Quaker Chemical Corp (KWR) 2002 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Quaker Chemical Corporation first quarter 2002 earnings release conference call. During the presentation all participants will be in a listen-only mode. Later, we will conduct a question and answer session. At that time if you have a question you will need to press the 1 followed by the 4 on your telephone. As a remainder this conference is being recorded Thursday April 25th, 2002. I would now like to turn the conference over to Mr. Ronald Naples, Chairman, and Chief Executive Officer. Please go ahead sir.

Thanks very much and thanks everyone for joining us. With me this afternoon are Joseph W. Bauer, our Chief Operating Officer and Michael F. Barry, our Chief Financial Officer and they both will be available for questions at the end and of course Michael will be giving you some comments later. I would like to start with stepping back a bit for a little context for what we have been up to earnings first quarter. The last seven or eight months of last year, you recall, really was a victim of declining industrial production and really began to hurt particularly in the last half of the year and we saw it worldwide even in Europe where our steel businesses got high share and a very strong position. We saw a weak second half, weak seven or eight months actually coming off to a very good first quarter. So that kind of situation didn't change much because of channel account since the January 1, 2002 and of course the results of that is that the first quarter 2001, the first quarter 2002 comparisons are not very happy. In a lot of way there was no way it could be. But I would like to point to however, there is a promising sequential improvement that we have seen. The fourth quarter 2001 to the first quarter 2002 an even in fact January progressing through February and March showed promising recovery in several areas that was pretty much of what we anticipated. Sales were only up of modest 3% for the quarter, but in fact the comparison got better each month. Our operating income fourth quarter to first quarter was up 25% on a leg-to-leg basis and our earnings per share were up 20%, even if we take out the positive impact of the amortization elimination and we don't need to make any other adjustments for receivables for other one items to get to that results and Mike will give you some more details on these financial numbers a little bit later. On some way if you come to the valley and we are coming off of the lows and we expect our sequential results to get better and later in the year we would expect our comparisons to get better. As we speak of coming to the valley in last years environment, there are several general issues that come to mind as we think about the coming year and may be on your minds in terms of what their impact on us is, so I would like to make some brief comments about them. I have in mind four particular issues. 1. Perspective increase in crude prices and what that may mean to us? 2. Is the impact of US steel tariff and where they lead? 3. Is the industrial production demand outlook, which of course is very important to us? 4. Is our mix of businesses that is global versus US? What a recovery in the US and a recovery in the rest of the world will mean to us and what the impact of exchange rates will be on us because of our mix of business? And I hope that by adjusting these four issues we can cover some general issues that would give you some more insight into the year for us. First crude prices. Of course this is in the area of tremendous uncertainty and tremendous uncertainties and tremendous volatility and of course the situation in the Middle East and what's happening these days around that from given anyone anymore ease in terms of certainty. However we had looked pretty hard at our own impact based on various assumptions of [_____] because I doubt somewhere in the neighborhood of 1/3rd of our own material purchases are related to crude. Our needs though are much more related to fuel wells and ethylene derivatives, which are several steps down... several steps removed from crude in terms of the derivative and they have their own dynamics in these markets. So if you look at this carefully and the impact on us. Our conclusion of this stage is that even at $ 27 for crude, we believe that we will be seeing lower raw material prices this year, that's helped not only because of the fact of our several of derivatives down from crude levels it is helped by our mix of our raw materials which we are working to manage. So obviously we are in a [_____] below $27 but we will get more benefit but even at $27, we think that we will be realizing savings versus last year's raw material. In fact it is so higher than 27, we think we will be in that position. Second note I made was about steel tax, that's definitely a wild card. Talking though with a differential impact, this will be around the world when it thus to the export import balance from the United States markets and what actions other countries might take? It could better focus on in this regard, our global presence particularly related to the steel business. Our share of markets in this business, in particularly our share of markets in rolling oils which is our most important steel product. In fundamental sense, we think about our distribution of business around the world, wherever steel is made we will be there. So in that fundamental sense it really doesn't matter a lot whether the steel has made in United States or somewhere abroad. Now of course, that is too general statement to be exclusively true but generally it is true. Our market share around the world have put us some good position wherever the steel happens to be made. Now there are some reality of trade patterns regarding United States, which should give us a little bit of comfort about where the business will grow around the world, firstly the US is not self-sufficient in world steel. So we are going to see imports they will continue. And second of all, it terms of the economics, recently there was still a $120 per accounting price difference between US and Europe. So we believe tariff, Europe is full in position that they can't export. So our mix of business in such that given our good balance between US and Overseas, we are not really relying on one or the other. Whatever the pattern is, we believe we will be better than anyone else in our market. All things is equal of course, who would like to see more in Europe that in United States because our margins there are better because we sell higher technology products. But to the extent that the business that does ship little bit around the world, we still think the mix of the business and this division of this business ships are better around the world we still think we will be in good shape. And there is a another side to this coin which is that for the extent that this kind of tariff in positioning in United States gives some relief to the US steel companies, we of course face much less risk for the kind of financial implications that we have seen in the last couple of years related to our steel customers. So in balance we think that's an okay story. Third is industrial production demand. Of course, all of our demand virtually all of it is to arrive from consumer durables. There is an ultimate automobiles and appliances anything which acquires a pipe quality rolled sheet of steel to be made. Of course, that kind of demand was soft all over the world last year and will beginning to see some ships upward. For example, General Motors has just increased of second quarter production schedule for this year so that it is about 8% over the last year of second quarter and this follows declining rates of auto sales reductions over the last few months and for example given the General Motors numbers again, in January the sales of cars were down 18.5 %, this February 3.5% versus prior year and March it was less than 2% versus prior year. So the automakers see increased or demand staying solid in fact, it may suggest that we were in a little faster recovery than we earlier thought. I don't want to go too far down that line because of course there is some certainly around it. But we are seeing improvements right now in the Europe and South America as well. I must say that though the Asia is still bit of put it as a show me kind of state because Asia have not has the kind of recovery in our businesses that we would like to seem so far. From industrial production on the whole, looks like it is going to be okay for as we view up today looking for. The fourth thing I mentioned was a global mix. Our business is about 45-55 US versus the rest of the world. If US recovery is just a portion to the rest of the world that is just a bad recovery here we will move ahead with it because of the fact that there is about 45% of our business here, but given our share of markets as I said particularly in steel around the world still gives us good opportunity to benefit from whatever trans may be out there. This is essentially is the benefit of the portfolio effect large number of countries with reasonably high market share. And with 5% percentage of sales outside the United States certainly one of the down sides is since we report in US dollars that a strong trend that the strong US dollar is not a good friend of ours, and we have seen that big time over the last five or six years in fact in my roughly six year is here I don't think there has been one quarter where exchange rates have worked in our favor and typically been a big negative for us. So if we look ahead this year, we feel that there is actually there is not going to be a big swing in terms of that will be a big add on, but we do think that the hurt will be a little bit less all this will not withstanding of course the fact we did have $0.03 negative in the first quarter comparison. So for the Euro hangs in there a little now could be a comparison for the rest of the year should not be so negative as we have seen them in the past few years. So the bottom line is that, there are many moving pieces here, but on balance I think that is positive for us. Particularly given our global integration, the commercial knowledge share we are working on, the global customer management we are working on, the world wide R&D emphasis that we have, our global organization, we think that these strategies we been working on support our preparedness for this time. And with that in mind what we have, that even though we are in tough times we are staying the course and doing the things that we think are often important to build a long-term capability of the company. We will look at the three imperatives that we operate us and integrate as a whole that we sell value to our customers and not simply barrels of oil of and we harness our worldwide knowledge. Whole of these require investment in systems and processes for us, we made those investments last year and then continue to make in this year investing in new processes building global transaction system that helps us to merge our business more globally because we think that is critical to our future. So we are going to hang in there with those things, even though the markets are tougher than we would like to see them be and help by the fact that we think there is a mix of things going on there are on balance positive for us. And I well also want to say in terms of outlook for the year, that we are not thinking a lot form price relief from our markets. But we do think that we are in a good position for continued improvement because of the kinds of things I have talked about. If the price relief comes that way, but we do not think it is necessarily there. We get it because we developed new products since an extensively that can be successful that will increase our prices but it won't come from simply raising our prices. That is kind of picture at the background if you will. Couple of other things that I would like to point to since our last conversation, we have made two acquisitions both relatively small, but in the wrong way important to us. United Lubricant is a company that lost small in the steel business that has very strong relationship with some of the best costumers in this steel business particularly AK steel in New York and [Minimill]. These are customers that we do not have a lot of success penetrating we believe that a future to our steel business is being a light to a right strategic steel companies and we have been working hard in our own strategies to make sure if that happens and we think United Lubricants will do a great deal for us in so many relationships with important powerful companies in the steel business. So we look to that as a good business in and out of itself and we are pleased with that acquisition because of that though we are particularly pleased because it gives us powerful strong customer relationships with powerful customers in steel business. And added to that is that United Lubricants does not particularly global in its business as an extent that we can take anything that we learn there or any customer relation we can build on there and take a global acuses a little more to work on. We do think that United Lubricants will be accreted to us this year. Epmar is again a very small acquisition even smaller than United about $7 million in revenues, which we announced just a couple days ago, but it is small and it relates to a smaller business for us chemical milling maskants for the aerospace industry which are sold by our AC products division on West Coast, but there are two important aspects to this far, as you have noticed small one that will help secure financial contribution from AC products which has been very meaningful to us and the two is that the technology capability at Epmar has a relationship to technology efforts that we have underway related to chemical milling maskants and coatings which will help us advance certainly maintain advance of our competitive position there. So, we think in the long run both have excellent prospects for us and even in the short run as I said either on is going to be deluded to our earnings per share this year. In fact, we expect a plus this year although very small so that is not diluted effect should have a minimal impact on the market value and we hope the acquisition themselves will have a positive impacts. And speaking of market value, I would like to mention one more point something we do not talk about much in this meeting, but it is important to many shareholders and as good as our stocked price appreciation has been that is really not what I am talking about and of course today, we are nearly all time high through our stock, but that is really not what I have in mind. What I have in my mind is out dividend. We are committed to the continuation with this dividend and it is important that we understand what we do not feel that constraints or ability to commit cash to growth because of our cash generation capability. We know that for some shareholders this is very important and others less important but we think it is an important support for our price and an important commit and make towards shareholders. In fact we announced some time ago or short time ago, our 30th consecutive annual increase. And just recently, I got publication merchants call with lists such as one of only 281 companies out of 10,000 public companies that has increased its annual dividend every year for 10 years and our record is 30 years, so we have been out of lot longer than those and our results are better than those. So, that is a broad view of the environment we are in and just a couple of additional points that I wanted to make to you and at this stage, I will ask Mike to give you more detailed about the financial results.

Thank you Ronald. Good afternoon everyone. I would like to discuss some of the components of the P&L for the first quarter in more detail and as usual I will start with sales. Revenues for the first quarter compared to the same period last year were down 7% to $59.9 million. The change in revenue reflects the following breakdown. Product line was down by 7%, which includes a 2% positive benefit due to the United Lubricants acquisition. Average prices were up by approximately 4% and currently translation unfavorably impacted sales by 4%. As we have discussed in the past a company has a segment of the business into three areas that are working process chemical, coating, and other chemical products. The metalworking process chemical and product used as lubricants for various heavy industrial and manufacturing applications and make up approximately 92% of our sales revenues. Reported revenues in the first quarter compared with 2001 were down 6% overall, primarily due to softness in our global markets particularly in the steel industry. Europe sales declined by 6% on a local currency basis and Asia sales revenue declined by 7% on a local currency basis and South American sales increased by 1% on a local currency basis, but declined by 19% based on actual exchange rate due to the Brazilian Rial and more recently the evaluation of the Argentine Peso. In the US, sales were up 7% before the increase coming from the acquisition of the United Lubricants. Our second business segment is coating, which makes up approximately 6% of our sales revenue and contains products that provide temporary and permanent coatings for metal products. Revenues for this segment were down 13% in the first quarter 2002 compared with 2001 due primarily to lower maskant sales to the aerospace industry as aircraft sales continues to decline. In our small business segment represent 2% of our sales for other chemical products sales were up 1% versus the first quarter of last year. Primarily, due to our Q2 technology joint venture, which produces sulfur removal products for industrial gas streams. And now, we will move on to gross margin. The company's gross margin percentage of 40.6% for the first quarter is slightly better than the 40.2% reported last year. The increase in gross margin percentage is primarily related to more favorable raw material costs partially offset by lower sales volume. As fixed manufacturing costs are now higher percentage of our sales. We also have lower gross margins to the Lubricant acquisition, which had an unfavorable impact on the overall gross margin percentage of 0.3% points. For the full year 2002, we expect our gross margin to be around 41% and this is down from our previous estimate, which was near 42% but the reason for the change is primarily due to the United Lubricant acquisition. We still anticipate achieving the gross margin benefits previously discussed as sales associated with the closure and sale of our manufacturing facilities in UK and France and some favorable products mixed changes as well as raw material price decreases of approximately 2% year-over-year. Moving down to P&L, when I discuss our SG&A another expenses. Reported SG&A of $20 million in 2002 is one and a half percent higher in $19.7 million reported in the first quarter of 2001. Included in the first quarter of 2002, is an additional reserve for doubtful accounts related to the national field bankruptcy. Also included our cost related to the implementation of the companies ERP systems as well as the SG&A impact of the United Lubricant acquisition on March 1, 2002. The current quarter result also included the adoption of ("SFAS") No. 142 Goodwill and Other Intangible Assets and therefore, the company no longer amortizes goodwill. However, the company did record $262,000 or $0.02 per share of goodwill amortization in the first quarter 2001. In addition, we have completed our goodwill impairment analysis and there is no goodwill impairment. On a ProForma basis adjusting for aforementioned items in both years, overall SG&A for the company declined 2.6% versus the same in year 2001. The other income category variance primarily reflects lower foreign exchange gains in 2002 versus 2001 for the first quarter. In addition the lower license and in addition we have lower license fee that come from about of 20 ventures in 2002 compared to 2001 as a result of lower business activity. Net interest expense is favorable to the first quarter of 2001 due to lower interest rate despite an increase in the net debt levels in 2002 as a result of the United Lubricants acquisition in March. Our second tax rate for the first quarter 2002 was 32% compared to the 31% for the first quarter of last year. Many external and internal factors can impact this rate, but we will clearly refine this number if necessary as the year progresses. Equity loss in the first quarter 2002 compared to equity income in 2001 reflects lower income year-over-year from our joint venture in Mexico as well as the start of our real estate joint venture. Minority interest was low in the first quarter 2002 compared to the same period last year, primarily due to lower net income from our joint venture in Brazil. I would also like to make few comments concerning our balance sheet even this is not yet been released or finalized. Our total debt has increased by $5 billion from the end of the first quarter last year. Primarily as a result of funds needed for the United Lubricants acquisition. The good news is that our incremental borrowings had an interest rate of below 2.5%. Despite the United Lubricants acquisition, our balance sheet continues to remain strong in the form of $16 million of cash at the end of March. I also want to address the Argentina situation and impacts Quaker. In 2001, Argentina represented approximately 1% of Quaker's consolidated net sale. They can see that is a very small part of our overall business. Quaker Argentina primarily sells products manufactured by contract manufacturers that were imported from other Quaker entities approximately one-third of our sales are exported to other markets and are denominated in dollars rather than pesos. The devaluation itself has no material P&L impact on the company since the profitability of Argentina has been relatively small. The balance sheet however will reflect lower investment in Argentina as results of translate in our Argentina assets and liabilities from the new devalue currency values. While it couldn't be made comparisons only to the same quarter of the product year I thought it would be appropriate that few comments comparing this quarter to the fourth quarter 2001 as well. Since the real economy is clearly in a different place from where it was this time last year. Many prophecies remarks by saying at the comparison I will be mentioning exclude the restructuring and special charges incurred in the fourth quarter 2001 as well as the United Lubricants acquisition and the amortization change that occurred in the first quarter 2002. First, our sales improved over the fourth quarter accidentally increased our growth margin. Both in [______] dollars and as a percent of sales particularly encouraging with the fact that we finished a quarter strongly with March being our strongest month in terms of sales since last summer. Our operating income for the first quarter exceeded fourth quarter levels by more than 25% despite the additional allowance for doubtful accounts as well as the expenses related to our New Year fee system. In spite, these charges are EPS for the quarter increased by approximately 28%. In summary, we continued to expect sequential quarterly earnings progress such as we saw in the first quarter and we believe that we are on track for the moderate earnings for the full year 2002 versus 2001 excluding the 2001 special items. And that includes my prepared remarks.

Thank you Mike. We are now would be happy to deal with any questions or comments or thoughts that you might have.

Thank you. Ladies and gentlemen if you would like to register your questions, please press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your request, please press the 1 followed by the 3. If you are using the speakerphone, please pick up your handset before entering your request. One moment please for the first question. The first question comes from [Greg Ramsey] with [______] Inc. One moment please.

Hi Greg.

GREG RAMSEY]: Good afternoon Ronald. Another excellent quarter. I just have one question with regard to the provisioning for the doubtful accounts and you think you are near at end with regard to that we are going to trans do you see there?

Well let Mike can answer that question or maybe Joe even and I cannot resist saying something.

GREG RAMSEY]: Okay.

I think let me put this way I certainly hope we are at an end to that I do not think we have zero exposure because I think we have been pretty, but I do think we have been conservative and I kind make sure that what was all covered in this regard and as I said the extent of the terrorist provide relief for the US steel companies that will certainly help us in terms of not having to confront us going forward. With that, Mike and Joe anything you would like to add?

No I would reiterate that Ron, I think we do try to take a conservative approach to this area and I think you might hope is evidenced by the increase in the US steel prices which has our main exposure area that is the symbol and that should be assigned and hopefully this will be much less in his [_____] for the yet. Frankly you might even get some of these in his back but I do not want to check on him too much. Joe do you have to anything to say?

No. I think you both covered the stronger pricing and you less has been on our exposure.

GREG RAMSEY]: Okay. Thank you very much and another good quarter.

Thank you Greg.

Our next question comes from [Christopher Crux] of [Commerce Capital Market]. Please go ahead with your question.

CHRISTOPHER CRUX]: Good afternoon.

Hi, Chris.

CHRISTOPHER CRUX]: Let me add my congratulations on a good quarter and tough environment out there.

Thank you.

CHRISTOPHER CRUX]: In terms of the sequential improvement that just showed the macro level that you think you may say are we are talking about possibly in the same order of magnitude from Q4-Q1 or with the leverage you have here if it has caused a percentage is up a little bit could be seen and even better increase in the later part of the year.

Well you are asking about the forecast something which is given the demand on 70s and a little bit tough to know but I will say this that we do expect at least an equivalent kind of magnitude increase and with just a little but of help, it should be bigger.

CHRISTOPHER CRUX]: Okay and secondly have what with the tariffs that are being put into place here, have you seen already any sort of shifts by your customers in terms of demand geographically in with the steel side?

Chris it is only going into effect toward the end of March as it relates to the first quarter results and we really have not and it has a very low impact and for April as we see it because has Ronald indicated in our opening remarks of our global present and we really do not expect a significant impact as a result of the terrorist. I heard just the other day too that a meeting that took place in Paris that the Colby Organization of Economic and Corporate Development had discussion with the US says that they will be willing to look at the terror if the global steel industry would take a look at the imbalance between supply and demand. So as I grant before the terrorist went into place and I think that was one of the strategies that US Government was looking for at that time to try to pay more attention on a global basis on the supply and demand in the steel industry. So, there may even be some additional movement as it relates to it. As it relates to our existing business and now we have not seen much in the way of shifts on a regional basis around the world and we do not much anticipate.

CHRISTOPHER CRUX]: Okay. I have a couple of followup questions here. On the coatings business, you went over I guess that you might touch upon briefly revenue was done about 13%. Can you just flush out a couple of issues there one is have you seen the bottom do you think in terms of demand there from the commercial aerospace side and secondly is it mostly volume is down and will pricing impact to be?

It is primary volume Chris and not pricing.

CHRISTOPHER CRUX]: Okay.

It is really somewhat hard to predict whether we have seen the bottom of that or not Boeing is our major customer there and at least through the first quarter that is reasonably consistent volume but talking with our people they see there is a chance of more softening and you know that particular customer and we do not expect it to be a serious impact to us.

CHRISTOPHER CRUX]: Okay.

Okay before starting the question if can add to that a little bit. It is kind of question of what kind of volume there is in the aerospace it is really more specific events to the question of what kind of planes do they build in. Since this 747 has a much higher usage of these chemical milling maskants as the other planes do. So, even if Boeing does okay and if it is not 767 instead of 747 that is less good for us. Since it is not really come for direct translation kind of question.

CHRISTOPHER CRUX]: Okay. I guess I was getting at in terms of your lead time some supplies will be six to seven months ahead of Boeing actual deliveries, which may be down to 20% already seeing the bottom in their business and I am just wondering may be if you could just remind us what the lead time in terms of your material?

The lead-time there they have some storage capacity that the lead-time is not to the extent to what you have just described as far as six month or so and more around one or two months.

CHRISTOPHER CRUX]: Okay. Great and in terms of your relation to changes in underlying raw materials even with press could bring up and you still see raw materials has been down a couple of percent, which is good to hear. I am just wondering if you also make a comment on generally what are the raw materials you might be seeing declines in this year?

The biggest impact to us has been the mineral oil we checked as above mentioned and a coconut oils and other one that we have seen favorable impact in.

CHRISTOPHER CRUX]: Okay, great, and congratulations again.

Thanks.

The next question comes from [Robert Koslowski] of [______] Company. Please go ahead with your question.

ROBERT KOSLOWSKI]: Congratulations on the good quarter. I just have a good question about what are the capital expenditure levels for this first quarter and how was the integration and the new global transaction system you own?

It was a little less than $2 million at this point and we expect to see heavier capital expenditure spending as we go through the year as we start spending very heavily on our new transactional system as well as from other initiatives.

ROBERT KOSLOWSKI]: Okay that is all I have and congratulations on the quarter once again.

Okay and thanks Bob. Thanks for joining us.

Ladies and gentlemen. If there are any additional questions, you will need to press the 1 followed by 4 at this time.

Okay and thanks everybody and I certainly appreciate your interest and we will be talking to you again in three months and look forward to hearing from you again. Have a good day.

Ladies and gentlemen that does concludes your conference call for today and you may all connect and thank you for participating.