Greetings, and welcome to the Quaker Chemical Corporation Fourth Quarter and Full-Year 2016 Results Conference call. 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, Mr. Michael Barry, Chairman, Chief Executive Officer, and President for Quaker Chemical. Thank you, sir. You may begin.

Thank you, Donna. 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 start it off now with some remarks about the fourth quarter. I’m pleased we have delivered another quarter of solid earnings and strong cash flow, despite continued foreign exchange headwinds which negatively impacted sales by 3% and earnings by 5%.This marks nearly three years of consecutive quarters where foreign exchange has negatively impacted our results compared to the prior year. I’ll now make comments on the quarter sales, and I’ll do so in each of our respective regions. In our biggest segment, North America, we showed a sales decline of 1% due primarily to a 2% decline from foreign exchange rates. Our European or EMEA region showed a 2% increase in sales despite a 2.5% negative impact from foreign exchange rates so overall, a good sales quarter for EMEA. And for the second quarter in a row, South America showed good revenue growth of nearly 20% as Brazil has begun to show signs of having hit bottom and beginning a slow recovery, with both good volume growth and improved product pricing. In our Asia Pacific region, sales were up 15% on strong volume growth which was partially offset by exchange rates and lower product pricing. Despite the challenges we faced, we were able to grow our non-GAAP quarterly earnings by 9%. In a nutshell, we were able to do this based on good growth on our base markets, taking share in the marketplace and continuing to…

Thanks, Mike, and good morning all. Before we begin, I’d like to remind; 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 2016 Form 10-K filed with the SEC. These are also available on our website. Quaker delivered another strong performance in the quarter and for the full-year, driven by significant increases in volume, especially organic volume growth. While we continue to be buffed [ph] by foreign exchange headwinds, we’ve been able to overcome these with our focus on leveraging market share gains, including our past acquisitions, our cost discipline and most importantly our continued focus on delivering results for 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 visibility into Quaker’s operations, excluding certain one-time items which we believe do not reflect our core operations. Reconciliations are provided in charts 10 and 11 of these investor slides and they’re also in yesterday’s earnings release in our Form 10-K also filed yesterday. So, my following comments are based on charts 4 and 5 taken together. Quaker reported a 9% increase in non-GAAP earnings per diluted share for Q4 2016 to $1.26, and a 4% increase for the full-year to $4.60, versus analyst consensus of $1.19 for the quarter and $4.53 for the full-year. We achieved these results on strong volumes and good cost discipline despite negative foreign exchange impacts of 5% for the quarter…

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

[Operator Instructions] Our first question is coming from Edward Marshall of Sidoti & Company. Please proceed with your question.

Good morning guys, how are you?

Good. Good morning Ed.

Hi, good morning.

So, my question is, I guess, when you look at the price compression that you might have seen due to raw materials. And I think you mentioned in the prepared remarks but I missed it. The basis points of impact on the margin due to the raw material squeeze. And then I guess, secondarily, I know you gave some guidance into Q1. I’m thinking about for the full year, maybe what that impact might be seen. I know we talked about in the past that you see it coming at some point you just can’t put a point to it.

So, on your first question was around I think gross margin, and that we said we had not had these number of one-off kind of items that were kind of unusual in nature. But they’re all on one direction. We would have been around 37%, our gross margin. So it would have been pretty consistent where we expected it to be. We always have kind of things going on in different places around the world, somewhere raw material is going off, some price increases, some maybe falling, currency issues and so forth. So we try to keep it in a certain range and that can be a 3 to 6-month lag at times. But it pretty much came in where we expected it other than these kinds of one-time items.

And as Mike said, we continue to expect to kind of carry that expectation into the first quarter.

Right. And could you comment on the full-year or is it just too early to do that?

Yes, we don’t comment, really give any guidance with respect to the full-year but we do try to just directionally since we’re already in the first quarter to give you a little inside into what we’re seeing. So I think the message there is excluding the one-time impact in the manufacturing line as well as raw material costs, we would have expected it to be closer to the 37%. And that’s what we see carrying forward into Q1.

Got it. And the restructuring benefit that you talked about in the quarter, in the reverse, do you know the basis points of improvement that you would have seen to the operating margin due to that action which you’ve done prior quarters?

Now, we actually had a slight credit in the quarter.

No, I’m sorry, not the charge itself or the benefit itself, I’m asking from prior quarter actions, what the benefit in the particular quarter from the cost savings?

Well, I think we mentioned that the total cost savings in the fourth quarter were relatively equivalent to where we were in the third quarter.

Yes, so we said the back half of the year.

So, sequentially, yes, sequentially it wasn’t a big difference there between the two quarters.

Right. So what we had talked about earlier is that we expected $3 million of the restructuring charge savings benefit to flow through the second half of the year. And we did see that and it was kind of proportionally throughout that second half of the year.

Got it. So about $1.5 million a quarter. And then finally I guess when you talk about FX headwinds 3% or 5%, I guess the euro is a big currency to pay attention to. What are you basing the 3% to 5%, what number, what euro conversion rate are you basing that 3% to 5% on?

Yes. So the last - really the last several quarters and certainly this last quarter the Peso and the RMB were more impactful than the euro as I mentioned.

Okay. Could you talk about the conversion rates that you baked into that forecast on those two currencies just to give us a sense?

I think the low-end of the range was really based upon current rates. And then the top-end of the range is really more based upon what people are projecting the rates to be on average for the year.

Got it. I appreciate it guys. Thanks very much.

Yes, thanks Ed.

Thanks Ed.

Thank you. Our next question is coming from Mike Harrison of Seaport Global Securities. Please proceed with your question.

Hi, good morning.

Good morning Mike.

Good morning.

Mike, I was wondering if maybe you can give a little bit more detail on the one-time charges that you called out related to raw materials and some manufacturing cost. What happened there? Did you just end up with some off-spec material and was there a particular region that that one-time charge affected?

And let me take a stab at that Mike. It really was quite a fairly long list of adjustments, for example, including manufacturing yield true-ups and adjustments that normally occur and other adjustments not particular to one region at all. And these adjustments that normally happen in the quarter, what was atypical is that normally there would be - we would see puts and takes. And in Q4, they just all the stars misaligned if you will in the same direction.

So it was just unusually negative when usually these net out to be more neutral?

Exactly.

Okay. And then just kind of continuing on the raw material theme; understanding that you don’t want to provide gross margin guidance for the full-year. But just maybe provide your outlook on what you’re seeing in terms of the raw material picture and trends in crude-based, plant-based, and animal-based raw materials?

Sure, we’re certainly seeing some of these trends upwards especially the vegetable based oils right now. We’re seeing not so much on the animal fats. And minerals will tend to over time go up and down in crude. So it’s not a big factor. We’re also seeing increases in the additives that we buy as well. So, that’s kind of a mixture of different things. And even though vegetable oils could be going up now, could maybe come down later in the year and so forth. So, it’s kind of normal cycle of things and we try to stay on top of these. As you know Mike, certain contracts that will automatically adjust for these types of items. And then, other ones that, are just more pure negotiations and go back to the customer and make our business case for the price increases. And generally, the matter of prices going up or down there is kind of a 3 to 6-month lag. But we’re trying to stay on top of it and keep our margins as constant as possible.

All right. Then I wanted to ask about the strength that you are seeing in Asia-Pacific right now. Is that more on the primary metals side or on the metalworking fluids side? Then in terms, I think you also said that pricing was lower in Asia-Pacific. I think I get a little bit concerned when I hear about higher volumes, lower pricing, and you’re gaining share. You’re not in a situation where you’re cutting price competitively in order to gain volume?

No, I think first of all when you talk about pricing, you got - we’re comparing versus the prior quarter from a year ago, not necessarily sequentially. And so, over that time period even though raw materials might be starting to go up, they are down and therefore there are some price adjustments that happen made them on the way. So, I’m not really concerned from that perspective. And then on the volume side, it was pretty much even. I think we had, we saw good auto growth in Asia-Pacific, in China in particular, the primary metals, as well is doing well. Including taking our shares in the market place so I think it’s a combination of various things, Chinese New Year was a little accelerated this year, closer to the end of the year. So, you have a number of factors in there but overall we feel very good about our Asia-Pacific business.

And in China right now on the steel side, are you seeing any benefit at this point from closures of less efficient steel capacity? And do you expect to see any action on this front during 2017?

If we continue based on what we read, the government to continue to take actions to shut it down. A lot of the mills that are shutting down tend to be the older less efficient mills, and tend to be the ones maybe we’re not particularly in. And hopefully that will shift production to the bigger mills where we tend to be in. It’s hard to say are we benefitting per say, at about all we know is kind of our volumes are up pretty well. So and how much of that is due to exports deal and how much is due to whole list of indigent demand in China. It’s really hard to kind of piece it all together. But all I know is overall our volumes are good.

And then last question from me is just on the acquisition front. There was a report out there suggesting that you might be looking at a deal potentially with one of your larger metalworking fluids competitors. Without commenting directly on that, I was just curious, you’ve got net cash position; your stock is near all-time highs so it’s a strong currency right now; borrowing rates are low, but potentially going higher; and you guys have done a lot of smaller bolt-on deals. But can you just talk about your capabilities and whether Quaker is ready to do a larger deal potentially?

Sure. I mean, as we’ve talked in the past, Mike, we’re looking at acquisitions. We feel that a key aspect to our growth not only do we think we’re going to have really good organic growth which we’re very happy about especially for our new technologies. But we think like you said we have very strong balance sheet and we continue to grow. We’re going to we continue to look for acquisitions that can bring us new technologies which would maybe be smaller acquisitions. And we also like to look at acquisitions that would be bigger companies. And it’s really more what’s available, what’s out there, who is willing to sell as you know, it’s not if it needs two people or two sides to kind of agree. So it’s really hard to tell, give any kind of indication of what’s going to happen. So, we’re always working on multiple opportunities like we have, some fall apart, some don’t. And we continue to progress on that. And I think no matter what the opportunities are whether there are small ones or large ones, we feel confident that not only do we have the team in place and the people in place but we would have the balance sheet and the financial flexibility to make them happen.

Sounds good, thank you very much.

Thanks Mike.

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

Good morning, Mike and Mary. Thank you for taking my questions and very nice quarter.

Good morning.

Good morning, Jon. Thank you.

Can you remind us what South America is as a percentage of revenue and profits? And kind of has the recovery continued or accelerated heading into Q1 that you’ve seen so far?

South America is, last I did the calculations, roughly 4% of our overall sales. So it’s a relatively minor piece of our overall business.

And is business down there profitable right now?

Yes, I mean, even I didn’t say at this time, probably I’ve said it in past conferences, even when we’re kind of in the very bottom, today which was probably the first half of last year and the year before. We still were generating cash to making money down there. So but we’re happy to see conditions improve.

Okay, great. And then, Mike, can you update us on your general competitive positioning? After so many years of share gain, how should we think of the ability to sustain that kind of growth? And are your competitors still standing still relative to what you guys are trying to offer?

We said in the past that we’ve been growing above market for on average little over 2% sometimes 3% and even some years 4%. But and we kind of give you indications each quarter of how much that is and this one we kind of pointed out that our markets were growing at 4.5%, we grew at 7% on our volumes. So you can kind of see that kind of spread again. Then, kind of the - will that continue? Certainly no guarantees things continue, but we’re talking about our competitive positioning. We feel it’s pretty broad based in different markets and in different areas against different competitors and so forth. So we still continue to feel very good about that. And the thing that gives me even more comfort about that going forward is these new technologies that we’ve purchased over the years, so we purchased several new technologies that we weren’t in 6 years ago or so. And now we’re continuing to make efforts into selling those technologies, rolling them out globally to our existing customer base. And so, you’ve probably heard me say every time, we’re still relatively early in the baseball game on that one and there is a lot of lead-way left to go. So, I feel between the combination and continued share gains and these new technologies, I continue to feel good about our organic growth here now.

Okay, great. Mary, can you comment on how you expect cash flow to grow relative to earnings this year? Is it going to be faster or slower in ‘17? What are the puts and takes to that, whether it’s CapEx or working capital or anything else?

We continue to at least to date again a positive trend in EBITDA. We continue to focus on operating margin and try for continued improvement in that operating margin as we hope to and as Mike said, our game plan to roll these technologies out globally. And to leverage that global footprint we have in the existing infrastructure we have to continue to hopefully drive the operating margin north. So, that should continue to translate into good cash flow.

But I think, also we kind of mentioned CapEx and working capital has been a little bit of a headwind for us. And we’re hoping some of those headwinds might come down so that would be plus if it did stabilize. And if CapEx side, we always try to keep - we’re pretty CapEx light as a company. We’ve been generally spending anywhere on average over the past several years maybe $12 million or so. And this year could be a tad more, not that much more. It could be $13 million, $14 million in that range. But and that’s because we’re building a new plant in the west side of India. So, but, other than that we don’t have anything major going on that would - we still think will have very strong cash flow.

Great, thank you. And then, finally, just if we could talk about the uncommon transaction-related charges. Are there more things shaking loose on the acquisition front in the near term? What does the pipeline look like compared to three or maybe even six months ago?

The pipeline is, as I kind of just mentioned a few minutes ago, we’re always looking at things. So there is always a one-time different deal is we’re talking to in different stages. So it’s really hard to predict what’s going to hit and what’s not. And of course even if we had a good understanding right now it’s not something we would disclose because we’re under confidentiality agreements and we got to complete the deal before something happens. So, there is always a lot of things going on the fire and things would, all I could say is we’re continuing to be committed to making acquisitions happen. It’s just hard to say if it’s going to be later this year or two years from now, it’s something. But if you can just look at our track record of 12 acquisitions over the past 6.5 years or so, then you can kind of see that we’re committed to this. And we expect that to continue.

Great, thank you very much.

Thank you.

Thank you. Our next question is coming from Laurence Alexander of Jefferies. Please proceed with your question.

Good morning. I just want to wrap up a few odds and ends. Can you - so with the comp discussion earlier about the tailwind from cost-cutting and the $3 million in the back half of last year, how much tailwind net do you think you have in 2017 left to capture? And also, with the way you did the restructuring, how much of that would leak back if you had a stronger end-market? Or do you think it is like a - or is it a structural net gain that we should just layer in going forward?

Well, yes, it’s a good question. I mean, because those were the specific programs and there are some specific areas in that. And so, we look at that kind of separately from continuing to invest in the business. And we continually do that as people invest in the business. And we haven’t really given any guidance around that kind of thing. But on this program in particular we think there is about $2 million more year-over-year incremental benefit coming in ‘17 versus ‘16.

Okay. And then, secondly, on the gross margins. I mean, just looking at the commentary from about a year ago and where you are at and how you seem to be more comfortable now around the 37% level. What would it take to get back to the prior peak margins? Is that really an issue of volume recovery? Is it a regional mix? Is it raw material swings? I mean, what do you see as like the key factors that might get you back to that peak? I’m just trying to get a feel for what the scenarios are.

Sure. And you mean peak, you mean when we were more around closer to 38% margins right?

Exactly.

Yes. So, it would probably be a drop in raw material prices that would tend to cause the most. We don’t see any major shifts in our product unless there is something major happening in our product lines. But we don’t see that happening. So it would have to be really I think a major drop in raw materials to cause that come back at this point. And you’re right. We didn’t know, it was such a major drop, was 100%, it was such a major drop we didn’t know kind of where things would eventually shake out. And we still are not what I consider great predictors of the, because there are mixed issues and so forth that happen quarter-to-quarter. But we have now seen a period of time where things have more stabilized around the 37%.

Then just lastly, can you talk a little bit about what you are seeing in terms of labor cost inflation and how you’re managing sort of staff retention?

Sure. I mean, first of all we’ve been very fortunate with retention. We’ve been able to retain our key people over time. And actually attract people from other companies. So we feel very good about that. From a labor perspective I think like most companies we’re going up with modest amounts in the most mature markets that we’re out in the 3% type of range. And then maybe some of the more growing markets we’re going into India or China, depending upon the position levels, that could be a little greater than that.

Okay, great. Thank you.

Thanks Laurence.

Thank you. Our next question is coming from Curt Siegmeyer of KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning, guys.

Good morning, Curt.

You mentioned in your prepared remarks some higher production in the quarter in some of your end-markets. Could you maybe give a little more color on that? How much of your 7% volume growth was due to that and what regions was it in? Was it just seasonal effects or what kind of drove it?

Sure. I mean, Global Steel, certainly is a big part of our company and roughly half of our business. And global steel production went up 4.5% globally. And if you look around the world what it did, Asia-Pacific went up 4.2%, Europe went up 7%, North America was up 5% and South America was down 9%. So, every region went up kind of except for South America on steel production. So, when you look at auto’s you kind of see a similar number, global auto production went up around 4.3%. So I think when you kind of look at those steel and auto, you’re in that 4% to 4.5% range and then you kind of look at our volumes, 7% range. So, the kind of way I just simply look at it is that differentials probably just tend to be tied to production and we tend to be tied to global numbers that differentials really are over-picking up in the marketplace above market growth market share gains.

Okay. And then on South America, you mentioned 20% growth. I know it’s a small piece of your overall business, but you gave the delta in total volumes versus underlying market growth. And I was wondering if you could maybe talk about that in terms of South America. How much of that 20% was underlying market growth do you think and how much of it was sort of new business wins?

Yes. I don’t have that exact breakdown in front of me. But I know we have been winning down in South America, we have been taking shares in that marketplace. But we also know things are getting better down there as well. I would say in general close to half of that 20%, maybe a little bit less is relative related to volumes. So that can kind of give you a sense of, it’s hard for me to give you that exact breakdown though what’s new versus just increased production. But it is a combination.

Okay, if I could squeeze in just one more just on capital allocation. I know people have asked a little bit about the balance sheet and acquisition opportunities with your net cash position, and your balance sheet is in the best shape it’s has been in a few years here. How do you think about the remaining capital allocation potentially buying back more stock, given you bought back about $6 million in ‘16? And I know it’s run quite a bit, so just wondering what your updated thoughts are on that.

Yes, I think we tend on the - again we think about capital allocation, we always say. It’s the most important way we can create shareholder value is to use our capital for making acquisitions. That’s by far the most primary use of it. Of course the dividend, we’ve been making dividends for ever since we have been in public company, 45 years and increased or maintained every year during that time period. So, those will always be continuous things. I think we view share repurchase programs more opportunistic. So I think when we saw our stock guide, the lower in January of last year. And we took advantage of that opportunity to buy our stock below $70 a share. And so, I think we’re just much more concentrated on the acquisition as the best way of using our capital.

Great, that’s helpful. Thank you.

Thank you. Thanks Curt.

[Operator Instructions]. Our next question is coming from Liam Burke of Wunderlich Securities. Please proceed with your questions.

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

Good morning.

Good morning.

Mary, you mentioned capital, that incremental capital will be needed to expand capacity in India. It’s relatively large steel market, certainly not as big as China, but relative to the rest of the world it is pretty big. Is there anything new going on there? Are you seeing any changes or is it just a natural progression of the market growth?

I’ll make a quick comment, Michael chime in. Currently our facility and we have a joint venture there - we’re the majority owner there. But our current facility is more on the eastern part of the country. And we see an opportunity, the growth in that industry as more in the western side. So again, with our philosophy of going with our customers and staying close to our customers, that’s really the catalyst for the build there. And we expect that to span over 2017 and 2018, so while, as Mike mentioned, you might see maybe a little bit of a tick-up in CapEx related to that again, still within those general boundary parameters that are typical for Quaker.

On the acquired technologies, Mike, some of these are complementary to what would go into a typical steel mill. Others are on the metalworking front. Is the organization in place to be able to sell these products globally?

Yes. I mean, definitely at this stage they are. Generally as we hire or as we acquire our new technology in an acquisition, the good news is we have that new technology. But we generally only have it in the country or the world that we purchase the acquisition. And then we have to hire people, product experts in that area to kind of help us with our existing sales force go and sell that. So, it takes a while to kind of get up to speed with that. Once we get those people in place then we tend to do trials, then once we do trials they become, and hopefully get the new piece of business, they become reference accounts for us. So, it’s a relatively lengthy sales cycle that continues to build up on itself. And I think we’re feeling good because we got all the people that we need for these new initiatives around the world. And we are gaining new business. We are gaining reference accounts and being successful in trials. So yes, I feel good for the progress that we made.

Great. Thank you, Mike. Thank you, Mary.

Thank you, Liam.

Thank you.

Thank you. Our next question is coming from Garo Norian of Palisade Capital Management. Please proceed with your questions.

Hi guys. Maybe just to tack on to the end of what your answer was there. Do you feel like you’ve gotten better over the last few years taking single-country bolt-on and being able to more quickly and effectively bring it throughout your system?

Yes, I think we’ve learned and benefited from the numbers of these acquisitions that we’ve done. And some that depends upon the kind of technology and the kind of resource they need to hire, I think of one the acquisition that we did was a relatively small one where we bought our tin plating business from McDermott. And that time we - they only had four tin-plating mills around the world. And they could use our brand and our infrastructure and people to help them. But that contained a small group of people that could go around the world and do that. So, actually they’ve been successful in gaining. And today we have 16 of those. So you can kind of see the progression. When, you go into other product areas like specialty grease [ph] where we haven’t been before. And there you happen to get grease experts around the world, so little bit of different dynamics depending upon the technology that you’re talking about. But overall I do agree that I think we’re gaining traction and we’re getting better at it.

And if I could add just a thought there too, I think we mentioned last year that we were implementing this customer relationship management system as well which we did do successfully around the world. And that just allows our process engineers what we call our sales people to have quicker access and up to date access to information which again we believe will help facilitate those processes.

Got it. And then just on M&A more broadly, how important has cultural fit been with these small acquisitions versus if you do something on a larger side? How meaningful might that be, a bigger organization if it’s not already kind of consultative customer-centric focus? What risks do you see or how that may or may not fit in with your guys’ culture?

Well, certainly one of the things we always look at acquisitions is culture. We want to have, we don’t want to have clashes or have two difference of opinions or way of approaches to the business. To be honest, it really hasn’t been that bigger an issue for us in the acquisitions that we’ve looked at. All the ones that seem to have a pretty good, I mean, if you’re successful in this business you’re concentrating on the customer and you try to find solutions for them, and that’s kind our business. And most of the ones we’ve been buying and looking at are geared that way. So, culture, I agree, it’s a really important thing. And so far it has been a big issue. And it will be something we’ll just continually look for as we look at our acquisitions in the future.

Okay, then just one last thing. How have you guys improved here or not, with your success in kind of penetrating the Japanese auto manufacturing chain?

We continue to make progress in that aspect. We have - we’re fortunate to have a Japanese joint venture that has been very supportive to us, helping us to provide resources to help us grow in different places around the world. And we’ve actually added resources ourselves in different places around the world that could accelerate that effort. So, it continues to be kind of one of, I consider those one of our many little singles. We try to keep hitting which continue to make progress, it’s not a double or triple, that are and our things. But each year we’re making incremental share gains in that segment.

Great, thanks so much.

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. Well, given there are no other questions, we’ll end our conference call now. And I want to thank all of you for your interest today. We are pleased with our results for the fourth quarter. And we continue to be confident in the future of Quaker Chemical. Our next conference call for the first quarter 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, today’s conference has concluded. You may disconnect your lines at this time. And have a wonderful day.