Greetings, and welcome to the Quaker Chemical Corporation First Quarter 2019 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..

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 first quarter.

As you can see our sales and earnings were essentially flat with last year, which is now how we typically perform as we strive to consistently grow these metrics every quarter. However, as you get behind the numbers you can see there were two items that have dramatically impacted our performance.

One is that our underlying industrial market did not grow. Global auto production declined by over 6% and steel increased by 2%. These are two largest end markets. We estimate that our overall underlying market we served declined by approximately 1%.

The other major headwind we faced was foreign exchange which negatively impacted sales by 5% and earnings by 4%. So we had to fight through two major headwinds to have results which were similar to last year. I am pleased to say that we offset these headwinds by one, continuing to take market share and growing more than market.

And two, continuing to make progress with our gross margin. Let me now talk more about both of these and I'll start with our market share gains. As I mentioned earlier, we estimate our underlying market declined by approximately 1%. Yet our volumes grew by 3%.

So this difference of approximately 4% higher than the market is indicative of our market share gain. This is consistent with our past performance where we have consistently grown above the market by 2% to 4%. It just so happens in this quarter where we are closer to the higher end of this range.

Our biggest volume gains were in Asia Pacific where we grew by 11%. And South America where we grew our volumes by 6%. In the US and Europe, we were essentially flat in volume growth but considering the market circumstances especially in Europe, this is a good result. The other area where we made progress is in our gross margin.

We sequentially improved the gross margins from 35.4% in Q4 to 35.9% in Q1. We also are expecting to see further gross margin expansion in Q2 again to the low to mid 36% range.

So I expect us to continue to tick market share and make incremental progress with our gross margins, which will help us offset the expected continuation of weakness in underlying industrial markets as well as foreign exchange headwinds.

While we expect Q2 to be a challenging quarter as a year-over-year auto production is still projected to decline, we do project that our comparisons versus prior year will improve in the second half of the year.

And overall for the year, we expect 2019 to be another good year for Quaker and expect year-over-year growth in non-GAAP earnings and adjusted EBITDA despite the currency headwinds and low growth in our base markets of automotive and steel. I would now like to make a few remarks about our upcoming combination with Houghton.

We continue to make progress with getting regulatory approval. Let me now give you some examples of items that are happening and have happened since our last update in early March to provide you some additional insight to our progress. We have finalized an agreement with a buyer to purchase the divested product lines.

Given this agreement is in place, the European Commission which gave us conditional approval in December can now proceed to give us final approval which we expect over the next few weeks. And since our last update, we have also made good progress with our discussions with the FTC.

We have worked with the FTC to identify and an independent consultant who has significant experience in industry including the products we will divest in North America. That consultant is currently assessing a divestiture package for completeness.

We expect the consultant to be approved by the FTC to serve as the interim monitor to ensure that post-closing we comply with our obligations for the consent decree in process having a monitor in place is common. We also understand that the FTC is preparing the consent decree that once completed will be sent to the FTC commissioners for approval.

So we are seeing progress in this process with the FTC. Based on everything we know, it is our best estimate that we will get FTC approval and be able to close in a couple months.

As I said in the past, we are excited about this combination as it will double the size of the company, enable continued above market growth for 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. 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 am happy with our Quaker team and continue to be excited about the upcoming combination with the Houghton 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 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 and in an effort to provide shareholders with better visibility into Quaker's core operations, excluding certain items that we believe do not reflect our core operating performance.

Beginning with this Q1, 2019 reporting period, Quaker has expanded its non-GAAP information to include non-GAAP operating income and non-GAAP net income in order to provide additional visibility into core operations.

In addition, we have changed our EBITDA reconciliation to include interest expense net of interest income versus including growth interest expense, which was our prior norm. Also this quarter, we began including the non-service component of pension related costs in our non-GAAP reconciliations.

These reconciliations are provided in charts 10 through 13 of this investor deck, and they're also in yesterday's earnings release and filing a Form 10-Q with the SEC. Please note that all prior periods have been recast so that the numbers are comparable.

Similar to last quarter Quaker's performance continued to demonstrate both resilience and consistency despite significant end market challenges with automotive showing continued weakness from Q4 into Q1 of this year and continuing FX headwinds that surfaced late in Q2 of last year.

In the face of these challenges, Quaker delivered non-GAAP earnings per diluted share of $1.41 which is comparable to Q1, 2018 despite the negative impact of foreign exchange on earnings of approximately $0.06 per diluted share. Please refer now to chart 4 and 5 as I review our Q1 financial performance in more detail.

Net sales of $211.2 million were down slightly compared to Q1 of last year as the benefits from volume growth of 3% and price mix of 1% were offset by the negative impact from foreign currency translation of approximately 5% or $9.6 million. All of the FX rates in our markets across the globe are unfavorable compared to Q1 last year.

The primary drivers of the negative impact were the EURO which depreciated 7% versus the Dollar. The Chinese RMB which depreciated 6% versus the Dollar and the Brazilian Real which depreciated 16% versus the Dollar. Our gross margin of 35.9% improved year-over-year and sequentially in line with our expectations.

For Q2, we expect our gross margin to be in the low to mid 36% range. Operating income and operating margin were down slightly despite the higher gross margin due to higher SG&A this quarter versus a year ago related primarily to higher labor related costs, including annual merit increases and professional fees.

The increase in professional fees was roughly half of the increase in SG&A and is primarily related to a legal action we are pursuing to protect certain technology from usage by others.

As a result of the slight decrease in operating income on flat net sales, adjusted EBITDA and adjusted EBITDA margin were $29.6 million and 14% respectively versus $30.9 million and 14.6% last year.

Our effective tax rate of 26.8% compares favorably to last year's 29.8% and both rates include the impact of certain non-deductible Houghton expenses and other non-GAAP items. Excluding these expenses in both periods, we estimate our effective tax rates would have been approximately 24% and 26% respectively.

For the full year 2019, we expect our ETR to be in the range 22% to 24%. This range reflects our expectation of receiving a concessionary tax rate of 15% versus a statutory rate of 25% in one of our non-US subsidiaries towards the end of this year, which will benefit the full-year rate.

The lower 15% rate was available to the company in each quarter of 2018. Because of the expected timing of receipt of the 15% rate late this year, we expect our Q2 and Q3 effective tax rates to be in the 24% to 26% range. The company's liquidity and balance sheet remains strong with a net cash position of $59.6 million versus $17.2 million last year.

Also during Q1 of 2019, Quaker repaid the outstanding borrowing under its revolving credit facility of $24 million. Turning now to chart 6, here you can see the increase in volumes I mentioned earlier up 3% year-over-year despite the estimated overall 1% decline in our key end markets that Mike discussed.

In chart 7, we can see the sequential and year-over-year improvement in gross margin. As I mentioned earlier, we expect our gross margin will trend upward in Q2 to the low to mid 36% area. Chart 8 shows our positive trend of adjusted EBITDA over time which we expect to continue in 2019.

Chart 9 depicts our cash and debt balances and you can see the continued balance sheet discipline and liquidity strength of Quaker. In summary, Quaker continues to deliver good earnings and cash flow despite various market challenges.

We continue to expect the market share gains and leveraging of our past acquisitions will drive above market growth and expect comparisons year-over-year to be more favorable in the second half of this year. In addition, we look forward to closing Houghton combination in the next couple of months.

As always, we will continue to focus on delivering the solid and consistent performance that our shareholders expect of Quaker. Thank you all for your interest in Quaker. And now back to you Mike..

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

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

Hi, Mike. Hi, Mary. How are you? Good morning. So I wanted to start with Asia looking at the volume growth up rather nicely kind of hearing from other groups about China specifically and the weakness they might have seen in the past quarter or two.

I'm curious if you can elaborate where the volume is coming? What you're doing successfully to kind of get that volume to where it needs to be? Thanks..

Sure. Yes, it was a really good quarter for Asia Pacific. We had 11% volume growth in that region. It really a lot of that volume growth came from China and Southeast Asia. They were certainly biggest stars of this area for this quarter.

If you look at the underlying markets there, steel production was continued to do well there, is really one of the bright spots in the world for steel production. It's hard to get a perfect estimate because of the thing with their shutting down on the older mills. But we estimate that overall steel production was around 5%.

And then auto production, of course was the other direction. We saw auto production being down depending what kind of service you looked at maybe 10% to 13%. So and we definitely saw that downturn in the auto market.

So really what we have here is, you have some good underlying growth in steel, but the majority of what it is, is share gains and those share gains come from a variety of places in all our different areas of product lines. It could come from new technologies, as well as just getting new pieces of business in our base markets.

So it's share gains is really the major part of that gain..

Are you doing anything specific that's to Asia in Asia Pacific that you're not doing in other parts of the world?.

No. Everything we're doing is --everything, all the different product lines and all our different approaches to our markets are consistent everywhere around the world..

Got it. Switching over to gross margins if I could for a second. Sometimes we see some supply issues with tightening of supply and higher prices that might eat into the gross margin profile as we move forward.

Do you see anything on the horizon that gives you kind of some concern as you look at your mix of inputs?.

Yes. Raw materials, there's something always going on raw material. It's been a relatively stable period past several quarters. So and there could definitely be potential uptick in a couple areas depending how crude has been trending upwards, so mineral oils could potentially have some pressure, additives is another area.

So it's--we expect that it could be a potential uptick based on what we see now. We may have to go out and get some prices increases again. It's really a normal course of business if raw materials do go up.

But based on everything we know right now we still believe we will see an upward sequential improvement in our gross margins to the low-to-mid 36%..

Got it. And then the final question for me, I'm looking at what auto, OEMs, what auto suppliers are telling us about the second half and reporting to a second half recovery new model rollouts et cetera.

Listening to your guidance, I think you were referring kind of around the FX component of the second half recovery and the rebalancing of that FX on a comp basis, but are you also seeing or hearing from customers that they're looking to kind of draw more material as we move forward with the second half recovery in auto..

Yes. Sorry, yes, we did actually mean that we felt our comparisons both in the underlying markets that we're in specifically auto will turn around and as well as FX. And a little more color on that on the auto side. I mean if you recall last year auto really started being negatively impacted in the third quarter and fourth quarter of last year.

And so now it kind of is hitting, it's getting close to hitting I would hope the bottom there but I think when all the projections we see in the auto industry seeing that those year-over-year comparisons seem to go positive in the third quarter and fourth quarter, but it's still negative in the second quarter..

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

Good morning. Thanks for taking my questions. I missed a little bit at the beginning there. So I apologize if I'm repeating, I ask you repeat something.

Did the 4% share gain that you exhibit in the quarter how sustainable is that? Was that just better execution on your end? Was it a function of the weaker competition or something going on because of the weaker end markets and volumes?.

Well, one of the things I say a consistent message we've had over time is almost for the past decade now, we've kind of consistently grown about 2% to 4% above the market. And we said we still expect that to continue here and we just did that again. Just so we were at the higher end of that range.

As you pick up pieces of business a lot of what we're picking up now are things that were just given the sales cycle in our business. So it's hard to put how these things come in the course of a year, but certainly we're off to a really good start with our market share gains..

Good, thanks. Mike and just any additional color on the timing of Houghton and I know you gave some more detail, but compared to your prior commentary of a few months.

How does this compare to the expected closing time? Is it about the same or is there just a little bit more delay going on?.

Yes. I think we were trying to convey it's a shorter timeframe. So we started using it, it's hard to predict so it's hard to say on this date we expect to close because if the process just also work that way and we can't control that but based -- before we said it's going to be a few months and now we're saying a couple months.

So to me that's shorter time duration than what we have, so it is an improvement..

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

Hi, good morning. As you've gone through this period of raw material volatility over the past several quarters, you guys seem to have managed pretty well. I was wondering if you can just talk about maybe how your approach to pricing has evolved over the past few years or the past several years.

And maybe talk about whether there are some other factors that are helping your gross margin things like mix or reformulations or I don't know, if there's a capacity utilization component to it..

That's a great question and I think there's all -- there's a tremendous amount of component. Certainly our pricing philosophy has always been to recover raw materials. We have different kinds of contracts. We have contracts that are formula based with some customers and maybe make up about 25% of our business where they automatically adjust over time.

And then we have other contracts that are more negotiations happen as things evolve. But overall we feel we've been able to achieve price increases and maintain our market margins. I think it's-- so as you point out that there can be other factors as well. I mean we consistently look for ways of reducing our costs and improving that way.

Whether it's in our manufacturing facilities or whether it's through looking at different types of raw materials. But overall I think the major impact on our gross margin continues to be our raw materials and just doing a good job keeping our margin in the right place they need to be..

All right. And then I was curious for your thoughts on Europe and the trends that you're seeing there.

Just wondering if there are some markets that you look at that could be indicating some improvements or whether based on your conversations with customers you would expect the softness there to continue?.

It's a good question. Certainly right now as we look at our markets around the world, Europe is our most challenging environment. If you look what happened in the first quarter you see auto production dependent upon kind of what you believe were down 4% to 5%, and steel as well down 2% to 3%.

So our markets there have been challenging, happy to say our volumes were flat. Again, I think that's another good market indication despite the kind of things we were experiencing and seeing that we were able to take share in the marketplace and continue to have volume there.

And we expect that to kind of continue as far as our kind of share gains are about that and in the underlying market, it's hard for us to have really a great visibility on that. We expect maybe some improvement but it's just --it's hard for us to get clear visibility in Europe..

All right. And then last question for me is on the greases business.

You did a handful of deals in that space and I think those brought a pretty nice cross-selling opportunity, just worrying with in greases have we pretty much fully leveraged that cross-selling opportunity or there are still more growth opportunities to come?.

No. We believe there's still more opportunities to cross-sell. We've made good progress in the United States now that we've one of the acquisitions we made gave us a manufacturing site in Europe that will do well.

We're looking at investing and putting production in Asia and having it there, we have people on the ground there in all regions to help continue with the business development. So we think that it has a long ways to go. Again, it's a long sale cycle to this but we think it's good.

And again that's a good example to something when we finally combine what happened that we would have not another base set of sales and customers that we could help cross-sell Greece to..

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

Hi, guys. It's Dan Rizzo on for Laurence. How are you? You mentioned that you're expecting just based upon macro indicators that auto trends or auto production should pick up on the back half year.

I was wondering what the lead time is before you start seeing your orders pick up in front of when auto production picks up, what's the lag?.

I don't know the exact question. We're certainly in that front end of things when they're making engines, transmission, stamping bodies, and so forth. We're in the front part of that. So we will --we would definitely lag somewhat whether that's a month or two it's hard to know.

What -- we don't, our products we don't-- our customers generally don't carry a lot of inventory so you don't have too much of an impact there. So one thing start to pick up, but again remember things are going to be picking up we believe in the auto industry.

But a lot of the comparisons that we're talking about it's just you know 2018 in the second half was a pretty down period for the auto industry as well..

Right. You mentioned that SG&A cost will be ticked higher in the quarter for some -- for different reasons. I was wondering if that's going to be kind of trending for the next couple quarters..

We do not expect those particularly the legal costs that I refer too. We do not expect them to repeat in the same magnitude next quarter. End of Q&A.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Barry for any closing remarks..

Okay. Given there are 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 in the first quarter. And we continue to be confident in the future of Quaker Chemical. Our next conference call for the second quarter will be in late July or early August.

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. And have a wonderful day..