KMG Chemicals Inc. (KMGB)

F4Q10 (Qtr End 07/31/2010) Earnings Call

October 12, 2010 10:00 am ET


Neal Butler - President and CEO

John Sobchak - CFO


Arnie Ursaner - CJS Securities

Eric Prouty - Canaccord

Jay Harris - Goldsmith & Harris

Mike Mork - Mork Capital Management



Good morning, and welcome to the KMG Chemicals Fourth Quarter and 2010 year-end 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 improvements of the Company.

Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that the 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 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 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 Butler

Good morning, and again, welcome to KMG's fourth quarter and 2010 year-end conference call.

John Sobchak, our CFO, and I will take you through the financials, provide an overview of each of our businesses, as well an update on the integration of recent Electronic Chemicals acquisition, and then share with you our outlook for KMG for fiscal 2011. After our comments, we will address your questions.

Our earnings release was filed early today, and I hope all have had a chance to review it. You can access it on our website. We also plan to file our 10-K on Thursday, October 14.

Fiscal 2010 was a very successful year for KMG. This is our second consecutive year of record financial results. Those of you who were on last year's year-end conference call will recall our expectation for fiscal 2010, namely that in the aggregate, our financial results would be better than 2009 and that we would close on an acquisition prior to the end of fiscal 2010. Both of those objectives were met.

For fiscal 2010, net sales rose 9% to $208.6 million, producing operating income of $27 million and net income of $15.3 million or $1.34 per diluted share versus fiscal 2009 sales of $190.7 million, operating income of $20.8 million, and $10.2 million of net income or $0.91 per diluted share for fiscal 2009.

The 50% improvement in net income was primarily due to what is now our largest business unit, electronic chemicals. Operating margin in this segment improved significantly as a result of the cost efficiency initiatives we implemented during fiscal 2009, as well as from a recovery in demand by our semiconductor manufacturing customers.

Net sales for the 2010 fourth quarter were $62.5 million versus $48.4 million in the final quarter of fiscal 2009 with a 29% increase being primarily due to the inclusion of our newest division to our Electronic Chemicals business which contributed $11.5 million in sales in the fourth fiscal quarter.

For the fourth fiscal quarter, operating income was $6.3 million compared to $9.4 million in fiscal 2009, and net income was $3.4 million or $0.30 per diluted share compared with the prior year's $4.9 million or $0.44 per diluted share. The decline in operating and net income in the fourth quarter was mostly due to lower demand by utilities and railroad customers in our Wood Treating segment which we began to see near 2010 fiscal year in addition to higher supply and raw material cost.

During fiscal 2010 we had spent $1.1 million in transaction and integration costs associated with the most recent Electronic Chemicals acquisition. Integration expenses were primarily fees paid to outside parties to assist us with the integration of the acquired business. Those costs totaled $663,000 for the year.

Transaction expenses included due diligence and closing cost and made up the balance.

Now I'd like to discuss the 2010 performance and outlook for each of our businesses. Electronic Chemicals 2010 first fiscal year sales rose 31% to $112 million from $85.8 million in the prior year with gains achieved in both North American and European operations.

The increase also reflects four months of sales by the newly acquired business which contributed $15.7 million to the top-line in those months. This segment contributed $11 million to operating income, an increase of 198% from $3.7 million last year and the aforementioned cost efficiency initiatives implemented in 2009 as well as improved sales on better economic conditions and was achieved despite $663,000 of integration expenses in fiscal 2010 of which $623,000 was incurred in the fourth quarter.

We completed the transition of Hollister plant onto our information systems on August 1 and the integration of the manufacturing operations continues on schedule and will carry through the fourth fiscal quarter of 2011 as production is shifted from third-party (toll) manufacturers to our plants in Pueblo and Hollister.

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