Greetings, and welcome to the Quaker Chemical Corporation Second 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 begin.

Thank you, Michelle. 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’ll start off now with some remarks about the second quarter. I’m pleased we have delivered another good quarter despite some market challenges. The quarter’s results were largely driven by two major factors. The first was strong sales and the second lower gross margins due to higher raw material costs. Let me start with margins. For the past four quarters, we have been in a rising raw material cost environment and as discussed in the past with raw materials, there’s a lag effect between the changes in our raw material costs and the adjustments to our product pricing. During our last conference call, we had expected a stabilization in raw material costs and that our second quarter gross margins would be consistent with our first quarter. However, we saw several key raw materials increase in the second quarter, especially in minerals, which negatively impacted our gross margin in the second quarter. The good news is that we do expect raw material costs to stabilize going forward leading to a gradual increase in our gross margins to our target 37% level So now let me move on to sales, and I’ll do that in each of our respected regions. Our biggest segment, North America, showed a sales increase of 9% due primarily to volume growth both organically and through acquisitions as well as price increases. Our European or EMEA region showed a 3% increase in sales despite…

Thank you, Mike, and good morning all. Before I begin, please remember that comments made during this call including forward-looking statements which are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2016 Form 10-K filed with the SEC. These are available on our Web site. Please refer now to charts 4 and 5, as I head into the financial discussion. Quaker reported a 12% increase in non-GAAP earnings per share to a $1.24 this quarter versus analyst consensus of $1.23. And a similar theme to Q1 of this year, strong volumes and good cost discipline continued to drive improvement in results despite challenges from rising raw material costs and a negative FX impact of about 1%. Our net sales of just over 201 million for Q1 set a record for Quaker and were driven by organic volume growth of 5% and acquisition-related volume growth of 2% from the Lubricor acquisition late last year. The overall 8% increase in sales Q2-over-Q2 was achieved despite a negative foreign exchange impact of about 1% on sales. The FX impact was primarily due to depreciation of the euro of about 3%, the Chinese RMB of about 5% and the Mexican peso of about 3% compared to Q2 2016 with a stronger Brazilian real up about 8% helping to mitigate the overall negative impact a bit. As Mike discussed, the challenges we faced with the continued rise in raw material costs is reflected in our gross margins. Specifically, our Q2 gross margins of 35.7% is down 2.5 percentage points from 38.2% Q2 of 2016…

Thanks, Mary. At this stage, we’d like to address questions from any participants on the conference call.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Good morning. Dan Rizzo on for Laurence. How are you?

Good morning, Dan.

Good morning, Dan.

Hi. You mentioned getting back to the 37% gross margin level. I think and I might be wrong but I think a few years ago 35% was kind of the bogey. Just given what you’ve accomplished over the past few years, is 37% now more of I guess the level that you guys think you can maintain over a longer term timeframe?

That is correct, Dan, yes. A few years ago, we kind of gave guidance around that 35% to 36% range and that’s when crude was at a much higher level. And then as raw materials declined over the past couple of years to a different level, as crude came down, we came to the conclusion that we saw things starting to line out that 37% is kind of the new level of these type of levels for raw materials.

But if crude were to rebound, obviously that would have a negative near-term effect. But if we were to rebound say up to $80 – around $80 and then stay there for a long period of time, could 37% still be achieved if they were to like just stay – like there wasn’t as much volatility?

It’s possible, Dan, but it’s hard to say, because you have a whole host of other raw materials as well. I just know I feel – we feel good at these type of levels in the foreseeable range and what people are predicting crude to be to kind of a 37% level.

Okay. And then when you announced the Houghton deal, I think it was 45 million with the year three synergy targets. Is that still the goal or is there any update to what you’re expecting over the three years?

No. There’s really no further updates. All the information that we communicated, both the timing of closing as a deal and the expectations from the benefits of the deal are still consistent from everything we know today.

Okay. Thank you very much.

Thanks, Dan.

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

Hi. Good morning.

Good morning, Mike.

Good morning.

Mike, can you comment on how gross margin trended during the second quarter if we were able to look at April, May and June? Just kind of curious if June was the worst month or the best month or somewhere in the middle? In the process of trying to get a sense of whether the improvement that you’re expecting were that 37% level should be more linear or whether we should expect maybe some more near-term improvement, or maybe it’s more fourth quarter improvement?

I think it will be linear in nature. It’s hard to say because you also have profit mix issues in a quarter as well. But generally from a raw material perspective, we kind of saw things bottoming out towards the middle of the second quarter and starting to get better from a gross margin perspective in June. So we see the turn starting to happen.

And you mentioned the increase in mineral-based raw materials. I know there was some tightness in the base oil market that was driven by some unusual maintenance outages. Is that part of what you were seeing or were there other raw materials that were causing problems in that bucket?

That was one of the primary ones but there were certainly other raw materials and it could vary in different parts of the world as well. But there were definitely some other increases. But if I had to pinpoint one, it would definitely be mineral oils.

Okay. Looking at the volume growth in Asia, obviously very strong but then pricing was lower. It doesn’t seem like it would be consistent with Quaker’s strategy to compete on pricing in order to win market share, but that maybe what the appearance kind of looks like there. Can you help reconcile that strong volume growth, but the weak price mix?

Well, in the way we capitalize price mix, we’re seeing price mix kind of being up 3% in Asia-Pacific. Wait – well, I got the wrong chart.

No, it was down. I’ll chime in here for a second. Price mix, yes, there was a negative impact in Asia. And we do attribute some of that really to mix. Mining, for example, was strong in that part of the world and that has a bit lower margin. So there definitely was some mix impact in Asia.

It’s not a price phenomenon.

Right.

Okay.

More of a mix issue, Mike, than a price issue.

Got it. And then just digging a little deeper in Asia, was wondering if you can comment on what you’re seeing in the steel market in China and their effort to take some of the less efficient capacity out of the market. Is that part of the strength in your numbers is that we’re seeing the impact of bigger and more efficient mills, but are your customers starting to run at higher utilization rates?

It’s really hard to kind of say exactly what that effect is. We know that in the second quarter itself, China steel production was up 4% versus where it was in the second quarter of last year. So we’re definitely benefiting from that. We also know we’re benefiting from, as Mary mentioned, rebound in mining and other – just taking share in the marketplace in different places. So I think as we’ve talked in the past we think the shutdowns of some mills will maybe directionally help us here and there. And because we tend to be more in the newer mills rather than lower efficiency mills. So it could help. But I don’t have that exact breakout to provide you any more guidance.

All right. One last question for you just on the Houghton business and kind of the pace of pricing that they may be seeing right now. Having just watched a merger in another part of the industry between Sherwin-Williams and Valspar, it really looks like the Valspar business that they were giving the store away and the merger was in process and pricing really languished. Is that a concern on the Houghton business right now if you’re in an environment where raw materials are – you need to be pushing pricing to catch up and Houghton is in the process of getting acquired? Do you have any sense of whether that could be going on?

No, we haven’t seen – as a competitor, we haven’t seen any evidence of something like that going on at all. They’ll have similar trends that we have whether it’s in sales or margins and so forth, but there’s nothing to make us feel uncomfortable or alarmed at this point?

All right. Thanks very much.

Thanks, Mike.

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

Good morning, Mike and Mary. Nice quarter and thank you for taking my questions. It is CJS.

Good morning, Jon.

Hi, Jon.

You there, Jon? Hello.

I’m showing he is no longer in queue. [Operator Instructions]. You’re back on.

Can you hear me now?

Yes.

Sorry about that. In prior quarters you mentioned that revenue growth was likely to moderate going to the second half. Any updates for your expectations for production levels in steel and auto for the rest of the year?

Sure. All I can really point to is external forecast that we have. So just to give you a sense in the first half of the year, global steel production grew at 4.3%. And in the second half of the year, it’s projected to be 1.3%. Global auto in the first half of the year was 2.8% and in the second half, it’s projected to be 2.2%. So we are – external forecast anywhere projecting somewhat of a decline, but still growing in our markets but just a little less than where it was.

Got it, thank you. And Mary, do you expect SG&A to remain flattish at these levels? How should we think of that – how they scale as revenues do in the cost saving programs that you did last year to get that?

Yes, the cost saving program was completed and as expected, so we view that as a success. And that was the run rate that we’ve put out there before. And our expectation has continued. Good cost control should play out in the second half of the year.

Okay. And Mike, finally, you mentioned hiring outside experts. How much will that cost you? Is that something that will be excluded outside of adjusted earnings and are you expecting greater synergy realizations either in speed or magnitude as a result?

Yes, we do have in the Q that we expect additional expenses related to the combination with Houghton between now and year-end to be in the $15 million to $20 million range.

And then just the realization speed of synergies?

The realization speed of the synergies has not changed from what we had put out there before, I think 20 million in year one.

Yes, 35 and 45 year two.

Okay, great. Thank you very much.

Yes. And then those would be – you had a question in there I think, Jon, as well around the – this would be non-GAAP, the expenses.

Okay.

Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Please proceed with your questions.

Hi. Just a couple more from me. In North America you mentioned the outlook for global auto production to maybe moderate just a little bit, but I think in North America auto production looks like it could actually go negative in the second half, if it hasn’t already. Can you talk about how your steel and metalworking customers are positioned to deal with that weakness?

How they’re positioned to deal with that weakness? I don’t know if I --

I mean what’s – I guess the concern that I have is that maybe you have customers who were doing some pre-buying while you were raising prices and they’re sitting with some elevated levels of inventory and now we’re potentially going into a situation where demand could actually slow and their production could slow. So I guess maybe the broader question is what’s your outlook for North America in the second half relative to the comments that you made about global steel and auto moderating in the second half?

Well, I think in – one of your questions was relative to inventory and people pre-buy and can they – could that be a negative impact on that? That’s not a concern for us. Our customers have very little inventory just because they can’t hold that much inventory of our type of products. So we don’t have a big concern over something like that. And then on North America in general, we continue to believe in what’s happening in North America. We are continuing to get new pieces of business and we project that in the second half of the year. So as I think about North America, I still think of it as something that’s going to do well.

All right. And then just in terms of the Lubricor business, I know all the excitement is around Houghton right now but can you just give us an update on how the integration of that Lubricor business has progressed?

It’s been very good. We’ve been very happy with the performance of Lubricor since we bought it towards the end of last year and so we’re very pleased. We’ve been integrating it well within our other technologies. They’ve been very helpful in making other customer connections for us. So again, it’s a relatively small acquisition and it’s – just like our other small ones we did brought some different technologies, a little different customer base and we’re very pleased with the – as I talk about singles, it’s another series of singles that is going to help us not only present us already but in the future, so we’re happy.

Got it. And then the last one for me is just looking at globally the steel business or the primary metals business. Are you expecting any new mills to be starting up in the second half that you’re going to be involved with?

We have big – one started up already in North America, the Big River mill as an example. That’s a good example in fact to your other question, Mike. We started up already but it’s ramping up in its production and that’s a good example of something that we expect to have considerably more sales in the second half of the year versus the first half of the year.

All right, thanks very much.

Thanks, Mike.

Thank you. Our next question comes from the line of Edward Marshall with Sidoti & Company. Please proceed with your questions.

Hi, guys. Good morning. How are you?

Good morning, Ed.

Good morning, Ed.

So I just wanted to kind of talk about Houghton for a second if I can relate that to kind of what you talked about with margins. How are the gross margins in respect to a core gross margin for Quaker?

Yes, we’re not at liberty to really share Houghton International data. What I would just say that it’s the kind of same trends in the business, higher sales and the raw material impacts, we’re kind of seeing the same overall trends. And I also would make a comment that nothing have we seen from what they’ve experienced and what they’ve produced is different than our expectations we had coming into the transaction. So everything’s kind of playing out as expected in my mind.

Could you talk about maybe the gross margin whether they’re stronger or weaker, or you’d rather wait until we see the consolidation?

Exactly. I don’t feel comfortable sharing another company’s financials. But I think the overall message that I would like to provide is we feel comfortable with the overall performance of the company. And in fact, it’s producing at our expectations.

We don’t see – just to add on to that comment, we don’t see anything different from what we showed in the investor deck when we did give some high level numbers regarding what the combination might look like.

Right. When I talk about – I’m sorry, the approvals as you’re working through the approvals, I’m wondering which location is the most critical piece for you as you move forward is the one that you’re more worried about than others?

No, I wouldn’t say so. Again, we got China approval, so we were happy about that. The other major approvals that we have outstanding is the U.S. and Europe and things are progressing, all the filings, submissions, request for data just like we expected. So we haven’t picked up any signals where anything that will make us feel more positive or negative than our general expectations. So it’s kind of playing out like we expect at this point and we just have to kind of let it run its course and get to the finish line.

Got it. And when I step back and I look at the stock performance since the deal has been announced, is it right to think that the price of the transaction’s up about 85 million since the closing? Is that the – or did you guys hedge any of those stock, the stock that was part of the deal?

No, I haven’t calculated that number. So I can’t comment on your number. But we don’t have – the deal is they get 24.5% of Quaker and 172.5 million of cash.

But no hedge, okay. Thanks very much, guys. I appreciate it.

Sure.

Thank you. Our next question comes from the line of Liam Burke with FBR Capital. Please proceed with your questions.

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

Good morning.

Good morning.

Mike, could we just sort of talk about some of the acquisitions outside of Houghton and how they contributed to the organic growth rate of the business during the quarter?

Well, the overall impact, which is really just Lubricor at this point in round numbers was about 2% of our volume growth or sales growth.

Right. But part of the way the company has been laid out is you’ve added these acquisitions immediately given your revenue bump, but now how are they growing organically within the Quaker umbrella?

Okay. We haven’t provided that data in the past. Qualitatively, I can convey we’re very happy with the kind of growth that we’ve been getting when I think about how we’re doing in our grease business and the kind of growth we’re seeing both from the businesses we’ve bought as well as the penetration we’re starting to make in our existing business. I feel good about that. I feel good about things like the [indiscernible] business. We continue to pick up new piece of business, die casting. So all of them are really providing singles to us and I think that’s part of that differential over the industry growth that we’re seeing that makes up about 2% of additional growth over the market this quarter.

Okay. And some of the acquisitions you could leverage your existing channels, some you had to add channels. All that has been – all that is setup now, is that right?

Yes, that’s correct, Liam. The resources are all in place. We’re kind of still at the stage of getting new piece of business, use that as a reference for us and then helping us grow within each of the regions of the world.

Great. Thanks, Mike.

Thanks, Liam.

Thank you. Our next question comes from the line of Garo Norian with Palisade Capital Management. Please proceed with your questions.

Hi. Good morning, guys. Can you hear me?

Yes, Garo.

Yes. Good morning.

Great. Just one question back on the raw materials. Is there any major difference regionally on how you guys have been impacted through the first half of the year from the raw material increases?

Yes. There’s a lot of regional differences. Some of those are caused by the supply issue. You can have raw material issues, for example, in Asia that we saw in the year where some raw materials even hard to get hold off. You have foreign exchange impacts. As the euro is changing, that impacts raw material costs in Europe and the same thing in Brazil. So there are a lot of puts and takes around raw materials all over the world.

Okay. Just one on closing. As far as I remember I think July 3 may have been a date for I guess maybe the U.S. request for more info. Is that correct? And can I assume that they did request? And then I’m curious what the next date might be?

Yes, you’re right. They did a PT secondary process [ph], which I certainly always expected that they would do and we’re in process of conversations with them in determining what that request will eventually be submitted. And we’re in the process of gathering that information to submit to them.

Okay. And what during this process, what level of insight do you have into their business?

We receive – we receive their financials on an ongoing basis, especially at the end of each quarter. So we get to kind of see that. And we’re not allowed certainly to communicate anything or interact on a commercial basis. We’re still competitors out in the marketplace from that perspective. So we are obviously working with them in integration but that’s really how we’re going to integrate the company, structure the company going forward and so forth. So hopefully that gives you a sense of what we’re doing.

Got it. And what’s the reasonable best case timing for a close?

Like we said, fourth quarter would – sometime in the fourth quarter. I think our best guess is still end of the year or into the first quarter. There’s no information at this time that’s different than actually when we first made the estimates that it’s kind of playing out like we expect so far.

Got it. Okay. Thank you.

Thanks, Garo.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Michael Barry for closing remarks.

Okay. Thank you. Since there’s 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 results in 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.

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