Greetings, and welcome to the Quaker Houghton Third 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 Houghton. Thank you. Mr. Barry, you may begin..

Good morning, everyone. Joining me today are Mary Hall, our CFO; Joe Berquist, our Chief Strategy Officer as well as our Head of Global Specialty Businesses and Shane Hostetter, our Head of Finance and Chief Accounting Officer. We have slides for our conference call.

You can find them in the investor relations section of our website at www.quackerhouhgton.com. Our last conference call was August 2, which was our first full day as Quaker Houghton. And now we've recently passed the 100-day mark and I can certainly attest it's been a fascinating 100-day period.

Today, I want to make some comments from both the perspective of our external environment as well as my observations on our initial days as Quaker Houghton. So let me start it off now with some remarks about the external environment and our third quarter results.

At a high level, our sales were down 7% with lower volumes and FX being the major drivers, which is very similar to the second quarter. Overall, our volumes were down 4% and foreign exchange negatively impacted sales by 2%.

Please note as I refer to these numbers, I'm being consistent with our reported financials in our new segments and how we are treating the additional Houghton sales as combination related and outside of these volume metrics.

However, we also provided pro forma information in our slides which include 2018 and 2019 for the third quarter year-to-date and trailing twelve month. When looking at the Q3 pro forma comparison, it also showed sales being down 7% with similar negative impacts due to lower volumes and foreign exchange.

So, our story is consistent no matter if you look at our reported financials or the pro forma financials. As we started out the quarter, our July performance was good and consistent with our previous expectations.

However, we saw a weaker than expected August and September compared to our original expectations, which included Q3 somewhat improving based on customer feedback and the information we had in July.

The declines in the quarter were due to a weaker automotive demand globally, and generally weaker industrial environment in most places of the world, lower steel production in the areas of steel where most of our products are used, and some country specific issues like India, where we saw a significant unexpected slowdown in industrial production.

In addition, we continue to see some customer inventory corrections in their markets. So, while we originally expected relatively weak conditions to continue, actual conditions ended up even weaker than expected. So, we asked ourselves when we saw these declines, were we losing market share.

We have gone through a customer by customer analysis to see what our gains and losses and market share were at the customer and product level.

This analysis continues to show that we are taking share in the marketplace as our overall organic volume growth due to share gains for Q3 2019 versus Q3 2018 was approximately 2%, and we saw these market share gains in all regions, and especially in Asia Pacific. And there were other positives in the quarter as well.

We continued to perform well in the areas that we can control which helped offset market challenges including continue to take share like I just talked about, keeping our gross margins at appropriate target levels, controlling our operating expenses, and executing on our cost synergies.

Doing this helped enable us to have a good third quarter pro forma adjusted EBITDA of 61 million, which is a 3% increase from the third quarter last year despite the volume declines. I now want to share some comments about how we have done in the first 100 days as a combined company.

I traveled to many of our locations globally and got to meet many new colleagues and business leaders. Some key takeaways for me were; one, the fit and culture between the two companies feels very good. We recently had a Top 100 leadership meeting as we set our priorities for Quaker Houghton.

And during our discussions, it was difficult to tell legacy-Quaker from legacy-Houghton leaders.

Our working together on integration planning for 28 months during the regulatory approval process really helped, and we have spent a great deal of time and energy both pre and post close on creating our core values and the kind of culture we want, and this has been paying off.

Second, I also got visibility into a number of strategic commercial initiatives that legacy-Houghton had been working on. We as competitors could not share this prior to being combined. I am very excited about what I have learned.

One example of an initiative that I found very promising was the equipment solutions that Houghton was working on as an addition to their offerings to customers. I believe this can have a great deal of traction for Quaker Houghton down the road. And third, with regard to the integration process, this has gone well.

While in early days, we have announced the vast majority of our organizational structures, consolidated our global headquarters in the Philadelphia area, and have begun the many tasks involved in achieving both the cost synergies and cross-selling synergies.

We have a dedicated team to lead this integration effort and ensure we are doing this well with always our number one goal in mind which is keeping our customers satisfied. So after the first 100 days, we are on track with all aspects of our integration. Another achievement I'm excited about is our acquisition of Norman Hay on October 1.

We believe this is a very strategic acquisition in our existing markets and also takes us into areas with higher inherent growth characteristics. In addition, we were able to purchase this business at an attractive price of approximately seven times EBITDA.

We are keeping this business separate rather than integrating at this time due to concentrating our efforts on the larger Quaker Houghton combination integration. Looking forward over the next quarter and into early next year, we continue to see markets as generally weak. It's really hard to tell exactly if we're at the bottom now.

Our current thoughts are that we are near the bottom, and we don't expect to see major market changes up or down for the next couple of quarters. As far as our EBITDA growth is concerned, our October 18 guidance still holds for 2019.

And in 2020, we do expect good EBITDA growth due to the estimated incremental cost synergies of approximately 30 million continuing to take market share and a full-year benefit of Norman Hay. So overall, it's been a good start to our newly combined company, and I continue to be excited about our future.

Despite the weak market conditions we are currently experiencing. I'm even more positive now about the future as we see the early benefits of combining our two companies and then adding Norman Hay. All the two-year projections we mentioned during our last calls still apply.

By August 2021, we expect our adjusted EBITDA to be over $300 million on a going-forward basis. Our net-debt-to-adjusted-EBITDA to be under 2.5 times and we expect to be growing above the market by 2% to 4% on our entire revenue base.

In closing, I want to thank all of our colleagues at Quaker Houghton whose dedication and expertise helps to create value for our customers, and shareholders, and differentiate us in the marketplace.

People are everything in our business, and by far our most valuable asset, and I'm very happy with our Quaker Houghton team and what we will be able to accomplish for our customers going forward. And that concludes my prepared remarks. I'll hand it over to Mary Hall so that she can review some of the key financials for you, for the quarter..

Thank you, Mike and good morning all. As you may have gathered from Mike's comments, we have a lot to talk about today.

Before I begin however, I need to remind you that comments made during this call include forward-looking statements, which were based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially.

For discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and Form 10-Q 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 we provide certain information including non-GAAP earnings per diluted share, non-GAAP operating earnings and adjusted EBITDA and certain pro forma items in an effort to provide shareholders with better visibility into core operations, excluding certain items which we believe do not reflect our core operating performance.

Reconciliations are provided in chart 13 through 26 of this Investor deck and some of them are in yesterday's earnings release in Form 10-Q as well. So as you all know by now, we closed the combination with Houghton on August 1st, 2019.

If one could pick the timing for close of a major transaction, one would pick the first day of a quarter, at least all accountants would. However, given our long awaited close, we are happy with a first of the month timing, but it does make things a bit messy.

We strive for clarity and transparency, so we've included in the deck both actual results and certain information such as sales revenue and adjusted EBITDA on a pro forma basis, as if we had been combined with Houghton throughout the periods presented.

We hope this provides more insight to the core operations of the combined company now, and going forward. So let me begin with actual results, which include two months of Houghton in Q3. I would refer you to the financial highlights slide on page five.

As Mike discussed, in Q3, we continued to face headwinds from the stronger dollar and continuing weakness in industrial production, generally across all of our end markets, but especially automotive.

As a result, net sales of approximately 325 million although up year-over-year due to the inclusion of Houghton would have been down 7% year-over-year excluding the two months of Houghton. This result is in line with our updated guidance issued on October 18.

Our actual reported gross margin of 32.3% includes a one-time expense of $10.2 million due to the sale of Houghton’s inventory in the third quarter that had been adjusted to its fair value in purchase accounting. Excluding this onetime expense, our gross margin would have been 35.5% as compared to 36.5% in the third quarter last year.

This result is in line with our prior guidance that upon close and before synergy capture, our gross margin would be in the 35% area as Houghton's gross margins are generally a bit lower than legacy-Quakers due in part to the accounting treatment for chemical management services also called FLUIDCARE and differences, some differences in product mix.

Our operating loss in the third quarter of $14.5 million includes a restructuring charge of $24 million and combination related expenses of $14.7 million.

The restructuring charge reflects the start of our program to achieve the expected cost synergies and the 24 million is our current estimate of primarily severance related expenses, we expect to incur over the next 12 to 24 months.

We still expect to incur total charges of approximately one times our synergy estimate as we've said earlier, which will be recorded as they are incurred.

Excluding the restructuring charge and the combination related expenses, our non-GAAP operating income increased to 34.5 million from 27.8 million in the prior year primarily due to the inclusion of Houghton.

Our non-GAAP operating margin of 10.6% is down from prior year’s 12.5% due primarily to the lower gross margin discussed earlier and a slight increase in SG&A as a percentage of sales due to the decline in sales. Our reported effective tax rate for Q3 was 27.6%.

Excluding the impact of all acquisition related charges, and other non-core items, we estimate that our effective tax rate for Q3 would have been approximately 20%. As we noted in our October 18th update to the quarter, in the current quarter we received the renewal of a concessionary tax rate at one of our non-U.S.

subsidiaries that we originally expected to receive in Q4. As a result, the effective tax rate guidance we gave you in our Q2 earnings call for quarters three and four has changed. Specifically, we said earlier, we expected an effective tax rate of 25% to 27% in Q3 and 19% to 21% percent in Q4.

With a beneficial tax rate actually received in Q3, the 20% effective tax rate estimate is in line with expectations. It's just one quarter earlier. Also, we now expect our Q4 effective tax rate to be in the range of 23% to 25% which would give us a full year effective tax rate of 22% to 24%.

Our adjusted EBITDA margin of 15.8% showed a nice improvement from 14.9% last year primarily due to FX transaction gains year-over-year which are included in other income expense and the inclusion post combination of equity earnings from the Korea J.B. which shows up below operating income.

Our non-GAAP EPS of $1.56 declined compared to $1.63 last year primarily due to the impact of the 4.3 million shares issued as part of the closing consideration, but still ahead of the consensus estimate of $1.41.

As I mentioned at the beginning of my remarks, we've included certain pro forma numbers for sales and adjusted EBITDA to help provide insight to the core operating performance of the combined company. You can see these pro forma numbers on Slide six through eight, and we provide reconciliations in the appendix on slide 19 through 26.

As you can see, pro forma net sales showed the same 7% decline we discussed on an actuals basis earlier.

Pro forma adjusted EBITDA improved 3% year-over-year to approximately $61 million primarily attributed to an improvement in gross margin and FX transaction gains partially offset by lower volumes and negative impacts from foreign exchange translation.

On Chart nine, please note our net-debt-to adjusted trailing 12-months EBITDA at September 30 of 3.3 times improved versus the approximately 3.4 times we estimated on our August first close. Our leverage ticked up slightly to about 3.5 times after our Norman Hay acquisition as expected which closed on October 1st.

However, Norman Hay brings with it similar good cash flow characteristics to that of Quaker Houghton and our commitment to improving leverage to less than two and a half times within two years from close remains unchanged.

Our liquidity position is strong with about 400 million available through a combination of cash on hand and undrawn revolver capacity.

On Chart 9 and 10, please note that we've updated or affirmed certain information provided earlier regarding accounting adjustments and other items, including our estimate of the impact of conforming accounting policies and our estimates for depreciation and amortization, interest expense, CapEx and tax rates.

There are no material changes here these are updates or more in the nature of fine tuning. In summary, Q3 was a challenge.

The operating environment was more difficult than we anticipated when we were looking forward in July, and in the midst of navigating unexpectedly choppy waters, we closed on our combination that doubled the size of the company, and we did it mid-quarter.

While sales were down through a lot of hard work across the company, we delivered on our gross margin expectations, improved our adjusted EBITDA margin, and took a good first step in improving leverage. It's early days.

We still have a lot more work to do, but we're confident that we are on track to deliver on our commitments regarding synergies, leverage and growth. These are key topics among others that we will speak to at our Investor Day scheduled for December 11th in New York at the New York Stock Exchange, and we hope to see you there.

If you've not yet received an invitation and would like to attend, please let me know. Thank you for your interest in Quaker Houghton, and now I’ll turn it back over to you Mike..

Thanks, Mary. We'll now open it up for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question here from the line of Edward Marshall with Sidoti & Company. Please proceed with your question..

Hi there. Good morning..

Morning, Ed..

So I wanted to talk about. We looked at the organic growth down about 7. I wanted to make sure that Houghton was trending about the same, was there any differences and maybe their end markets that you'd like to share with us at this time..

No major differences really. What we was between the two companies was pretty similar impacts between the different types of businesses that we have..

Okay. You mentioned about 2% to 4% market share gains and that's what I think historically Quaker has done. You talked about several initiatives that Houghton might be bringing on.

I'm just curious if overtime you expect that number to increase as far as market share gains over the market?.

Yes. I mean the one thing we've -- I guess committed to Ed and trying to set expectations [indiscernible] like Quaker historically has been growing above the market, 2% to 4%.

If you look at what we did this quarter as a combined company, we did 2% and we said it’d probably get back to that 2% to 4% after a year as we get really geared up with a lot of the cross-selling initiatives that we have and that takes a little bit of time.

So I do -- I do feel confident that on the entire base of revenue, we'll be consistently in that 2% to 4% one year from now after all the things are kind of in place relative to cross-selling synergies, and could it be higher, it’s always potentially for that, but for right now I’m just – we’re going to stay with what we said about continually growing 2% to 4% over the market..

Got it. And in the release you talked about 2 million in synergies. I just want to make sure that's part of the 5 million that you expect this year, and do you still expect that additional 3 million? And Mike in your prepared remarks, you said 30 million in 2020.

I just want to make sure that's the 2020 components and it’s incremental over that 5, so it's combined 35 million over the first, I think two years versus the first year and a half I think which is the original doc. Okay..

Yes. You're correct Ed, and both of those the -- we would expect to have three or so in the fourth quarter, and then we would have an incremental 30 next year..

Got it. And did the change in the business segments, I guess the global specialty business, it looks like the majority of that is a traditional Quaker business. I think there was about 12 of the 50 in from Houghton.

Would you provide you know the pro forma for the segments for 2Q, 1Q as we go forward, or how should I– how should I think about kind of adjusting for that?.

Yes, this is Shane Hostetter. So the amounts, the breakout like you said is obviously there is components between Houghton and Quaker.

I would say, excuse me I would say your estimate is a little light on the Houghton side, but we won't be disclosing the individual components between Houghton legacy versus Quaker legacy within the global specialty businesses.

We will be obviously disclosing the four segments going forward on an apples-to-apples basis from quarter-to-quarter basis, but we also will not provide pro forma items, the legacy businesses from prior year are just Quacker centric..

Got you. So we'll see the true up as we move forward each quarter that reports….

That's somewhat correct..

Okay. All right. Thank you guys, appreciate it..

Thank you, 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..

I was wondering you mentioned the 2 million synergies and your expectation that you would get another 3 million or so in Q4. We're going to get some contribution from Norman Hay in the fourth quarter.

Just curious as to why we would be moving from $61 million pro forma EBITDA number to something that's lower than that given that we should be getting at least a kind of a low-to-mid single-digit million dollar EBITDA contribution for Norman Hay and those incremental synergies..

At a high level, it's really because I mean this is just our best forecast that we have from our businesses. There's certainly some components in there, like foreign exchange transaction that have kind of the lower operating income that, that was a positive this month, but we wouldn’t expect that going forward.

There could be a little bit because we only had two months of Houghton in the third quarter. That probably put a little upward pressure a little bit on the gross margin. We expect to see probably some seasonality in our business.

You know, one of the things that's really hard for us Mike to forecast is like a month of December, there can be seasonality. We don't know.

Given the weak markets -- there's you know we're hearing some rumblings at some places that there could be more extended shutdowns over the holidays, that maybe we normally see, but it's really kind of too early to tell on a lot of that. So it's just tough sometimes in these choppy markets to get a very precise forecast.

So that's the best we have at this point, but I'm certainly hoping it's higher..

Got it. And maybe in terms of those the extended shut downs. I'm assuming that you saw some of that activity take place in Q3.

Were there specific regions or end markets where that activity was most pronounced in Q3?.

I don't think we saw too much from a customer perspective around extended shutdowns. We did see certainly some lower production at our customer level, because maybe things in their supply chain or their customer chains as far as inventory corrections. But we didn’t see any too much from an extended shutdown.

We did see you know the beginning effects for example on the early days on the GM strike in September, they are a customer of ours. So you had some certain things like that..

And then wanted to also ask about the raw material versus pricing situation. Obviously you guys had pricing down in the quarter overall. My assumption is that that's starting to follow what's going on with raw material trends.

So is that true? And then my other question regarding that is has Houghton seen similar trends around its pricing, or often can be the case a company that's about to be acquired can maybe lose some of its pricing discipline.

So do you feel like maybe there's some additional work to do on that legacy-Houghton portion of the business from a pricing standpoint?.

Sure. You know -- when I think about pricing right now, I think our raw materials I feel we're in a very stable raw material environment and therefore we're generally on a pretty stable pricing environment. So I don't think of our -- think of what we're in a mode of declining prices right now.

I think it's relatively stable, so one of the things there could be mix effects in there too, that are causing this. And as far as legacy Houghton they have been doing price increases overtime and so forth. So there's there's not a -- you know it's not that I don't think nothing's been done or anything like that. So I think, that's fine.

Of course one of the things that we're going to be doing that, we've been consistently doing and the legacy-Quaker business is doing the EVA analysis, and we've been doing that for the past 12 years and that we kind of find that helps points us in the right direction of areas whether it's customer profitability or product line profitability that can be approved or maybe don't have adequate returns, we will be doing that analysis in 2020 on the legacy-Houghton business or the entire Quaker Houghton platforms.

So hopefully that will continue to be a benefit for us going forward..

Okay. And then I had a question on the Asia Pacific business. You've had two quarters now where volumes were lower. If I think about Q4 of 2018 and Q1 of 2019 both of those quarters saw good volume performance even as we were seeing markets deteriorating around you.

So given those challenging comps, is it fair to say that we should expect volumes to continue to decline in Q4 and maybe even into Q1? And maybe can you give a little bit of color in there also about where you were -- you mentioned India had an unexpected decline.

Can you, can you talk about what you were seeing there?.

Sure. Yes it's hard to tell. I mean, when I think about Asia Pacific for us, they continue to be very optimistic. And I feel their overall performance has been really strong.

So yes, the volumes were down 4% but in context of some of the like automotive markets in China for example, in double digits being that it's I think they've been performing really well and like I said in my comments where we kind of looked at where we're getting share gains we're gaining share gains everywhere in the world, but especially in Asia Pacific.

So I really feel our Asia-Pacific is continuing to do well. So it really will depend upon how things start. If things start to rebound, I think in automotive in China or not, there's talk of more incentives in place for that but who knows. So, I think that will really depend.

I think we'll always do better than the market, how the market is growing there. India in particular that was we did see some declines there that were somewhat unexpected because of what's been happening relative to industrial production there.

But again, the feedback we've been getting from our leaders there is that the government is putting in place some incentives and things in place to improve that and, they expect to see some kind of a rebound going forward there. So I don't – and actually I think that's going to be a long term thing. But it's certainly hit us in the third quarter..

All right. Thanks. And then one just kind of quick housekeeping keeping question, the inventory purchase accounting adjustment that you made, you noted there was a gross margin impact or gross profit impact of about $10 million.

Did that also fall down the P&L and impact the operating profit and EBITDA as well or was there an offset somewhere else?.

No Mike, this impacted operating profit as well as EBITDA..

All right. Thanks very much..

Thanks Mike..

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

Good morning thank you for taking my questions.

Maybe if you could start, I know December is a little bit tough to forecast, but could you discuss on a sequential basis if October and November were stable or weaker than September and if any end markets recovered or stood out otherwise?.

I’d Just say October was fine and was consistent with our expectations. November is really hard to follow. So still, it's kind of early days here and in November and like you said December is going to be the one that's really more of a wildcard..

Okay. Got it.

What -- was October weaker than September, though, kind of with a -- what I was getting at?.

Yes, I think all I can say is October was fine. We weren’t disappointed. We thought it was that October it was consistent with our expectations..

Okay. Got it.

And did you discuss your gross margin expectations in Q4 and what are the selling price and mix and input price and synergy components of that?.

No. We just like -- we don't generally get specific guidance around that. But you've heard….

35% is what you know we've said until the synergies again begin to kick in. And so again, staying in that 35% area, that’s the guidance we have said for the second half of the year and we’re sticking with that..

Okay, great. And then just looking in the slides why does your CapEx come off half percent two years into the integration.

Is there some investment you're turning off, or any other color you could provide on that?.

I think we were thinking that normally both companies were around 1.5% of sales for CapEx and then we said you know in the next two years, we're going to begin a number of optimization projects in our supply chain and how we do things with different sites.

And that will require some additional capital investment to optimize that supply chain in that two year period. And then once that's over, we expect that to go down towards more normal level of 1.5%..

Okay. Great. Thanks. Got a last one from me, Mike. You’ve mentioned a couple of times how excited you are about the equipment business and how and then my understanding is that Norman Hay actually brings something to the table on that front as well.

Are you able to tell us what exactly that opportunity might look like from a revenue or margin standpoint, and you know growth rate and if you need to wait for a bit more integration before Norman Hay can contribute to that effort.

Yes. No I don't see it as a big, as more as a revenue thing, and certainly, will there be some revenue and then this whole -- it early days in this whole effort.

But what I guess what excites me is I really you know feel it's part of our offering it can be continued to be a differentiator as we go to customers not only providing them with the kind of products we can provide, and the kind of service we can provide them, but also as part of that equipment, as part of that delivery of things that we can provide.

I just think that will continue to help us with our differentiation in the competitive environment..

Okay great. Thank you..

Thank you, John..

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

Good morning. Most of my questions have been answered, but I guess, two things. One on the Houghton side, are there any parts of their end market exposure that would improve with a lag to the turn in activity in end market -- in the end markets or much like Quaker is their entire business basically coincident with the end markets..

I think it's, most of the business that they have is very consistent with that, with Quakers legacy business. I think they do have other type of businesses like the offshore business that would have a different set of characteristics to it that you know as the price of oil goes higher and so forth. That could pick up along with that.

But other than that, I can't, I can't think of the business as relatively consistent with what we do..

And then secondly with respect to sort of the operational rhythm at their -- on their side of the business, is there anything that they were doing differently from Quaker in terms of either inventory management or price indexing, price negotiations with customers like Quaker could benefit from? Or is it mostly sort of halting -- adopting the Quaker methodologies?.

I think both companies actually did a good job of managing price. So I don't, I don't think there's a lot to do there. You didn't mention -- inventory and management maybe and stuff like that.

You know we are – have been very happy and impressed with what we've learned about their working capital management practices and just manufacturing in general that I think legacy Quaker can benefit from. So I think both companies do it, do things generally well in the pricing area.

And I think you know we'll continue to keep track, best practices into place to do that going forward. And that's going to be really important.

I can't tell you how much effort and conversations we have around margin management and maintain and are making sure that as we get these benefits from our supply chain optimization procurement benefits that we expect to get and making sure we keep all those there's been a lot of discussions and processes put around to ensure we got good.

We're going to get the kind of margin and expansion that we expect to see..

Okay. Thank you..

Thanks, Laurence..

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

Okay. Given that there are no other questions; we’ll end the conference call now. And I want to thank all of you for your interest today. We are pleased with the finalization of our combination with Houghton and I'm confident in the future of Quaker Houghton. Our next conference call for the fourth quarter will be in late February or early March.

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

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