Quaker Chemical Corp (KWR) 2009 Q4 法說會逐字稿

Greetings and welcome to the Quaker Chemical Corporation fourth quarter and full-year 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 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 will start it off now with some remarks about the fourth quarter and what we are currently seeing in our marketplace.

Our earnings for the fourth quarter were $0.71 per share. This is a large improvement in both year-over-year, as well as sequential comparisons. As you may recall, we had a loss of $0.26 per share in the fourth quarter of 2008, breakeven results in the first quarter, earnings of $0.29 in the second quarter, earnings of $0.45 in the third quarter, and now $0.71 per share in the fourth quarter. So, we are seeing very good improvement and we are pleased with this result, considering that volumes are still down approximately 10% from where they were before the local crisis started.

So, let's talk about the volume impact. The fourth quarter volume is up 7% from third quarter. This is also the first quarter in a while we had seen improvement from the prior year period, as our volumes are up 12% from the fourth quarter of 2008.

Our volume improvement is broad-based, with all regions showing gains. However, the strongest improvements are being seen in China, Brazil and India and this is due to the strong steel industry demand in these countries. One of the reasons we believe the fourth quarter volumes were also strong was the restocking effect in the supply chain.

Going forward, the volume picture is not as clear. So, while we have seen good sequential volume improvement over the past year, there is a great deal of uncertainty with the kind of volume changes we will see going forward. Some examples include the restocking effect that may be ending shortly or the demand uncertainty in several markets like autos and Europe, where some of the government incentive programs have ended or China.

In China, we have two effects, which will provide some unevenness in demand. One is the seasonality of our business in China, where the fourth quarter is typically our strongest period. The other issue that could impact our demand is the tightening of credit in China and how this affects the growth we expect to see in China. So, it's hard to say for sure what is going to happen with our overall demand in the short-term. However, we still believe that over the longer term, we can expect to see a gradual improvement in volume in all regions.

Our gross margins are also getting back to acceptable levels and this continues to be critical given that our volumes are still lower from pre-crisis levels. While they are about 12% higher than the fourth quarter of 2008, they have declined about 1% from the third quarter. The margin improvement from 2008 is in part due to the cost reductions we have taken in manufacturing, as well as lower raw materials. However, we are now seeing raw material prices starting to increase and you can see this impact in our fourth quarter margins.

I know many of you may have the question of what all this means in 2010 for Quaker. Where will bottom line results be and what will happen with our volumes, margins and costs. As you know, our policy is not to give specific guidance in this regard and we will continue with this policy. The only thing I will say is that we expect to have year-over-year earnings growth for the full-year 2010. However, this growth will be tempered by our continuing investment in countries such as China, India, Russia and Brazil, as well as our investment in other growth initiatives.

So, as we reflect on 2009, it turned out to be a good year, despite the dramatic start to the year. We feel we took quick and appropriate steps to get our cost structure better aligned with the new volume realities we were facing. We maintained our dividends, despite our results at the end of 2008 and 2009 -- early in 2009, as well as the bankruptcy of two key customers, GM and Chrysler.

We had good sequential earnings improvement throughout the year and our annualized EBITDA for the second half 2009 is now above pre-crisis levels and at an all-time high. We also had record cash flow generation for the Company in 2009 and used this to pay down our debt by 26%. Our net debt-to-capital ratio is now 20% compared to the 32% where it was a year ago and this is the lowest ratio it has been since 2003.

So, I feel good that we have weathered the global crisis well. We are financially stronger today than when we entered the crisis. More importantly, I feel good about our future. We believe we have a differentiated business model, a strong management team and associate base, a solid balance sheet, and good growth initiatives in place, with significant potential. So, all in all, I believe we are in a good place today and I'm very confident in our tomorrow.

In closing, I especially want to thank all of our associates whose dedication and expertise helps differentiate Quaker in the marketplace. And now I'll turn it over to Mark Featherstone, our Chief Financial Officer, so that he can provide you with more details behind our financials and after that, we will address any questions you may have.

Thanks, Mike. Good afternoon, everyone. Yesterday we announced fourth quarter 2009 earnings of $0.71 per share compared to a loss in the fourth quarter of 2008. Overall, EPS was up 58% from the third quarter of 2009. I should note that the fourth quarter benefited from a low tax rate and the third quarter included CEO transition costs of $0.07 per share, but we are pleased with our progress. I am also pleased to report that our current EBITDA run-rate is now higher than before the economic crisis and we are coming out of the recession in stronger shape financially than when we went in.

I'll go through the fourth quarter P&L and then we'll go onto questions. The global economic crisis didn't impact Quaker until the fourth quarter of 2008 and then it hit hard, with the steep drop-off in volumes, particularly in North America and in Europe. As a result, the comparisons with the fourth quarter of 2008 are to a very low base.

Revenues for the fourth quarter compared with the same period last year were up 13% to almost $132 million and were 11% better than the third quarter. In comparison to last year's fourth quarter, volume increases were experienced across the globe. In addition, foreign exchange increased revenues by approximately 8% versus the prior year quarter. Compared to the third quarter, overall volume was up about 7% with all regions reporting increases. However, these volume increases must be kept in perspective.

For example, capacity utilization rates in the US steel industry averaged a little over 60% in the fourth quarter of 2009. This compares to the low 50%s in the third quarter and the low 40%s in the second quarter. However, this is still far below the almost 90% capacity utilization of early 2008.

We did benefit from some end markets inventory restocking during the fourth quarter. We do not expect this to reoccur to the same extent going forward. However, we also do not anticipate a double dip recession.

Turning to gross margin, gross margin as a percentage of sales was 36.1% this quarter versus 37.4% in the third quarter and 24.2% for the fourth quarter last year. It appears clear that raw material prices have reached the bottom of the cycle earlier in 2009, and while there is considerable volatility in the market, the overall direction is clearly upward. We also continued to benefit from the aggressive cost actions we took in late 2008 and early 2009. However, we are beginning to add back some people, particularly in manufacturing, as our volumes increase. In addition, higher costs related to the startup of our Middletown, Ohio plant expansion were also a factor.

Finally, the impact of reduced CMS gross revenue, where we sell Tier 2 supplier's product at low margins and other mix-related factors accounted for about 20% of the percentage increase. We report our CMS contracts on either a gross or net basis, depending on the terms of the contract and how directly our revenue is tied to the costs incurred for the Tier 2 product purchases. For the last several years, most of our CMS contracts have been accounted for on a gross basis. However, in 2009, as CMS contracts have been renewed or renegotiated, more contracts are moving to a net basis. This change in CMS has contributed to the higher reported gross margin percentage that we're currently experiencing. Additional CMS contracts moved to a net basis reporting, effective in January 2010. While this will improve reported gross margins, it will also reduce reported sales by about $20 million on an annualized basis.

Let's move onto SG&A and other expenses. In absolute terms, SG&A for the quarter increased almost $9 million compared to the fourth quarter of 2008. However, approximately three quarters of this increase related to the reversal of incentive compensation accruals in the fourth quarter of last year compared to having accruals this year. Most of the remaining increase relates to foreign exchange rate differentials. I would like to note that our SG&A as a percentage of sales in the fourth quarter decreased compared to the third quarter.

Turning to the tax rate, as I mentioned previously, we did (inaudible) benefit from a low tax rate in the fourth quarter due some FIN 48 tax reserves falling off. We expect to continue to experience volatility on a quarterly basis in our tax rate due to FIN 48 and potential changes in income mix. For 2010, we currently anticipate a tax rate of between 30% and 35%.

Looking at the balance sheet, we recently completed a $100 million self-registration that will allow us to issue either debt or equity on an accelerated basis. We did this as part of our ongoing efforts to increase our financial flexibility. However, we have no current plans to access funds through the self-registration. With record cash flows from operations this year, our net debt-to-capital ratio improved dramatically to 20% at December 31, 2009. We do anticipate some increase in working capital going forward, as volumes and raw material prices begin to increase. And as you know, the first quarter historically has been our weakest cash flow quarter of the year.

I believe that the combination of our self-registration and our strong balance sheet position will position us well to take advantage of opportunities that may arise. And that concludes my prepared remarks.

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

(Operator Instructions) Mr. Barry, I'm showing no questions in queue.

Okay. Hopefully we don't have the same kind of technical issues we had a couple conference calls ago. If you were trying to get through for a question, please give Mark or myself a call.

So just, again, to sum up, we are pleased how we're managing through these unusual times and we continue to be confident in our future at Quaker Chemical. Our next conference call for the first quarter results will be at the end of April and, again, 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.

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.