Greetings, and welcome to the Quaker Houghton Third Quarter 2019 Results Conference Call. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Barry, Chairman, Chief Executive Officer and President for Quaker Houghton. Thank you. Mr. Barry, you may begin.

Good morning, everyone. Joining me today are Mary Hall, our CFO; Joe Berquist, our Chief Strategy Officer as well as our Head of Global Specialty Businesses and Shane Hostetter, our Head of Finance and Chief Accounting Officer. We have slides for our conference call. You can find them in the investor relations section of our website at www.quackerhouhgton.com. Our last conference call was August 2, which was our first full day as Quaker Houghton. And now we've recently passed the 100-day mark and I can certainly attest it's been a fascinating 100-day period. Today, I want to make some comments from both the perspective of our external environment as well as my observations on our initial days as Quaker Houghton. So let me start it off now with some remarks about the external environment and our third quarter results. At a high level, our sales were down 7% with lower volumes and FX being the major drivers, which is very similar to the second quarter. Overall, our volumes were down 4% and foreign exchange negatively impacted sales by 2%. Please note as I refer to these numbers, I'm being consistent with our reported financials in our new segments and how we are treating the additional Houghton sales as combination related and outside of these volume metrics. However, we also provided pro forma information in our slides which include 2018 and 2019 for the third quarter year-to-date and trailing twelve month. When looking at the Q3 pro forma comparison, it also showed sales being down 7% with similar negative impacts due to lower volumes and foreign exchange. So, our story is consistent no matter if you look at our reported financials or the pro forma financials. As we started out the quarter, our July performance was good and consistent with our…

Thank you, Mike and good morning all. As you may have gathered from Mike's comments, we have a lot to talk about today. Before I begin however, I need to remind you that comments made during this call include forward-looking statements, which were based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and 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 note that we provide certain information including non-GAAP earnings per diluted share, non-GAAP operating earnings and adjusted EBITDA and certain pro forma items in an effort to provide shareholders with better visibility into core operations, excluding certain items which we believe do not reflect our core operating performance. Reconciliations are provided in chart 13 through 26 of this Investor deck and some of them are in yesterday's earnings release in Form 10-Q as well. So as you all know by now, we closed the combination with Houghton on August 1st, 2019. If one could pick the timing for close of a major transaction, one would pick the first day of a quarter, at least all accountants would. However, given our long awaited close, we are happy with a first of the month timing, but it does make things a bit messy. We strive for clarity and transparency, so we've included in the deck both actual results and certain information such as sales revenue and adjusted EBITDA on a pro forma basis, as if we had been combined with Houghton throughout the periods presented. We hope this provides more insight to…

Thanks, Mary. We'll now open it up for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question here from the line of Edward Marshall with Sidoti & Company. Please proceed with your question.

Hi there. Good morning.

Morning, Ed.

So I wanted to talk about. We looked at the organic growth down about 7. I wanted to make sure that Houghton was trending about the same, was there any differences and maybe their end markets that you'd like to share with us at this time.

No major differences really. What we was between the two companies was pretty similar impacts between the different types of businesses that we have.

Okay. You mentioned about 2% to 4% market share gains and that's what I think historically Quaker has done. You talked about several initiatives that Houghton might be bringing on. I'm just curious if overtime you expect that number to increase as far as market share gains over the market?

Yes. I mean the one thing we've -- I guess committed to Ed and trying to set expectations [indiscernible] like Quaker historically has been growing above the market, 2% to 4%. If you look at what we did this quarter as a combined company, we did 2% and we said it’d probably get back to that 2% to 4% after a year as we get really geared up with a lot of the cross-selling initiatives that we have and that takes a little bit of time. So I do -- I do feel confident that on the entire base of revenue, we'll be consistently in that 2% to 4% one year from now after all the things are kind of in place relative to cross-selling synergies, and could it be higher, it’s always potentially for that, but for right now I’m just – we’re going to stay with what we said about continually growing 2% to 4% over the market.

Got it. And in the release you talked about 2 million in synergies. I just want to make sure that's part of the 5 million that you expect this year, and do you still expect that additional 3 million? And Mike in your prepared remarks, you said 30 million in 2020. I just want to make sure that's the 2020 components and it’s incremental over that 5, so it's combined 35 million over the first, I think two years versus the first year and a half I think which is the original doc. Okay.

Yes. You're correct Ed, and both of those the -- we would expect to have three or so in the fourth quarter, and then we would have an incremental 30 next year.

Got it. And did the change in the business segments, I guess the global specialty business, it looks like the majority of that is a traditional Quaker business. I think there was about 12 of the 50 in from Houghton. Would you provide you know the pro forma for the segments for 2Q, 1Q as we go forward, or how should I– how should I think about kind of adjusting for that?

Yes, this is Shane Hostetter. So the amounts, the breakout like you said is obviously there is components between Houghton and Quaker. I would say, excuse me I would say your estimate is a little light on the Houghton side, but we won't be disclosing the individual components between Houghton legacy versus Quaker legacy within the global specialty businesses. We will be obviously disclosing the four segments going forward on an apples-to-apples basis from quarter-to-quarter basis, but we also will not provide pro forma items, the legacy businesses from prior year are just Quacker centric.

Got you. So we'll see the true up as we move forward each quarter that reports…

That's somewhat correct.

Okay. All right. Thank you guys, appreciate it.

Thank you, Ed.

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

Hi. Good morning.

Good Morning, Mike.

I was wondering you mentioned the 2 million synergies and your expectation that you would get another 3 million or so in Q4. We're going to get some contribution from Norman Hay in the fourth quarter. Just curious as to why we would be moving from $61 million pro forma EBITDA number to something that's lower than that given that we should be getting at least a kind of a low-to-mid single-digit million dollar EBITDA contribution for Norman Hay and those incremental synergies.

At a high level, it's really because I mean this is just our best forecast that we have from our businesses. There's certainly some components in there, like foreign exchange transaction that have kind of the lower operating income that, that was a positive this month, but we wouldn’t expect that going forward. There could be a little bit because we only had two months of Houghton in the third quarter. That probably put a little upward pressure a little bit on the gross margin. We expect to see probably some seasonality in our business. You know, one of the things that's really hard for us Mike to forecast is like a month of December, there can be seasonality. We don't know. Given the weak markets -- there's you know we're hearing some rumblings at some places that there could be more extended shutdowns over the holidays, that maybe we normally see, but it's really kind of too early to tell on a lot of that. So it's just tough sometimes in these choppy markets to get a very precise forecast. So that's the best we have at this point, but I'm certainly hoping it's higher.

Got it. And maybe in terms of those the extended shut downs. I'm assuming that you saw some of that activity take place in Q3. Were there specific regions or end markets where that activity was most pronounced in Q3?

I don't think we saw too much from a customer perspective around extended shutdowns. We did see certainly some lower production at our customer level, because maybe things in their supply chain or their customer chains as far as inventory corrections. But we didn’t see any too much from an extended shutdown. We did see you know the beginning effects for example on the early days on the GM strike in September, they are a customer of ours. So you had some certain things like that.

And then wanted to also ask about the raw material versus pricing situation. Obviously you guys had pricing down in the quarter overall. My assumption is that that's starting to follow what's going on with raw material trends. So is that true? And then my other question regarding that is has Houghton seen similar trends around its pricing, or often can be the case a company that's about to be acquired can maybe lose some of its pricing discipline. So do you feel like maybe there's some additional work to do on that legacy-Houghton portion of the business from a pricing standpoint?

Sure. You know -- when I think about pricing right now, I think our raw materials I feel we're in a very stable raw material environment and therefore we're generally on a pretty stable pricing environment. So I don't think of our -- think of what we're in a mode of declining prices right now. I think it's relatively stable, so one of the things there could be mix effects in there too, that are causing this. And as far as legacy Houghton they have been doing price increases overtime and so forth. So there's there's not a -- you know it's not that I don't think nothing's been done or anything like that. So I think, that's fine. Of course one of the things that we're going to be doing that, we've been consistently doing and the legacy-Quaker business is doing the EVA analysis, and we've been doing that for the past 12 years and that we kind of find that helps points us in the right direction of areas whether it's customer profitability or product line profitability that can be approved or maybe don't have adequate returns, we will be doing that analysis in 2020 on the legacy-Houghton business or the entire Quaker Houghton platforms. So hopefully that will continue to be a benefit for us going forward.

Okay. And then I had a question on the Asia Pacific business. You've had two quarters now where volumes were lower. If I think about Q4 of 2018 and Q1 of 2019 both of those quarters saw good volume performance even as we were seeing markets deteriorating around you. So given those challenging comps, is it fair to say that we should expect volumes to continue to decline in Q4 and maybe even into Q1? And maybe can you give a little bit of color in there also about where you were -- you mentioned India had an unexpected decline. Can you, can you talk about what you were seeing there?

Sure. Yes it's hard to tell. I mean, when I think about Asia Pacific for us, they continue to be very optimistic. And I feel their overall performance has been really strong. So yes, the volumes were down 4% but in context of some of the like automotive markets in China for example, in double digits being that it's I think they've been performing really well and like I said in my comments where we kind of looked at where we're getting share gains we're gaining share gains everywhere in the world, but especially in Asia Pacific. So I really feel our Asia-Pacific is continuing to do well. So it really will depend upon how things start. If things start to rebound, I think in automotive in China or not, there's talk of more incentives in place for that but who knows. So, I think that will really depend. I think we'll always do better than the market, how the market is growing there. India in particular that was we did see some declines there that were somewhat unexpected because of what's been happening relative to industrial production there. But again, the feedback we've been getting from our leaders there is that the government is putting in place some incentives and things in place to improve that and, they expect to see some kind of a rebound going forward there. So I don't – and actually I think that's going to be a long term thing. But it's certainly hit us in the third quarter.

All right. Thanks. And then one just kind of quick housekeeping keeping question, the inventory purchase accounting adjustment that you made, you noted there was a gross margin impact or gross profit impact of about $10 million. Did that also fall down the P&L and impact the operating profit and EBITDA as well or was there an offset somewhere else?

No Mike, this impacted operating profit as well as EBITDA.

All right. Thanks very much.

Thanks Mike.

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

Good morning thank you for taking my questions. Maybe if you could start, I know December is a little bit tough to forecast, but could you discuss on a sequential basis if October and November were stable or weaker than September and if any end markets recovered or stood out otherwise?

I’d Just say October was fine and was consistent with our expectations. November is really hard to follow. So still, it's kind of early days here and in November and like you said December is going to be the one that's really more of a wildcard.

Okay. Got it. What -- was October weaker than September, though, kind of with a -- what I was getting at?

Yes, I think all I can say is October was fine. We weren’t disappointed. We thought it was that October it was consistent with our expectations.

Okay. Got it. And did you discuss your gross margin expectations in Q4 and what are the selling price and mix and input price and synergy components of that?

No. We just like -- we don't generally get specific guidance around that. But you've heard…

35% is what you know we've said until the synergies again begin to kick in. And so again, staying in that 35% area, that’s the guidance we have said for the second half of the year and we’re sticking with that.

Okay, great. And then just looking in the slides why does your CapEx come off half percent two years into the integration. Is there some investment you're turning off, or any other color you could provide on that?

I think we were thinking that normally both companies were around 1.5% of sales for CapEx and then we said you know in the next two years, we're going to begin a number of optimization projects in our supply chain and how we do things with different sites. And that will require some additional capital investment to optimize that supply chain in that two year period. And then once that's over, we expect that to go down towards more normal level of 1.5%.

Okay. Great. Thanks. Got a last one from me, Mike. You’ve mentioned a couple of times how excited you are about the equipment business and how and then my understanding is that Norman Hay actually brings something to the table on that front as well. Are you able to tell us what exactly that opportunity might look like from a revenue or margin standpoint, and you know growth rate and if you need to wait for a bit more integration before Norman Hay can contribute to that effort

Yes. No I don't see it as a big, as more as a revenue thing, and certainly, will there be some revenue and then this whole -- it early days in this whole effort. But what I guess what excites me is I really you know feel it's part of our offering it can be continued to be a differentiator as we go to customers not only providing them with the kind of products we can provide, and the kind of service we can provide them, but also as part of that equipment, as part of that delivery of things that we can provide. I just think that will continue to help us with our differentiation in the competitive environment.

Okay great. Thank you.

Thank you, John.

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Good morning. Most of my questions have been answered, but I guess, two things. One on the Houghton side, are there any parts of their end market exposure that would improve with a lag to the turn in activity in end market -- in the end markets or much like Quaker is their entire business basically coincident with the end markets.

I think it's, most of the business that they have is very consistent with that, with Quakers legacy business. I think they do have other type of businesses like the offshore business that would have a different set of characteristics to it that you know as the price of oil goes higher and so forth. That could pick up along with that. But other than that, I can't, I can't think of the business as relatively consistent with what we do.

And then secondly with respect to sort of the operational rhythm at their -- on their side of the business, is there anything that they were doing differently from Quaker in terms of either inventory management or price indexing, price negotiations with customers like Quaker could benefit from? Or is it mostly sort of halting -- adopting the Quaker methodologies?

I think both companies actually did a good job of managing price. So I don't, I don't think there's a lot to do there. You didn't mention -- inventory and management maybe and stuff like that. You know we are – have been very happy and impressed with what we've learned about their working capital management practices and just manufacturing in general that I think legacy Quaker can benefit from. So I think both companies do it, do things generally well in the pricing area. And I think you know we'll continue to keep track, best practices into place to do that going forward. And that's going to be really important. I can't tell you how much effort and conversations we have around margin management and maintain and are making sure that as we get these benefits from our supply chain optimization procurement benefits that we expect to get and making sure we keep all those there's been a lot of discussions and processes put around to ensure we got good. We're going to get the kind of margin and expansion that we expect to see.

Okay. Thank you.

Thanks, Laurence.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Barry for any closing remarks.

Okay. Given that there are no other questions; we’ll end the conference call now. And I want to thank all of you for your interest today. We are pleased with the finalization of our combination with Houghton and I'm confident in the future of Quaker Houghton. Our next conference call for the fourth quarter will be in late February or early March. 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.

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