Quaker Chemical Corp (KWR) 2015 Q2 法說會逐字稿

Greetings. Welcome to the Quaker Chemical Corporation second-quarter 2015 results conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Mr. Michael Barry, Chairman, Chief Executive Officer, and President for Quaker Chemical Corporation. Thank you, Mr. Barry, you may now begin.

Thank you, Rob. 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 section of our website at www.quakerchem.com.

I'll start it off now with some remarks about the second quarter. I'm pleased we have delivered another quarter of consistent earnings and strong cash flow despite a variety of market challenges.

We have accomplished this notwithstanding some significant changes in our external environment over the past several months including a much stronger dollar against many of the world's currencies, low oil prices, and the impact that both of these had on regional steel production. Let me now talk about each of these in greater detail to give you a better perspective in which to evaluate our second-quarter results.

Foreign exchange rates negatively impacted our earnings by 8% and our revenue by 7% this quarter. So you can see that our earnings and revenue would have been showing pretty good growth if not for the exchange rate impact.

Lower oil prices also impacted our results in several ways. On the plus side we saw some expansion in our gross margins as there can be some lag effect between changes in our pricing and our raw material costs.

On the other hand our top line was negatively impacted since we did see some declines in our product pricing. On the demand side we grew our volumes notwithstanding lower volumes from our tube and pipe product line due to lower oil and gas production.

This negatively impacted our overall sales by approximately 1%. So lower oil prices impacted our reported results both in positive and negative ways.

We also saw shifts -- some shifts in regional production especially in our steel markets which makes up close to half of our overall business. The stronger dollar enticed more steel imports into the US negatively impacting North American steel production.

In fact steel production was off versus last year by 7% in North America. Globally the story was not much better. In fact all the major regions or countries show flatter decline in steel production versus the second quarter of 2014.

Overall global steel production declined about 2.4% in the quarter versus last year. Those are industry numbers; however on the positive side most of the external data I have seen about the steel industry suggests that after 2015 we should see growth in the 3% per year range for the next several years.

I'd now like to make some comments on our quarterly sales and I'll do this region by region. North America showed growth of 4% of sales, although the ECLI acquisition made up 8% of the growth and foreign exchange negatively impacted sales by 2%.

So given the declines of steel production and tube and pipe that I mentioned, you can see we're continuing to have good traction in market share gains in North America. Our European, or EMEA region, showed an 18% decline in sales which was primarily driven by the decline in the euro.

South America continues to be our most challenging region. Sales dropped 35% with currency and lower demand being the two largest causes for the decline. Overall though I think it's important to point out that we continue to make money in South America and we have consistently reacted to the economic situation as conditions change through the actions similar to the previous streamlining efforts that we did.

Our strongest region continues to be Asia Pacific where sales grew 6% despite foreign exchange headwinds of 2%. So again you can see our Asia Pacific numbers further reflect our ability to gain share as steel production actually declined 2% and other industrial production was relatively modest at best in most countries in the region.

As you can see the sluggish global economic environment, strong US dollar, and low oil prices are impacting our business dynamics for the quarter. However, we were able to offset these negative impacts and show some growth in our non-GAAP earnings and EBITDA.

In addition we had strong operating cash flow for the quarter and generated $9 million more than the second quarter of 2014. We were able to achieve these results on the benefits of our recent acquisition as well as taking share in the marketplace.

Now I'd like to give you a sense of our share gains we are seeing in the base business. As mentioned we had numerous negative items impacting us this quarter, including 7% from foreign exchange, 2% from South America, 1% from tube and pipe product lines, and 1% from lower product pricing due to lower raw material costs.

We've seen an overall aggregate decrease on our net sales of 11%, whereas acquisitions increased -- helped to increase overall sales by about 5% to help partially offset this. So the net impact of all these factors is approximately a 6% decline in sales, yet we were down only 4% in total.

So I look at this differential of approximately 2% being our share gains we achieved in our three largest regions which makes up over 90% of our business, and these 2% gains were made despite our largest market, steel, being down 2.4%. So I believe this is another indication that we are growing our market share in our major regions and end-user markets.

We believe the share gains are due to our commitment to our customer andcustomer intimacy model, which puts the customer 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 lines 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 and our goal is to hit as many singles as possible to produce multiple runs and thereby show continuous growth even in tough market conditions.

Over the next quarter we expect to see the continuing impacts of low oil prices and a stronger dollar on our revenue. In the case of raw materials we expect that we have probably reached the bottom and we will begin to see some modest firming in raw material costs going forward.

But this is really hard to determine especially with the fluctuations in the price of crude oil. As mentioned during the last call, we expect more volatility in our gross margins this year as there can be timing differences between raw material cost changes and our related product price adjustments which we saw in the second quarter.

As raw materials continue to settle, we would expect our margins to be in the 35%, 36% range but it's difficult to predict the exact timing to this. 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 continue to grow our earnings and cash flow despite the realities of the stronger dollar. We will do this by executing our business strategy which we project will lead to continued share gains in the marketplace.

Also we will continue 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 such as the one announced yesterday.

The combination of all these growth vehicles gives us confidence that 2015 will be another good year for Quaker as we expect to have modest growth in our earnings which will mean our sixth consecutive year of earnings improvement. Speaking of acquisitions, we are happy to announce the acquisition of Verkol, a specialty grease and lubricant company located in Spain.

This acquisition gives us manufacturing capabilities in Europe to help grow our business there, a state-of-the-art R&D facility, strong talent, and unique technologies that we can cross-sell on a global basis. We are pleased to continue our expansion into specialty greases and lubricants with this acquisition as we build our global specialty grease business both organically and through acquisition.

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.

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

Thank you, Mike. Good morning, everyone. Before launching a financial review of the quarter, please note that Quaker does provide a non-GAAP earnings per share table in an effort to provide shareholders with visibility into Quaker's operations, excluding certain items which we believe do not reflect our core operation.

Such table is outlined in chart number 10 of the investor slides, yesterday's earnings release and our Form 10-Q also filed yesterday. Okay, as referenced in chart number 4 of the investor slides, Quaker's second quarter 2015 includes the following Chief Financial Officer highlights.

Let's address highlights number 1 and number 2. Solid operating results drive quarterly non-GAAP earnings per diluted share of $1.15, up 4% from $1.11 in the prior year's quarter.

Negative impact of $0.09 per diluted share, or 8%, is due to foreign exchange. Quarterly sales are up 4% on volume including recent acquisitions, offset by 7% decline from foreign currency translation.

Clearly, foreign currency translation continued to have a significant impact on the Company's reported and non-GAAP results impacting the top and bottom line, all summarized in the investor charts number 6 and number 10. As a reminder to you all, approximately 60% of Quaker's business is outside of the US.

And, similar to other US-based reporting entities with global footprints, the impact of fluctuations in foreign currency exchange rates is highly relevant. Quaker's primary exposure relates to the translation of its results to US GAAP.

The impact of the strengthening US dollar has turned out to be quite broad reaching across many currencies, as you've all noticed. While most currencies in which Quaker operates depreciated against the strengthening US dollar, we noticed that as a function of magnitude of exposure and level of depreciation versus the US dollar, the most impactful currency rates to be are the euro, the Brazilian real, the Argentinian peso, and the Mexican peso. And the Australian dollar, with a 1% decline in the average foreign exchange currency rates for the second quarter of 2015 versus the same period last year being 19%, 27%, 10%, 15%, and 17% respectively. Finally, Quaker's major translation exposures are generally the euro and the renminbi, while Quaker has more modest translation exposures to these other currencies. Looking forward, we currently believe the US dollar may continue to remain strong year-over-year versus numerous currencies.

With respect to CFO highlight number 3, increased gross margin in the current quarter driven by timing of certain raw material cost decreases.

I note turning to chart 7, gross profit increased $2.4 million in the second quarter of 2015, or 4% from the second quarter of 2014. The increase in gross profit was due to increased product volume and gross margin expansion.

Gross margins increased to 38.4% in the current quarter from 35.7% in the second quarter of 2014. The increase was primarily due to the lag between the net reduction in raw material costs and decreases in Quaker product prices to customers.

In the past Quaker has experienced on average an approximate three- to six-month lag between a net change in raw material costs and the ultimate changes in product prices to customers. We do not expect to see raw material costs -- we do expect to see raw material costs increase modestly, but we do not have a perfect crystal ball in this regard.

As raw materials continue to stabilize, we would expect our margins to be in the 35% or 36% range, but it is difficult to predict the exact timing of this.

So turning to CFO highlight number 4, lower year-over-year effective tax rate. Looking at Quaker's net results on chart number 6, Quaker's effective tax rates for the second quarters of 2015 and 2014 were 27.1% and 30.6% respectively. The primary contributor to the decrease in the current quarter's effective tax rate was lower changes to reserves for uncertain tax provisions in the second quarter of 2015.

Quaker's effective tax rates for the first six months of 2015 and 2014 were 28.8% and 32.5% respectively. The primary contributors to the decrease in the current year's ETR were lower changes in reserves related to uncertain tax positions in the first six months of 2015, and certain one-time items that increased the first six months of 2014's effective tax rate.

We currently estimate the full-year 2015 effective tax rate will approximate 29%. Moving to CFO highlight number 5, strong quarterly operating cash flow generation of $19.2 million.

In chart number 6 of the investor pack, the Company's net operating cash flow of $19.2 million for the second quarter of 2015 increased its year-to-date net operating cash flow to $27.3 million compared to $8.3 million for the first six months of 2014. The increase of $19 million in net operating cash flows was driven by higher operating performance and lower cash invested in the Company's working capital during the first six months of 2015.

Also included in the second quarter of 2015 net cash flow were repurchases of 18,854 shares of its common stock for approximately $1.6 million pursuant to the share repurchase program announced in May of 2015. Notably, we plan to buy back at least enough shares in 2015 to offset the dilutive impact of shares issued in 2015.

Quaker's adjusted EBITDA increased 2% from $25.8 million in the second quarter 2014 to $26.2 million for the second quarter of 2015 despite the negative impact from changes in foreign exchange rates on the Company's earnings of 8% as I mentioned earlier. Adjusted EBITDA remains a key metric for Quaker and is summarized for your reference in charts number 6, number 8, number 11, and number 12.

Similar to earnings per share, we adjust EBITDA to reflect items which are not part of our core business activities. On a trailing 12-month basis adjusted EBITDA approximated $100 million at June 30, 2015, versus $93.4 million last year, despite the significant negative impact of foreign exchange this year.

Looking at CFO highlight number 6, continued strength in balance sheet for future acquisitions. And looking at chart number 9, the Company's cash exceeded its debt by $3.7 million at the end of the quarter driven by the strong operating cash flow I mentioned earlier.

As of June 30, 2015, Quaker's consolidated leverage ratio continued to be less than one-time EBITDA. Notably, yesterday Quaker also announced the acquisition of Verkol, a leading specialty grease and lubricants manufacturer based in northern Spain for approximately $40.1 million including net cash of $10.5 million.

In 2014, Verkol recorded revenues of approximately $33 million and estimated adjusted EBITDA of $4.3 million. Quaker paid approximately $32.4 million for this acquisition in total, including approximately $2.8 million in transaction related expenses; or stated differently the equivalent of 7.5 multiple of estimated 2014 adjusted EBITDA.

The Verkol acquisition is included for your reference of the subsequent event in Quaker's second-quarter 2015 Form 10-Q which we filed yesterday. We will provide further insight into the purchase price allocation for this acquisition in our third-quarter 10-Q for your reference.

So, meanwhile, we are estimating a preliminary annual impact of $0.10 to $0.15 per diluted share as a result of this acquisition, pending of course the finalization of its purchase accounting. The $2.8 million in transaction related expenses will be recorded in the third quarter and treated as a non-GAAP adjustment to reported earnings per share due to its uncommon nature.

With respect to this acquisition of Verkol we notably have made a total of 11 acquisitions now over the past five years. From a capital allocation perspective, we have paid a dividend for 43 years and we do remain committed to distribute cash to shareholders via these ongoing quarterly dividends.

However, we will also continue to execute on core strategic acquisitions provided the returns are in excess of Quaker's cost of capital. We believe these acquisitions again are the best alternative for Quaker to generate shareholder value.

On the other hand, which we have mentioned, to the extent we make a judgment that value-generating acquisitions cannot be executed on a timely basis, we will distribute cash to shareholders through share repurchases beyond the minimal level of repurchase required to offset the dilutive impact again of shares issued each year in connection with compensation plans. So this concludes my prepared remarks.

But, finally, I would like to personally thank all of you for joining us on the call today. And, importantly, I would like to thank the Quaker associates around the world for their commitment to our customers and their contributions to the success of Quaker Chemical. I'll now turn the call back over to Mike Barry. There you go, Mike.

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

Thank you.

(Operator Instructions)

Our first question is from the line of Mike Harrison with Global Hunter Securities.

Hi good morning, and congratulations on a nice quarter in a tough environment here.

Thank you Mike.

Thank you.

I think the main question on a lot of people's mind is just looking at the gross margin number this quarter and talking about the lag effect of raw materials versus pricing. Eventually we get from 38.4% back down to the 35%, 36% range, but the timing is in question.

So if I look back to the 2008, 2009, 2010 time frame, you were really able to hold margin gains. You kind of peaked out in Q3 of 2009, but you were really able to hold those gains through 2010 before raw materials started to go up again in 2011.

Is that a good pattern or road map to follow if I want to get some kind of a sense of what the timing looks like? Or are there differences now compared to that 2009/2010 time frame?

I think a lot of it, Mike, really depends upon how fast raw materials stabilize. Because the way I kind of think of it is if raw materials today just froze at today's levels, that within a three- to six-month period everything would come through and be stabilized.

And we actually -- you go back in time as well from a year ago and a year prior to that I guess starting we had this real stable period for like a year and a half where our margins were very stable, and that's because raw materials were stable. So any time there's a change I always think of it as it takes three to six months to come through.

What we don't know here and what makes this very difficult for us to address this and give you any kind of precise guidance is what will happen with raw materials from here on out? We are seeing a slight uptick right now in our raw materials, but as we all know there's been changes of crude oil over the past several weeks.

Will that eventually translate into lower raw materials or not? And then you have other raw materials that we have that really have in some ways different supply/demand characteristics associated with it such as the vegetable oils and so forth, animal fats. So it's really kind of hard to understand or get a precise thing, but the only guidance I would give you and say it could be different than those past is that, once we get to a stable point within a few months, like I said that three- to six-month lag, things should stabilize and get to a normal place.

And kind of a related question, just on pricing and mix. You were negative in Europe and Asia which is what I would expect, positive in South America given the inflation and environment there. That's to be expected too.

But I was surprised to see that you were 3% positive on price mix in North America. What's going on there to make that a positive number? And maybe any thoughts on what we should be modeling for the rest of the year in North America on the price mix front?

Well it could be we've had acquisitions impacting us, but we had ECLI come on stream last year. And generally those prices are higher -- their grease prices are higher than others so that can skew things. And really it comes down to sometimes in a particular quarter just the product mix that we have.

Then was hoping to get a little bit more color on the Verkol acquisition. You said it gives you some additional exposure to grease in the steel industry.

What are some of the key differences in the technologies that Verkol brings compared to what you got when you bought Summit? And can you talk about this continuous casting product technology that they bring?

Sure, three different companies are very different. Summit gave us a good platform initially to get into the grease business, gave us manufacturing capabilities, gave us good technical people to help us develop formulas as we try to penetrate say the steel industry.

We bought ECLI. They were really focused primarily on the automotive market and a whole different kind of level of type of sale there where you get specked into cars, interior cars and so forth.

That would really have been hard to penetrate organically. What this brings with Verkol is it actually brings a company that has a strong presence of selling specialty greases into the steel industry.

That's one of the primary markets that they bring. So now we will have specific products that are now actually used in the steel industry and we can -- but of course they are more of a regional, and even within the European region they tend to have primarily their sales sold in Spain.

About 80% is in Spain. But now we can use these good products that they have and use them around the world. And we already -- we're already starting to make penetration in our steel business with grease, but now this would help I think accelerate that.

The other aspect I think you mentioned was the continuous casting fluids that they make. That's an area -- we don't have a strong presence today in the steel mills. It's not the biggest market in the world.

We don't have perfect knowledge of the exact market size, but ballpark number it might be a $30 million type of market. And they have good technology for this in that they've been very successful in their part of the world. And now we would like to use our global base that we have and the customer intimacy we have in the steel industry to help sell that around the world.

Last question for now and then I'll get back in queue. The financing of the Verkol acquisition, is that mostly coming out of cash or are you going to be drawing on credit lines for that?

We drew on our credit line at this point in time and then we worked to optimize our cash management over time.

Thank you very much.

Thank you.

Our next question is from the line of Laurence Alexander with Jefferies.

Good morning. Couple of questions. Can you talk a little bit about what you're seeing in terms of cost inflation, particularly wage inflation by region and how you think that's going to evolve over the next couple of years?

Sure. The biggest challenge for us on the cost inflation perspective continues to be South America. We see wage inflation continuing to be an issue there and especially in light of the environment and where you have your top line falling, yet you tend to have your cost of people still being relatively high on a local currency basis.

So to me that's the biggest challenge we have, and we've been addressing that for our streamlining efforts and trying to do business differently down there as we react to that situation. And we think we've done a pretty good job with that.

We continue to see maybe higher than normal type inflation than you would expect in the US in the countries such as India and China. But China seems to be becoming less of an issue for us as time goes on. And then of course Europe and the US we see really relatively modest wage type increases.

Secondly on the M&A environment, are you seeing any shift in the valuation multiples or the psychology on the part of sellers?

We haven't. I think one of the -- in our industry there's such the opportunity -- we don't have like a perfect universe of a lot of different opportunities to make a judgment on that. I would expect if a private equity firm owns a business in our industry or a much larger corporation has a division of something obviously they know what's going on in the world and what multiples are happening.

I would expect that they would expect to see higher level multiples. We are tending to find that if you have a more local or regional player family run type business, maybe not as much and I think maybe you look at it indicative of what we paid for in the Verkol acquisition.

Okay. And then just lastly on that theme as you look at the emerging markets in particular, can you talk a little bit about what the regional players are like in terms of relative technology?

Are there players -- we've heard differently. Are there players in the emerging markets that you'd be interested in acquiring for technology purposes rather than market penetration?

In the emerging markets we have looked at some local players, at least over time we've looked at potential players in Brazil. We looked at players in China. And so far there might have been some technology there or some play, but where it might have gotten us into a different product line that we didn't have, but so far we haven't in those emerging markets, haven't made any headway there.

But we are interested. We are continuing to want to have discussions. And Brazil in particular. Like one of the things even though this is not right on what you're asking, but like with Brazil I think one thing nice about our position, it's a challenging environment for us now but we're definitely a market leader down there. And in some ways maybe some of this turmoil or negative market conditions down there may be opportunities to make acquisitions as some other people maybe want to access.

Thank you.

Thanks, Laurence.

Our next question is from the line of Scott Blumenthal with Emerald Advisors.

Good morning Mike, good morning, Margo.

Good morning, Scott.

Mike, you like to discuss service, and I understand that's a very important part of the business. But can you maybe talk about new products or new product development, maybe new services that you may be working on? Do you track that or can you give us maybe a percentage of sales that's coming from new products or new services that you might have introduced over the last couple of years?

I don't have -- we certainly track things but I know exactly the kind of measure you're looking at and I can't give you an overall indication certainly. But I can maybe talk a little bit about it.

In each of the areas, I think about our business in steel, I think about our business in metalworking, our hydraulic fluid business, and our mining business, and of course all these new technologies that we just got, the six new technologies we acquired in the past several years. In each one of those areas I can think off -- as I think through those we are definitely an R&D type company.

We definitely continue to evolve our product line, and we are definitely putting out what I consider new or evolving platforms of our technology. So sometimes we don't have one measure that we kind of communicate to Wall Street, but we do put a lot of emphasis in it. We just don't have that metric for you.

Margo, one of the things that you tend to not mention but I would imagine that it is to some extent meaningful, can you talk about CapEx? What you planned for the rest of the year and any projects that you might have?

Yes, that's fine. We're more than happy to talk about it. Generally we're CapEx light so it tends to be something that on that basis is somewhat downplayed. But we remain on track to really stick within our range.

We spend approximately $12 million a year and I just don't think we're -- we don't see any reason that it's going to be anything dramatically different. We're running a little bit slower in the beginning of the year.

It happens to kind of weight higher in the back end of the year. And there's nothing real noteworthy that's going to hit your radar screen at this point in time for 2015.

Okay. And we do continue to acquire. You mentioned the 11 acquisitions over the past few years. I imagine you're acquiring some type of a productive capacity with all of those.

Can you talk maybe a little bit about utilization at this point? And you may, depending upon the current environment, we could expect that you probably have maybe a little bit too much at this point. Is that right?

As far as -- I know what you're saying. Capacity utilization is really not a -- compared to most chemical industries it's not a proper measure for our industry I don't believe because we're a pretty, as Margo said, low CapEx type of environment.

We tend to blend things so it's not these huge production plants that react and make new molecules. So over time if you look at some of the actions we've taken like last year we did a streamlining of our operations in Europe with our Italian operations.

We continue to look for ways we can do things. With Verkol, the one we just made yesterday, we don't expect in the short term to do anything there because it's actually one of the benefits that gives us this grease manufacturing in Europe.

And we're very excited about that because our other grease manufacturing was in the US. So having a platform and a place to manufacture and be close to our customers over there, we're excited about. So it's something we always continue.

We look about how we can optimize our manufacturing, but right now we feel pretty good. We don't have major expansion plans on -- the only one that's kind of out there some time in the future might be in India where we want to build a second plant. Our plant right now is on the eastern side of India and we want to build one more in the western side some time in the future.

And since you did mention Verkol, Mike, for my last question you did say that they are -- about 80% of their sales are in Spain. Can you talk about your exposure to the Spanish market particularly prior to this and maybe some customers that you may get access to that you didn't have before?

Well, I would say prior to this our exposure to Spain was kind of even keel with all of Europe. It wasn't like heavily into Spain or light into Spain.

We had people in Spain and we sell to the steel customers and car customers in Spain. So it's like a normal place.

This certainly does increase our Spanish sales, but mainly in new product areas that we were not in. We also think that Spain was hit particularly hard when Europe had its downturn a few years ago and now is coming back. So we think it's a good time to actually increase our exposure into Spain.

Thank you.

Thanks, Scott.

Our next question is from the line of Curt Siegmeyer with KeyBanc Capital Markets.

Hi, good morning guys, nice quarter.

Thank you, Curt.

Could you guys maybe dig in a little bit just on volumes, up 4%? What would base volumes have been? I'm assuming probably down slightly?

Well certainly when you look at acquisitions themselves, acquisitions were 5% of our sales. So you could see from that perspective that things are down.

And it's really hard to be honest to try to get a clear picture in this. One of the things I was trying to do in my remarks, and maybe I'll just repeat some of this because it gets lost. There's a lot of things happening in our results.

So you have the foreign exchange being down 7%. You had South America alone, which is really just a small part of our business, a little less than 5% of our business, but that was down a lot and it impacted our sales 2%.

The tube and pipe, which is another small piece of our business, roughly around 4% of our sales, that impacted our sales about 1% overall. And then of course you had some of this product pricing because of our adjustments on things going down.

So that's where I was kind of saying if you put these things together, okay that's like an 11% decline in sales. And then you said okay, we have the acquisitions, they're up 5%.

So maybe our overall when you look at things should be around a 6% decline in sales, yet we were down 4%. And so that differential there, that 2%, the way I look at it is that these are our share gains that we've made in our base businesses in our three largest regions which is about 90% of our business.

So -- and we made these in light of the steel industry being down 2%. So I think our share gains are roughly -- our base business has been growing around 2%, and again these are in very tough markets and these markets are flat to down.

So I think you can see these kind of -- you can see it that way. It's just hard to get at it through the -- there's just so much going on in this quarter with our numbers.

Sure, sure thanks. And on that point, if you give us your 30,000-foot view of the demand environment and tying that into your outlook which sounds qualitatively slightly more conservative from an earnings growth standpoint, is it mostly Latin America that has you sounding a little bit more cautious?

Or if you think back to your April guidance and from a demand standpoint what has sort of changed the most I guess or of any other regions that you're notably more cautious on? And are there any positive offsets?

Yes, I don't know if there's really anything that's one thing that's caused us to change. In the past if you go look at our past accomplishments and what we've done we've been generally growing our earnings and EBITDA close to 10% per year type of range.

And then you look at this year, it was foreign exchange. Foreign exchange has been a big impact.

So you see foreign exchange for the first half now is 8% down. So it's going to be hard to replicate the kind of historical growth that we've seen in those things.

So that's -- so I think we just put the word modest in there to just give people more color. I don't know if our world from how we saw things in the first quarter has dramatically changed. I think we were just trying to maybe provide a little -- using that word to provide a little bit more color to people.

Got it. Thanks.

Thank you, Curt.

Our next question is from the line of Garo Norian with Palisade Capital.

Hi guys. I just wanted to ask a few questions around the Verkol acquisition. Broadly speaking, what's the revenue exposure in steel versus all other markets?

I would say it's not overly lopsided. I think we've got some metalworking exposure and some primary steel exposure and other -- some of our other businesses.

I don't see it overly lopsided one way or another. I think you've got a mix.

Definitely it's not like 80% or 90% of the business or anything like that. It's less than half the steel business there. And again it tends to be concentrated in that Spanish and that general area where their plant is located.

Got you, okay. And you talked about the exposure they have in Spain and Liberia potentially. Do they have much if any business let's say outside of Europe today? Or is that something that you can really leverage?

They have some but it's relatively minimal.

It's still a little bit minimal.

And then looking at least I guess at their production capacities or something like that, they talk about grease versus oils. What's the right way to understand when they talk about oils? What does that really mean?

They make specialty lubricants or a whole host of things. And I think these continuing casting fluids are an example of that that they sell. So as you know, I mean it's kind of like the whole range of lubricants that are -- you can sell to different customers, they tend to sell all different types.

Okay, but it doesn't take you -- I know in the past you've talked about kind of some of the competitors out there that really go more into let's say engine oils and things like that. Anything in that department?

No, no.

This is in our core, but the product that we don't have as much access to is continuing casting oils is kind of the noteworthy piece. But it's right near our center.

Okay. And just to make sure, having their first half this year relative to last year, is there anything of significance different up or down?

It's better than last year.

Okay, and then just moving away from them. What's the big changes in currency, particularly the euro?

Is there anything you're seeing different competitive-wise? Is there any chance anybody is trying to bring imports into North America from Europe or anything like that?

No. We have not seen any change in competitive dynamics because of the currency issues.

Okay, great. That's all I've got, thanks.

Thanks, Garo.

Thank you. Our next question is a follow-up from the line of Mike Harrison with Global Hunter.

Hi. Just a couple more. Looking at Asia, it accounts for a pretty large majority of the world's steel production but really only about a quarter of your sales.

What accounts for that difference and what does that say about Quaker's growth opportunity in Asia? Obviously you had a very strong performance there in the quarter.

Well I think one of the -- we have roughly the same kind of share in steel as I use that as an example, steel around the world, so that's relatively consistent.

The reason that we would sell more to say steel companies in the United States versus China is China generally has the newer technology mills and those mills are more efficient and can use higher technology products which consume less of our type of thing, but generally have higher margins as well. So I think that's the biggest dynamic to the first part of your question.

And then on your second part, we have been growing. I'm really pleased with what we saw in China and India and the kind of growth we're seeing.

We are growing more than the market and I think part of that is we have gotten into -- that's why I use the steel mill example. We'll get into a steel mill, selling the cold rolling oil generally and then over time we try to sell them more of the other products in our portfolio whether it's the hydraulic fluids, the cleaners, and then the new ones that we picked up.

Well there's tinplating or surface technologies, greases. So I'm really happy that this kind of strong -- we have a really strong organization that's been there a long time in China and now we're increasing our product portfolio of things to sell. And if you look -- go back in the past four quarters or five quarters or so and their growth has been really good...close to double digits each quarter versus the prior year's quarter. And the markets certainly have been doing that. So you can kind of see these share gains, that's the best indicative place to look to see the share gains happening.

And then just in terms of what's going on in China, I think a lot of us are having some concerns about what the impact of the market gyrations there could have on the consumer market and the broader economy. How much of a concern is that for you both in terms of a potential slowing in demand for manufacturing and infrastructure build out as well as maybe concerns over continued over-capacity in their steel industry there?

The only thing I can rely on is external data because I'm not an expert on all these things and all the factors. But people are projecting that the China steel industry is going to be relatively flat over time.

But then when you look at the overall global capacity or production of steel it's supposed to be going up starting after this year or roughly around 3% a year. So I think at least the experts or the people or different surveys I read or different reports that make these forecasts don't project that a huge decline in over-capacity in the China steel area.

People still see the steel industry as a global market and in a lot of ways we don't care where it's made because wepretty much have share everywhere around the world. And as long as it's made somewhere, we'll get our fair share of work. So as long as it continues to be there and grow and people are projecting things to be growing 3% that's kind of what we care about.

Thanks very much.

Thank you, Mike.

Thank you. At this time I'd like to turn the floor back to Mr. Barry for closing comments.

Okay, great. No other questions we'll end the conference call now. I want to thank all of you for your interest today.

We are pleased with our results in the second quarter and we will continue to be confident in the future of Quaker Chemical. Our next conference call for the third-quarter results will be in late October or early November, and if you have any questions in the meantime, please feel free to contact Margo or myself. Thanks again for your interest in Quaker Chemical.

Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.