KMG Chemicals' CEO Discusses Q3 2011 Results - Earnings Call Transcript

KMG Chemicals (KMGB)

Q3 2011 Earnings Call

June 09, 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

Rosemarie Morbelli - Gabelli & Company, Inc.

Daniel Rizzo - Sidoti & Company, LLC

Unknown Analyst -

Presentation

Operator

Good morning, and welcome to the KMG Chemicals Inc. Third 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 light of interest rate and current 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 now like to turn the call over to Neal Butler, President and CEO. Neal, please go ahead.

J. Butler

Good morning, and welcome to KMG's Fiscal 2011 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, including progress on integrating the March 2010 Electronic Chemicals acquisition. We'll also discuss the outlook for the remainder of fiscal 2011 and after our comments, we will address your questions.

Our earnings release was filed earlier 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 third quarter results were below our expectations, we experienced solid sales across all 3 of our segments and accomplished in the performance of these businesses over the next several quarters. Net sales rose by 26% to $65.1 million for the third quarter of 2011 and were up by over 30% for the 9 months ended April 30 as our markets continue to recover from the lower demand experienced last year.

Our Electronic Chemicals business experienced sales growth of 30% in the third 2011 fiscal quarter versus the prior year, due primarily to the March 2010 acquisition, as well as the recovery in the semiconductor market we had seen throughout this fiscal year. Creosote saw strong top line improvement over prior year's levels with higher volumes driving a 37% increase in sales for the third quarter, which were still below expectations. Penta and Animal Health were in line with last year's revenue numbers, which we'll discuss in greater detail shortly.

For the third quarter of fiscal 2011, operating income was $4.6 million and net income was $2.6 million or $0.23 per diluted share. This compared to operating income of $5.8 million and net income of $3.3 million or $0.29 per diluted share for the same period in fiscal 2010. For the first 9 months of fiscal 2011, net sales rose 31% to $192.1 million, operating income was $14.9 million, and net income was $8.5 million or $0.74 per diluted share. In the same period last year, net sales were $146.2 million; operating income was $20.7 million with net income of $11.9 million or $1.05 per diluted share.

Regarding our Electronic Chemicals segment. Sales increased by 30% to $38.5 million from $29.6 million in the prior year period due primarily to the acquired business, along with increased demand due to improvement in semiconductor manufacturing. In the fiscal 2011 third quarter, we benefited from a full 3 months of sales from the acquired business as compared to only one month of sales in the third quarter of fiscal 2010. We also generated improved sales due to a healthier end-market that drove product demand in the U.S., Europe and Asia. This segment contributed $1.6 million to operating income, down from $2.2 million in last year's third quarter. This decline was due primarily to higher raw material costs, as well as the higher manufacturing and distribution expenses associated with the integration of our most recent acquisition.

Raw material cost increased in much of fiscal 2011. In response, we have committed a global price increase that phased in during the third fiscal quarter. Fourth quarter 2011 results will reflect a full 3 months benefit from these increases. Earlier this week, we announced an additional price increase for certain products that are continuing to be impacted by escalating raw material costs. We will see the full impact of this second price increase in our first quarter of fiscal 2012.

Distribution expenses for this business increased by $2.5 million to 16.7% of revenues from 13.2% of revenues in last year's third quarter. This increase was due to higher sales volume associated with the acquisition, transportation lanes that are temporary to lift and optimize as we consolidated production from 2 contract manufacturing locations, the continued rise in diesel prices and the tightening of the market for common carrier services. We did see some notable improvement relative to the second quarter of fiscal 2011, as we were able to achieve our previously stated goal for distribution expense as a percentage of revenue in the mid-16% range. While we believe additional improvements can be achieved, we do not anticipate being able to regain the 13.2% level of last year's third quarter which benefited from a dramatically lowered diesel prices in a very competitive common carrier market.

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