Michael F. Barry - Chairman, Chief Executive Officer, President and Member of Executive Committee Margaret M.

Loebl - Chief Financial Officer, Vice President and Treasurer

Daniel D. Rizzo - Sidoti & Company, Inc.

Liam D. Burke - Wunderlich Securities Inc., Research Division Michael J.

Sison - KeyBanc Capital Markets Inc., Research Division Michael J. Harrison - First Analysis Securities Corporation, Research Division Scott B.

Blumenthal - Emerald Research

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 the details around the financials, and then we'll address any questions that you may have.

We also have slides for our conference call. You can find them in the Investor Relations part of our website at www.quakerchem.com.

I'll start off now with some remarks about the third quarter. I'm pleased to report that we had a very good quarter, as strong revenue growth led to double-digit growth in earnings per share.

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 8% for the quarter versus 2013, with growth primarily driven by higher volumes.

We saw double-digit growth in sales in our 3 largest regions, which were partially offset by decline in our South America sales. Going region-by-region, South America was our most challenging region.

Our revenues were down 25% due primarily to lower volumes associated with the poor economy and the decline in the overall steel and auto markets. In our Europe or EMEA region, we saw 11% growth despite only a modest increase in the auto and steel markets.

In our Asia Pacific region, we had 13% growth, with China being the main driver. And in North America region, we had a growth of 10% with very strong growth coming from Mexico in our coatings business.

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 customers' needs as our top priority and provide 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 the 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.

Looking at the sequential quarterly trend in the third quarter versus second quarter, overall sequential sales growth was 4% quarter-over-quarter. We saw a strong growth of 7% and 10%, respectively in North America and Asia Pacific, and a modest decline of 2% in Europe, due to the traditional summer holiday period.

In South America, we experienced an 11% decline due to the poor economic conditions I mentioned earlier. On our gross margins, they were slightly down, but relatively consistent with our third quarter of 2013, primarily due to slightly higher raw material costs.

Overall, our gross margins continue to be very stable, and have remained at this level for the last 5 quarters. So I'm pleased with our overall performance.

Despite a weak South American environment, we continue to achieve very good growth in revenue, earnings and cash flow. And our EBITDA growth continues to do well.

For the first 3 quarters of this year, it's up to 11%, and we're now closing in on the $100-million adjusted EBITDA mark. The bottom line is, I continue to be confident in our future.

In the fourth quarter, we expect to have typical seasonality impacts on our business as well as operating in a slowing global economy with a strengthened dollar. Despite this, we expect 2014 to be another good year for Quaker, not only financially but as well for our continued strategic positioning of the company.

In addition, I also believe our strong balance sheet and liquidity will continue to enable us to generate future shareholder value-creating opportunities, such as funding our strategic growth initiatives and making additional acquisitions, similar to our recent acquisition of the ECLI products. While still a relatively small acquisition in size, ECLI is our largest acquisition to date and it provides us an entry into the specialty grease market in the auto industry.

We believe their products and application expertise, in combination with our global footprint, can help drive their global growth. Regarding acquisitions in general, I continue to believe that right acquisitions over the next several years can create additional significant value for shareholders.

And we're continuing to actively work on these type of acquisitions and opportunities. 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'm delighted to be here on the call, and I reiterate that we're very pleased with our results in the third quarter, despite the continued challenges in Brazil as well as the slowing global economy. 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 investors with visibility into Quaker operations, excluding certain items, which we believe do not reflect our core operations, including, earnings related to Primex, our investment in a captive insurance company.

The reference table is outlined in Chart 10 of the investor slides, yesterday's earnings release and our Form 10-Q, also filed yesterday. Next, I'd like to mention our special Quaker items, which relate to the third quarter.

First, Quaker acquired ECLI Products LLC, a specialty grease manufacturer in the third quarter for $52 million, with estimated 2014 EBITDA of $7 million on sales of $25 million. Second, Quaker announced on June 30, the acquisition of the remaining 49% ownership interest in its Australian affiliate, Quaker Chemical Australasia for AUD 8 million from its joint venture partner, Nuplex Industries.

I mentioned that second quarter 2014 transaction now, given that the resulting incremental impact on Quaker's consolidated net earnings only started to impact us in the third quarter of 2014. I also note that the impact of the 2 acquisitions on earnings was minimal this quarter due to the offsetting impact of the fair value accounting for ECLI and acquisition-related costs.

Third, Quaker announced in May, 2014, a 20% increase in the quarterly cash dividend to $0.30 per share payable July 31, 2014, versus the $0.25 per share declared over the previous 4 quarters. As referenced in Chart 4, a financial review of Quaker's third quarter includes the following highlights.

With respect to highlight number 1 on Chart 4, the title reads, record volume drives above-market growth in net sales. Turning specifically to Chart 5 and 6, net sales for the third quarter of $198.9 million increased approximately 8% from net sales of $184.1 million for the third quarter of 2013, primarily, due to higher record product volumes.

Included in this, company's net sales growth for this quarter, was 1.7% of additional sales from the acquisition of ECLI. Notably, the consolidated total volume increase is partially offset by price in selling mix decreases of approximately 2%, and foreign exchange translation decrease of less than 1%.

Our diverse geographic footprint helped us, as a double-digit revenue growth in 3 of Quaker's 4 regions, more than offset the 25% decline in revenue in South America year-over-year, due to poor economic conditions in the region. Importantly, it should be noted that the growth in volume and net sales in Q3 2014 versus Q3 2013 outpaced the end-use market growth of the steel and automotive industries served by Quaker.

Although official data are not readily available at this time, we estimate Q3 percent end-use market growth to be low-single digits. The key driver for Quaker Steel's growth has been and continues to be Quaker's ability to take share of wallet with existing customers on pre-acquisition products and more recently acquired products and technologies.

Turning from the top line growth story to margins, with respect to highlight #2 on Chart 4, the title reads, stable margins continue to drive strong operating results. Turning to Chart 7, gross profit increased approximately $4.3 million or 7% from the third quarter of 2013.

An increase from sales volume noted earlier on relatively consistent gross margins of 35.4% and 35.9% for the third quarter of 2014 and the third quarter of 2013, respectively. Gross margins have been approximately 35% or better for the past 5 quarters, demonstrating Quaker's ability to manage price, mix and raw materials effectively, targeting the 35% gross margin levels.

The relatively stable raw material cost environment has been a major contributor to the stable margins. Selling, general and administrative expenses, SG&A, increased approximately $2.6 million from the third quarter of 2013.

The increase in SG&A was driven by higher labor-related costs, primarily on increased sales and merit inflation, incentive compensation increases, acquisition-related costs and a U.S. customer bankruptcy, partially offset by the company's prior year cost streamlining initiatives and the effects of foreign exchange.

Notably, SG&A as a percent of net sales of 25% in Q3 2014 is down versus 25.6% in Q3 of 2013. I note that Q3 2014's SG&A levels would have been lower, if not for the timing of certain expenses, as an example, incentive compensation.

And the uncommon nature of other expenses, as an example, acquisition-related costs. 3 out of 4 Quaker's regions achieved improved operating results in Q3 versus last year, while South America's results were down significantly year-over-year.

Notably, South America is recognizing the full year impact in 2014 of the regions cost streamlining efforts initiated last year, which has, at least, partially mitigated the downside, related to the poor economic environment. With respect to highlight #3 on Chart 4, the title reads, below operating income items contribute to strong results.

The current quarter is benefiting from the following operating income items. The $1.6-million net year-over-year increase in other income for the third quarter was largely the result of foreign exchange gains and receipt of annual government grants in one of the company's regions.

Comparatively, the third quarter of 2013, had significant foreign exchange losses and minimum related government grants, as the majority of such grants were recognized in different quarters of the prior year. Higher interest income of $0.4 million in the third quarter compared to the third quarter of 2013 was primarily due to the interest received on certain tax-related credits, and an increase in the level of the company's invested cash in regions with higher returns.

The lower income tax rate in Q3 2014 is based largely on bookings at a 25% statutory rate for China in the prior year, compared to the 15% concessionary tax rate that currently prevails as well as timing of adjustments and reserves for uncertain tax positions. With respect to highlight #4 in Chart 4, the title reads, continued EBITDA growth and non-GAAP EPS is up 31%.

Quaker's adjusted EBITDA increased 16% to $26.5 million in the third quarter from $22.8 million in the third quarter of 2013. Adjusted EBITDA remains a key metric for Quaker and 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. On a trailing 12-month basis, adjusted EBITDA is $97 million for the period ending September 30, 2014.

Looking at the range of 2008 to the third quarter year-to-date adjusted EBITDA annualized, equaling an estimated $101.4 million, the compounded average growth rate for adjusted EBITDA is 16.7%, with margin on adjusted EBITDA up 6.4% or 640 basis points in annualized adjusted EBITDA 2014 versus 2008. Referencing the Chart 6.

Earnings per diluted share for the third quarter was 1.18 -- compared with $1.18 compared to $0.95 for the third quarter of 2013, with non-GAAP earnings per diluted share increasing 31% to $1.19 for the third quarter compared to $0.91 for the third quarter of 2013. Notably, Quaker exceeded analysts' consensus expectations of $1.03 a share with these $1.19 per diluted share non-GAAP results in the third quarter of 2014.

With respect to highlight #5 on chart 4, the title reads, strong cash flow and balance sheet from acquisitions. Strong quarterly earnings and improved working capital management drove net operating cash flows of approximately $30 million for the third quarter, compared to $24.5 million in third quarter of 2013, which increased the company's year-to-date net operating cash flow to $38 million, compared to $51.9 million for the first 9 months of 2013.

The $13.9 million increase in cash flow is primarily relates to -- the decrease in cash flow primarily relates to the year-over-year increase in working capital. Turning to Chart 9.

The company had positive net debt -- cash debt position of $1.6 million at September 30, 2014, with $64.2 million of cash on hand and $62.6 million of debt outstanding. It is also, the company's consolidated leverage ratio of 0.65:1 continued to be less than 1x EBITDA, despite the added borrowings for the $52 million purchase of the ECLI.

We continue to believe that making acquisitions is the best way to create significant shareholder value. Including the acquisition in Australia and ECLI, Quaker has made a total of 9 acquisitions over the last 4 years.

We believe our strong balance sheet and ongoing cash flow generation will allow us to make significant future acquisitions, while continuing to pay consistent dividends to shareholders. Again, we were pleased with our very strong operating results in this third quarter, and we believe 2014 will be another good year for Quaker.

I would like to personally thank all the Quaker associates around the world for their commitment to our customers and contributions to the success of Quaker Chemical. This concludes my prepared remarks for today.

Thank you, and I'll now turn the call over to Mike Barry.

Thank you, Margo. At this stage, we'd like to address any questions from any of the participants on the conference call.

You indicated that stable raw material costs have helped you over the past couple of quarters, but now with petroleum prices falling, would that provide more of a tailwind or you going to have to also lower your own prices as well to kind of catch up?

We don't think of it internally as a windfall to us at all. We don't think it's going to be a major impact.

We are -- if I look at -- just talk about the raw materials themselves in a second, we buy a mixture of raw materials certainly, the ones related to crude should start to decline and, but we haven't seen much already on that, they're just starting. And then -- and even in some places like in Europe they're not going up or going down, I should say.

Then you have other raw materials that we buy like, vegetable oil, that we expect to have upward pressure on. And then we have animal fats, there's a kind of a mixture, in some regions, it's down and others regions, it's up.

And then, we also buy a whole bunch of other things like gasoline, derivatives and they're actually increasing. So overall, when you look at the basket of our raw materials, we expected to be maybe slightly down, maybe a couple of percentage points.

But then, we have some contracts that automatically adjust based on raw material prices. And so, we're not going to see some a much of impact on from a gross margin level.

We don't see because between that and other [indiscernible] discussions and negotiations with customers. Our whole goal still remains to keep our gross margins in that kind of consistent range we've been in over time.

So again, bottom line is, you may have some slight thing. There is always a lag effect on some things, but we don't expect this to be a big thing one way positive or negative for us.

The goal for gross margin is 36%, right? Is that, I think, you said that in the past?

35%.

35%. So we're above that, we think we can probably stay up above 35%?

Yes. I mean, obviously, it's hard to -- we have so many different kind of products sites in all around the world and so forth.

But in round numbers, we have always said 35%. But if you look at where we were for the past 5 quarters, we've been between 35% and 36%.

And certainly, that's kind of our goal that just continue to stay in that range.

Mike, when I looked at revenue growth traditionally and then your revenue track with steel production, roughly during the quarter, steel production grew around 3%. Looking at your organic growth had more than twice that number, you mentioned acquisitions and market share gains.

Was there anything, in particular, that it was stronger in the quarter to drive that, I'll call it, twice organic growth?

No, there's nothing in particular. It's really, I think of our growth in kind of different buckets.

Some of them could be like new mills that we picked up over the past several years, and as mills start ramping up in time, because we get disproportion on amount of the business out of new mills that come up. And so as they come up, that gives us a little boost.

And then, we're continuing to take share on our core products that we might be picking up on new mills here and there around the world, or we could be actually selling other products besides our core cold [ph] rolling lubricants and maybe making more penetration in cleaners or hydraulic fluids and so forth. And then the other aspect is we're continuing to make progress in some of the recent acquisitions that we made, whether it's grease or surface technologies or templating or dye casting.

So it's not any one of this things, it's kind of a mixture of all these this things that's kind of leading to our growth.

Okay, and Margo, as the global footprint grows, you add acquisitions. Do you see any need to up any kind of capital expenditure.

We've been managing to date to stay pretty constant in our SG&A albeit we've grown and sell the plant in China and there has been some offsetting managing the CapEx to offset that. I think we evaluate it, we're going into the budget season now and evaluating where we're going with that.

I do believe, we'll -- there will be investments for growth as you see from time-to-time. But we'll continue to be a CapEx-light company.

In terms of South America, where do you think you are at in terms of demand there? Is it stable, is it getting a little bit worse, getting a little bit better going forward?

We think we're at the bottom. I don't think, we're -- we don't expect that going worse.

But you never know, right? I mean but I think, we saw -- we've definitely seen a decline in the economic environment in Brazil, say from the first quarter through the third quarter.

It's kind of gotten consistently worse. But the feedback or the sense we have is hopefully we've reached the worse.

And now the elections are over in Brazil, maybe that will have a positive impact. But we don't expect it to get worse, that's for sure and hopefully, we'll improve.

Okay, great. You talked about the market growing 2% to 3%, I think, in the current quarter.

How do you look at the -- where do you see the market growing in maybe the fourth quarter heading into 2015. Do you think sort of this 1.5x to 2x the market type growth that you've been generating, which is impressive, will continue?

On your -- on the first part of the question around market growth, we, certainly our sense is that the market itself -- the overall global markets that we're dealing intend to be slowing, say versus earlier in the year. I think of places like China, we already just talked about Brazil, even Europe is slowing.

So our sense is that the market will have low growth. And then the second part of your question is our goal continues to be to hit on these bunch of singles, whether it's the new technologies we acquired, we still think we're very early in that game of rolling those out, and we have a lot of leeway there.

We continue to want to take share in the marketplace. That's been our track record like you said, the past several years.

So our goal is just to continue to as we have been with our business model and our strategic initiatives as well, as bringing on new acquisitions and our goal is to continue to growth no matter what the market conditions are.

Okay. And then Margo, final question.

When you think about the acquisition contribution expected for the next couple of quarters in terms of top line growth, can you give us a little help of roughly how much that is.

We haven't really -- we've told you in the past that we prior to ECLI, we thought, we had about $75 million as added sales for acquisitions when we put them on. We have another $25 million with ECLI, so that's the base starting point.

And then you have to make assumptions from there as to how we grow, our acquisitions would grow, and add to the bottom line. But as Mike said, we're in the second innings of adding those -- rolling those out around the world.

So I would anticipate, it'll be at a measured steady pace.

Just following up a little further on the acquisition stuff. Does the ECLI acquisition put you where you need to be in terms of your specialty grease portfolio?

Or do you see the grease market is having some additional consolidation opportunities that you guys could execute and benefit from?

I think, in specialty grease, first of all it's a huge market. It's well over $1 billion total market and that's what attracted us to the specialty grease market to begin with and certainly going into the first acquisition that we made Summit Lubricants gave us kind of an entree into it and the ability to start grease -- getting grease to penetrate some of our existing markets.

One of the things as we -- was hard to penetrate, was this existing automotive market, where you have to be spec'd in and it's a level of approval and it wasn't -- to do that organically wasn't really that kind -- wasn't really feasible. So we're very happy with the ECLI, because that gives us that ability to penetrate that segment of the specialty grease market and then grow it more globally than they have.

And we're very pleased with that. And we also believe there's other segments in the grease area that we want to continue to go after geographically.

We're -- right now we're predominantly a U.S. -- almost all U.S., in grease and we want to grow that and look at acquisitions elsewhere around the world for grease.

And there's other markets that grease goes into as well that we haven't really begun to penetrate. So we think there's a lot of potential headroom to grow in grease with both organically and acquisitions throughout the years.

And then, obviously, the volumes were pretty strong across the board with the exception of Brazil. But I think, the Europe, year-over-year growth at 14% is the one that stands out to me.

Obviously, sometimes you get a kind of a one-time sale in association with a plant sale. But was there one-time benefit in that number?

Are you viewing Europe as a region where you can kind of see sustained better growth, given the work you've done to grow that business over time.

Well, any quarter, when you're only looking at a quarter piece of business, you always have the potential of shipments flowing in one quarter when you go to the comparative period versus another quarter and so forth. But there's -- but there are definitely -- in Europe, we did see, over the years, some good share gain and how we're especially in the primary metals area.

So a bulk of what we're seeing, I believe, is true business, true growth that we've achieved. It's hard to predict, I'm not saying, we're going to expect to see that kind of growth every quarter from Europe, because you always you do have these fluctuations and order patterns and so forth.

But we are definitely seeing some good overall growth in Europe.

And the margin strength in Europe, is that the volume growth driving that or we starting to see some of the restructuring benefits contribute there?

Yes, I think, it's mainly volumes that we're seeing. It's not really -- we haven't really experienced the, that small kind of restructuring that we did over the past year.

And presumably, if you keep the volume growth going, you should be able to leverage those restructuring benefits pretty nicely then?

Sure. Yes, volume helps everywhere around the world.

The last question I have is on -- you referenced some of the year-on-year improvements in SG&A costs. But if I look sequentially, those costs crept a little bit higher.

Are we seeing higher labor costs and incentives and merit compensation in the third quarter, as compared to Q2 levels? Or were there other components contributing to the higher expense?

And I guess, just looking into Q4, is it fair to assume that we see further increase in the SG&A costs and the labor costs [indiscernible] comp?

That's a good question, and I'm glad you asked. We are basically staying with the outlook that we have some timing issues here.

We don't see any unnecessary creeping in our -- the structure of our SG&A. So you're seeing the -- we're sticking with our standard approach that is we have some timing issues here and at the same time, we continue to invest to grow our business year -- we are steady and I don't see any unusual, anything that concern me.

We mentioned..

Unusual expenses in the quarter, right? There was the acquisitions and the bankruptcy and I think like that.

How much acquisition-related costs was within SG&A?

We haven't put that in our disclosures at this point in time.

Was it bigger or smaller than the $300,000 for the customer bankruptcy?

Yes. It's bigger.

Bigger.

Bigger.

Margo, you talked a little bit about interest income from overseas cash and maybe you can give us an idea as to obviously, however, you feel comfortably doing it, as to how much you have over there. What percentage maybe?

That's a good question. Basically, we see a couple of things going on.

You look back about four quarters and I see, the last 2 quarters I had credits. There are elevated levels, because I had credits related to interest earned on some tax credits.

So you can then go back to the period before last the 2 quarters and that's a little more normalized. And basically, yes, we are seeing higher levels than you might get in the U.S.

because a large portion of the cash is overseas. If we -- so yes, it's largely overseas.

How much cash?

I said the majority of the cash is overseas. Yes.

It's largely overseas.

That's helpful. And I guess, we're all kind of struck as to how much South America is down.

Maybe, you can give us some more details on what's happening there. Did you lose a customer and maybe.

What, is South America basically Brazil, or maybe you can give us an idea as to what percentage of your South America sales Brazil represents?

It's certainly, predominantly, Brazil, and vast majority of it. We certainly added Argentina and some -- and other countries around there.

But it's over 90% would be Brazil. So that's really driving it and it's really, I mean, we're seeing pretty large declines in and it really is, it's not necessary share-related.

And if you look at our steel position everything is kind of -- steel, we haven't lost a customer. And so it's really just showing what's been of kind of happening in the markets down there.

So and the auto market has been really hit very hard down there. It's been showing a double-digit type of declines quarter-over-quarter.

So it's not a pretty place right now.

Okay, Mike, I appreciate that. And Maybe you can -- my last one here, maybe you can delve into some of the nonpetroleum raw materials a bit for us.

You did mention that you're expecting some upward pressure on vegetable oils. We understand that it's supply and demand, but maybe you can talk about where you're sourcing some of those and why you feel there may be continued upward pressure?

I believe we're expecting a record harvest here. So maybe that could mitigate that some of that for you.

Yes, I mean, what we've -- certainly seeing, our raw material people are saying that there are certainly some lower yield globally on some of the key raw materials that we buy. We buy coconut oil, palm oil and mostly, that comes from Southeast Asia, type area.

So yes, we expect to see some upward pressure on that. Obviously, things could change, but that's our best guess.

But again, as I said overall, we expect to see our raw materials to be, as a basket, slightly declined. And one other thing just mentioned here, I guess, Scott, is to go back to Brazil for a second.

I just want to mention, yes, I said, Brazil is a pretty tough place, but it's not like we're losing money in Brazil. I want to highlight that, we're still -- Brazil is still a profitable place, we're generating cash in Brazil.

It's just not at the standards where we expect to be.

That's very helpful. I appreciate that.

Okay. Thank you.

I appreciate, Kevin. So given that there are no other questions, we'll end our conference call now.

And I want to thank, everyone, for your interest today. We're pleased with our 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 full year results will be in late February or early March. And if you have any questions in the meantime, please feel free to contact Margo Loebl or myself.

Thanks, again, for your interest in Quaker Chemical.