Greetings, and welcome to the Quaker Chemical Corporation Fourth Quarter and Full-Year 2017 Results Conference. 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. It is now my pleasure to introduce your host, Michael Barry, Chairman, CEO and President. Thank you. You may begin.

Thank you, Dana. 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 website at www.quakerchem.com. I'll now start it off with some remarks about the fourth 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 were very strong sales, and the second, lower than expected gross margins. Let me start with the margins. Since mid-2016, we have been in a generally rising raw material cost environment. And as we've discussed in the past with raw materials, there's a lag effect between changes in our raw material costs and the adjustments to our product pricing. On the last conference call, our expectation was that gross margins would begin to increase in Q4, but instead they were even with Q3, primarily due to raw materials being higher than our expectations. The good news is that we do expect our gross margins to trend upward over the next few quarters, and expect that during most of 2018, our gross margins will be around 36%. While we see raw materials continuing to increase, especially in the first part of the year, we also have pricing initiatives in place where necessary to offset the raw material cost increases as well. While we'll continue to experience some more of this lag effect we have talked about in the past, we are making good progress, and that is the reason for our higher margin expectations. So we do expect the margins to continue…

Thank Mike and good morning all. Before I begin, let me remind you that comments made during this call will include forward-looking statements. These statements 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 2017 Form 10-K filed with the SEC. These are available on our website. Turning to our results. As you all know, Mike likes baseball analogies, so I thought I would use one myself. To quote Yogi Berra, it's déjà vu all over again. Once again Quaker delivered a strong performance in the quarter, and for the full-year, driven by significant increases in volume, primarily organic volume. While we continue to experience challenges in our gross margin, as raw material costs were higher than we expected, we were able to offset this with continued market share gains, benefits from our past acquisitions, improvements in SG&A from our cost disciplines, and most importantly, our relentless focus on serving our customers. As I lead us into the financial summary, please note that Quaker provides certain information including non-GAAP earnings per diluted share and adjusted EBITDA in an effort to provide shareholders with better visibility into Quaker's core operations. Excluding certain one-time items which we believe do not reflect our core operations, reconciliations are provided in charts 10 through 12 of this investor deck and they're also in yesterday's earnings release and the Form 10-K filed yesterday. So now if you'll please look at Chart 4 and 5 together as I highlight our financial performance. Quaker reported a 1% increase in non-GAAP earnings per diluted share in Q4 to…

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

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Mike Harrison of Seaport Global Securities. Please proceed with your question.

Mike, I was wondering if you could give us a little bit more color on the raw material picture. Are you having any issues with raw material availability, any shortages of key materials, or are they just going up in price, and also are you seeing any regional differences in terms of the pace of raw material inflation?

Sure. On the first part of your question there is not really availability issues at all with it, it's more around our expectations of something happening in the quarter. So, like for example, in the fourth quarter, there were hurricane events, there were -- and crude was increasing nothing more than anticipated. So that just kind of means there is another round of price increases we kind of we have to kind of go through. So once these kind of things level out, stabilize, and we get the price increases in place, we will get back to kind of where we need to be. We've just been in this environment really that has been kind of going up. You definitely do see regional differences think some more challenges in the Asia-Pacific region, but the currency can play some roles in this as well. So there are some differences but we just react to as raw materials go up, put price initiatives in place to offset them.

All right. And as we're thinking about the price that you're going to need in order to be able to offset that and kind of get to the 36% that you're targeting for 2018, I mean should we be modeling kind of a 1% to 2% pricing contribution for the year or could we see that number get more into this -- the mid-single-digits?

No, I think it's probably in the lower end of that, yes, not mid-single-digits.

Okay. Curious on South America, obviously a very strong quarter, and we've seen some improvements there but it seems to be coming in sits and starts, can you give any thoughts on kind of what you've seen as Q1 has unfolded and we're in kind of a seasonally slower period in South America, has that sustained or are we having a steady start again?

Yes, we won't comment too much on the first quarter, but it's so kind of still early relative in -- speaking from our results perspective. But I would just say in general things continue to do very well in South America. So from a volume perspective, we just continue to see more steel production and more auto production.

And then last question for me for now is on Houghton, sounds like you're still waiting for the approvals in the key jurisdictions in the U.S. and EU. At this point, do you have any update on what might need to be divested, it sounds like you said that's still within what you had originally been anticipating, but just any color there would be appreciated?

Sure. I think we've mentioned in the past the areas that we felt would have to be some remedies or divestitures around will be some product lines in the primary metals area and that's what's -- that's what was our expectations going in and that's what's going to be coming out. So we'll have to do some divestitures in that in some of those areas and really just commenting on that, there's really nothing negative in this regard, and like you said, it is nothing consistent from our original modeling, our original expectations it's just the process itself is just taking a little longer.

Thank you. Our next question is coming from Jon Tanwanteng of CJS Securities. Please proceed with your question.

Can you talk about the cash flow benefits of the U.S. tax reform are they basically equivalent to the change in effective tax rate?

Well we do expect some -- the benefits to the tax rate will result in lower cash taxes, so there will be some benefit clearly there. And as I indicated, we do expect a pretty, pretty meaningful benefit dropping our effective tax rate to that 23% to 25% area this year.

Okay. And can you remind us what proportion of Houghton revenue or profits are in the U.S. and did they get the same level of tax benefits level?

We expect that our Nucor, as I think about it, the combined company will have similar -- end-up in a similar tax place as what I've indicated for Quaker.

Yes, they have a little as a percentage of business little less than the U.S. that we do, but as Mary said, our best estimate at this stage we will have equivalent between the two companies in the U.S. tax reform.

Okay, great. And then Mike, how much of the synergies you've talked about and that $45 million or better actually show up in the gross margin for the company three years down the line? What is that gross margin potential I guess of once you've integrated it assuming a more normalized environment for us?

Yes, Jon, yes, there's definitely a portion of it because when you're talking about part of the synergies we're talking about are going to be in the procurement area or the raw material area as well as the manufacturing and supply chain and having a more efficient supply chain. So there will definitely be a portion in that. I think what I've -- our intent I guess is when we announced the closing we would then have a conference call we'll kind of walk through some of those benefits and the timing in more details, but at this stage, we're not ready to kind of disclose all that at this point.

Okay, fair enough. And then just last one quickly, is it still possible for Houghton to close in Q1 since you said first half instead of Q2, just wondering what the timing thoughts are around that?

Sure. I mean it's possible, but the fact that we're sitting here on March 1st, I would say it's more likely that it would be a second quarter event.

Thank you. Our next question is coming from Edward Marshall of Sidoti & Company. Please go ahead.

I just wanted to stay -- good morning Mike and Mary.

Good morning.

I just wanted to stay on deal of Houghton, if I took a second, the delay. Have you had any -- particular correspondents with the regulators, I mean worthy saying how close do you think you are? And then, likewise you spend about I guess $30 million now with the combination-related cash expense this year, what's your estimate I guess as we move into the first half 2018 for the total number of combination-related expenses?

Okay. On the contact with the regulators, the answer is a lot of contact on a daily, weekly basis with it. We have a lot of respect for the regulators and the process they go through. There is no disagreements, it's just working through the process at this stage. So there is not a lot of gnashing of the teeth, we have lot of disagreements it's just a very detailed process you have to kind of go through and get them complete before you can close the transaction.

And regarding the expenses that you had a question around, Ed, so beginning -- from the beginning of the year through and including close, we expect to spend another $30 million to $35 million, a lot of that is related to at close paying the advisors, banks, et cetera, so that's $30 million to $35 million.

Additional allowance what you're saying?

Which we would capitalize.

Right, right, okay.

Right.

And you said that's in additional to the $30 million that you spent already?

Yes.

Okay, okay. And then, if I could, you touched on pricing already, I just kind of wanted to elaborate on that a second, how -- maybe the same type of question how are the pricing discussions going with customers, it sounds like they're receiving, it's been well received I guess, or maybe not as well you would like. But I'm curious about are you -- do we expect in 2018 to continue to play catch-up if raw materials continue to increase or will it be large step changes where you're trying ahead of it for a while, then a while to catch-up. Just kind of wanted to get your sense as to how that pricing kind of dynamic might work?

So we kind of always said is once prices stabilize, it's like basically three to six months lag. So prices go up, it takes three to six months to go and of course the opposite happen on the way down. So on a stable environment; once you get stabilized for a while, it's going to reach its natural course. The -- I think one of the things that has happened over the past several quarters now is that just has continued to increase. So we're kind of continue to be in this mode. We generally don't overshoot on prices with our customers anticipating higher things. We want to be fair with our customers and as we see price increases and make adjustments with them accordingly. So it’s really just a timing thing, so if things stabilize from this moment on and you’ll be looking three to six months out having till back to the margins that we kind of expect to have. So it’s just a matter of how things continue to progress from here on out. And one thing, I know, I found overtime, is what we've been told or what people are forecasted hasn't been true, it's been, we thought things are going to be stable for a while and then, certainly things happen, crude goes up, hurricanes happen, or whatever.

Right. And so are you saying that -- are you saying you start to see you're already into that three to six month lag, and that you've seen quite, you've seen the raws kind of stabilize, I don't think that's what you are saying, but is that what you're saying?

I'm saying we’ve been doing price increases for many, many quarters now. It's just that the raw materials keep going up more. So we're kind of in that cycle. So it’s -- what's happened and it’s our price increases are fine and we’re tracking -- we’re getting. It’s getting them where we need them, so it’s really the continuation of the raw materials progressing upwards.

And is it a simple just kind of maybe I can answer this question but is this simple of saying, hey, our gross margin should be $37 million, take the difference between the $37 million and the $35 million one you've reported and say hey that's the drive comprising or is there other things in that number that I need to think about?

On a quarterly basis, there can be other things in that gross margin number because there's manufacturing in there and there can be slings and different things and so forth. But when you look at it over let's say a course of a few quarters and so forth, those type of things net out, I kind of think and it's really that differences can be really explained by more of the raw materials and the pricing that we need in our products.

Excuse me. Our next question is coming from Laurence Alexander of Jefferies. Please go ahead.

Hi guys, this is Dan Rizzo on for Lawrence. How are you?

Hi Dan, good.

How are you doing?

In the press release you mentioned mix issues being somewhat of a thing in the fourth quarter. I was just wondering if you can provide some color on that, are we in certain region or certain end markets where mix is kind of decreasing.

Well, one of the thing with Asia-Pacific in particular we can have some mix issues where as various businesses ebb and flow there, mining is one, I think about in China as an example, that has been gradually picking up over time and that can tend to be little lower in margins and that could influence it. So within any certain quarter you can have certain mix issues and when you look at it generally in the full-year, it's not too bad.

Okay. And then just you mentioned that auto is flat in U.S., flat in EMEA, and improving elsewhere, can you just give regional trends on steel?

Regional trends on steel, it was a -- I would say in general, when I think of 2017 was a pretty good year for the steel industry, it's really one of the first times we saw almost kind of everywhere having decent steel production growth all one time. So I'd say we're seeing pretty good in general increases across the board throughout the whole -- throughout the whole world. There is not, I would say one area that is just tremendously growing, you kind of see things and go from North America, EMEA, with pretty decent steel growth and China. China is someone that's the harder one to kind of get your hands on, because when you look at the data and most of the data comes out of the World Steel Association. They admitted it's probably somewhat overinflated when you look at China because the data itself doesn't naturally count some of the smaller and efficient mills and when they have shutdown and they weren't in the baseline, let's say to the comparison period and some of that is shifting to the larger mills which is in the data they collect kind of overinflates it a little bit. So but overall I would say from our perspective, we are seeing pretty constant growth in all places with steel and in all parts of the world and we expect steel to be, as Mary said, a pretty good market again this coming year maybe not quite the same amount of growth but generally good growth for steel.

Mr. Alexander did you have any additional questions?

I do not.

Okay, thank you. Our next question is coming from Liam Burke of B. Riley FBR. Please go ahead.

Mike, you had higher -- lower gross margins this quarter, but your adjusted operating margins were higher year-over-year, could you give us some color as to how you’re managing that SG&A line?

And I'll type in here, Liam; again we just, continue to be very disciplined in managing our costs. So we said all along that one of the benefits even other combination with Houghton will be increasing the size of the company and yes we've shown an ability as we do that, as we grow revenues, to continue to leverage that operating margin and you're just seeing that play out kind of quarter-over-quarter for us.

Okay. And in the past, you’ve made acquisitions some of those acquisitions you could leverage your existing sales channels or your relationships in the steel mills, others you had to sort of build incremental distribution, looking at the market share gains you have here, do you have the organization in place to handle both your current acquisitions and then potentially Houghton?

Yes, we do. I mean the past acquisitions all the people that we had say business development people, we had to put different places around the world, they have been established and we do have the resources in place to drive continued growth there and as I again using the baseball analogies, we are still relatively in the early innings of that. So only now with these new technologies, so we're very optimistic about that. And then, of course, when we have the combination with Houghton and that gets finalized, the both companies will have the internal resources to be able to do the cross-selling synergies to drop them.

On the early innings, is it similar, I mean are the product similar where you have a longer sales cycle here?

Yes, I mean it's -- I would say definitely I mean I wouldn't say it's going to be day one, we commented in everything but it’s going to be kind of the same thing. But the good news is we have the channels in place, the customers, we have the people in place, we have the technologies, the one thing we won't have to do is hire people from different places around the world. So from that perspective, it’s fine as far as qualifying products with customers and so forth we’re going to still have to do that and that can take some time at least we will have all the infrastructure in place.

Great, thanks Mary and congratulations Mike.

Thank you, Liam.

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

Hi, good morning. First question was on the gross margin commentary around say 36% ballpark for this year and so aiming for the 37% target, is that kind of an ex-happen comment or you're including Houghton ultimately or what's the right way of understanding it?

No it’s not. It’s that -- when we are giving that kind of guidance at this point that’s Quaker only. So the structures and gross margin around Houghton we will get more into once the combination is done and then we’ll -- as we have that conference call talk about what the new company looks like and then we’ll give you more a sense of okay what's the combined margins and prospects around that.

Great. Okay. And just on the raw materials you’ve been dealing with, is there in any way almost a volume perhaps benefit as customers might want your help to reformulate things, so that the costs net to them, not going up so much?

Sure. So one of the things we do with customers all the time is if we have a certain agreement that's going on and we feel we can reformulate and given the same performance using our lower cost raw material, we given that option and sometimes they choose to take it and sometimes they don't or sometimes they may trial it. So that’s kind of our -- over the course of history a lot of things we constantly do with our customers.

Great. On the product volume chart that you guys include just eyeballing it looks like through the quarters of 2016 it was kind of nice sequential growth and then through the quarters of 2017 it was a bit more flattish, I guess either can you remind me what was driving 2016 or maybe just talk about why 2017 didn’t see the continuation of the kind of growth that 2016 had saw -- seen?

As I don't have too much detail off the top of my brain, I think some of that is acquisition impact.

Okay.

Garo. So as you know we did the small Lubricor acquisition at end of November 2016 but that's really the only thing acquisition for example that's impacting that 2017 numbers whereas in the prior year ended 2015 and going into 2016 for example we had Verkol acquisition and some more significant acquisition.

Got it. Okay, thank you for the reminder.

Yes, I mean our organic growth this year --

5%.

Yes, 5% so and that's really one of the highest periods. So it's 2017 I mean it's been a really good, really strong year for just basic organic growth for the company.

Thank you. That’s what I was kind of trying to make sure I understood because my impression is that this year was actually one of the strongest years in the last few but then just visually it didn’t seem to be consistent. And then just a last question from me is can you remind me is there anything in the agreement with Houghton related to kind of a date where things need to close by or otherwise for some reason the deal doesn’t go or I just feel like there is some sort of end time in these types of agreements?

No, there is no date in which the agreement terminates. There is a provision in the agreement that once you reach the one-year mark, you can take steps if you want to try to do things differently or get out. But so our intent is to continue on with this, it’s going to add a lot of value for our shareholders and certainly have been the early in the other side of what to do anything different as well. So we’re excited about this.

Yes, great. I look forward to seeing that press release. Thank you.

Yes, me too.

Thanks, Garo.

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

Okay, okay, given there is no other questions we will end our conference call now and I want to thank all of you for your interest today. We are pleased with our results for the fourth quarter and full-year and we continue to be confident in the future of Quaker Chemical. Our next conference call for the first quarter 2018 results will be in late April or early May 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 conference. You may disconnect your lines at this time and have a wonderful day.