KMG Chemicals (KMGB)

Q2 2011 Earnings Call

March 11, 2011 10:00 am ET

Executives

John Sobchak - Chief Financial Officer and Vice President

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

Analysts

Stephen DeNichilo - ACK Asset

Daniel Rizzo - Sidoti & Company, LLC

Arnold Ursaner - CJS Securities, Inc.

Eric Glover - Canaccord Adams

Presentation

Operator

Good morning, and welcome to the KMG Chemicals, Inc. Second Quarter 2011 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 lines and businesses; the condition of capital markets in the 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 will now like to turn the call over to Neal Butler, President and CEO. Neal, please go ahead.

J. Butler

Good morning. Again, I welcome you to KMG's Fiscal 2011 Second Quarter Conference Call. John Sobchak, our CFO, and I, will take you through the financials and provide an overview of each of our businesses, including our progress in integrating our March 2010 Electronic Chemicals acquisition. We will also discuss our outlook for the remainder of fiscal 2011. After our comments, we will address your questions.

Our earnings release was filed early today, and I hope all have had an opportunity to review it, you can access it on our website. We also plan to file our 10-Q later today. While our earnings fell somewhat short of our expectations in the second quarter, we're very pleased with the trends in each of our business units.

We recorded a 44% increase in net sales to $64.9 million, as our markets continue their recovery from the lower demand experienced in the second quarter of last year. Our Electronic Chemicals business experienced sales increase, up 57%, due primarily to the March 2010 acquisition in that segment, as well as the recovery in the semiconductor market.

We also reported a 40% increase in sales in our Creosote business and 3% sales growth in our Penta business, both due to increased demand. Animal Health was also a strong performer, as we benefited from the recovery in the U.S. food animal sector that negatively impacted sales and margins in the business since fiscal 2008.

For the second quarter of fiscal 2011, operating income was $4.8 million and net income was $2.4 million or $0.21 per diluted share. The cost of operating income of $6.9 million and net income of $4 million, or $0.35 per diluted share, for the same period in fiscal 2010. For the first half of fiscal 2011, net sales rose 34% to $127 million. Operating income was $10.4 million and net income was $5.9 million, or $0.52 per diluted share, compared to net sales of $94.5 million operating income of $14.9 million and net income of $8.6 million, or $0.75 per diluted share, in the same period in fiscal 2010.

As discussed in last quarter's conference call and release, the first half of fiscal 2010 was unusually strong, due to favorable product mix in our Wood Treating business combined with a dramatic, short-lived drop in raw material prices. A movement back to more normalized raw material pricing was seen in the latter half of fiscal 2010.

And looking at our Electronic Chemicals segment, sales increased by 57% to $36 million from $22.9 million in the prior year, due primarily to the acquired business as well as improved sales on better economic conditions. This segment contributed $1.3 million for operating income, down from $2.5 million in last year's second quarter. Further decline due to higher manufacturing and distribution costs, primarily attributable to integration costs associated with the most recent acquisition.

The key element of our strategy is to consolidate production of solvents and most acids into two KMG owned [ph] facilities. During the quarter, we incurred duplicative plant costs as a consequence of the need to expand the operations of our plant in Pueblo, Colorado, that produces acids, and our plant in Hollister, California, that process solvents, in advance of moving additional production to these two locations. At the same time, we continue to pay for the contract manufacturing locations in Bay Point, California and Dallas, Texas, which are operated on our behalf by General Chemical and their products, respectively.

A key driver for our manufacturing integration plan was our customers' requirements to requalify our products for their semiconductor fabrication plants, which are now being produced in our new manufacturing locations. This process is quite involved and has been executed very efficiently by the KMG team. As a result, the product and the duplicative plant costs will be eliminated once production is consolidated into Pueblo and Hollister at the end of the fourth fiscal quarter. At that point, we will load the Dallas, and Bay Point will be limited to the contract manufacturing of one-on-one product group.

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