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…

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…

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…

[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