KWR
#Thanks, Mike, and good morning, all.
Before I start, please note that Quaker provides certain non-GAAP information, including non-GAAP earnings per diluted share and adjusted EBITDA, in an effort to provide shareholders with visibility into Quaker's performance excluding certain items, which we believe do not reflect our core operations, including earnings related to Primex, our investment in a captive insurance company.
Reconciliations are provided in charts 10, 11, and 12 of these investor slides and they're also in yesterday's earnings release and our Form 10-Q, also filed yesterday In addition, please do not place undue reliance on any forward-looking statements.
Quaker delivered another strong quarter, despite the continuing headwinds from foreign exchange, an anemic economic environment, and a higher effective tax rate, Q3 of 2016 versus Q3 of 2015.
We continue to benefit from market-share gains in our legacy products and from cross-selling our more recently acquired products and technologies, while maintaining strong margins.
As a result, Quaker continues to deliver good adjusted earnings and adjusted EBITDA growth and strong cash flow.
Please refer to charts 4 and 5 as I walk through some detail.
Reported earnings per share of $1.21 for Q3 of 2016 is up 12% versus the $1.08 in Q3 of 2015, with a non-GAAP earnings per share of $1.25 up 5% over Q3 of 2015.
Note that foreign exchange had a negative impact this quarter of about $0.04 per share, and the higher effective tax rate, a negative impact of approximately $0.06 a share.
Adjusted EBITDA also showed good growth, up 6%, to a trailing 12 months of $106.3 million, with an adjusted EBITDA margin of nearly 15%.
So now let me circle back to the top of the P&L and share some detail there.
Net sales were up about 1% quarter over quarter, as 4% volume growth was partially offset by a negative FX impact of 2% and price/mix adjustments of about 1%.
Foreign-exchange headwinds have been a recurring challenge for us this year, and this quarter we were negatively impacted again by depreciation, primarily of the Chinese RMB and the Mexican peso.
As we indicated in our last call, we are beginning to see our gross margin contract a bit with the realignment of our prices and raw material costs.
Our gross margin declined to 37.2% versus 37.7% Q3 of last year and 38.1% last quarter.
However, also as expected and as we discussed in our last call, our SG&A decreased to more than offset this decline in gross margin, as we saw benefits from our global restructuring program and continued cost discipline and lower costs associated with transaction-related expenses, resulting in increased operating income, up about 14%, and improved operating margin of 11.2%.
Below operating income, the significant delta quarter over quarter is the effective tax rate, which I mentioned earlier.
Our Q3 effective tax rate of 28.3% versus 24.4% last year is a bit better than the guidance we gave you last quarter, as certain tax adjustments to previous filings and reserves moved in our favor.
For Q4 and full year, we continue to expect recertification of a concessionary tax rate in a non-US subsidiary, which will reduce our full-year effective tax rate to 28% to 30%.
Despite the inflated tax rate, our strong operating performance carried through to the bottom line, with both reported and non-GAAP earnings showing good growth.
The balance sheet and cash flow continue to be strong, and we have improved our net cash position to about $23 million.
We accomplished this while increasing our current-year dividend to 8%, with the last four quarter dividend payments approximately ---+ approximating $17.3 million; repurchasing approximately 171,000 shares for about $13.2 million, and that's since the Board approved our share repurchase plan last May, May of last year; and using about $26 million to acquire Verkol in the prior year.
We continue to believe that this balanced approach to capital allocation helps to create long-term, sustainable value for our shareholders.
And now if you will turn your attention to charts 6 through 9, I have already talked in some detail about each of these metrics, the metrics in these charts, so let me just focus on the trends.
As you can see in chart 6, volumes show a nice positive trend.
On chart 7, our gross margins demonstrate consistency, as well as some modest softening, in line with expectations.
Our adjusted EBITDA on chart 8 continues to show good, positive growth in both dollars and margin percent, and the balance sheet and cash metrics on chart 9 reflect our consistent ability to fund current growth and position ourselves for future growth.
An overarching theme I hope you take away from these metrics is that Quaker has a strong track record of delivering steady, consistent growth over time and through a variety of economic conditions.
Last quarter, I shared some expectations, including slow end-market growth and foreign-exchange headwinds of 3% to 6% for the full year, which we expected to offset with market-share gains, leveraging of past acquisitions, and cost savings of about $3 million in the second half of the year.
Q3 performance was largely in line with these expectations.
For Q4, we expect much of the same, with the additional bit of color that Mike shared that we expect our Q4 gross margin to be similar to Q3.
Most importantly, we continue to expect growth in our top and bottom lines and continued growth in adjusted EBITDA.
My thanks to all of you for your interest in Quaker, and I will now turn it back over to Mike.
Thanks, <UNK>.
At this stage, we would like to address any questions from any participants on the conference call.
It is hard to look past more than one quarter in our business relative to this, and that's why we wanted to give guidance that we think the third quarter and the fourth quarter will be at similar type levels.
And it really will depend upon what's happening in the fourth quarter with pricing.
We have a number of contracts that will ---+ with customers that will go up and down with pricing, anyway, and adjust.
So, it's really hard to say.
So, I don't think we're too far out of line right now, but certainly if there is a big step change from here either up or down, certainly that could impact us, especially going forward when you look into the first quarter of next year.
It could be positive or negative.
Sure.
We don't give ---+ we think we have achieved pretty much the level we are going to be at at this point, and that's why we said the third and the fourth quarter will be the same.
We're getting close to those ultimate levels at this point.
We mentioned that we had about a $1 million hit in ---+ or I said that we ---+ another way of looking at it is we said we were about $3 million of savings in this year.
We achieved a little bit in the second quarter, but really it kicked in in the second half of the year.
So you could see it is probably in that 1 to 1.5 range at this point, per quarter.
Overall, yes, it was relatively flat, and it was really being driven by two things.
So we actually had good volume growth, so our volume growth was up 7%, but we had foreign-exchange impacts, so you can see what's happening with the RMB.
And then, there is also product pricing issues, has been some declines over there.
So they offset the volume growth, so it was relatively flat overall.
Those were expenses related to acquisitions that we had spent on the quarter, and we non-GAAP these because we felt they were atypical in nature, and they should have been non-GAAP to provide our shareholders with a better understanding of what is happening in our business.
So, it was really due to the nature of those type of expenses.
Sure.
Certainly from a steel perspective, we are seeing rebounding in crude steel production on a global basis, but when you really break it down, we saw in the third quarter declines in North America, Europe, and South America, so the only place that really grew was Asia-Pacific and that was really being driven by both China and India.
So, that's there.
And in car production, overall car production is generally doing pretty well.
We are starting to see weakness in the North America market.
China continues to do very well.
Europe is also at this point doing pretty well.
Up over 3%, yes.
Yes.
And hopefully, we are hitting bottom in South America and we will start to see some rebounds there, but certainly that has been a continued negative for the auto market.
Sure.
Normally, as we said in the past, we really don't comment on acquisitions until they are finalized, and during most of these conference calls, we will get a similar question, and we just feel that's the best way of handling this, because at any point in time, we have ---+ we are working on a number of potential acquisitions that could be in various stages.
So it's really hard to predict when and if any will be acquired, so that's the reason we don't comment on acquisitions until everything is finalized.
They're mainly in North America, and normally this is not a major issue for us.
Just to give you some flavor of it, it was really actually ---+ some of it was [somewhat] in our smaller businesses, which we don't really talk about quite a bit, like Epmar and Summit, and there we have ---+ we had unusual patterns of shipments in this quarter versus the third quarter of last year.
And actually, a lot of it was due to the third quarter of last year, so the comparison masked what was happening.
And it was impacting ---+ in those two instances alone, for example, it was impacting our sales in North America by about 3%.
So, that's why we thought we should mention something around it.
I think we will continue to take share.
I have a lot of respect for our competitors, but I think it is ---+ like I have mentioned, it is due to our business model.
I think it's due to our emphasis that we are putting on different initiatives and certainly our new technologies that we are trying to grow globally around the world.
No, you're talking about the timing of shipments.
No, as I was trying to explain, a lot of it had been in the third quarter of last year, so when you're looking at the comparison between third quarter of this year and that, it was some unusual activity last year.
I think this is the first time we have actually seen some light at the end of the tunnel type of thing, and we think it will be a slow recovery, so we don't think it will be any fast rebound in South America.
We have been very fortunate.
We have been taking share down there, so that's part of what we have seen in growth.
But we do see, and things we have read through steel producers, that as we start to get into 2017, they would expect to see some slow recovery in their economy.
So, I think it will continue to get better, but I don't think it is going to be a dramatic improvement, and certainly better from the continuing downward progression that we experienced over the past several years.
It could be due to two things, product mix and what's happening in our products, as well as some adjustments in pricing as we go, timing, lag adjustment type of things.
But nothing ---+ I would say there is nothing unusual happening there in Asia.
Our trials are still progressing and doing well, and we hope to continue to be successful there and become reference accounts for other pieces of business in the future.
No, I would just like to say thanks, everybody, for calling in today and your interest.
We are pleased with the results for the third quarter and we continue to be confident in the future of Quaker Chemical.
Our next conference call for the fourth quarter and year-end 2016 results will be in late February or early March 2017, and if you have any questions in the meantime, as always please feel free to contact <UNK> or myself.
Thanks again for your interest in Quaker Chemical.
