KMG Chemicals' CEO Discusses Q4 2011 Results - Earnings Call Transcript

KMG Chemicals (KMGB)

Q4 2011 Earnings Call

October 13, 2011 10:00 am ET

Executives

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

John V. Sobchak - Chief Financial Officer and Vice President

Analysts

Jay Harris - Goldsmith & Harris

Steven Schwartz - First Analysis Securities Corporation, Research Division

Daniel D. Rizzo - Sidoti & Company, LLC

Eric Glover - Canaccord Genuity, Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Presentation

Operator

Good morning, and welcome to the KMG Chemicals Inc. Fiscal 2011 Fourth Quarter and Full Year Financial Results 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 this 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 price 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 would now like to turn the call over to Neal Butler, President and CEO. Thank you, Sir. You may begin.

J. Neal Butler

Thank you. Good morning, and again, welcome to KMG's fiscal 2011 fourth quarter and year end conference call. John Sobchak, our CFO, and I will take you through the financials and provide an overview of each of our businesses. We'll also discuss the outlook for fiscal 2012. After our comments, we'll address your questions. Our earnings release was filed earlier today and I hope all of you had a chance to review it. You can access them on our website. We also plan to file our 10-K tomorrow.

We generated record revenues in both the fourth quarter and full year of fiscal 2011 driven by increased sales of electronic chemicals and higher volumes of Creosote in Wood Treating Chemicals business. We operate profitably in each quarter of fiscal 2011 and generated positive cash flow for the year while making substantial investments in our corporate infrastructure, paying down debt and increasing our cash dividend. As many of you are aware, we announced our expectations for the fourth quarter in early September. Our record revenues have in large part validated our targeted consolidation pieces in growth strategy. Our bottom line results were below expectations driven by a combination of higher than expected raw material prices, distribution cost and some lingering lucrative manufacturing costs associated with consolidation of our electronic chemicals manufacturing following our acquisition from General Chemical.

With this consolidation initiative completed, the higher cost material that was produced during the transition period is being worked down, and we expect that any consequential cost associated with those activities will be behind us by the end of this first fiscal quarter of 2012. Additionally, the pricing actions we put in place in the second half of fiscal 2011 and the first quarter of 2012 are expected to offset the raw material cost increases in both Electronic Chemicals and Wood Treating Chemicals businesses.

Fiscal 2011 was a transformative year for KMG following the acquisition of General Chemical's Electronic Chemicals business and successful integration into our operation. We've consolidated manufacturing, expanded critical capabilities necessary to facilitate organic growth and establish ourselves as a leading U.S. supplier of high purity process chemical sort of semiconductor industry. This is an important achievement given a solid demand environment for these products and the additional business associated with a more than $15 billion of customer expansion initiatives in the United States and any of which are currently underway.

We completed several important supply contracts in our Wood Treating business and have also solidified our position as a major supplier and manufacturer of Wood Treating Chemicals. This will allow us to benefit from the strong maintenance and railroad tie replacement rates that are anticipated through calendar 2013.

With fiscal 2012 underway, many aspects of our strategy are coming together. The actions we have taken and investments we have made to position KMG to capitalize on the wealth of opportunity, and here in our markets and deliver superior returns to our customers. And before I turn things over to John, I'd like to discuss the 2011 performance and outlook for the business.

Regarding our Electronic Chemicals segment. For the fiscal 2011 year, sales increased 35% to $151.5 million from $112 million last year, due primarily to the acquired business, along with increased demand due to improvement in semiconductor manufacturing. In the fiscal 2011 fourth quarter, sales increased by 10% to $40.2 million from $36.5 million in the fourth quarter of last year. The majority of our growth in the fourth quarter was organic as the 2010 fourth quarter inflated the full 3 months of sales from the Electronic Chemicals acquisition. We continue to see a healthy in-market but recognize that a recession, our significant global economic downturn, could negatively impact sales. Our customers are taking a cautious outlook, but so far we have not seen a material decline in demand. Although some European semiconductor manufacturers have advised a slowdown in the fourth calendar quarter, the European market is a relatively small part of our Electronic Chemical sales, and we have not seen that response in North America. This segment contributed $6.2 million to operating income in fiscal 2011, down from $8.4 million in fiscal 2010. In the fourth quarter, operating income was $262,000 in fiscal 2011 versus $2.8 million in fiscal 2010. This decline was due primarily to the aforementioned higher raw material cost as well as higher manufacturing and distribution expenses associated with integration of our most recent acquisition. Global price increases were phased in during the end of fiscal 2011 and additional product specific increases are planned for the second quarter implementation.

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