expected. So we didn’t know how long that would last. And so, the majority of [technical difficulty] where we couldn't make really any progress because the government was shutdown.

Once they started up, it takes -- took a little while to get back into the discussions and -- but we picked up where we need to be. We are having productive discussions with the FTC. So I feel we’re -- have made progress since let's [technical difficulty] last announcement on January 8.

But -- and I still think we get regulatory approval and close within the next few months..

Okay, great. Thank you. And then, Mary what are the total Houghton combination expenses you are planning for in 2019? And maybe if you could give it by quarter, that will be helpful too..

Really depends on when exactly we close, Jon. I think what we'd say is, from beginning in 2019 through close, we expect the expenses to total in the $25 million to $30 million area..

Okay, great. And then finally, Mike, you had a press release about an investment in India, a new facility.

Is that a major investment? What are your expectations there? Is there any significant change to your capital investment strategy?.

No, that’s been built and we probably touched on it a little bit maybe over the past couple of years in our capital expenditure discussions. But it's a relatively lower cost part of the world to build a facility. So we are very happy that we’ve an additional facility now, that's really on the West Coast or West part of India, I should say.

The other production facility that is more in the Western part of [technical difficulty] like I said, [technical difficulty] comments that India was -- we’ve -- we are seeing good volume growth in India and we think that will be a continued area that especially in the kind of markets that we are in, steel, automotive and so forth that that will continue to grow very well and that’s why I think it was over a year-ago, December of '17 when we [technical difficulty] very happy now to have a 100% of everything [technical difficulty]..

Great. Thanks a lot, guys..

Thank you, Jon..

Thank you. Our next question comes from the line of Garo Norian with Palisade Capital Management. Please proceed with your question..

Good morning, guys.

Just wanted to circle back to the manufacturing cost and just wanted to make sure, was there any impact to customers through the challenges that you had?.

No, no, Garo..

Okay, great.

And then, looking through the segment information in 10-K, it looks like there was a pretty good increase in the year-over-year non-operating charges and I was wondering what the primary drivers of that increase were?.

Most of that is compensation related, incentive compensation related..

Got it. Great. Thank you..

Thanks, Garo..

Thank you. [Operator Instructions] Our next question comes from the line of Rosemarie Morbelli with G. Research. Please proceed with your question..

Thank you. Good morning, everyone..

Good morning..

Regarding the automotive production, you are expecting second half to be stronger than the first half just because of easier comparisons or what do you expect in terms of production second half versus first half? Are you seeing the demand or the production rather increases -- increasing some data aspects [ph]?.

I really don’t have that information right in front of me. So, I can't really tell you if it's going to be the exact production stuff. All I can point to is, all we look at is the IHS and the LMC data, which is relatively consistent [technical difficulty] just point you to that to give more information..

Okay, thanks.

And then since I’m somewhat new to the story, what is behind your ability to gain share? Is it your technology, is it the service, is it that you're competing with small companies, I suppose -- I mean, excluding Houghton, can you give me a better feel for what is happening there?.

Yes, we’ve had a pretty long track record now, continually growing above our base markets and if you look at over the past 8, 9, 10 years now, we’ve been growing pretty consistently this 2% to 4% over the markets. And I think that kind of gives back to our business model for a heavy service oriented and provide solutions to our customers.

So when they have issues with the current supplier and that supplier could be really any size and they have problems, we will generally get an opportunity to help them, solve their problems. And once we get that opportunity to help them and get a trial to solve their solutions, we generally keep that piece of business.

So, I think it just goes back to our customer intimacy business model and our heavy service orientation and our ability to solve customer issues..

Okay. Thank you.

And if you -- Mary, do you have the CapEx estimate for 2019?.

What -- generally what we say is our CapEx runs in that $10 million to $12 million a year range pretty consistently and we'd not expect anything different in this year..

Okay. Thank you..

Thank you..

Thank you..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will turn the floor back to Mr. Barry for any final comments..

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

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

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