Quaker Chemical Corporation Q1 2010 Earnings Call Transcript

Quaker Chemical Corporation Q1 2010 Earnings Call Transcript
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Quaker Chemical Corporation (KWR)

Q1 2010 Earnings Call Transcript

April 28, 2010 8:30 am ET

Executives

Michael Barry – Chairman, President and CEO

Mark Featherstone – VP, CFO and Treasurer

Analysts

Gregory Macosko – Lord Abbett

Liam Burke – Janney Montgomery Scott

Presentation

Operator

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Previous Statements by KWR
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Welcome to the Quaker Chemical Corporation first quarter 2010 results 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.

Michael Barry

Thanks, Rob. Good morning, 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.

We have also added some slides for our 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 first quarter and then follow with what we are currently seeing in the marketplace.

Our earnings for the first quarter were $0.84 per share. This is a large improvement from the first quarter of 2009, when we essentially broke even. About a $0.11 per share is due to an unusually low tax rate because of the expiration of some FIN 48 tax reserves. So as since, this tax effect our earnings would have been $0.73 per share.

I ask you to see on page four. This is now the fifth quarter in a row that we had seen improvement in our earnings level. As you may recall, we had a loss of 26%, a $0.26 of share in the fourth of 2008, breakeven results in the first quarter of 2009, earnings of $0.29 per share in the second quarter, $0.45 in the third quarter, $0.71 in the fourth quarter and now $0.84 in the first quarter of 2010. So we are seeing very good improvement and we are pleased with these results considering the volumes are still down approximately 7% from where they were before the global prices began. You can see this on the volume chart on page five.

Looking forward, we continue see strong fundamentals in the next two years that should be the good growth although we do expect somewhat lower demand in the second half of the year versus the first half. There are really several reasons for the short-term impact.

One is the demand in countries such as Brazil, Germany, Italy, France and the U.K. where tax incentives for auto purchases are running. Another reason is there is seasonality in parts of our business where we supply certain customers for portions of the year. For 2010, at some key customers, the first half will have greater sales than in the second half, given their two supplier strategy.

Then there is the impact of China tightening credit as well as the supply chain restocking impact ending in parts of the world. Again all these will tend to tamper demand in the second half of the year. However, the undercurrent of recurring economies and its impact on our four steel and automotive markets is expected to partially offset this impact.

We are also seeing pressure on margins due to higher raw material costs. We currently are or will be soon in discussions with customers for price increases given our increasing raw material cost but there will likely be a lag effect before we recover our margins.

On the SG&A side, we are investing in key initiatives that will lead to future growth, both these investments are in the emerging markets or BRIC countries. As you know, we do not give specific guidance as it relates to future earnings but I will say that while our earnings for the remaining quarters of the year will probably be lower than the first quarter, we do expect them to at least equal or exceed the pre-crisis quarter’s levels we achieved in 2008.

All-in-all 2010 is expected to be a strong year for Quaker and looking beyond 2010, I also believe Quaker is well-positioned for future growth. For example, as you can see on page six, approximately one third of our business is now tight, the highest growth regions of the Asia and South America. Our strong positions in both regions will allow take advantage of the good inherent growth expected in these regions.

Then, when you look at the other two thirds of our business in the more matured markets of the U.S. and Europe. These regions should experience growth rates above GDP in our markets, just due to the gradual recovery of demand for steel and autos in these regions over the next two years.

An example can be seen on page seven, where the U.S. steel industry is currently operating around 70% capacity utilization and pre-crisis, it was around 90%. This recovery will not come in one year, but it’ll likely take several years but it should provide us with good growth.

This is quite a difference from a few years ago, even before the crisis on the matured markets of the U.S. and Europe were flatten down. So, whether we are talking about the high growth markets like China, India or Brazil or the more matured markets like U.S. and Europe, we believe our product markets show promising growth for the next two years.

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