Quaker Chemical Corp (KWR) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Quaker Chemical Corporation fourth-quarter 2014 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, Michael Barry, Chairman, Chief Executive Officer and President of Quaker Chemical Corporation. Thank you, sir, you may begin.

Thank you, Kevin. Good morning, everyone.

Joining me today are Margo Loebl, our CFO, and Robert Traub, our General Counsel. After my comments, Margo will provide details around the financials, and then we'll address any questions that you may have. We also have slides for the conference call. You can find them in the investor relations part of our website at www.quakerchem.com.

I will start it off now with some remarks about the fourth quarter. I'm pleased to report that we had very good quarter, as solid revenue growth led to a double-digit increase in our adjusted EBITDA.

Let me now try to give you a sense of what we experienced in the quarter, and I'll start with sales. Our overall sales were up 5% for the quarter versus 2013, with growth primarily driven by higher volumes. Foreign exchange rates negatively impacted us by 4%, but this was largely offset by the revenue increases from our 2014 acquisitions. We saw very strong growth in sales in North America and Asia-Pacific, which was partially offset by a decline in our South American sales.

Going region by region, South America was our most challenging region. Our revenues were down 26%, due primarily to lower volumes associated with the poor economy, and the decline in the overall steel and auto markets, as well as a weakening in the Brazilian real. In our Europe or EMEA region, we saw a 2% decline, with modest growth from our base business and the Binol acquisition being more than offset by the change in exchange rates.

In our Asia-Pacific region, we had approximately 10% growth, with China being the main driver. Finally, in our North America region, we had growth of 13%, with 5% organic growth, and 8% growth from the ECLI acquisition. The majority of the North America organic growth is being driven by our Mexico and Summit businesses.

Overall, we continue to do well in gaining share in the marketplace throughout the world. We believe this is due to our commitment to our customer intimacy model, which puts the customer's needs as our top priority, and provides them with strong service and business solutions. I believe this approach continues to differentiate us in the marketplace. We have a great deal of initiatives in our base business line, and in each of our regions, as well as through growing our recently acquired technologies around the globe. As I mentioned in the past, using a baseball analogy, I see each of these initiatives as singles. Our goal is to hit many singles, to produce multiple runs, and thereby show continuous growth, even in tough market conditions.

On our gross margins, they were slightly up, but relatively consistent with our fourth quarter of 2013, primarily due to lower raw material costs. Our overall gross margins continue to be very stable, and have remained at this level for the last eight quarters.

So I'm pleased with our overall performance in the fourth quarter. Despite a very weak South America environment, and exchange rate headwinds at the end of the year, we were able to achieve very good growth in most of our key metrics. And for the full year, we set records in revenue, non-GAAP earnings and adjusted EBITDA. Sales were up 5% for the year, and our non-GAAP earnings and adjusted EBITDA were up 11%. And our return to shareholders in 2014 was strong, at 21%, and this was on top of the returns of 45% and 41%, respectively, for 2013 and 2012.

Looking forward to 2015, we do see some headwinds. Foreign exchange will definitely impact us this year, as the dollar has strengthened against many of the other currencies. Given that about 60% of our sales are outside the US, this translation effect on our sales and profits will be felt. We estimate that the impact on our top and bottom line will be at least 4%. In other words, had exchange rates stayed at 2014 levels, we would expect to show at least 4% more sales growth and earnings growth in 2015. The other headwind is that some of the economies around the world are expected to have lower growth. For example, Russia, China and Brazil are not expected to show the type of growth we have seen in the past. Europe also continues to show only modest growth in our markets. Overall, we do expect our global end use markets of steel and automotive to grow, which is good. But we now expect global growth to be more modest than what we had expected, say, 6 months ago.

The impact of lower oil prices is harder to define. Some of our raw materials that are crude based, like mineral oils, are declining, and this will also impact our product pricing with customers. Other raw materials, such as additives, animal fats or vegetable oils, are not declining, or not declining much. And in the case of vegetable oils, we expect to see higher prices in the future. So unlike the previous two years, where we've seen stable margins, we may see some more volatility in our gross margins, as there can be timing differences between what we experience in raw material costs, and how our product prices are adjusted with customers. Overall, our stated goal is to keep our gross margins at our targeted levels, which we expect to be in the 35% range over the longer term.

So while there's a great deal happening around us, the bottom line is, I continue to be confident in our future. We believe that we can continue to grow the top line and bottom line, despite these headwinds. We will do this by executing our business strategies, which we project will lead to continued share gains in the marketplace.

Also, we are continuing to leverage our recent acquisitions by selling our newly acquired technologies on a global basis. And finally, we will continue to work on new acquisition opportunities. The combination of all these growth vehicles gives us confidence that 2015 will be another good year for Quaker, as we strive to increase our revenue, operating income and adjusted EBITDA for the sixth consecutive year.

In closing, I want to thank all of our associates, whose dedication and expertise helps to create value for our customers, and differentiate Quaker in the marketplace. People are everything in our business, and by far our most valuable asset, and I'm very happy with the Quaker team we have in place throughout the world.

And now, I'll turn it over to Margo Loebl, our CFO, so that she can provide you with more details behind our financials. And after that, we'll address any questions you may have. Margo?

Thank you, Mike. Good morning, everyone.

I reiterate that we are very pleased with our quarterly results, meeting the analyst consensus of $1.00 earnings per share, despite the FX headwinds in the fourth quarter and challenges in Brazil. Before launching a financial review of the quarter, please note that Quaker provides a non-GAAP earnings per diluted share table, in an effort to provide shareholders with visibility into Quaker operations, excluding certain items which we believe do not reflect our core operations, including earning related to Primex, our investment in the captive insurance company. Such table is outlined in chart 10 of the investor slides, yesterday's earnings release, and our Form 10-K, also filed yesterday.

Moving on to the financial review, as referenced in chart 4, Quaker's fourth quarter includes the following highlights. With respect to highlight number 1 on chart 4, volume drives 5% increase in net sales for quarter and year. Looking at chart 5 and 6, net sales for the fourth quarter of 2014 of $194 million increased approximately 5% from net sales of $184.3 million for the fourth quarter in 2013, primarily due to higher product volumes and price and product mix.

Included in the Company's net sales growth for the fourth quarter of 2014 was $8.4 million, or 4.6%, of additional sales from acquisitions made in 2014, which was largely offset by $6.6 million, or 4%, related to a decrease in foreign exchange rate translation. Net sales for the full year 2014, of $765.9 million, increased $36.5 million, or 5%, from $729.4 million for 2013, due to higher product volumes. Included in the Company's net sales growth in 2014 was $12.8 million, or 1.7% of additional sales from acquisitions, which was largely offset by $10.3 million, or 1.4%, related to a decrease in foreign currency exchange rate translation.

Complementing the relatively uneven 2014 global market growth in steel and automotive, a key driver for Quaker sales growth has been, and continues to be, Quaker's availability to take share of wallet with existing customers on pre-acquisition products in more recently acquired products and technologies. With respect to highlight number 2 on chart 4, stable margins continue to drive strong operating results in quarter and year.

Turning to chart 7, gross profit increased approximately $4.4 million, or 7%, from the fourth quarter of 2013, on the increase from sales volumes, on relatively consistent gross margins of 35.9% and 35.4% for the fourth quarter of 2014 and the fourth quarter of 2013, respectively. Gross margins have been approximately 35% or better for the past eight quarters, demonstrating Quaker's ability to manage price, mix, and raw materials effectively toward this targeted 35% gross margin level. Gross profit increased approximately $12.1 million, or 5%, from 2013, which was driven by the increase in sales volumes on relatively consistent gross margins of 35.7% and 35.8% for 2014 and 2013, respectively.

Selling, general and administrative expenses, SG&A, increased approximately $3.2 million from the fourth quarter of 2013, which was driven by the net impact of several factors noted in our press release. Highlighting these increases were SG&A acquired with the Company's 2014 acquisitions, and higher labor costs on increased sales and merit inflation, partially offset by the effects of foreign currency exchange rate translation. In addition, the Company incurred approximately $0.6 million of diligence-related costs in the current quarter, to support its 2014 acquisition-related activity, compared to $0.2 million in the prior-year quarter.

Notably, SG&A also increased due to $0.8 million of costs related to a streamlining initiative in Brazil, which was implemented during the fourth quarter of 2014. The impact to SG&A from the 2014 cost streamlining effort in Brazil will provide a virtually full-year positive impact in 2015. While the Brazilian economy is expected to continue to be challenging in 2015, this cost streamlining effort will help Quaker increase its profitability level in Brazil.

For the full year, SG&A increased approximately $6 million from 2013, which was driven by the net impact of several factors noted in the press release. Highlighting these increases were also SG&A acquired with the Company's 2014 acquisitions, and higher labor-related costs on increased sales and merit inflation, which were partially offset by lower incentive compensation costs, and decreases in foreign currency exchange rate translation.

In addition, the Company incurred approximately $1.1 million of diligence-related costs to support its acquisition-related activity in 2014, compared to $0.2 million in 2013. With respect to highlight number 3 in chart 4, adjusted EBITDA, up 13% in the quarter, and approximated $100 million in the year. Further, Quaker's adjusted EBITDA increased 13%, to $23.8 million, in the fourth quarter of 2014, from $21 million in the fourth quarter of 2013. Adjusted EBITDA remains a key metric for Quaker, and it is summarized in charts 6 and 8.

Similar to earnings per share, we adjust EBITDA to reflect items which are not part of our core business activity. For the year, adjusted EBITDA approximated $100 million at December 31, 2014.

Looking at the range of 2008 to 2014, the compounded average growth rate for adjusted EBITDA is 16.4%, with margins on adjusted EBITDA up 89%, or 610 basis points, over that respective period. With respect to highlight number 4 on chart 4, non-GAAP EPS, up 11% for the year, while up only slightly from prior year, with the comparison impacted by foreign exchange and tax rate. Strong volume and stable margins drove another good year for Quaker, with record revenue, operating income and adjusted EBITDA.

Referencing chart 6, earnings per diluted share for the fourth quarter of 2014 were $0.95, compared to $1.07 for the fourth quarter of 2013, with non-GAAP earnings per diluted share of $1.00 for the fourth quarter of 2014, compared to $0.98 for the fourth quarter of 2013. The fourth quarter comparison obscures year-over-year earnings growth, as the fourth quarter of 2013 benefited from an $0.08 per share favorable tax adjustment, while the fourth quarter of 2014 was negatively impacted by foreign exchange of $0.04 per share, and other non-operating expenses.

Earnings per diluted share were $4.26 in 2014, compared to $4.27 in 2013, with non-GAAP earnings per diluted share increasing 11%, to $4.26, for 2014, from $3.84 for 2013. Changes in foreign exchange rates negatively impacted the 2014 net income by approximately $1.2 million, or $0.09 per diluted share. With respect to highlight number 5 on chart 4, solid cash flow generation in the quarter and year, solid quarterly earnings and improved working capital management drove net operating cash flows of approximately $16.7 million for the fourth quarter, compared to $21.8 million in the fourth quarter of 2013, which increased the Company's year-to-date net operating cash flow to $54.7 million, compared to $73.8 million for 2013.

The $19.1 million decrease in full-year operating cash flow primarily relates to an outflow from accounts receivable. Other than normal outflow due to high sales, a key driver in the change in the Company's receivables was an increase in the level of bank exceptions draft that the Company received on outstanding receivables in its Asia-Pacific region. Overall, the current year marked an uncommon increase in the use of such methods of payment by the Company's customers, which the Company expects to be at a more stable level in the next year.

With respect to highlight number 6, on chart 4, continued strength in balance sheet for future acquisitions, turning to chart 9, the Company had net debt of $11 million at December 31, 2014, with $64.7 million of cash on hand, and $75.7 million of debt outstanding. And also, the Company's consolidated leverage ratio of 0.76 to 1 continued to be less than 1 times EBITDA, despite the added borrowings for the Company's record acquisition activity in 2014. Specifically, the Company's acquisition activity was highlighted by the second-quarter purchase of the 49% remaining interest in its Australian equity affiliate, the third-quarter domestic purchase of ECLI products, and the fourth-quarter purchase of Binol AB in Switzerland -- in Sweden.

We continue to believe that making acquisitions is the best way to create significant shareholder value, and believe our strong balance sheet and ongoing cash flow generation will allow us to make significant future acquisitions, while continuing to pay consistent dividends. In conclusion, Mike noted that over 60% of our sales are outside the US, and that the translation of Quaker's revenue and ultimate earnings into dollars varies with the fluctuation of the applicable foreign exchange rates.

To the extent foreign exchange rates remain where they are today, we anticipate additional headwinds in 2015. For perspective, using the revenue data in Quaker's business segment footnote in the 2014 10-K, investors can begin to broadly estimate the impact of foreign exchange rates on Quaker's 2015 revenue.

For example, the reader could take the current Euro rate of approximately 1.13, and calculate the differential versus the 2014 average Euro rate of approximately 1.33. Applying this differential to Quaker's 2014 EMEA revenue can serve as an estimate of the impact of foreign exchange on the region's 2015 revenue at current rates -- or at 2014 revenue, at current rates, given the majority of Quaker's revenue in that region is denominated in Euro.

To the extent there is a meaningful move in the Brazilian real or Chinese renminbi, this type of calculation with the relevant exchange rates could be indicative of the impact of foreign exchange on the revenue of South America and Asia-Pacific, respectively, given that these currencies dominate these regions. Again, we were pleased with our very strong operating results in 2014, and we believe, despite foreign exchange-related headwinds, 2015 will be another good year for Quaker, with increased revenue, operating income, and adjusted EBITDA.

Finally, I would like to personally thank all of you for joining us on the call today. And importantly, I would like to sincerely thank the Quaker associates around the world for their commitment to our customers and contributions to the success of Quaker. This concludes my prepared remarks today.

Again, thank you, and I will now turn the call back over to Mike.

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

(Operator Instructions)

Our first question today is coming from Lawrence Alexander from Jefferies. Please proceed with your question.

Hey, good morning. This is actually George D'Angelo on for Lawrence Today. Given raw material volatility, are you guys seeing any of your customers pushing for price concessions?

Yes.

(laughter) Give more detail on that?

We have -- certainly, from a customer perspective, we have contracts with some customers that are automatically indexed, and automatically changed, over periods of time. And they could change and, every 3 months, maybe some even 6 months. And that's more of an automatic thing. And then you have some customers that buy products that have a high content of mineral oils. And therefore, they would be looking for price decreases on those.

You have other customers that buy products that don't have a lot of content of those raw materials that decline, and would not get any price decreases. So it's a mixture how we do business and -- but in general, as people look at the gas pump and see prices going down, now they're going back up. They -- people tend to equate that to our products.

Is there any sense of the magnitude across your businesses that it might be?

No. I -- it's not a -- it's -- again, it's really hard to say on this. As I made in my opening remarks, it's really hard to get at this one, because we have a lot of moving parts between our raw material prices and -- as well as the product adjustments, the timing of product adjustments. So we -- the only thing I can really say, George, I guess, is that we'll see. We could see, certainly, a little bit more volatility in our gross margin. We're not even sure we will see that, but I would expect this. Because the past couple of years have just been unbelievably steady in raw materials.

And how these index adjustments kick in, how we make adjustments with customers on our pricing, how raw materials flow, it's just -- it's a very complex thing. You have foreign exchange rates in there, because some are dollar denominated, but yet you have weak -- a weakening Euro, and so their raw materials don't adjust that much. It's just a very complex situation, so it's really hard to give clear guidance on this.

Okay. Thanks. That's helpful. And just one more. Given the valuations in the energy sector, is that an area where future M&A might be more interesting for you guys?

No. I think we're -- we tend to stick to the areas that we've identified in our core markets. That's process fluids, and other types of industrial lubricants and chemicals that get used in the processing of metal. And as you know, we've made more acquisitions in grease. That's another area we've identified, and would like to do more in the future.

So I think we're pretty much sticking to the core areas, and we think there's a lot of growth still to be had. Not only from our past acquisitions that we've made, but from future acquisitions in our core areas.

Thanks.

Thank you.

Thank you. Our next question today is coming from Liam Burke from Wunderlich Securities. Please proceed with your questions.

Thank you. Good morning, Mike. Good morning, Margo

Hi, Liam.

Morning, Liam.

Mike, you've mentioned before that grease is an integral part of generating complementary revenue. How has the Summit transition, from a pretty much regional operation to fitting into your global platform, how has that been progressing?

Good. It's -- when we made that acquisition, roughly four years ago, I'd say, in the early years, we were concentrating on the acquisition itself, and making sure everything was good there. And we're very happy with how that -- the acquisition in that business is performing itself.

And then over time, we started hiring product experts around the world. Because even though we have an infrastructure to sell to our customer base around the world, we needed product experts in, say -- in this example, in grease, to go with our salespeople, and to make the business case for a customer to want to change to our products.

We also had to install a global product line of greases, as well. So I would say, over that effort in 2014, we pretty much now have all the people that we needed to help develop business around the world. And we got our global product line in place, and we feel we have a supply chain now that can supply that.

So now we're more in the mode of getting trials with various customers to promote that grease. And we expect to continue to see good sales growth into our existing channel for that acquisition.

Great. Thanks, Mike. And on market share gains, you've had some -- you've had a good degree of success taking share from competitors in your core product. Are you getting any competitive push back, either on pricing or more aggressive marketing?

We always have -- there's always competitors out there, and you always have competitive actions. But we continue to believe that we'll stick to our strategy, and how we do business, and how we provide service to our customers. And we feel that will continue to allow us to continue to take market share in the future.

Great. Thank you, Mike.

Thanks, Liam.

Thank you.

(Operator Instructions)

Our next question today is coming from Mike Sison from KeyBanc. Please proceed with your question.

Hey, good morning. Nice end to the year.

Thanks, Mike.

Mike, given the headwinds that you have in foreign currency, I just wanted to understand your outlook for 2015. Given all the moving parts, are you implying that you still can grow earnings and EBITDA in 2015 versus 2014?

Yes.

Great. And then, what about the -- how much of the cost savings from Brazil will kick in this year, Margo, in terms of the benefit there?

That's a good question. I would submit $800,000, approximately, is what the cost was of the program for us. We will clearly achieve at least cost savings of $800,000. And as you know, and with all due respect, we would expect to gain something more than that. So that's the direction we have for you at this point in time.

Okay. And then when you think about 2015, again, you highlighted some areas of economic uncertainty. Mike, can you maybe walk us through, geographically, where you think you can generate some volume growth? And maybe a couple reasons of where that momentum is coming from?

Sure. North America continues to be a good, strong region for us. And in particular, in Mexico, we've had very strong performance in Mexico over the past several years. And we feel that is a place where there's continued investment, and continued good growth.

Again, North America, with all our business initiatives that we have, that will be a good place. We -- you go around the globe, we -- in Europe, yes, I think the underlying markets will have modest growth. And of course, with our initiative and things, we'll hope to do better than that. Certainly try, that's our goal, to do better than that.

Brazil and South America, I always think we're maybe at the bottom of those things, with the economy and so forth. So hopefully, there will be some uptick there, but we're not counting on it. But we would expect, with our restructuring program and so forth, that we'll see improvement there.

And then you go to Asia-Pacific. They're -- even last year, if you look at our growth in Asia, it was very strong, much stronger than the underlying market. And again, through our gain and initiatives.

And so even though things might be lower in places like China, we still -- we have a good business in India. We think we'll good get good growth there. And even in China, we'll continue to try to take share there, and continue to grow more in the market.

Great. And then, balance sheets still in very good shape. These have been really nice bolt-on acquisitions. What are your thoughts on -- or maybe even if there's any more aggressive transformational acquisitions out there that could be interesting for Quaker?

We're continuing to work on acquisitions in our pipeline. And a lot of the acquisitions that we've done, as you've pointed out, bolt on, little -- relatively small.

We would like to do larger acquisitions. We do believe we have the balance sheet to do that, and the management team. And with the larger ones, we felt we could get good synergies, cost synergies, as well.

And so we continue to look for those. But they're more, again, it's hard to know when exactly that right opportunity will come along.

But we do have things in our pipeline that are -- even if the big ones don't come along, we have smaller ones that we hope to continue to make and do this. And as we've said in the past, we're -- we believe making acquisitions is the best way to add shareholder value.

We feel we've shown that in the past several years, and we'd like to continue with that. And if, for some reason, our balance sheet continues to get stronger, and we have cash, and we don't see the acquisitions up there, we'll find another way of getting that cash back to shareholders.

Great. Thank you.

Thanks, Mike.

Thanks, Mike.

Thank you. You've reached the end of our question-and-answer session. I'd like to turn the floor back over to Management for any further or closing comments.

Okay. Thank you. This will 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 for the full year, 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 Margo or myself. Thank you again for your interest in Quaker Chemical.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.