Greetings, and welcome to the Quaker Chemical Corporation Second Quarter 2016 Results Conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Barry, Chairman, CEO, and President of Quaker Chemical Corporation. Thank you, sir. You may begin.

Thank you. Good morning, everyone. Joining me today are Mary Hall, our CFO; and Robert Traub, our General Counsel. After my comments, Mary will provide the details around the financials and then we’ll address any questions that you may have. We also have slides for the conference call. You can find them in the Investor Relations section of our website at www.quakerchem.com. I will start it off now with some remarks about the second quarter. I am pleased we have delivered another quarter of solid earnings and strong cash flow, despite a variety of market challenges such as foreign exchange headwinds, slightly lower steel production, and the continuing challenges in South America. 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 sales by 3% and earnings by 4%. This marks over two years of consecutive quarters where foreign exchange has negatively impacted our results compared to the prior year period due to a strong U.S. dollar. Overall steel production per the World Steel Association was down 0.2% compared to the prior year quarter with South America and Europe showing declines and North America and Asia Pacific showing gains. The latest full year forecast we have seen indicate that global steel production should be stable or slightly positive for the remainder of 2016 compared to the same period last year. I now like to make some comments on the quarter's sales and I will do so in each of our respective regions. North America showed a decline of 3%. We had good base volume gains of 2%, but they were more than offset by exchange rates and lower product pricing. Our European or EMEA region showed a 29% increase in…

Thanks Mike and good morning all. Before I start, please note that Quaker provides certain non-GAAP information including non-GAAP earnings per diluted share and adjusted EBITDA in an effort to provide shareholders with feasibility of the Quaker's performance excluding certain items which we believe do not reflect our core operations, including earnings related to Primex, our investment in a captive insurance company. Reconciliations are provided in charts 10, 11, and 12 of these investor slides and they are also in yesterday's earnings release and our Form 10-Q also filed yesterday. In addition, please do not to place undue reliance on any forward-looking statements. Q2 was another strong quarter for Quaker, despite the continuing headwinds from foreign exchange and relatively flat global fuel production and a higher effective tax rate Q2 versus Q2 of 2015. We continue to benefit from market share gains, strong gross margins and our prior acquisitions, which are all key drivers for our positive performance. Overall, our key performance drivers remain very consistent with the first quarter. So let's take a look at our Q2 financial performance in detail and I'll refer you to charts 4 and 5 in particular. Our reported EPS for Q2, 2016 of $1.13 is the same as Q2, 2015 with non-GAAP EPS of $1.11 for Q2, 2016 decreasing from $1.15 in the prior year. Notably this quarter's reported and non-GAAP EPS would both have been higher if it had not been for the negative impacts of foreign exchange of about $0.05 and a higher effective tax rate which had a negative impact of about $0.09. As you can see without the noise of foreign exchange and a higher quarterly tax rate, the company had a strong operating performance in the quarter. This performance started with our net sales, which reflected good volume…

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

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Laurence Alexander of Jefferies. Please proceed with your question.

Good morning. This is Dan Rizzo on for Laurence. How we’re doing?

Hi, Dan, how are you?

Good morning.

Good. So for second quarter in a row, Europe seem to up from the rest of the segments in terms of sales. Are you taking more share there, is there more of a rebound or is it, I mean, just what's - I guess, what’s the reason behind that?

Yes. So, I think it's what you are seeing in the - because we had more stronger organic growth there and market share gains there. And I think it's really the timing of when we pick up pieces of business and where we pick them up in this quarter versus the quarter of last year we've taken more share in Europe.

So just taking shares, it's not that the markets are stronger in that region?

Correct. I mean, yeah, certainly auto is strong, steel was actually down in Europe, steel production. So for the most part, the kind of growth that we are seeing in our volumes was market share gains.

Okay. And then in just terms of your M&A strategy, would you ever consider I guess just kind of thinking outside the box so to speak, and just can we go in for another leg, or another platform for growth or you just want to kind of stick to what you are doing now, I mean…

Yes, we believe there is opportunities in our existing space and we do things that are basically around metal and from the time metal is made, whether it’s steel or aluminum to the time it's made into a final body part or also a part that get choose by consumers and we see us sticking kind of to that platform. We are in coatings for example to some extent. That's an area we could potentially continue to grow and to a larger extent as well, but right now we don't see us going too far field from where we are and we believe there are sufficient opportunities in our space to continue to grow both organically and with acquisitions.

Okay. And then final question then with the performance in Asia Pacific being down and being based on FX, would that suggest that you have more - I guess, you are more sensitive to currency changes within that region versus say the euro or the peso or it's the other parts of the world?

Well certainly, we saw some movement in the China’s currency this quarter and that was a large impact to our things, and it looks like hopefully recently things has stabilized a little bit and even strengthened. So, but definitely that’s been - China is a big part of our Asia Pacific earnings.

All right, thanks guys.

Thank you, Dan.

Thank you. Our next question is coming from Liam Burke of Wunderlich Securities. Please proceed with your question.

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

Good morning, Liam.

Good morning.

Mike Asia Pacific was down on volume-wise, China volumes were up slightly, was there any change in the markets of China for you?

Well, the challenging part in China for us has certainly been some mining business that we had. Auto continues to do okay in China, but steel of course is a major influence there. And as you know, it depends upon sometimes we have whole supply situations with some of our customers and you could get into some seasonality effects. I mean, overall we feel really good about our China position. We feel we continue to take share in China. So, we are still pretty - feel really good as China is one of our growth drivers for the company.

Great. And one the M&A front, the valuations moving up, do you have - does the pipeline still look good, just give us a sense as to how that looks?

Sure. I mean, we have - obviously, with the companies we would like to acquire, lot of these companies are either not available at any given point of time, but our goal is to kind of continue to make contact with companies so when they do become available that they would hopefully choose to go with Quaker. And it’s hard to say valuations because it is such a fragmented thing, it’s not like there’s a bond. We don’t believe valuations are necessary and an issue for doing an acquisition, it’s more of the availability and the timing of those acquisitions. But we continue to be optimistic as you look over the next several years that there should be some good acquisition opportunities available.

Great. Thank you, Mike.

Thanks Liam.

Thank you. Our next question is coming from Curt Siegmeyer of KeyBanc Capital Markets. Please proceed with your question.

Good morning Michael, good morning Mary.

Good morning Curt.

Good morning.

Just a couple of quick ones. Could you guys maybe clarify, this might be a question for Mary, just why currency is expected to be - I know it’s 4% hit to the bottom line this quarter and you expected to get worse 6% for the balance of year. Could you just clarify why that is?

But that sounded that was really around the full year outlook.

Yeah.

And it was given a range, that doesn’t mean it’s going to be anywhere near that magnitude for the remaining part of the year.

Okay, okay. And then just in South America, you mentioned sales down 14%, could you maybe parse out how much of that was currency and how much was volume?

Yeah, sure. The volume piece itself in South America was down around 10%. Certainly, you’re seeing lower steel production down there and auto production is way lower. So we’re continuing, but again if I look at the customer by customer what’s happening actually down in South America, we’re gaining share down there. Some people have actually one company in particular has left the market. So anyway, it’s a tough situation, but we’re a market leader down there and we feel sticking it out. We’ll pay dividends as things rebound. The exchange rates itself, the impact was probably down around 19% or so.

Is the situation, would you characterize it as stable at low levels or do you feel like it’s actually deteriorating or is there anything, any signs of life or green shoots at all?

Good question, Curt. Yes I would say, we feel it's been stable or stabilizing. Our situation in particular, we envision that going forward that our profitability will be better than it has been in the past because we’ve been - the way we’ve been impacted by volume declines and we continually make adjustments. But who knows, but as far as light at the end of the tunnel there, we are getting indications in the marketplace that industrial production should be better going forward than it has been in the past and really that’s the first time we’ve gotten that indication in a long time in Brazil.

Great, thank you.

Thanks.

[Operator Instructions].Our next question is coming from Mike Harrison of Seaport Global Securities. Please proceed with your question.

Hi good morning.

Good morning Mike.

Good morning.

Mike, I'm a little bit surprised that you didn’t see more benefit in terms of the volume number in North America as it relates to steel production and the tariffs that were put in place. Is that not having much of an impact or is it you just are going to see it on the lag and maybe the second half looks little better?

Well yes, steel production was up in North America and we did see volume gains, we continue to take share especially in steel industry the - I would say, and auto in general was at the OEM level was good. But where we saw weakness and I guess, we really didn't comment on it because it's a relatively minor part of our business. But they are series of pieces of our business that we saw more weakness, and so for example, mining. Mining is not a big part of our business, but as you probably know and read is that the volumes in mining have been declining globally and so that impacted us. And we also found in some of the other industrial markets outside of steel and auto that there is more weakness than you might expect, tube and pipe as a market for example that was still continues to show because of production of pipes is lower. So it's kind of these other little markets that when you add them up is kind of eating away a little bit at the stronger what's happened in steel and auto.

And as we get into the second half is the tube and pipe, do we hit easier comps and laps some of the pronounced weakness, I assume that's mostly oil field related weakness, maybe start to see a pickup in the second half?

I mean indications are that we see where we were in the second quarter, again kind of hopefully in a bottom type of period that's kind of the anecdotal things that we picked up in different parts around the world. So our expectation is that while it won't come rocketing back or anything like that, it should hopefully continue to improve as we go through time here.

All right and appreciate the guidance on gross margin for the second half of the year and I'm hoping that I can maybe push you to go just a little bit further and any kind of initial thoughts on where we might expect to be at this time next year. Is something in the 37% range sustainable into 2017 or are you expecting that we come under additional pressure?

It's really hard to say with the fluctuations in raw materials and how they go about. So I think the only thing we feel comfortable at this point is the visibility we have through down the end of the year in the markets, the raw material markets that we are looking. We feel from that like you said it's going to start at 37%. It's hard to say long-term because at any point in time you can have a spike up or down in raw materials and that will impact our gross margins. But overall, we always feel as we say we feel good, we feel we've been able to adjust to the conditions that are surrounding us of raw materials while there may be some lag effect at times. We'll get back to good levels.

Maybe to ask it a different way, just in terms of your pricing, can you remind us how much of your business is automatic contractual pass-throughs are related to changes in raw material costs and maybe how confident are you just in the overall pricing environment in terms of competition, supply and demand dynamics and your ability to pass higher cost through to customers and sell them on the value proposition?

Well, to first part of your question, we estimate around 25% or so of our business is tied to these formula-based contracts and then the rest are really kind of straight negotiated contracts. Like in point two is historically we feel we do a good job working with our customers as prices go up or down in the raw materials and providing them data which makes the business case to make changes in our pricing, and over at least historically we've been successful to do that. So we would expect to have the same kind of success going forward.

And then the last thing I wanted to ask Mike or Mary, if you would like to discuss so that’s while you mentioned the SG&A cost leverage, you had about 26% of sales for Q3 and as I look back over the last few years, you've gotten as low as the 24%, 25% range as a percent of sales at some point. Is that where you see the long-term SG&A as a percent of sales leveraging down to 24%, 25% or is that something we could drive maybe even to the low 20% range over time?

We really haven't given specific guidance around that, Mike. So I don't want to kind of start giving SG&A as percent of sales guidance. I would just say our goal is over time as we grow organically and inorganically is to leverage our infrastructure as a company and to continue increase our operating margins or EBITDA margins and I think if you kind of go back over the past several years, you can kind of see as we've been growing organically and through acquisitions that we've done that and all those kind of continue to work on that.

All right. Thank you very much.

Thank you, Mike.

Thank you. [Operator Instructions] Our next question is coming from Garo Norian of Palisade Capital Management. Please proceed with your question.

Hi, good morning guys.

Good morning, Garo.

I wanted to better understand I guess the cash flow improvement. It looks to me like it's been primarily working capital and then I guess particularly if I look over the last two years, even it's really meaningfully improved there. How much more is there to maybe work on there or have you got kind of as tight as you can reasonably get?

We, working capital does continue to be a focus. I'm never satisfied that we've gotten as much as we can and it certainly will continue to be a focus going forward.

Okay and it's nothing - I guess, just to make sure it is most kind of structural action that you guys have been taking or are there any certain kind of unique one-time initiative type of benefit sort of help?

Nothing special there.

No.

It's like a constant - just the things we do on a normal basis every day.

Great. And then can you just update me on the aluminum kind of side of the business and the exposure, how significant to the overall kind of company end market is aluminum these days and maybe perspective of what it was I don’t know, three, five years ago and what kind of progress do you see going forward?

When we first got into aluminum back in six years ago, when we made our first acquisition, like got us a presence in the United States. And at that point, certainly it was in the order of 1% of sales, and again we try to not give too much specific data relative to that for competitive reasons. But we have grown that area. We've grown in the United States. We've run it through cross-selling of products into the customer bases that we bought. We've picked up additional mills in Europe, in the Middle East and recently we've been starting to make some traction in China. We've had three trials ongoing in the first half of this year, which is really the first time we've had any kind of sustained growth in China and so far those trials are proceeding well. So we have definitely been growing in that area.

Great. And I just - obviously, I think of steel as the key end market between aluminum and the auto value chain, is the auto kind of value chain still larger?

I'm sorry. Could you repeat that question again, Garo?

As far as exposures by kind of broad end markets as I think of steel versus aluminum versus auto or something in that camp, what's the, I guess rate ranking for broad exposures for the business?

Certainly steel was the biggest part in our company overall and the biggest part of steel will go into auto.

Okay, so not really the pressure because the way you kind of talked about steel versus tube, I mean I think of tube as the end part of steel also kind of...

Yes. So actually the way we - I know what you are saying, but the way we actually differentiate or separate our business is we actually have that in our metal, more key piece of business, that’s our designation. Yes.

Okay. All right, that's it. Thanks so much.

Thanks, Garo.

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

Okay. Thank you. Given there is 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 for the second quarter and we 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 Mary or myself. Thanks again for your interest in Quaker Chemical.

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