Quaker Chemical Corp (KWR) 2009 Q2 法說會逐字稿

Welcome to the Quaker Chemical Corporation second quarter earnings conference call. At this time, all participants are in a listen-only mode. 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.

Thank you. Good afternoon, everyone. Joining me today is Mark Featherstone, our CFO and Jeffry Benoliel, our General Counsel and Head of Global Strategy. As usual, Mark will provide some more details around the financials, and then we will address any questions that you may have. But I'll start it off now with some remarks about the second quarter and what we're currently seeing in our market place.

The good news is that we saw a decent level of profitability in the second quarter at $0.29 per share. This is certainly good sequential quarterly improvement compared to the $0.25 loss in the fourth quarter of last year and the break-even results in the first quarter of this year. While we ultimately want and need a higher level of earnings for our business, we're pleased with this result, considering the significant volume decline we're experiencing due to the continued global economic crisis.

So, let's talk about the volume impact. Overall, our volume was down 36% versus the second quarter of last year. However, the second quarter volume is up 4% from the first quarter. So, while we have dramatic reductions in our volumes, in our year-over-year comparisons, we are seeing gradual improvement in our volumes on a sequential quarterly basis. Based on what we're hearing from our customer base, we feel we have may have reached the bottom in the second quarter.

We are seeing signs from the steel industry that volumes are improving and the improvements are now showing in each region of the world. However, the volumes are still dramatically below historical comparisons. For example, in the United States, steel capacity utilization was below 50% in the second quarter, compared to being around 90% last year.

The same can be said about North American auto production, which also seems to be at the bottom and way below any historical comparison. So, the good news is that we believe we have reached the bottom. The not-so-good news is that we only expect modest increases in volumes going forward, not a fast rebound to where we were in 2007 or 2008.

As you know, we had to take significant actions with our cost structure to help offset this dramatic volume decline. We took two major cost reduction efforts, one in December of last year and one in February. Both sets of actions were taken with the goal minimizing the impact on our associates while also continuing to provide a high service level to our customers. The result of our cost actions are fully in place, and you can see from our P&L that they have helped us significantly.

Our gross margins are also getting back to acceptable levels. This is critical given that our volumes are so much lower. The margin improvement is in part due to cost reductions we have taken in manufacturing as well as lower raw materials. However, we are now seeing raw materials starting to increase in a number of areas. We also feel good about new potential business opportunities. Given that industrial production levels are down, companies are now more open to looking at opportunities for new products and services that can help their profitability. We are seeing these opportunities in all regions of the world.

I do want to say a special thanks to two of our larger customers, GM and Chrysler. We have been long-time suppliers of products and services to them, and we have helped them reduce their costs throughout the years. During this trying period for them, we continued to support them in many ways, and we are very happy that they considered us as essential suppliers during their bankruptcy proceedings. We have collected over 85% of our prebankruptcy receivables already and expect the remaining shortly. Concerning cash flow, we are pleased with our significant cash flow generation this year, which is primarily a result of working capital reduction. This has enabled us to pay down our debt by 20% since the beginning of the year while maintaining our dividend and investing for our future, such as our Middletown, Ohio, expansion project.

In closing, we are pleased with the quarter, especially in light of the substantial volume declines due to the global economic crisis. We are very thankful for the support of our many stakeholders in the Company, including our customers, banks, suppliers and shareholders. I especially want to thank all of our associates whose dedication and expertise helps differentiate Quaker in the market place.

And now, I'll turn it over to Mark Featherstone, our Chief Financial Officer, so that he can provide with you more details behind our financials, and after that, we'll address any questions you may have. Mark?

Thank you, Mike. Good afternoon, everyone. Yesterday, we announced second quarter 2009 earnings of $0.29 per share, including CEO transition costs of $1.2 million, or approximately $0.07 per share. The second quarter reflects the full impact of both the fourth quarter and first quarter cost reduction efforts, so we've been able to largely offset the decreasing gross margin dollars with SG&A and other expense reductions. I'll let you know that this improvement is in spite of volumes that, while better than the first quarter, we're still below fourth quarter 2008 levels. Second quarter volumes were approximately 4% better than the first quarter, and we continue to expect only modest volume increases as the year progresses.

I will spend the next few minutes focusing on the second quarter P&L, and then we'll go on to questions. Revenues for the second quarter compared with the same period last year were down 35% to $102 million, but we're 4% better than the first quarter. Compared to last year's second quarter, double-digit volume decreases were experienced in all regions with volume in Asia and South America experiencing smaller declines. This was partially offset by federal mix and selling price effects. In addition, foreign exchange decreased revenues by about 5% versus the prior year quarter.

It is clear that the various parts of our business are recovering at different rates. For example, compared to the first quarter, volumes in South America were up more than 20% from a very weak first quarter, while volumes in Asia were up 7%. The volumes in both of these regions were also up slightly from fourth quarter 2008 levels. Compared to the first quarter, volumes in Europe were up modestly, while North America volumes were down somewhat, with auto plant shutdowns being a major contributing factor.

Turning to gross margin, gross margin as a percentage of sales was 35.2% this quarter versus 29.1% in the first quarter and 28.3% for the second quarter last year. The margin expansion was in part the result of the cost reduction actions the Company has taken and a more favorable raw material cost environment. In addition, the impact of reduced CMS gross revenue, where we resell tier-two suppliers' products at low margins, accounted for almost half the percentage increase. And while raw material markets remain volatile, we're beginning to experience some raw material cost increases, and we're continuing to monitor this very closely.

Moving on to SG&A, other expenses. In absolute terms, SG&A per quarter declined about 22%, or $8.1 million compared to the prior year. About 70% of this decrease related to savings from our restructuring programs and other cost savings measures. Lower foreign exchange rates accounted for the remainder of the decrease. While our SG&A as a percentage of sales is higher than historic levels, SG&A is down significantly in dollar terms. As I noted previously, the dollar decline in gross margin dollars were approximately $8.7 million, is almost fully offset by reduced SG&A spending, so we feel we have just the right expense levels in mind with the current market environment.

Turning to other income, other income is lower than 2008 due to an arbitration award from the previous year. And the interest -- the increase in interest expense compared to the second quarter of 2008 is reflected in lower interest income and higher interest rates, which more than offset the impact of lower debt levels.

Looking at the balance sheet, with $26.8 million of cash flow from operations, the Company's net debt to total capital ratio improved dramatically to 23% at June 30, 2009, compared with a strong 32% at December 30, 2008, and was the lowest since 2003. And net debt at June 30, 2009, was also at its lowest level since 2003. We feel that our strong balance sheet position will help us to take advantage of opportunities that may arise as the economy recovers. And that concludes my prepared remarks.

Thanks, Mark. And at this stage, we would like to address questions from any participants on this conference call.

We will now be conducting a question-and-answer session. (Operator Instructions).

Okay. Well, since there's no questions, I just want to thank you for all of your interest today and tuning in to us. While these are challenging times, we are pleased with how we're managing through them, and we continue to be confident in the future of Quaker Chemical.

Our next conference call for the third quarter results will be at the end of October. And if you have any questions in the meantime, please feel free to contact Mark Featherstone or myself. Thanks, again, for your interest in Quaker Chemical. Good-bye.

Please note, due to technical difficulties, there was no Q&A session for today's conference call.