KMG Chemicals (KMGB)

Q3 2012 Earnings Call

June 08, 2012 10:00 am ET


Eric Glover

J. Neal Butler - Chief Executive Officer, President, Director and Member of Risk Oversight Committee

John V. Sobchak - Chief Financial Officer and Vice President


Rosemarie J. Morbelli - Gabelli & Company, Inc.



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Good day, ladies and gentlemen, and welcome to the KMG Chemicals Third Quarter 2012 Financial Results Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Eric Glover, Investor Relations Manager. Sir, you may begin.

Eric Glover

Thank you, Mary. Good morning, everyone and welcome to the KMG Chemicals Inc. Fiscal 2012 Third Quarter Financial Results Conference Call. I'd like to start by introducing myself. I am KMG's new Investor Relations Manager and I'm very excited to have joined the company recently. I met some of you already but for those I haven't met, I hope to see you in the near future. If you have any questions, always feel free to call me directly at (713) 600-3865 or by email at

We'd like to begin by reminding you that the information on this conference call includes certain forward-looking statements that are based upon assumptions that in the future may prove not to have been accurate and are subject to significant risks and uncertainties, including statements as to the future performance of the company. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Factors that could cause results to differ include, but not -- but are not limited to the loss of primary customers; successful implementation of internal plans; product demand; the impact of competing products; increases in the price of raw materials and active ingredients; successful acquisition and integration of additional product lines and businesses; the condition of capital markets in light of interest rate and currency fluctuations and general economic conditions; environmental liability; the ability to obtain a registration and reregistration of products; increased environmental compliance costs of product; and general, political and economic risks and uncertainties.

With that said, I will now turn the call over to Neal Butler, President and CEO. Please go ahead, Neal.

J. Neal Butler

Thank you, Eric. And good morning and again, welcome to KMG's Fiscal 2012 Third Quarter Conference Call. John Sobchak, our CFO and I will take you through the financials and provide an overview of each of our businesses. We will then discuss our expectations for the remainder of fiscal 2012. After our comments, we will be pleased to address your questions. Our earnings release was issued this morning and we plan to file our 10-Q on Monday.

During the fiscal third quarter, we officially closed on the sale of our Animal Health business to Bayer HealthCare on March 1, 2012 and generated diluted earnings per share of $0.34 versus $0.23 in the third quarter of last year.

Operating income increased to $6.9 million for the quarter, representing 66% year-over-year growth. As we had communicated to you in prior calls, our solid financial performance this quarter was fueled by operating efficiencies resulting from the completion of our plant consolidation efforts, the implementation of pricing actions to recoup raw material cost increases and benefits from our Continual Improvement efforts which produce supply chain and logistics efficiencies with associated expense reductions.

I am pleased to report that consolidated gross profit margins this quarter reached 30.9%, up 5 percentage points sequentially, and nearly 4 percentage points on a year-over-year growth basis. In addition, consolidated operating margins expanded to 10.3%, up from approximately 6.7% in the same period last year.

Within our Electronic Chemicals business, we experienced relatively healthy overall demand as segment sales grew 2.4% year-over-year to $39.4 million. Aided by targeted pricing actions and the roll off of higher cost inventory, this business generated a significant uptick in segment operating margins after corporate allocation expenses to 9.9% from 4.1% in the year-ago period.

Operating margins in the Electronic Chemicals business averaged 13.6% before corporate allocations over the quarter and are on track to meet our fiscal year-end operating margin goals. We anticipate achieving further incremental gains in operating margins as we reap the benefits from our Continual Improvement program.

Our Wood Treating business generated a 16% year-over-year sales growth to $27.2 million. The significant increase primarily reflected higher realized pricing for all of our product lines, as we successfully passed through price increases to our customer base in response to increased raw material cost.

Operating margins in this segment before our corporate allocations were 18.8% in the fiscal third quarter, up 160 basis points from 17.2% in the last year's fiscal third quarter. At this juncture, we anticipate that Wood Treating segment net sales will remain essentially flat in the fiscal fourth quarter and for the remainder of the calendar year.

I'll now turn the call over to John who will discuss our financial results in greater detail.

John V. Sobchak

Thanks, Neal and good morning, everyone. Before I begin, I want to remind everyone that beginning in the first fiscal quarter of 2012, KMG's reportable segments were revised to reflect the change from 4 to 3 reportable segments: Electronic Chemicals, Wood Treating Chemicals and Animal Health.

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