KMG Chemicals, Inc. (KMGB)

F3Q10 (04/30/10) Earnings Call

June 4, 2010 10:00 am ET

Executives

Neal Butler – President and CEO

John Sobchak – CFO

Analysts

Alex Silverman – Special Situations

Arnie Ursaner – CJS Securities

Eric Glover – Canaccord Genuity

Jay Harris – Goldsmith & Harris

Jt Rieck – Crosscap

David Cohen – Midwood Capital

Steve Roberts – NorthPointe Capital

Steve Schwartz – First Analysis

Rosemarie Morbelli – Ingalls & Snyder

Presentation

Operator

Good morning, and welcome to the KMG Chemicals Incorporated third quarter 2010 conference call. We would like to begin by reminding you that the information in 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 are not limited to, the loss of primary customers, successful implementation of internal plans, product demand, the impact of competing products, increases in the prices of raw materials and active ingredients, successful acquisition and integration of additional product line 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 registration and re-registration of products, increased environmental compliance cost of products, and general, political and economic risks and uncertainties.

With that, I would like to turn the call over to Neal Butler, President and CEO. Neal, please go ahead.

Neal Butler

Thank you. Good morning and again welcome to KMG’s third quarter 2010 conference call. John Sobchak, our CFO, and I will take you through the financials, provide an overview of each of our businesses, as well as bring you up to date on the Electronic Chemicals business recently acquired from General Chemical, which we closed on March 29. After our comments, we will address your questions.

Net income for the first nine months of this fiscal year increased 125% to $11.9 million or $1.05 per diluted share versus $5.3 million of net income or $0.47 per diluted share during the same period last year. With regards to quarterly results, we are very pleased to report another record quarter for net sales, operating income, net income, and diluted earnings per share.

Comparing the current third quarter to last year’s, net income rose 20% to $3.3 million or $0.29 per diluted share from $2.8 million or $0.25 per diluted share last year. Net sales were $51.6 million, up 13% from $45.9 million. Operating income rose to $5.8 million, a 7% improvement compared to $5.4 million in the third quarter of last year.

Now I’ll discuss each of our businesses. Sales of Electronic Chemicals rose 71% to $231.6 million from $71.2 million in the prior year period, with gains achieved in both North American and European operations. The increase also reflects one month of sales by the newly acquired business, which contributed $4.2 million to revenue for that one month we owned it during the quarter. Electronic Chemicals contribution to operating income for the quarter was $2.9 million compared to an operating loss of $649,000 in last year’s third fiscal quarter, which was the trough of the recession for the semiconductor business.

The big news in the third quarter was closing on the acquisition of General Chemical’s Electronic Chemicals business on March 29th for a total cash purchase price of $26.7 million, which included $7.6 million of inventory. The acquisition includes chemical manufacturing equipment and a facility in Hollister, California, as well as equipment related to production to electronic chemicals in Bay Point, California. I’m pleased to report that once again we had no goodwill associated with this most recent acquisition.

There are several reasons for enthusiasm about this acquisition, some of which we described on our last conference call, but I would like to mention a few points here. There is roughly an 80% overlap between our legacy product lines and those of the acquired business, and yet there is only about a 20% overlap in customers. This means broader exposure to an expanded customer base that services a wider global footprint. With this acquisition, we now have over a 50% market share of the $250 million

US market for acids and solvents used to manufacture semiconductors. We expect this increase in market share to translate into gains and operating margins, greatly driven by increased manufacturing throughput. This is in contrast to our first electronic chemicals acquisition where much of the improvement in profitability came from driving down operating expenses, specifically as a result of improved supply chain efficiencies and associated cost reductions.

The acquisition also expands our presence in Asian markets. Our 15% share in the European market did not change with this transaction. The integration is progressing on schedule, and so far, there have been no notable obstacles. We project there will be approximately $250,000 per month of transition-related costs through our fourth quarter, which will tail off over the first half of fiscal 2011.

During that time, we look forward to achieving significant operating synergies from combining certain functions of the two electronic chemicals businesses. For example, we have a large volume. Our solvent-based products being totally manufactured by a third-party under an agreement that expires at the end of calendar 2010. We plan to consolidate those volumes into the Hollister plant greatly improving the performance and utilization rate of that operation by almost doubling plant throughput.

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