Quaker Chemical Corporation (KWR) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Quaker Chemical Corporation Second Quarter 2019 Results and Combination Close 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, Michael Barry, Chairman, Chief Executive Officer and President for Quaker Chemical Corporation. Thank you. Mr. Barry, you may begin.

Good morning, everyone. Joining me today are Mary Hall, our CFO; and Robert Traub, our General Counsel, Joe Berquist, our Chief Strategy Officer as well as our Head of Global Specialty Businesses, Shane Hostetter, our Head of Finance and Chief Accounting Officer. We will have a longer than normal conference today. I'm very excited to be able to finally talk in more detail about the Combination with Houghton International since it has been over two years since our original announcement. And of course, the prospect of this combination goes back many years. When I enter Quaker nearly 21 years ago we had a project called Project MIH. This was our code name for our project to combine with Houghton. The MIH stands for "Made in Heaven" and I'm pleased that we're finally able to make this Combination happen. In structuring this conference call, I thought it would best if we talk about the second quarter for Quaker Chemical first. Take your questions on the quarter. And then we can move into discussion of the Houghton Combination where we have some prepared remarks. And then we'll take any additional questions that you may have. In this regard, we also have two sets of slides for the conference call. You can find them in the Investor Relations section of the website. And our new website is www.quakerhoughton.com, but also our old website of quakerchem.com also has the slides. I'll start off now with some remarks about the second quarter. The quarter was challenging and you could see this most clearly in the 7% drop in net sales. There are two main drivers to this decline. One was foreign exchange which had a 3% negative impact and the other was our volumes which were also down 3%. The drop in volumes was caused primarily by two factors. The first is weakness in the global automotive market. The IHS numbers for the second quarter showed a 7.5% decline in global automotive production with each region showing less builds in the second of 2019 compared to the prior year. The biggest declines in auto production occurred in China which was down 16% and Europe which is down 7%. The other major factors impacting our volumes were production reductions in June by a number of our global customers in order to correct inventory issues. We saw this with our steel customers especially in North America, South America and China. When looking at our volumes by region, we saw declines in North America and Europe of 4% and in South America of 5%, while Asia-Pacific was essentially flat year-over-year. I also want to note that in our second quarter 2018 conference call we mentioned that that was a very strong quarter for us. And we did mention that there were some timing elements in sales of North American and Asia-Pacific which had kind of unusually high volumes then. Overall, for this quarter we estimate that our industrial end markets declined more than our business did as we were able to continue to achieve market share gains in many of our markets. For example, on Asia-Pacific our overall volumes were essentially flat despite the significant decline in China automotive. In summary, it was a tough quarter for each of the regions given what happened in the global markets, but we were able to mitigate some of this through market share gains across the globe. On the plus side, our second quarter gross margins were where we expected, which was 36.5%, which was an incremental improvement over the 35.9% in the first quarter. In addition, we have good SG&A control on the quarter and this help to mitigate the declines in our volumes as well. Overall, we were down 2% in non-GAAP earnings and adjusted EBITDA, with foreign exchange negatively impacted both of them by an estimated 3%. So in summary, this is not the type of quarter we are accustomed to delivering, but we did mitigate some of the decline in global markets and the foreign exchange headwinds we faced through our market share gains and improve gross margins and good SG&A control. Looking to the second half of the year, we don't expect our markets to dramatically change. However, we do expect year-over-year comparisons to improve because our markets weakened in the second half of last year as did foreign exchange rates versus U.S. dollar. Overall, we don't expect the negative impacts we face in the second quarter to have the same magnitude into the second half comparison. For Legacy Quaker Chemical, our forecast indicated that our full year results are expected to show year-over-year improvement in non-GAAP earnings and EBITDA which means we are projecting positive comparisons in our Legacy Company's second half performance to 2018. And that concludes my prepared remarks for the second quarter. I'll now hand it over to Mary Hall so that she can give you have some of the more details around financials for the quarter.

Thank you, Mike and good morning all. As Mike noted this earnings discussion pertain solely to the second quarter earnings performance of Quaker Chemical. Before I begin, please remember 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 a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release in Form 10-Q and the risk factors included in our 2018 form 10-K filed with the SEC. These are available on our website. In addition, please add that we provide certain information including non-GAAP earnings per diluted share and adjusted EBITDA in an effort to provide shareholders with better visibility into core operation excluding certain items that we believe do not reflect our core operating performance. Reconciliations are provided in chart 10 313 of this Investor deck and they are also in yesterday's earnings release in Form 10-Q. So in Q2, Quaker continue to face headwinds from a stronger dollar across most of our market and continuing weakness in automotive, which also negatively impacted cold rolled steel production globally in Q2. In the phase of these challenges, we continue to show sequential improvement in our gross margin and good cost control as Mike mentioned. As a result Quaker's non-GAAP earnings per diluted share were up 11% sequentially, but down 2% year-over-year reflecting the negative impact of foreign exchange on earnings of approximately $0.04 per diluted share or 3% compared to last year. Please refer now to chart four and five as I'll review our Q2 financial performance in more detail. Net sales of $205.9 million were down 7% compared to Q2 last year due to the negative impact from foreign exchange of 3%, a decrease in volume of 3% and lower price mix of 1%, a stronger U.S. was the primarily driver of the negative foreign exchange impact specifically versus the euro which depreciated 6% versus the dollar. The Chinese RMB down 7% versus the dollar, the Brazilian Real down 9% and the Indian rupee down 4% versus the dollar. Our gross margin up, 36.5% in Q2 is consistent with Q2 of last year and with the expectations we shared in our earnings call last quarter. Our non-GAAP operating income decline due to lower sales; however excluding acquisitions related expenses, our non-GAAP margin improve slightly compared to the prior year due to the good cost control in our SG&A which decrease to 8% year-over-year. Similar to our non-GAAP operating income adjusted EBITDA was down slightly to $31.4 million compared to $32.2 million last year due to the lower sales, but our adjusted EBITDA margin improve to 15.3% compared to 14.5% in the prior year. Our effective tax rate of 24.2% in Q2 is up versus 16.8% in Q2 of last year. Those rates include the impact of certain nondeductible Houghton expenses another non-GAAP item, but Q2 of last year also included a U.S. transition tax adjustment of $1.2 million in Q2 of last year, which positively impacted the rate. Excluding all non-GAAP items for both periods, we estimate the effective tax rates would have been approximately 22% and 21% in this Q2 and Q2 of last year respectively. For the rest of the year post close of our combination with Houghton, we estimate our effective tax rate will be between 25% and 27% in Q3 and between 19% and 21% in Q4. These ranges reflect our expectation of receiving a concessionary tax rate of 15% versus the statutory rate of 25% in one of our non-U.S. subsidiaries toward the end of this year. For the full year we continue to expect that our effective tax rate will be in the range of 22% to 24% excluding all non-GAAP items. Turning now to chart six, here you can see the decline in volumes I mentioned earlier down 3% year-over-year and down 2% sequentially as market conditions weakened particularly in June. In chart seven, we see the continued sequential improvement in gross margin to 36.5% which is consistent with Q2 last year, Chart eight, shows our positive trend in adjusted EBITDA over time which we expect to continue going forward. Chart nine shows our continued improvement in our net cash position which was about $74 million at the end of Q2 reflecting our balance sheet discipline and strong liquidity. In summary, Quaker delivered a solid quarter despite significant market challenges. We're excited to finally close the Houghton Combination and are ready to move forward in executing the next chapter of a growth story. One thing that doesn't change is our focus on delivering the solid and consistent performance our shareholders expect. And now, I'll turn back to you Mike.

Thanks Mary. We will now open it up for questions. I would ask if you have – if you keep your questions at this point just to Quaker Chemical's performance only and in the second quarter, and then after this round of questions will begin our remarks around the Combination. We have another slide deck around that. And then we will open it up to questions again.

Great. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question here from Jon Tanwanteng from CJS Securities. Please go ahead.

Good morning. Thanks for taking my questions and congratulations on finally closing the deal.

Thank you, Jon.

For Quaker, can you talk about the June slowdown and if you see that trend extended in the July and how much of the FX headwind do you see also in the second half compared to last year?

We still see overall foreign exchange be in a slight headwind, but it's going to be lot less than above that we've seen in the first half of this year, that's for sure. So it's more just a slight thing of that at this point based on our estimates. And then on the June production issue, we feel a lot of it was more one-time in nature, but certainly our markets are generally weaker. But we have gotten some indications and some of these customers that they slowdown that in certainly parts or in the world they will be coming back as we go for the third quarter, fourth quarter type of thing. So, I don't think it's a prolong thing. In addition, of course, we have our initiatives to continue to gain share in the market and so forth, so and contain where we're above the market, so, that just comfort and confidence as well.

Okay, great. I'll jump back in for Houghton [ph] later.

Thank you.

Our next question is from Mike Harrison from Seaport Global. Please go ahead.

Hi. Good morning.

Good morning, Mike.

I was just kind of piggybacking on that last question regarding the slowdown and maybe some production curtailment. We've also heard that there are some facilities that are taking early downtime. Typically, you would shut down for a portion of August, that's typically a European thing. But some of them have taken early downtime or extended holiday downtime around August. Are you hearing about that? And so, maybe as we think about regionally could we think that maybe Europe is going to be maybe a little bit slower to come back or any thoughts around kind of typical holiday shutdowns?

Well, general, when the markets are weaker you can't get some of that. I haven't had anything too specific around that in Europe in particular and so our major customers, but certainly that some that can certainly happen.

All right. And then, it sounds like you're talking about an inventory correction that is customer managing their finish product inventory. But I was just wondering, are customers holding significant inventories of your products aside which kind of already in the system or in the webs. Just wondering if you feel like you're at risk if customers decided to pull back on levels of your products or safety stock that they might be holding an inventory?

No. Our customers keep a very low level of our products, one, two-week kind of thing generally.

All right. And then, the last question for now is just related to the pricing declines that you saw in Europe and Asia. I'm wondering if we should expect to see further price declines, maybe how you feel about your ability to hold price even if all materials are maybe moving a little bit lower?

Yes. That's lot of what you're seeing there really wasn't, let's say price decline as much as product mix there. So price has been relatively general stable in raw material environment right now the -- in general the statement is stable.

All right. Thanks very were much.

Our next question is from Edward Marshall from Sidoti & Company. Please go ahead.

Good morning, guys.

Hi, Ed.

Thanks. Good morning. I was focusing on the Asia Pacific, specifically the margin. You've given some good commentary on the sales line there. As we look at the decline on the margin I'm curious if that have anything – can you kind of bifurcate maybe volume versus currency there on the margin side. And then follow up the weakness in the sales. Can you discuss maybe the trade impact versus overall market weakness? Thanks.

Yes. I mean, trade impact to us, it's not a thing that really has a significant impact on us because it can impact us on a couple different ways. Our raw materials to get higher cost if we were shipping for example China raw materials into the U.S. or vice-versa. But we try to mitigate that as much as possible. That's not a material thing for us. And then on the side of like steel production for example on trade, we have the equal shares around the world. And with that, it doesn't really matter where steel is made. So, we tend to be kind of protective. I would say that trade though is more of an issue around that also just brings down the economies or makes people maybe a weaker global environment. So from my perspective that's how I view it really impacts us. And then concerning your question on margins, Shane, do you want to comment on that.

Yes. So, just in general, as you think that margins from a product mix perspective, some of the impact on the automotive decline, there are some heavier margin products on that side compared to some of the steel. So as you look at the mix on the given period there isn't a mix issue that happened in Asia and Europe, so you see some of the volume mix on what I would call, the probably metal side versus the metalworking side is really contributing to the decline.

Got it. And do you think the same formula of outpacing market growth with market share gains continues in Asia Pacific and specifically to China. I guess one of the things we're hearing this second quarter in some of the calls is about an initiative to buy local. I'm just curious if you're seeing any of that at all? Thanks.

Yes. We have not experience that, but on that we continue to believe that we will continue to grow above the market. I think, point to that here, China itself with the severe decline in autos we were still on our Asia-Pacific region flat. So we have been getting to the market share gains that kind of offset that. So, yes, we still expect to see very good things for us in Asia Pacific.

Great. Thanks guys.

Thank you.

Our next question is from Laurence Alexander from Jefferies. Please go ahead.

Hi, there. Could you touch on two things? One, since we've had a chance to stress test the operating culture and -- does the ability to grow ahead of the market, has it expanded or contracted in the markets that were softer. That is – does its pro or countercyclical? And did that show you anything about the way the sales force is working that needs to be fixed? And then secondly, can you just characterized trends on raw materials and how we should thing about the back half of the year?

Sure, Laurence. On the raw material front that's relatively stable. It's pretty good environment right now. We haven't seen much change from the previous quarter and we don't expect to see much changes in the quarter upcoming here. So it's pretty stable environment. And then on your first question which was the….

Non-operation -- operating culture. Laurence, could you rephrase that first part of your question?

Sure. I mean, I guess over the years we have characterized the spread versus the end markets. But I guess what I'm asking about is, as the market softens does the pace of share gains accelerate? Or do the customers become more resistant to new product launches and so it slows down?

Sure. Actually I think it's kind of independent. The things that we're doing to gain share in the marketplace are generally things we've been – the things we're gaining today are relative things we been working on for a while with the customer. And so in some way I view it almost independent of the environment that we're operating under.

Okay. Thanks.

Thanks, Laurence.

We do like to turn the floor back to Mr. Barry.

Okay. Good. Thank you for your questions on the quarter. Now, I will provide my remarks on our Combination with Houghton which was closed yesterday. I would ask if you could go to the slides that we put into the Investor Relations section of our website so that you can kind of better follow along with my remarks. We put a good number of slides into this deck. Our intent this morning is not to go through all of the slides in detail instead I'll briefly comment on some slides and spend some more time on others. But please note, we do have a good deal information here to kind of better describe the many aspects of our Combination. So, I'll start on slide four. Here is some information about the terms of the deal; governance, financing and updated synergies. I'll just mention two things now that are not covered elsewhere in my remarks. The net debt that Houghton had at closing was $660 million versus the $690 million when we announced the deal. This is one of the contributors to our net debt to EBITDA closed in 3.4 times versus the 3.7 times we estimated at announcement over the -- about two years ago. The second item is that we've added three independent former Houghton directors to the board. And you can see those in the press release as well. On a slide five, you could see the financing for the deal. it's all bank debt which provides us attractive rates and flexible pay off terms as we generate cash flow, and the undrawn portion provides us with a good liquidity. Also, I appreciate the Fed's actions on Wednesday, which will help keep our rates in an unattractive 3.4 to 3.6 percentage range. And I do want to thank our bank group for being very supportive through this long process. On slide six, we summarize the strategic rationale for doing a Combination. There are so many great features about this Combination. But to me some of the major highlights include, one, gaining talent. I always say people are greatest asset and we really have a tremendous talent pool in our combined company that will enable us to service our customers better. Two, provide us an avenue to continue our ability to grow above the market like the 2% to 4% we have done historically, even if now we are double the size. Three, we expect to achieve good cost synergies which enable us to be much more efficient given now that we're twice the size, and four, better R&D capabilities. I'm truly excited about the ability to take our two companies different approaches to developing products for customers and put them together. I believe this will allow us to develop better products in the future than either company could have done alone. On slide seven, our key priorities. Here I'd like to point out that our customers are our number one priority. We want them to be well served during this time of integration and see no disruption with our supplier products and services. Another key priority is to create a strong culture and engagement in our people, again, our most valuable asset as we come together as two companies. Both companies have a similar customer focused culture, but we will be putting a lot of focus to ensure that we create a strong and consistent culture for company going forward. We also will be increasing our efforts around ESG also known as CSR, a sustainability by some, which we strongly believe in for the safety of our people, making our communities better and helping our customers to be more sustainable which is important to them. On slide nine, this combination creates the leading global supplier of industrial fluids, our global scope in terms of customers, people manufacturing locations, R&D locations and countries we do business with has dramatically increased in the last two days. Slide 10, this is our new leadership team which is a combination of existing leaders from Quaker and Houghton. I believe one of the key differentiators from some of our competitors is the experience level of our leaders especially the leaders that have led businesses directly in our industry and really understand our customers’ needs and our business model which is critical to our success. We have over 130 years of business leadership experience in our industry from this leadership group. On slide 11. We have a summary of our expansion across multiple fronts whether its customer, markets, products or geography. This increase in size and scale provides us with more opportunities and less risk. Over the next set of slides, I'll touch on each one of these. On slide 12, we talk about our customers and the dramatic increase in the number of customers coming from 3,500 to 15,000. Also the customer bases are very complementary with not as much overlap as maybe one would think and that is really due to the different strengths each company has in different markets. Overall, our customer concentration is now reduced as we combine our two companies. For example, our largest customer is now 4% of sales versus 8% before. On Slide 13, we are comparing Quaker in the past to Quaker Houghton now. While our presence in all key markets increased, you can see our metalworking presence has more than doubled as we are now in more end markets within this area. But even with this near doubling size, our overall market share in this industrial fluids market is still well less than 20%. The next slide, slide 14 shows the different addressable markets that we have a good presence. We have color coded them so that you can see which company has a stronger presence in which market, as well as the ones where both companies have a good presence. The overall takeaway is that we now have stronger positions and more addressable markets because of the combination. Slide 15, we take things a step further and look at the key market positions and what the combination did to increase the leadership position in each end market. On the top part of the chart, you can see a significant increase in our leadership position and many of our chosen markets. The more dots the better in this chart and you could see the increase in dots for many of the end markets. The bottom part of the chart reflects which capabilities are enhanced by the combination to increase these leadership positions. But I won't go more into the chart now. It just does provide a good deal of information that you may want to look at more when you have time. Next on slide 16, we have a similar chart as the last one, but this one is around product lines. You can see the increase in dots and many of the product lines that the combination strengthened our product portfolio and made it broader. We now have a strong basket of products that are well-positioned to service our customer's needs in many markets. As I mentioned earlier, I am also excited that with the addition of the ability to combine our R&D organizations and develop better products in the future because of different approaches each company takes to formulating products. One additional area of expansion I'd like to talk now is in slide 17 where it shows our additional strength we have geographically. Now being combined our presence in several areas has been significantly improved such as Mexico, South America, Germany, India, Thailand and South Korea. Overall our company now does business in 115 countries. The next slide 18 will be a familiar slide to the people who have seen our investor presentations in the past. And despite this combination nothing has really changed with our growth strategy. We believe our markets will be growing over time although modestly in the 1% to 2% range and we will continue to grow above the market by 2% to 4% over time for a differentiated customer intimate business model and our cross-selling opportunities. We have done this consistently in the past 10 years and believe this will continue. The cross-selling opportunities will come from selling products that one company has that the other doesn't. Or maybe it's even a weaker product. And selling out to the other customer base, which remember is very complimentary. We'll also continue to expect benefits from the past acquisitions that each company has made and has not, and those products maybe have not been completely rolled out yet. And of course acquisitions will continue to be a core part of what we do as well. I believe these are very good ways of creating shareholder value. In the short term we will concentrate on paying down debt and -- but we will still look for smaller bolt on acquisitions as opportunities arise after we reach our targeted net debt to adjusted EBITDA ratio into years we will look for larger opportunities. In slide 19, we have provided more detail around our cost synergies. As you could see we have broken down the synergy realization by time both by calendar year and by years from today. Some key points are that we now expect to achieve $60 million of synergies versus our previous estimate of $45 million. All these synergies will be achieved by the end of year two. So in year three we will see the full effect. We are providing a breakdown of the type of synergies which are very broad based in nature and come from many sources such as supply chain optimization, extra production, raw material purchasing and operational efficiencies. If there was one benefit from a long period of trying to get regulatory approvals, it was that we really were able to plan thoughtfully and in a detailed manner how to fully achieve these synergies. Now we are ready to hit the ground running and achieve them. On slide 20, we provide more detail around the divested businesses. We had to divest certain product lines in Houghton's aluminum and steel businesses in North America and Europe. The revenue impact was consistent with our original expectation of 3% of the combined company. The adjusted EBITDA impact mentioned here of $11 million is more of the variable impact that we get hit with day one. But over time, that impact is less as we will reduce the related manufacturing and SG&A costs that remain with the company. Okay. Let's move on to slide 22. One of the more frequent questions that I've been asked over the past two years is how is Houghton doing. We were not permitted to share this information until now. The short answer is that Houghton's performance has been very consistent with the projections that were provided in our July 2017 proxy for the shareholder vote. You can see this by comparing the actual adjusted EBITDA to the projected adjusted EBITDA in the boxes right below then, so, all in all very consistent and a close match. You can also see that Houghton had more variability than Quaker over this time period. On the right hand side we tried to list out some of the key factors impacting their performance from 2016 to the last trailing twelve months, so comparing the two less bar columns there. And there were two major drivers there. There were Korean joint venture and there were offshore business performances. Both of which showed declined. We believe these businesses are likely at their lowest point currently and there is more upside than downside going forward. Fortunately the Houghton businesses that have been the core part of Houghton have been performing well and grew adjusted EBITDA by $8 million over this two and a half year period. Another item to point out is that there's been a decline in the combined companies adjusted EBITDA between 2018 and the trailing 12 months. This decline is really primarily due to foreign exchange rates. On the next slide, slide 23. We are taking the same data as the previous page and adjusting it on a pro forma basis which included the divestments and some other minor adjustments. Today our trailing 12 months adjusted EBITDA is $239 million. Just like that previous chart it's down from 2018 primarily due to foreign exchange. However, we are projecting our full year 2019 pro forma number will be somewhat over 2018 despite being down on the trailing 12 months. While we don't expect our markets to dramatically change in the second half of the year we do expect to have our year-over-year comparisons to improve because our markets weakened in the second half of last year as the foreign exchange raised versus the U.S. dollar. Overall. We don't expect the negative impacts we face in the second quarter to have the same magnitude as in our second half comparisons. And our forecasts indicate some year-over-year improvement in our adjusted EBITDA for the second half. In addition, we will also begin to see synergy improvements which we estimate will be approximately $5 million over the next five months. And that will be back loaded into the fourth quarter. On slide 24, this provides an indicative picture. What happens now that we're combined, and then after we achieve the cost synergies. As you can see our adjusted EBITDA run rate goes to $290, and by the time we get to this point which will be two years from now we believe our growth will also generate additional EBITDA and we will be over $300 million which is quite a change from Quaker's trailing twelve months adjusted EBITDA of $124 million. A couple other points on the slide, the gross margin of the combined company will be 35% which is our estimate of what is currently, which is not on the slide and we expect that to increase to about 37% once the cost synergies are achieved. Also we expect to expand our adjusted EBITDA margin by 4 percentage points to 18% once the cost synergies are achieved at the end of year two. On slide 25. We have given some additional information that may be helpful as people model our performance going forward. And slide 26 provides our capital allocation priorities. We will be focusing on paying down debt, our long term debt to adjusted EBITDA target is two to two and a half. We believe we will be below two and a half, two years from now. We'll also continue to pay a dividend like we have consistently done over the past 47 years. And as I mentioned earlier we will continue to look at acquisition opportunities going forward although in the short term they will be small in nature. On slide 29, I make my concluding remarks. I am really pleased. We are at this point and we can begin our journey as Quaker Houghton. Two years from now we will be a company that has achieved the synergies and we will be a $300 million plus adjusted EBITDA Company that is well-positioned for above market growth and has a balance sheet and it's targeted debt range and is well positioned to make future acquisitions. So with that, I'd like to open it up for questions.

[Operator Instructions] First question here's from Jon Tanwanteng from CJS Securities. Please go ahead.

Thanks take my questions again guys. Mike, you mentioned an over $300 million EBITDA goal in two years, assuming that September 2021. And you have -- maybe [Indiscernible] and 240 goal for this year pro forma, can you tell us what your goal is by the end of 2020 kind of between those two data points or even 2021 if you can see that far with the full synergy?

Well, as you know we don't kind of given really specific guidance per year and stuff like that. But one thing I just want to clarify on the $300 that was on a -- by the time we reach that it's going to be on a go forward basis. But I think, Jon, if you can that synergy achievement in that one chart and that's a big component of certainly going from the 230 today to the 300. I think if you can model in those as year-by-year, calendar year synergies you get a pretty good idea of where we're going to be.

Okay. Got it. And maybe just to get it in another way. What is your expectation for EBITDA growth in 2020 organically before synergies I guess? Is going to be approaching that historical between call it high single digit rate that you've done traditionally?

Well, one of the things we said is certainly the 2% to 4& -- we always long term we expect to be 2% to 4% percent over. If you read some of the comments we had in the press release, we see the first year here is there's really going to be concentrating on the integration stabilizing, customers focusing on them, retention and so forth and making sure everything is very stable. I wouldn't be surprised if our volumes might not achieve that 2% to 4% in that first year. But I said in that in the press release that it would get back to that in the second year. So I still think we'll have growth depends of course what our end markets are doing at that time. But it may be a little bit more modest than the interim period here.

Okay. Fair enough. And then, you mentioned Korea being a sore point for Houghton. What does that JV doing and kind of what is the outlook going forward for?

Sure. I mean, it's a very significant JV and it has a very large business. We're very happy to be honest because we had as Quaker, we didn't have a large presence in Korea. And really -- what really happened and if we kind of looked at their performance over time and we'd certainly don't – you don't have that information but you would see that 2016 was kind of a somewhat is an outlier or a little bit in there and how high their performance was. And then some things have happened since then is really just some of the slowdowns in the Asian markets. They obviously sell a lot to the Korean OEMs. So, where they have slowed down there and maybe even other parts of the world like China for example that that's what we're seeing there. So, we don't really -- the best guidance we've gotten from the Houghton team is that, it's likely that we're at the kind of trough at this point with that JV.

Okay. Any hope for improvement in the near term or just plateauing at this trough level?

Well, we haven't had like a lot of detailed discussions with our joint venture partner on that yet, so I can't really comment on that. But again what we've been told by the Houghton team, they feel there's more upside than downside going forward with that entity.

Okay, great. And then just finally on a strategic side, but what is your appetite for smaller bolt-on and M&A deals between now and getting to your target leverage. Is there an active pipeline or have you been too busy to focus on that and what does the market look like?

Well, mainly our approach is with M&A is like we're kind of not actively going out right now and looking for things. But as opportunities arise and they come up and people want to sell and you have to kind of react to that. So, from that perspective we are continuing to look at opportunities and we are interested in and still making these smaller type of acquisitions that we feel can create good shareholder value.

Great. Thank you very much. Congrats again.

Thanks, Jon.

Our next question is from Mike Harrison from Seaport Global. Please go ahead.

All right. Good morning and congratulations. I've been waiting two years to ask these questions and I don't know what to ask first. Mike, you mentioned that this transaction has been around for quite a long time, kind of kicking around as an internal project within Quaker. Can you talk about kind of how this transaction has evolved over time maybe why it took so long for you guys to move forward in a deal without? And why is the timing right now? Is it just as simple as is having a willing seller or is there more to it?

Yes. I think it’s really as simple as that. I mean, certainly the history with Houghton has been that they were a private company up to 2007. They were sold to AEA. At that time when they were sold we would love to participate in that process. We were now allowed to participate in that process because there was the owner wasn't a big fan of Quaker, the family owner there. So, he didn't want to allow Quaker into the process. And then the private equity owner of Houghton for five years sold it in 2012. Even in that process it didn't make sense for AEA to include us in that process because they were trying to sell before the capital gains treatment changed and they want to take advantage of that. So they wanted to get stuck into any kind of regulatory review. And therefore we were not part of that process, so when the Hinduja Group bought it in 2012 then we started to have discussions with them and then it finally culminated to having an agreement in place in April 2017.

All right. And then, wanted to ask also about this larger customer base moving from 3500 customers to 15000; are there going to be some opportunities to shed some low margin business among those customers or have to be some that aren't great or might be better served through distributors. Just wondering if you have thoughts on that? And do you have tools in place from I guess an ERP or an IP perspective or their tools to identify and take action like that on a customer by customer basis?

Our approach right now is to kind of keep everything we have and stabilize, get everything integrate it and -- but then we will start to do things like we normally do, Mike, when we take an EVA approach to business, we analyze where we make money whether it's in certain product lines or certain customers and maybe out of that exercise some things change, but we don't have any information to lead us to because we haven't been privy to that kind of information since we've met competitors and so forth. We don't have any customer related type information. So I hope that gives you more flavor. It could happen. Some could happen down the line. But right now everything is going to be stay the same.

Okay. And then the last one for me right now is it seems like really one of the most impressive opportunities you have here with this combination is the strong position that Quaker Houghton is going to have in metalworking obviously, the broadest portfolio in the industry and in market leading share yet it's still relatively low in terms of the combined total market. I was wondering if you can talk about how you're going to be approaching that metalworking market. How long is the selling cycle? And you win big chunks of business after that selling cycle is complete or do you get little pieces at a time. Just trying to think of how that share gain opportunity could evolve?

That's a good question. First of all the way you summed it up I thought I totally agree by the way they did a really good job with that couldn't set a better, because I do believe that's a big opportunity. And I still believe we even have good opportunities within our other markets as well and metals market. But generally how we're going to go about, we have these cross-selling. We think they're going be significant going to take a while. As you know we've made a number of acquisitions over time and the sale cycles for these things takes a while. As you get new technologies that you want to sell to your customer bases. So in this case we have products that let's say Houghton has that Quaker never had. And we're very excited about those and trying to sell those to our existing customer base. Likewise, we have the opposite situation. Quaker has products that Houghton doesn't have. And because the customer bases are so complementary in nature and that we believe there is good opportunity here. We haven't given any specific guidance around the speed at which this can happen and other than we think it's really going to first become visible in the second year. So it's going to take a while. There's run rate. But we have programs around that and we're very -- we are very excited about to make it happen. And the other question I think you kind of have was around the size of customers and metal -- in the metalworking and generally it's a smaller sales amount of quantity products that you sell to a customer at a specific location generally than then maybe in the metals market, so many more customers.

All right. Thanks very much.

Thanks Mike.

Our next question is from Laurence Alexander from Jefferies. Please go ahead.

Hi, there. So I guess first of all just looking at some sort of the end market breakdowns that you've given how important for you is to specialty greases as a longer term opportunity?

At longer term we still like special greases because it's a kind of rate in and expands our portfolio that the size of the specialty greases market is a huge market itself. So it increases the addressable market for our company. And as you know we've made three smaller acquisitions in grease over the past 10 years in this area and we're even -- even in the Quaker portfolio things we're still rolling that out globally, trying to penetrate into our existing customer base with specialty grease. And now we will have that same opportunity to do that with the customers that haven't had.

Can you breakout for the combined company the pro forma, the percentage of sales that is tied into the metals, the industrial and the automotive markets and aerospace in the big four?

We don't have -- I don't have anything specifically in this. But I would just say the one thing I could say is automotive, we think continues to be something that's probably in the order of magnitude about a third of the company. And then, the -- but while these other markets I think we're much more diverse now than these and other metalworking markets. Houghton is much more diversified and how they go about these other industrial markets. So, we are planning the product show some additional slides around that to kind of give a better flavor of that as we go forward with our investor presentations.

And even on the automotive side as we've talked about before, again, Quaker tended to focus more on the large OEMs, Houghton, much more diversified automotive focused Tier 1 Tier 2. So even though the combined company is still in roughly that one-third to automotive, it's a much broader automotive footprint.

Can you give us a sense for the relative size of your larger competitors, I mean, what you know what your sizes are the multiple of your next largest competitor or some kind of metric like that for market density?

I don't have perfect information on that, Laurence. So, I don't want to throw out numbers. We believe in our space what we call our space we are the market leader. I would just say the next two people or companies down from that would be Fuchs and Castrol.

And then just lastly, I guess we haven't really touched on the difference in the operating cultures. Can you give a sense for what you think Quaker can learn from Houghton and what the housing can learn from Quaker. And what you're itching to fix?

Yes. I don't know. Yes. That's a great -- that's a really great question. I think our cultures in general by the way are pretty similar. We had a lot of time here, 28 months to plan our integration and because we're only ten miles apart we got to deal almost on a daily basis with each other around planning for integration issues. So, we feel really good about the relationships that develop the cultures of the company, the focus on the customer. So from that aspect we feel really good. I think, Dave, there's different things that each company is focused on. Like I think the for example, Houghton has been farther ahead than we have been and putting equipment in with customers to automate kind of monitoring things and we're excited to learn and do more of that around our customer bases. I think certainly we have certain practices that I mentioned earlier like taking the EVA approach to the company, analyzing where we make our money, where we don't, by customer, by product line just understanding better again because we felt that has really helped the Legacy Quaker business a lot improving profitability. And Houghton hasn't done that historically. But we think doing something like that over time will help optimize the profitability of our businesses.

Thank you.

Thanks, Laurence.

Our next question is from Edward Marshall from Sidoti & Company. Please go ahead.

Good morning once again. The combined D&A that you provided in the press release allows you kind of the back into some EBIT margins for Houghton. And I'm curious, has the deal accounting been finalized yet or are you still going through those metrics in that subject to change?

Yes. The latter, the deal accounting has not been concluded. This is just reflective of our estimates as of now. We are obviously engaged with valuation experts, but this is very much preliminary.

Okay. It looks it might be a little bit lower on a kind of mid single-digit kind of EBIT basis. But it does look like the synergies make that recover relatively quickly. I just want to be clear that the synergies the 60 million how much of that would be cash versus how much of that might be non-cash through D&A takeout, et cetera?

It's all cash.

Okay. The second question I want to talk about was the – and the 11 million from the divestiture, is that also included in the $60 million or is that in -- is that in excess of that 60?

Yes. So if you can see kind of in that one chart where we kind of have a walk-through, Quaker, Houghton and then you have the 60 million synergies, yet the 11 million take off for divestitures, so there are two separate items.

Got it. And then finally, if I look at the number of customers that Houghton has versus the number of customers that Quaker has, I think one of the key elements about Quaker is about the customer intimacy in the model. I'm just curious with that many customers. How you I stay so close to your customer with that kind of market breadth? Thanks

Sure. That's a good question. They do have a very customer intimate approach and if you look at for example there they put their business called the FLUIDCARE business which is the same kind of business we call chemical management services business. They actually have a lot more people involved in that business where they have people at the plant day in day out at a number of their larger customers. So they do put a lot and they have a lot more people than Quaker does kind of out there servicing customers on the street. So that they have more customers, but they also have more people as well servicing, so again we find that a very attractive feature of our approaches for combining our two companies.

Excellent. Thanks for the update guys. Lot of my other questions have been already asked. Thank you.

Thanks Ed.

This includes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Okay. Given there are no other questions, well, I'll end the conference call now. And I really want to thank all of you today for your interest today. We are pleased with the finalization of a combination with Houghton. And I am confident in the future of Quaker Houghton. Our next conference call for the third quarter 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 Houghton.

This concludes today's teleconference. You may disconnect your eyes at this time. Thank you again for your participation