Greetings and welcome to the Quaker Chemical Corporation First Quarter 2017 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, Mr. Michael Barry, Chairman, Chief Executive Officer, and President for Quaker Chemical Corporation. Thank you, Mr. Barry. You may now begin.

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 our conference call; you can find them in the Investor Relations section of our Web site at www.quakerchem.com. I will start off now with some remarks about the first quarter. I am pleased that we have delivered another good quarter driven by strong organic volume growth, more than offsetting continued foreign exchange headwinds which negatively impacted sales by 2% and earnings by 3%. I'll now make comments on this quarter's sales, and I'll do so in each of our respective regions. Our biggest segment, North America, showed a sales increase of 6% due primarily to volume growth. Our European or EMEA region showed a 13% increase in sales despite a 4% negative impact from foreign exchange rates. So it was clearly a very good sales quarter for EMEA due again to organic volume growth. And for the third quarter in a row we're happy to report South America showed good revenue growth, 30% growth in South America sales was due primarily to positive foreign exchange impacts and higher pricing and product mix. In our Asia-Pacific region, sales were up 9% on strong volume growth, more than offsetting the foreign exchange headwind of about 3%. Despite the challenges we faced in currency and higher raw material cost, we were able to grow our non-GAAP quarterly earnings by 20% and our adjusted EBITDA by 13%. In a nutshell, we are able to do this based on good growth in our base market, taking share in the marketplace, and continuing to leverage our SG&A, including benefits from our 2015 restructuring…

Thank you, Mike, and good morning all. As Mike said, we're pleased with our Q1 results, particularly the strength in volumes across the company, which drove our strong operating performance. Before I dive into the details, I'd like to remind you 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 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 2016 Form 10-K filed with the SEC. These are available on our Web site. Please refer now the charts four and five, as I head into the financial discussion. There are a lot of words on chart four, but there was a lot going on in the quarter, and I hope this helped with understanding all of the moving parts. Quaker reported a 20% increase in non-GAAP earnings per diluted share to a $1.18 versus analyst consensus of $6 with strong volume growth, and good cost discipline driving these results, despite a negative foreign exchange impact on earnings of 3%. The good volume growth across the company resulted in a 9% increase in net, sales despite a 2% hit from foreign currency translation on the top line. This was primarily due to the depreciation of the Euro of about 3%, the Chinese RMB of about 5%, and the Mexican Peso of about 12%, versus Q1 2016, with appreciation of the Brazilian Real of about 20% mitigating the overall negative impact a bit. On the gross margin front, we did it serious pressure in Q1 as Mike mentioned, with a gross margin of 36.4% in Q1 versus 38.2% last year. However,…

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

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Edward Marshall of Sidoti & Company. Please go ahead.

Hi guys, good morning.

Hi there, Ed.

So, the first question I had was on the pricing and the lag that you see. Being that you gave the second quarter guidance on gross margin, I'm curious as we progress into 2Q, are you continuing to see raw material prices increase? And I'm assuming you're raising prices to offset that. So just help me think that through.

Sure. Again, it's really a very complex situation [technical difficulty] around the world, but in general, I would say we definitely are seeing price increases increasing pretty broad-based, but some more in other places around the world. Currency certainly plays a role. And also, we have this lag effect. Some contracts are indexed, and some where they go up automatically but it might wait a period of time before you hit that reset button. And then we also have contracts or just rate negotiation with customers. So we're kind of in the midst of in that process. And when you put all that together, we think the second quarter will be roughly the same as the first quarter of this year in gross margin. And then after that, based on what we see, and things could certainly change, but we would expect it to kind of trend up a bit, and get closer to the sub-37% type of level.

So the world is [ph] plateauing in their prices, and you're just catching up faster?

Yes, I think it's the -- I don't know if it's plateauing, you know -- I mean, we expect I think based on our outlook for prices, I would say that's probably a fair comment, and then as we're catching up with our pricing.

Got it. So if I move to the leverages you saw in the operating structure line or the operating -- some of the efforts that you've put through with SG&A, I'm curious what more can you do on the SG&A line in kind of the rising raw material prices to offset that gross margin compression that you did so well in Q1. Is there anything left to do on the leverage line there or the operating line there?

Well, we're always looking for opportunities where we can do things. We're still trying [ph] growing the company in growing, and so we're going to be -- we're not on a motive, I would say, cutting back. Our focus is on growth, but we always look at ways to optimize different situations internally, whether its in functional areas or in manufacturing footprints or things like that, we're always kind of pressure testing those. And of course, a lot of what we're doing now is planning for integration with our eventual combination here with Houghton International. We're beginning that process, and of course a lot of that is going to be focused on how we can optimize everything between the two companies.

Okay. And then the last question I had was on the inventory growth in year relative to revenue. And if look out on a year-to-year basis inventories grew faster, but on a sequential basis it's even more dramatic. And I'm curious if there was anything in particular, especially as you give the guidance as more of the tempered growth rate on a go-forward relative to what you saw in Q1. I wanted to get a sense from you as to maybe what's going on in the inventory [indiscernible] the cash flow has been a focus for the business.

Yes, I think at the end of the year, so sequentially at the end of the year people are managing -- customers are managing inventory levels down. And what you see is restocking occurring in the first part of the year, which is not unusual.

Okay. Thanks very much.

Thanks, Ed.

Thank you. The next question is from Liam Burke of Wunderlich Securities. Please go ahead.

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

Good morning, Liam.

Good morning.

Mike, Asia-Pacific, could you give us a little color on China. I know there's some consolidation of capacity going on there. Could you give a sense how you're participating in it?

Sure. They are over time reducing steel capacity. In general, they're shutting down the older and more inefficient mills. We tend to be more in the newer mills in China. So we don't see or anticipate that the continued trend in that area will be detrimental to us, and may even be a slight positive. And overall, we continue to be more tied to just general steel production rather than, let's say, capacity of steel [indiscernible] steel produced somewhere in the world. We're happy.

Are you still seeing the types of share gains in China as you're seeing in the rest of the world?

We are. I mean, we are seeing our gains are pretty broad-based, especially when you look at on a full-year basis. It's not like we're really dominating or having a real strong area in one part of the world versus another. It's pretty broad-based share gains. And it's pretty broad-based in a variety of areas, in both our base businesses in maybe getting new mills or picking up new mines in [indiscernible], but as well as with the new technology, so it's kind of really this series of singles kind of thing I always mention, where we try to do a lot of different things in different places, and they add up to hopefully a lot of run [ph].

Great. Thanks, Mike.

Thank you, Liam.

Thank you. The next question is from Laurence Alexander of Jefferies. Please go ahead.

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

Good morning, Dan.

Good morning, Dan.

If we think about just the growth going forward, you guys generally take some market share, but we kind of peg it as usually taking one to two percent of above whatever the regional sales trends are. Does that seem like a fair kind of rule of thumb?

What we've said in the past is we try to point these out in these conference calls is, looking at the underlying growth of our market, global auto and steel, and then looking at how we grew. And generally, over time, that's been in the, let's say, 2%, sometimes 3% or so range. When we pointed out this quarter it was over 3% -- between 3% and 4%. So it was stronger then normal quarters. But I say on average this trend of this 2% or so is about right.

Okay. And I apologize if you've answered this before, but post the Houghton deal I assume you're going to focus on de-levering. I was just wondering what you're comfortable with in terms of just carrying debt in terms of a net debt to EBITDA ratio or just whatever ratios you look at.

Yes, and I'll take that one, Dan. What we had said even before announcing the Combination is that we view kind of our sweet spot in terms of average leverage over time in that 2% to 2.5%, or 2 to 2.5 times net debt-to-EBITDA area, and clearly we were nowhere near that. We are going to start out in mid-to-upper three at close, and quickly we believe to work our way down to that 2.5 times area within two years is our target.

Okay. Thank you very much.

Thanks, Dan.

Thank you. The next question is from Mike Harrison of Seaport Global Securities. Please go ahead.

Hi, good morning.

Good morning, Mike.

Good morning.

Mary, you and I have talked in the past about SG&A cost and you ability to leverage those and maybe what the appropriate run rate should be to support growth, can you just take a little bit more time and walk us through the reasons that we saw SG&A decline especially versus where we work other than the fourth quarter and maybe comment on the outlook for SG&A causes, is something right around $48 million a quarter. A good run rate or do you see a reason that it should attract higher or lower over the course of the year?

Yes, so some things that impacted this quarter, you know, we continue to see the benefit of the 2015 restructuring program kicking in, and also as you probably noted in the reconciliation tables there were other cost streamlining initiatives going on, and as Mike mentioned, we are always working for opportunities to continue to optimize the business. The $48 million in the quarter and that level being flat to last year should we expect that going forward as Mike said we are growing the business or not cutting the business and so I think the communication that we had is bad. We continue to want and expect to drive the operating margin nor does that mean in order to support growth that the $48 million might see a little higher number normally going forward perhaps but again our objective is to continue to drive that operating margin now.

So maybe we see attract higher from that 48 million a quarter number but as a percentage of sales expect to see continued leverage then?

Yes.

All right, great. And then, looking at the North America volumes flat this quarter compared to the strong growth that you showed in EMEA and Asia pacific. I think the last time we saw a good volume growth for full year in North America was 2014. I think that probably coincides with some 2015, 2016 declines in well field as well as mining that may have weighed on the business but can you talk a little bit about why the north America region seems to be in decline and into the situation where you are gaining share and it's the markets themselves that are declining?

The volumes were a bit happening North America, we had a 6% growth in volume product line growth in the North America and we actually see -- speaking of mining, we didn't mention this in the comments but that's right up. I think the - you are seeing pickups in our mining business and they predominantly are hitting north America and Asia pacific as that where we tend to have the mining business, so part of that volume pickup that we did see in north America is due to that. But we continue to get share gains there North America as well. North America continues to do very well.

And just to clarify maybe to that on the 6% increase was sales and 8% actually volume growth including the acquisition and so we think it was pretty good quarter North America.

And I'm sorry. So how much was the Lubricor acquisition and what was the organic volume growth number in North America?

Hang on one second. So in the order of 5%, organic…

Three percent.

So, sorry, 3% or 5%?

Five percent organic growth and 3% due to the acquisition of the Lubricor.

Got it, okay. And then, the last question I have is just around the EMEA and Asia-Pacific strength, were there any unusual fills from new mines in either of those regions? And do you have any expectation that you are going to see some new mills come on stream during the rest of 2017 in either of those regions?

Yes, I think it's -- we continue to expect the market share gains and things like that, but there is nothing any discreet events there I would say in general in Asia-Pacific as I just mentioned. Mining has picked up, so that's been a positive and part of that group that we showed there. And I think in Europe, you have really just seen a combination of the growth in the market as well as our market share gain.

All right. Thank you very much.

Thanks, Mike.

Thank you. The next question is from Curt Siegmeyer of KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys. Nice start to the year.

Thanks, Curt.

Thank you.

Just a followup on the gross margin, you talked about in the third quarter and fourth quarter thinking that it's likely you can get back to that sort of 37% sort of range even with higher raw material cost. So, I know in the past you sort of had lower targeted gross margin maybe a normalized basis I guess. So given your confidence and the ability to offset some of the higher raw, should we kind of think about gross margin going forward as this new 36 to 37% range kind of being like a more normalized range going forward?

Yes, I would say that the level of raw material prices that we have see today, in the past when it was much higher raw material prices and you had also higher product prices because of the entire raw material prices, things tend to level out in that 35–36 range based on where we today in the range of raw material prices, we would -- I agree with you it would kind of in that 36%–37% -- hopefully closer to 37%.

Okay. And then, just on the acquisition, once that closes and you start thinking about going forward in 2018 and some of the product overlap and just general obvious increase in size, how do you kind of think about the impact that will have on your ability to take share which has been a key kind of part of your story for obvious reasons? You have one large competitor that you can't take share from anymore. And then, just potentially the scale that you might have, just sort of thinking through that and how that might impact that part of the story going forward?

We still think we have a good ability to do that. First of all, we have a pretty fragmented market. So there is a lot of competitors all different shapes and sizes and then -- and so -- so there's a lot -- we have been picking up shares it's been really from a whole host of people. We saw these new technologies that we are rolling out. And then, I think more importantly, now we have new technologies in both companies that we can sell to each other's customers. We have very complementary not only product portfolio but a customer base as well, so, 15,000 customers -- unique customers between the two companies; 14,000 of which of these customers are unique to one company or the other. So it just gives us lot of opportunity for cross selling. So, I think we can put all those three things together, I would still expect to see above market growth.

Perfect. Thank you.

Thanks, Curt.

Thank you. The next question is from Jon Tanwanteng of CJS Securities. Please go ahead.

Hi, Mike, Mary. Great quarter, and thank you for taking my question.

Thank you, Jon.

Good morning.

Can you tell us what the response has been from your customers regarding the merger announcement? What are the main points of enthusiasm? What are main push backs if any?

Generally, it's been a relatively positive response or non-event [ph] I would say. It's not a -- you haven't gotten too much of a negative response I would say as a general statement. I think the customer sees as both as too strong, big company, they see the merits of the combination.

Got you. Mary, can you just tell us what you are expecting in terms of merger expenses over the next 12 months? And if you expect any [indiscernible] deductible at all?

Yes, I think our expectation -- we took the 9.1 million in this quarter. Our expectation is that from this quarter going forward until close that the additional expenses will be in the neighborhood of $15 million to $20 million. And we do believe that a lot of that will be non-deductible for tax.

Got it. Mike, you noted that end market forecast imply lower growth going forward relative to what you saw in Q1. Has that been confirmed by what you have seen in the month of April so far?

Well, first of all, we haven't see our final results yet in April. And one month is not a thing [indiscernible] so, I would rather not comment on those kind of trends, but, yes, hard to say. I mean that all of want to kind of point out is what these external forecasts are saying. And if we believe them, it's hard to say because they have constantly been wrong in the past. But if you believe in, you would think [indiscernible] come down lower, but you also see the other side of the economy that things continue to look good in various places. So, it's really hard to tell.

Okay. Fair enough. And finally, Mary, can you just clarify the previous discussion on the SG&A? You expected it to decline as a percent for revenue going forward even if the absolute value goes up?

Our target is to improve our operating margin leverage. So, we -- that does imply that SG&A as a percent should go down even if the nominal dollar go up.

Got it. Great. Thank you for taking my question.

Yes, thank you.

Thank you. [Operator Instructions] Your next question is from Garo Norian of Palisade Capital Management. Please go ahead.

Hi, guys. One thing that may help me understand the SG&A side of thing, can you talk about the currency impact? I know you kind of mentioned it, but if not for the currency impact on a dollar basis where SG&A is an op [ph]?

Yes, we've benefited. We've benefited on the cost line from the depreciation in those major currencies that I mentioned, or if they are hitting us on the top line from a translation perspective. So I think we did see -- obviously we do get some SG&A cost increases associated with compensation and normal inflation in those kinds of cost. And for this quarter, I think the affect impact largely offset those increases, which is why it's not flat.

Great. All right. And then, I was noticing the EMEA segment had a relatively challenged 2015. You guys had a strong -- looking at product line strong recovery in 2016 and it started off strong again this year. Is there anything unique that's occurring in that segment, or is this kind of just good steady business improvement?

Yes, I think it's just continued improvement and some share gains that we've achieved in the region more than anything else.

Okay. Great. And then just lastly thing from me, you guys mentioned related to the having combination you will be doing some financing with the syndicated bank agreement et cetera. Is that something that is going to be made, kind of ultimately like a contingent on a close, or how -- I guess, I want to understand better how that will or won't really make a difference to the financials between now and the close?

Well, so we have committed financing as we mentioned, when we announced the deal. Bank of America and Deutsche provided them, the committed financing, which enables the party to sign the deal. And the way that committed financing works is it's in place and then until close it for some reasons we don't close the transactions, and we will incur some nominal cost, relatively nominal costs associated with that commitment, but that obviously would not incur the bulk of those financing fees associated with actually completing the combination.

Okay. So, at least through the year, rest of this year, I mean the interest expense line shouldn't change too much until I think things closed?

Yes, and we would -- any cost that we do incur related to the commitments and the financing arrangements will be -- our plan would be to include those in our non-GAAP bucket, if you will, along with other pre-closings, integration, and innovation planning and pre-closing costs.

Great, I understood. Thanks so much.

All right, thanks, Garo.

Okay. We have no further questions in the queue at this time. I would like to conference back over to management for closing comments.

Okay. Given there are no other questions, we'll end our conference call now, and I want to thank all of you for your interest today. We are pleased with our results from the first quarter, and we continue to be confident in the future of Quaker Chemical. Our next conference call for the second quarter results 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. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.