Greetings, and welcome to the Quaker Chemical Corporation Second Quarter 2015 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. I would now like to turn the conference over to your host, Mr. Michael Barry, Chairman, Chief Executive Officer and President for Quaker Chemical Corporation. Thank you. Mr. Barry, You may now begin.

Thank you, Rob. Good morning, everyone. Joining me today are Margo Loebl, our CFO; and Robert Traub, our General Counsel. After my comments, Margo 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 Web site at www.quakerchem.com. I’ll start it off now with some remarks about the second quarter. I’m pleased we have delivered another quarter of consistent earnings and strong cash flow, despite a variety of market challenges. We have accomplished this notwithstanding some significant changes in our external environment over the past several months, including a much stronger dollar against many of the world’s currencies, low oil prices and the impact that both of these had on regional steel production. Let me now talk about each of these in greater detail to give you a better perspective in which to evaluate our second quarter results. Foreign exchange rates negatively impacted our earnings by 8% and our revenue by 7% this quarter. So you can see that our earnings and revenue would have been shown pretty good growth if not for the exchange rate impact. Lower oil prices also impacted our results in several ways. On the plus side, we saw some expansion on our gross margins as there can be some lag effect between changes in our pricing and our raw material costs. On the other hand, our top line was negatively impacted since we did see some declines in our product pricing. On the demand side, we grew our volumes notwithstanding lower volumes from our tube and pipe product line due to lower oil and gas production. This negatively impacted our overall sales by approximately 1%. So lower oil prices impacted…

Thank you, Mike. Good morning, everyone. Before launching a financial review of the quarter, please note that Quaker does provide a non-GAAP earnings per share table in an effort to provide shareholders with visibility into Quaker’s operations, excluding certain items, which we believe do not reflect our core operations. Such tables is outlined in Chart 10 of the investor slides, yesterday’s earnings release and our Form 10-Q, also filed yesterday. Okay. As referenced in Chart 4 of the investor slides, Quaker’s second quarter 2015 includes the following Chief Financial Officer highlights. Let’s address highlights number one and number two; solid operating results drive quarterly non-GAAP earnings per diluted share of $1.15, up 4% from $1.11 in the prior year’s quarter. Negative impact of 9% per diluted share or 8% is due to foreign exchange. Quarterly sales are up 4% on volumes including recent acquisitions offset by 7% decline from foreign currency translation. Clearly, foreign currency translation continue to have a significant impact on the company’s reported and non-GAAP results, impacting the top and bottom lines, all summarized in the investor charts number 6 and number 10. As a reminder to you all, approximately 60% of Quaker’s business is outside of the U.S. and similar to other U.S.-based reporting entities with global footprints, the impact of fluctuations in foreign currency exchange rates is highly relevant. Quaker’s primary exposure relates to the translation of its results to U.S. GAAP. The impact of the strengthening U.S. dollar has turned out to be quite broad reaching across many currencies, as you’ve all noticed. While most currencies in which Quaker operates depreciated against the strengthening U.S. dollar, we’ve noticed that it is a function of magnitude of exposure and level of depreciation versus the U.S. dollar. The most impactful currency rates to be of the…

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

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from the line of Mike Harrison with Global Hunter Securities. Please go ahead with your questions.

Hi. Good morning and congratulations on a nice quarter in a tough environment here.

Thank you, Mike.

Thank you.

I think the main question on a lot of people’s mind is just looking at the gross margin number this quarter and talking about the lag effect of raw materials versus pricing, eventually we get from 38.4% back down to the 35%, 36% range but the timing is in question. So if I look back to the 2008, 2009, 2010 timeframe, you were really able to hold margin gains. You kind of peaked out in Q3 of '09 but you were really able to hold those gains through 2010 before raw materials started to go up again in 2011. Is that a good pattern or roadmap to follow if I want to get some kind of a sense of what the timing looks like or are there differences now compared to that '09, 2010 timeframe?

I think a lot of it, Mike, really depends upon how fast raw materials stabilize because the way I kind of thing of it is if raw materials today just froze on today’s levels, within our three to six-month period, everything would come through and be stabilized. And when we actually go back in time as well from a year ago and a year prior to that I guess starting, we had this real stable period for like a year and a half where our margins were very stable and that’s because raw materials are stable. So any time there’s a change, I always think of it as it takes three to six months to come through. What we don’t know here and what makes this very difficult for us to address this and give you any kind of precise guidance is what will happen with raw materials from here on out. We’re seeing a slight uptick right now in our raw materials, but as we all know there has been changes of crude oil over the past several weeks. Will that eventually translate into lower raw materials or not? And then you have other raw materials that we have that really have in some ways different supply-demand characteristics associated with it such as the vegetable oils and so forth, animal fat. So it’s really kind of hard to understand or get a precise thing, but the only guidance I would give you and say it could be different than those past is that once we get to a stable point within a few months, like I said, that three to six-month lag then should stabilize and get to a normal place.

All right. And kind of a related question just on pricing and mix. You were negative in Europe and Asia, which is what I would expect; positive in South America given the inflation in area environment there. That’s to be expected too. But I was surprised to see that you were 3% positive on price mix in North America. What’s going on there to make that a positive number, and maybe any thoughts on what we should be modeling for the rest of the year in North America on a price mix front?

Well, it could be we’ve had acquisitions impacting us. We have ECLI come on stream last year and generally those prices are higher, grease prices are higher than others so that can skew things. And really it comes down to sometimes in a particular quarter just the product mix that we have.

All right. And then I was hoping to getting a little bit more color on the Verkol acquisition. You said it gives you some additional exposure to grease in the steel industry. What are some of the key differences and the technologies that Verkol brings compared to what you got when you bought Summit? And can you talk about this continuous casting product technology that they bring?

Sure. Three different companies are very different. Summit gave us a good platform initially to get into the grease business, gave us manufacturing capabilities, gave us good technical people to help us develop formulas as we try to penetrate, say, the steel industry. We bought ECLI. They were really focused primarily on the automotive market and it’s a whole different kind of level of type of sale there where you get specked [ph] in cars, interior cars and so forth that would really have been hard to penetrate organically. What this brings, Verkol, is it actually brings a company that has a strong presence of selling specialty greases into the steel industry. That’s one of the primary markets that they bring. So now we’ll have specific products that are now actually used in the steel industry and we can – of course they are more of a regional and even within the European region, they tend to have primarily their sales sold in Spain, about 80% is in Spain. But now we can use these good products that they have and use them around the world. And we already were starting to make penetration in our steel business with grease but now this would help I think accelerate that. The other aspect I think you mentioned was the continuous casting fluids that they make. That’s an area we don’t have a strong presence today in the steel mills. It’s not the biggest market in the world. We don’t have perfect knowledge of the exact market size. But a ballpark number might be a $30 million type of market and they have good technology for this and that they’ve been very successful in their part of the world. And now we would like to use our global base that we have and the customer intimacy we have in the steel industry to help sell that around the world.

All right. Last question for now and then I’ll get back in queue. The financing of the Verkol acquisition, is that mostly coming out of cash or are you going to drawing on credit lines for that?

We drew on our credit line at this point in time and then we work to optimize our cash management over time.

All right. Thank you very much.

Thank you.

Thanks, Mike.

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

Good morning.

Good morning, Laurence.

Good morning.

A couple of questions. Can you talk a little bit about what you’re seeing in terms of cost inflation, particularly wage inflation by region and how you think that’s going to evolve over the next couple of years?

Sure. The biggest challenge for us from a cost inflation perspective continues to be South America. We see wage inflation continue to be an issue there. And especially in light of the environment and where you kind of have your top line falling yet, you tend to have your cost of people still being relatively high on a local currency basis. So that to me that’s the biggest challenge we have and we’ve been addressing that for streamlining efforts and trying to do business differently down there as we react to that situation, and we think we’ve done a pretty good job with that. We’ve continued to see maybe higher than normal type of inflation than we would expect in the U.S. in the countries such as India and China, but China seems to be becoming less of an issue for us as time goes on. And then of course Europe and the U.S., we see really relatively modest wager type increases.

And then secondly on the M&A environment, are you seeing any shift in the valuations like multiples or the psychology on the part of sellers?

We haven’t. I think one of the – in our industry we don’t have like a perfect universe with a lot of different opportunities to kind of make a judgment on that. I would expect if a private equity firm loans a business in our industry or a much larger corporation that has a division of something, obviously they know what’s going on in the world and what multiples are happening, I would expect that they would expect to see some higher multiples. We’re finding out that if you have a more local or regional player family run type business, maybe not as much and I think maybe if you look at it indicative of what we paid for in the Verkol acquisition.

Okay. And then just lastly on that theme as you look at the emerging markets in particular, can you talk a little bit about what the regional players are like in terms of relative technology? I mean are there players – let me put it differently. Are the players in the emerging markets that you’d be interested in acquiring for technology purposes rather than market penetration?

In the emerging markets, we have looked at some local players. Over time, we’ve looked at potential players in Brazil. We’ve looked at players in China. And so far there might have been some technology there or some play where it might have gotten us into a different product line that we didn’t have. So, so far we haven’t – and those emerging markets haven’t made any headway there. But we’re interested. We are continuing to have discussions. In Brazil in particular like one of the things but even though this is not right on what you’re asking but with Brazil, I think one thing nice about our position, it’s a challenging environment for us now, but we’re definitely a market leader down there. And in some ways maybe some of the turmoil or the negative market conditions down there maybe to opportunities to make acquisitions, as some other people maybe want to access.

Thank you.

Thanks, Laurence.

Our next question is from the line of Scott Blumenthal with Emerald Advisers. Please go ahead with your questions.

Good morning, Mike. Good morning, Margo.

Hi, Scott.

Good morning, Scott.

Mike, you like to discuss service and I understand that that’s a very important part of the business but can you maybe talk about new products or new product development, maybe new services that you may be working on? And do you track that or can you give us maybe a percentage of sales that’s coming from new products or new services that you might have introduced over the last couple of years?

We certainly track things but we don’t – I know exactly the kind of measure you’re looking and I can’t give you an overall indication certainly, but I can maybe talk a little bit about it. In each of the areas, I think about our business in steel, I think about our business in metalworking, our hydraulic fluid business and our mining business and for all these new technologies that we discussed, the six new technologies we’ve acquired in the past several years. In each one those areas, I can think – as I think through those, we are definitely an R&D type company. We definitely continue to evolve our product lines and we are definitely putting out what I consider new or evolving platforms of our technology. So sometimes this is – we don’t have a one measure that we kind of communicate to Wall Street, but we do put a lot of emphasis on it. I just don’t have that metric for you.

Okay. And Margo, one of the things that you tend to not mention but I would imagine that it is to some extent meaningful, can you talk about CapEx? What you planned for the rest of the year and any projects that you might have?

Yes, that’s fine. We’re more than happy to talk about it. Generally, we’re CapEx light, so it tends to be something that – on that basis it’s somewhat downplayed. But we remain on track to really stick within our range. We spend approximately 12 million a year and I just don’t think we’re – we don’t have any reason that it’s going to be anything dramatically different. We’re running a little bit slower in the beginning of the year. It happens to kind of weight higher in the backend of the year and there’s nothing noteworthy that’s going to hit your radar screen at this point in time for 2015.

Okay. And we do continue to acquire, you mentioned the 11 acquisitions over the past few years, I imagine you’re acquiring some type of a productive capacity with all of those. Can you talk maybe a little bit about utilization at this point? And you may, I guess depending upon the current environment, we could expect that you probably have maybe a little bit too much at this point. Is that right?

As far as – capacity utilization is really not a, compared to most chemical industries, not a proper measure for our industry I don’t believe because we’re generally a pretty – as Margo said, low CapEx type of environment. We tend to blend things. So it’s not these huge production plants that react and make new kind of molecules. So over time, if you look at some of the actions we’ve taken, like last year we did a streamlining of our operations in Europe with our Italian operations. We continue to look for ways we can do things. With Verkol, the one we just made yesterday, we don’t expect in the short term to do anything there because actually one of the benefits that gives us is grease manufacturing in Europe and we’re very excited about that with our grease manufacturing within the U.S. So having a platform and a place to manufacture and be close to our customers over there we’re excited about. So it’s something we always continue. We look about how we can optimize our manufacturing, but right now we feel pretty good. We don’t have major expansion plans. The only one that’s kind of out there sometime in the future might be in India where we’re going to build a second plant. Our plant right now is on the eastern side of India and we want to build one more in the western side sometime in the future.

And since you did mention Verkol, Mike, for my last question you did say that they are about 80% of their sales are in Spain. Can you talk about your exposure to the Spanish market particularly prior to this, and maybe some customers that you may get access to that you didn’t have before?

I would say prior to this, our exposure to Spain was kind of even keel with all of Europe. It wasn’t like heavily into Spain or light into Spain. We have people in Spain and we sell to the steel customers and car customers in Spain. So it’s like kind of a normal place. This certainly does increase our Spanish sales but mainly in new product areas that we were not in. We also think that Spain was hit particularly hard when Europe had its downturn a few years ago and now is coming back. So we think it’s a good time to actually increase our exposure into Spain.

Good enough. Thank you.

Thanks, Scott.

Thanks, Scott.

Our next question is from the line of Curt Siegmeyer with KeyBanc Capital Markets. Please go ahead with your question.

Hi. Good morning, guys. Nice quarter.

Good morning, Curt. Thank you.

Thank you, Curt.

Hi. Could you guys maybe dig in a little bit just on volumes, up 4%? What would base volumes have been? I’m assuming probably down slightly or --?

Well, certainly when you look at acquisitions themselves, acquisitions were 5% of our sales. So you could see from that perspective that things are down. It’s really hard, to be honest, to try to get a clear picture in this. And one of the things I was trying to do in my remarks and maybe I’ll just repeat some of this, it kind of gets lost. There’s a lot of things happening in our results. So you have the foreign exchange being down 7%. You had South America alone, which is really just a small part of our business, a little less than 5% of our business. But that was down a lot and it impacted our sales 2%. The tube and pipe, which is another small piece of our business, roughly around 4% of our sales. That impacted our sales about 1% overall. And then of course you had some of this product pricing because of our adjustments on things going down. So that’s why I was kind of saying like if you put these things together, okay, that’s like a 11% decline in sales. And then you said, okay, we have the acquisitions. They’re up 5%, okay, so maybe overall when you look at things should be around the 6% decline in sales. Yet we were down 4%. And so that differential there, that 2% the way I look at it is these are our share gains that we’ve made in our base businesses in our three largest regions, which is about 90% of our business. And we made these in light of the steel industry being down 2%. So lastly, our share gains are roughly – our base business has been growing around 2% and again, these are in very tough markets and these markets are flat to down. So I think you can see these kind of – you can kind of see it that way. It’s just hard to get at it through the – there’s just so much going on in this quarter with our numbers.

Sure. Thanks. And on that point, if you sort of give us your 30,000-foot view of the demand environment and kind of tying that into your outlook, which sounds qualitatively slightly more conservative from an earnings growth standpoint. Is it mostly Latin America that has you sounding a little bit more cautious or if you think back to your April guidance and from a demand standpoint, what has sort of changed the most I guess of any other regions that you’re notably more cautious on? And are there any positive offsets?

Yes, I don’t know if there’s really anything that’s – one thing that has caused us to change, in the past – if you go look at our past accomplishments and what we’ve done, we’ve been generally growing our earnings and EBITDA close to 10% a year type of range. And then you look at this year with foreign exchange, foreign exchange has been a big impact. So you see foreign exchange for the first half now is 8% down. So it’s going to be hard to replicate the kind of historical growth that we’ve seen in those things. So I think we just put the word modest in there to just give people more color. I don’t know if our world from how we saw things in the first quarter has dramatically changed. I think we were just trying to maybe provide a little – using that word to provide a little more color to people.

Got it. Thanks.

Thank you, Curt.

Our next question is from the line of Garo Norian with Palisade Capital. Please go ahead with your questions.

Hi, guys. I just wanted to ask a few questions around the Verkol acquisition. Broadly speaking, what’s the revenue exposure kind of steel versus all other markets?

I would say it’s not overly lopsided. I think we’ve got some metalworking exposure and some primary steel exposure and some of our other businesses. I don’t see it really lopsided one way or another. I think you got a mix.

Yes, definitely. It’s not like 80% or 90% of the business, right, or anything like that. It’s less than half the business, the steel business there. And again, it tends to be concentrated in that Spanish and that general area where they’re plants are located.

Got you, okay. And you talked about the exposure they have in Spain and Liberia potentially. Do they have much if any business let’s say outside of Europe today or is that something that you guys can really leverage?

They have some but it’s relatively minimal.

It’s still a little bit minimal.

Okay. And then looking at least I guess their production capacities or something like that, they talk about grease versus oils. I mean what’s the right way to understand when they talk about oils what that really means?

Specialty lubricants are a whole host of things and I think these continuing casting fluids are an example of that that they sell. As you know – it’s kind of like a whole range of lubricants that you can sell to different customers. They tend to follow all different types.

Okay. But it doesn’t take you – I know in the past you’ve talked about kind of some of the competitors out there that kind of really go more into let’s say engine oils and things like that. This doesn’t – anything in that department?

No. That’s true.

No, this is in our core but the product that we don’t have as much access to is continuing casting oils is kind of the noteworthy piece. But it’s right near our center.

Okay. And just to make sure, I mean their first half this year relative to last year, is there anything of significance different up or down?

It’s better than last year.

Okay. And then just moving away from them. What’s the big changes in currency, particularly the euro? Is there anything you’re seeing different competitive wise? Is there any chance anybody is trying to bring imports into North America from Europe or anything like that?

No, we have not seen any change in competitive dynamic because of the currency issues.

Okay, great. All right. That’s all I’ve got. Thanks.

Thanks, Garo.

Thank you. Your next question is a follow up from the line of Mike Harrison with Global Hunter. Please go ahead with your question.

Hi. Just a couple more. Looking at Asia, it accounts for a pretty large majority of the world’s steel production but really only about a quarter of your sales. What accounts for that difference, and kind of what does that say about Quaker’s growth opportunity in Asia? Obviously, you had a very strong performance there in the quarter.

Well, I think one of the – we had roughly the same kind of share in steel as I use that as an example of steel around the world. So that’s relatively consistent. But the reason that we would sell more to, say, steel companies in the United States versus China is China generally has the newer technology mills and those mills are more efficient and can use higher technology products, which consume less of our type of things, but generally have higher margins as well. So I think that’s the biggest dynamic for the first part of your question. And then on your second part, we have been growing. I’m really pleased with what we saw in China and India and the kind of growth we’re seeing. We are growing more than the market and I think part of that is we’ve gotten in – as I used steel mill as an example, we’ll get into a steel mill, selling the cold rolling oil [ph] generally. And then over time we try to sell them more of the other products in our portfolio whether it’s the hydraulic fluids, the cleaners and then the new ones that we picked off others, [indiscernible] or surface technologies, greases. So I’m really happy that this kind of strong – we have a really strong organization that’s been there a long time in China and now we’re increasing their product portfolio of things to sell. And if you look back on the past four quarters or five quarters or so, their growth has been really good, post double digit each quarter versus the prior year’s quarter. And the markets certainly have been doing that. So I think you can kind of see the share gains. That’s the best indicative place to look to see the share gains happening.

And then just in terms of what’s going on in China, I think a lot of us are having some concerns about what the impact of the market gyrations there could have on the consumer market and the broader economy. How much of a concern is that for you both in terms of a potential slowing in demand for manufacturing and infrastructure build out as well as maybe concerns over continued overcapacity in their steel industry there?

The only thing I can rely on is external data because I’m not as expert on all these things and all the factors. And people are projecting that the China steel industry is – it’s going to be relatively flat over time, but then we do look at the overall global capacity or production of steel, it’s supposed to be going up only starting after this year roughly around 3% a year. But I think at least the experts or the people or different surveys I read or different reports that make these forecast don’t project that a huge decline or overcapacity in the China steel area. People still see steel industry and it is a global market and in a lot of ways we don’t care where it’s made, because we have pretty much our share everywhere around the world. And as long as it’s made somewhere, we’ll probably get our fair share of work. So as long as it continues to be there and grow and people are projecting things to be growing 3%, that’s kind of what we care about.

All right. Thanks very much.

Thank you, Mike.

Thank you, Mike.

Thank you. At this time, I would like to turn the floor back to Mr. Barry for closing comments.

Okay, great. With 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 our results in the second quarter and we will continue to be confident in the future of Quaker Chemical. Our next conference call for the third quarter results will be in late October or early November. And if you have any questions in the meantime, please feel free to contact Margo or myself. Thanks again for your interest in Quaker Chemical.

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