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Executives

Neal Butler – President, CEO

John Sobchak – Chief Financial Officer

Analysts

Daniel Rizzo – Sidoti & Company

David Yuschak – SMH Capital

Ross Haberman – Haberman Fund

Eric Duncan – Maloney Securities

Larry Brooks – Maloney Securities

KMG Chemicals Inc. (KMGB) Q1 2008 Earnings Call December 9, 2008 10:00 AM ET

Operator

Welcome to the KMG Incorporated first quarter 2009 conference call. We would like to begin by reminding you that the information in this conference call includes certain forward-looking statements and are based upon assumptions that in the future may not prove 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 these 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, environmental liability, the ability to obtain registration and re-registration of products, increased environment compliance cost of products and general political and economic risks and uncertainties.

With that, I would like to turn the Neal Butler, President and CEO.

Neal Butler

Good morning and I also want to welcome you to KMG's first quarter 2009 conference call. John Sobchak, our CFO and I will summarize our first quarter results, review each of our businesses and the outlook for the markets they serve, discuss our expansion initiatives, share insights on our expectations for the year as a whole, and then open up the call for your questions.

We're very pleased by the top line performance of what has become our largest operation, our Electronic Chemicals business whose annualized run rate remains at about $105 million. First quarter sales were $26.2 million and benefited from previously implemented price increases and from increased sales volume and the key markets. In North America, sales were $21.2 million and the international segment sales were $5 million.

We are frequently asked how the Electronic Chemicals business will be affected by the global economic downturn. As we see it today, overall production of semiconductors is indeed likely to decline with in ship ranging from 10% to 25%. While sales volume may decline, we have effectively implemented needed price increases to keep up with raw material cost escalations we experienced in fiscal 2008 and have initiatives underway to gain critical market share and reduce operating supply chain expenses, all of this in an effort to meet our Electronic Chemicals operating income goals.

As we reported in our news release this morning, we expect the operating income generated by the Electronic Chemicals business in the future quarters to be notably higher than the $1.6 million in the first quarter when we incur transitional service fees and third party consulting fees. Thos non recurring fees totaled approximately $1 million in the first quarter.

Our intention is to be the preferred supplier in the wet process chemical sector. We will accomplish this by focusing on meeting street customer requirements and providing a consistent and high level of service. We are well positioned and committed to meet our ever greater purification requirements and working in partnership with our key customers to set these strategic needs as the semiconductor market continues to evolve.

Moving to our Wood Treatment business, creosote revenues increased by approximately 40% to $17.5 million with both higher prices and increased volume contributing to the top line growth. Demand by railroads for cross ties treated with creosote were near the top of the historical range. As some of you may recall, we had forecast less sales for creosote in fiscal 2009 and despite the sales increase in the first quarter, we expect to see demand lessen as rail traffic declines and railroads react by slowing maintenance programs.

So for now, we still look for 2009 creosote sales volume to approximate last year's level with an increase in operating profit at fiscal year end. Revenues declined to 2% to $7.1 million due to reduction in spending by utilities for maintenance and installation of distribution poles. Nonetheless, operating margins were quite strong coming in at 27%. We continue to look for annual sales to approximately last year's $26.4 million.

As we noted in our annual report, creosote and Penta has been re-registered by the EPA. These registrations represent the key franchise to do business in the United States and serve as an expensive barrier to entry for potential competitors.

Finally, our smallest business segment Animal Health Pesticides is a seasonal business with sales weighted to the third and fourth quarters. As most of you know, we're working towards expanding and diversifying our sales and geographic distribution while diminishing the seasonality.

In the current first quarter, sales were $1.4 million compared to $1.5 million in the comparable period of fiscal 2008. The same quarter comparison is a difficult one as Animal Health hit a high hurdle last year when first quarter sales were exceptionally strong, up 73% compared to fiscal 2007 first quarter.

We've seen a continuation of lower discretionary spending by our U.S. farm and livestock customers to cut spending on pesticidal ear tags in the face of high cost for feed, fuel and fertilizer in our third and fourth quarters of fiscal 2008.

On a positive note, we've seen these same input costs for fuel and fertilizers start to decline, hopefully freeing up capital and allowing growers in the spring to more aggressively focus on and address improving their return on investment through effective fly and pest control. Our distributors have reacted favorably to our 2009 marketing programs and we will enter the season with reduced levels of inventory of ear tags relative to last year.

First quarter Animal Health revenues included initial sales in Mexico, Argentina and Puerto Rico as well as Australia. We filed registration applications in Columbia, Venezuela and Brazil and look to penetrate those markets in fiscal 2010. We also will see sales in Uruguay later this fiscal year.

We expect Animal Health sales to improve as the year progresses with seasonally stronger second half sales in North America coupled with these sales in Latin America.

At this point, I'll turn the call over to John to provide details on the financials and additional information. Afterwards, I will provide more color on our outlook for the remainder of the year.

John Sobchak

Starting with the income statement, current first quarter revenues were $52.2 million, an increase of 145% from $21.3 million in the first quarter of 2008. The top line growth is driven by the addition of the Electronic Chemicals business as Neal mentioned, and strong creosote sales.

The Electronic Chemicals business contributed $26.2 million of the $30.9 million increase in revenues and creosote revenues were up by $5 million. The $111,000 in the $161,000 decline in Animal Health and Penta revenues respectively were not very material.

Gross profits increased by $8.7 million to $15.5 million over the previous year period primarily due to the addition of the Electronic Chemicals business. While creosote revenues increased, creosote is a lower margin product for us. Slightly lower Penta sales coupled with higher prices for the petroleum based solvent used to formulate Penta solutions caused a reduction in our gross profit dollars and margins for Penta relative to Q1 of last year.

As a result, the margin of KMG's overall business in the first quarter declined to 29.7% from 31.9% in Q1 of 2008. We have implemented pricing and purchasing actions that should lead to an improvement in gross profit margins for the fiscal year as a whole over fiscal 2008.

SG&A was $12 million in the first quarter of 2009, a $7.8 million increase over the prior year. Most of that increase was due to Electronic Chemicals business. As a percentage of revenue SG&A was 23% in the first quarter 2009 versus 20% for the same quarter last year. Although we moved away from the transitional services from air product at the end of September 2008, we incurred substantial costs related to those services for the first two months of the quarter, along with approximately $434,000 in fees to consultants who are assisting us in the integration of the business.

At the same time we had built and staffed our post transition system so we could complete necessary training and testing. We estimate that the redundant systems added approximately $600,000 in additional expenses in the first quarter. Together these final non recurring transition and integration costs total just over $1 million in the first quarter. SG&A in our Legacy business was flat in the first quarter as compared with the prior year period.

Operating income increased $913,000 to $3.5 million for the quarter, a 35% increase from the first quarter in 2008. And again, that operating income in Q1 of 2009 was reduced by just over $1 million by transition and integration costs that will not be recurring.

The Electronic Chemicals business contributed approximately $1.6 million in operating income. Creosote contribution to operating income increased by $84,000. Penta's contribution to operating income declined by $278,000 for the quarter primarily due to the increase in the cost of the solvent raw material, and also due to the 2% decline in revenues.

Animal Health contribution to operating income declined by $31,000 on lower sales and produced an operating loss of $150,000 for the quarter compared to $119,000 loss in Q1 of fiscal 2008. For the Animal Health segment, it's important to keep in mind that sales and profits are seasonally weighted very heavily to the second half of our fiscal year, and we incur mild operating losses in the first half of the year, as sales during those periods are insufficient to cover fixed costs. Our plans to expand sales south of the equator would help address this seasonality issue.

Our income tax rate was 38.2% for the quarter. That's up from 36.3% in the first quarter of last year. Net income was $1.62 million, a slight improvement over the $1.55 million of net income for the year earlier period. Earnings per diluted share were $0.14 per share in both periods.

Moving on to our balance sheet, we have $3.3 million of cash at the end of the first quarter. That's up $700,000 from fiscal 2008 year end. We repaid a net amount of $4.6 million in debt during the quarter, using cash flow from operations for a total net amount of $13.6 million repaid since the Electronic Chemicals acquisition closed on December 31, 2007.

$4 million of the principal repayment during the quarter was used to pay off the remaining balance on the $10 million note from OxyChem. That had the effect of removing $2 million from current liabilities in our current balance sheet.

At October 31, we had long term debt of $56.4 million. That's down from $61 million at July 31; the end of our fiscal year and it's down from $70 million on January 1, right after we closed the Electronic Chemicals acquisition.

At quarter end, we had $6 million in borrowings under our $35 million revolving loan facility. The second half of our fiscal year is typically our strongest in terms of earnings and cash flow from operations. By the end of our fiscal year, we anticipate repaying the remaining $6 million borrowed on our revolver and building a strong cash position. That cash position along with our $35 million revolver should be sufficient to fund an acquisition in fiscal 2010.

We finished the quarter in a good position relative to the three financial covenants we have with our bank group. We are required to maintain a fixed charge coverage ratio of at least 1.5. Our ratio was 1.8 at October 31. We are also required to maintain a funded debt to capital ratio of no more than 60%. Ours was 48% at the end of the quarter. We also need a funded debt pro forma EBITDA ratio of no more than 3.5 and we were at 2.6 on October 31.

We are currently paying 2.5% over LIBOR on our term loan borrowings which were $30.4 million at the close of Q1 as well as the $6 million borrowed on our revolver. We had $20 million on non amortizing notes maturing; they're seven year notes for which we pay a fixed interest rate of 7.43%.

With $51 million of shareholders equity, KMG's book value was about $5.51 per share at the close of the first quarter. Now I'll hand it back to Neal.

Neal Butler

We remain on track to achieve sales of approximately $280 million in fiscal 2009. As we reported in mid October during our fiscal year 2008 year end conference call, we expect to achieve significantly higher profits in 2009 versus 2008 due to having the Electronic Chemicals business for a full 12 months, coupled with post integration cost savings in that business as well as the $1.2 million reduction in amortization expense primarily associated with our Penta business.

We obviously continue to face uncertainties with today's volatile economy, but we believe our attachment to key infrastructure industries provides some measure, though certainly not guarantee of stability. We're mindful of developing economic downturns and the threat that it may pose to each of our business segments. We will continue to monitor developments and take prompt action when necessary.

Our long term growth continues to be roughly an 80 to 20 mix of acquisition and organic. A key driver in our organic growth will be diversification and global markets with particular short term focus on Europe and the Middle East with Electronic Chemical and in Latin America with Animal Health products. Additionally, in Animal Heath, we have a new ear tag in developmental trials and anticipate a 2010 market introduction in the United States.

We believe that the current economic situation could prove to be beneficial with regards to our acquisition efforts. We have five production facilities with capacity to bring in new products that are either developed internally or purchased on our current lines. We are pursuing several acquisition candidates and are working towards closing our next acquisition in fiscal 2010.

With that, I'd now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Daniel Rizzo – Sidoti & Company.

Daniel Rizzo – Sidoti & Company

Just in terms of price increases, are you pretty much done? You said you caught up to raw material costs so I imagine that you're not going to be raising and give the current situation after raising prices in the near term. Is that true?

Neal Butler

There will probably be some minor price increases that we may see in the first of calendar year 2009 but basically there won't be any significant price increases going forward in this fiscal year.

Daniel Rizzo – Sidoti & Company

In terms of the Animal Health sales in Latin America and Mexico and Puerto Rico, are they still in the trial stages or has it advanced from there?

Neal Butler

The sales, I'll use Puerto Rico as an example, we actually have shipped the vast majority of our entire product line to Puerto Rico. We've had sprays, dust, the ear tags and the pour ons have all gone into Puerto Rico, so we actually have a full line of sales down there. The other markets in Latin America where we've actually shipped products to date have primarily been ear tags.

John Sobchak

One clarification, you had asked about the price increases and while we are pretty much done with price increases, those increases have not been fully manifested in the first quarter results.

Daniel Rizzo – Sidoti & Company

So you're going to see a little bit of that. We should see the remainder of that coming up in the next quarter.

John Sobchak

The results of previously enacted price increases, the improvement will still show up in subsequent quarters versus Q1.

Neal Butler

One other comment I would attach to that as well, there is a possibility that we may still see some increases on certain raw materials, some very specific raw materials where those increases do come through assuming that they do, we will increase prices to compensate for that.

Daniel Rizzo – Sidoti & Company

Could you give clarify on what those raw materials are?

Neal Butler

They would primarily be in the wood treatment areas.

Operator

Your next question comes from David Yuschak – SMH Capital.

David Yuschak – SMH Capital

It appears that the integration cost probably ran in this first quarter higher than you had talked about in the fourth quarter conference call. Is that right?

John Sobchak

The thing that happened in the first quarter that would be different from the previous quarters, say Q3 and Q4 of fiscal 2008 is that as we built the system, and staffed up to operate the system internally, essentially what happened in the first quarter of 2009 is we had two parallel systems running. One was our own system which was where our people were being trained and we were testing the system during August and September, and at the same time we were paying for a completely redundant system that was being operated by Air Products.

So in that sense, expenses related to the transition and integration effort were higher in the first quarter than what you would have seen in previous quarters.

David Yuschak – SMH Capital

As far as ongoing on the SG&A line as a percentage of sales, it looks like you could have a lot more room for improvement here as you go through the rest of the year, particularly given some of the encouragements here from, even though we've got some lousy numbers, your revenue has certainly held up pretty well here.

Is there anything in SG&A line right now that could give us some hope that as a percentage of sales that can come down longer term and what kind of goal would you have in mind to potentially reach as a percentage of sales?

Neal Butler

In the SG&A line, that's where the integration costs would come out of so there was just over $1 million of non recurring integration costs that would come out. Also, starting in January, we have $1.2 million in this fiscal year of amortization expense that shows up in SG&A that's going to be reducing as well.

In addition to that, we are embarking on a concerted effort to reduce our supply chain costs, distribution and warehousing costs associated with the newly acquired business. The theory there is that while we were operating under the Air Products ERP system, we maintained the supply chain that was in place. That supply chain was built for a much larger multi billion dollar Electronic Chemicals division, not for this product line specifically.

Now that this product is under our control and operating under our system, we're able to optimize that, so we're embarking on that this year. There will be benefits this year but I think the greatest benefit for that will be seen in 2010.

David Yuschak – SMH Capital

How do you see that supply chain changing compared to where it was under Air Products?

Neal Butler

Some of the supply chain expenses are in areas like warehousing. There are a number of things we believe we can do to make our warehousing much more efficient and some that that's going to be consolidation, actually moving out of some. There are some just general supply chain expenses that we have basically assumed coming over from Air Products and as we delve into them, and we've done this with our past acquisitions, that's one of the key places we look to take expenses out. Most of it though is going to be warehousing and freight.

John Sobchak

To the extent that oil prices stay low, we'll see a benefit from lower diesel prices as well.

David Yuschak – SMH Capital

On the gross margin, certainly with higher commodity prices that's impacted your cost on your entire product line, how much do you think it's possible to recoup in gross margin recovery given what's happened currently in commodities, not to say that they can't come back up but it would seem to me this 29% gross margin that you've been running on trailing 12 month basis has been a higher gross margin. It's a pretty good base line for saying that's kind a bottom end of the range given the substantial spike in commodity prices we're experiencing so anything going forward has got to be a lift because of the intense pressure in the last 12 months. Could you give us observations?

Neal Butler

We agree with that. We do expect to see some lift from commodity prices, a favorable impact on our gross profit margin. We expect as I stated in the call gross profit margins in fiscal 2009 overall to be higher than fiscal 2008. How much higher is yet to be seen. We're kind of in the middle of it now.

For instance, we really have not seen much of a decrease in chlorine prices. Chlorine is a major raw material for us in the manufacture of [pethachlorinal] so not all raw material prices are coming down.

Operator

Your next question comes from Ross Haberman – Haberman Fund.

Ross Haberman – Haberman Fund

What should your D and A run in for the quarter?

John Sobchak

Depreciation and amortization for the quarter was about $1.8 million. And remember, we were talking about $1.2 million of amortization expense coming out of the balance of fiscal 2009.

Ross Haberman – Haberman Fund

So the $5.7 last year is going down to $4.5? Is that what you mean?

John Sobchak

Last year we didn't have the Electronic Chemicals business for the full 12 months so you can't really do that math.

Ross Haberman – Haberman Fund

So at this rate you're running about $7.2 on a yearly basis.

John Sobchak

That's correct. And then if you take the $1.2 million over seven months it's about $170,000 per month of amortization expense reduction that we'll see going forward also off of these current amounts.

Ross Haberman – Haberman Fund

So the $1.8 million on a quarterly basis is going to be running $1.5 million less? Did I understand that?

John Sobchak

That's about right, yes.

Ross Haberman – Haberman Fund

So for the second quarter you're looking at about $1.3 million.

John Sobchak

Second quarter no, because I would say that's correct for the third quarter. The second quarter is kind of a transition quarter.

Ross Haberman – Haberman Fund

The creosote, I think you said sales for '09 will be about flat with last year. Should we see much better income based on lower input costs then and should we see much of that this quarter?

Neal Butler

We saw a little bit this quarter. At the end of the fiscal year, the answer is yes, we should see an improved operating income over the prior year.

Operator

Your next question comes from Eric Duncan – Maloney Securities.

Eric Duncan – Maloney Securities

Congratulations on a good quarter in a really tough environment. My first question had to do with the Animal Health segment. I know it is a seasonally slow time at the moment. Your initial push in expanding internationally in that segment has obviously been in Latin America and I was hoping you could discuss your opportunity in Australia first and secondarily, you had mentioned a new ear tag and I was curious as to how that might be an improvement on the existing one and what the demand is for that or what you anticipate it to be.

Neal Butler

Australia is an international market that we've traditionally done business in since we made the acquisition from Bering and Engle Hein. We have a particular distributor there who's a large international distributor actually and they see opportunity to expand, I don't know that I would say the full product line but certainly components of our product line and they're looking for some specialty ear tag products to move into Australia as well. So we're fairly enthused there but I'd be reticent to give any kind of percentage increase but I do think we have opportunities to expand in Australia.

As it relates to the new ear tag, the new ear tag is designed to increase the efficacy against horn flies and face flies which are the two primary pests on cattle. It gives a little bit longer activity but the more important thing is it increases the kill for face flies.

Eric Duncan – Maloney Securities

You mentioned that part of your business model is acquisition related and certainly this seems to be an area in which you're at least examining opportunities. What would be your goal should you make an acquisition in this area?

Neal Butler

In the Animal Health Arena?

Eric Duncan – Maloney Securities

Yes. Or what area do you feel that you could expand on that would help the overall model there.

Neal Butler

It's actually a pretty small marketplace. There are a couple of players that are significant competitors that we would very much like to buy their pesticidal product line. Other than those couple of players, what we're really looking at are bolt on products that might be able to expand our footprint in poultry and cattle.

We're not looking very hard at international acquisition opportunities. We're able to supply the markets overseas from our existing facility in Elwood, Kansas.

Operator

Your next question comes from David Yuschak – SMH Capital.

David Yuschak – SMH Capital

On the D and A, that $1.2 million, was that something that you had not counted on in a way of profitability as far as EPS going into your current fiscal year from the last conference call?

John Sobchak

We've been aware of it and in fact in the 10K's that we've put out for the last several years we've disclosed what we anticipate our amortization expense to be going forward for the next several years. It's not a required disclosure but we though it was pertinent to investors considering the reduction that occurs during fiscal 2009.

David Yuschak – SMH Capital

As far as working capital requirements going forward, as you look what inflation had on your inventories and receivables both over the last 12 months, how much do you think you'll be able to lower working capital requirements because of what you've seen so far in the inflationary impact subsiding?

John Sobchak

The biggest impact we're going to have on working capital is optimizing the working capital in the Electronic Chemicals business right now. We also ended up with higher than what we had targeted for inventory in the Animal Health sector given the fact that Animal Health sales last year were lower than we were anticipating.

In the Electronic Chemical space, Air Products was handling our invoicing and collection activities as part of the transitional services, so now that we have that in house we intend to bring current those accounts. Likewise on inventory, we think there's some opportunity to manage inventory a little more efficiently and that will also be a natural fall out from the supply chain optimization exercise we're going through this year.

David Yuschak – SMH Capital

As far as your current inventory is concerned, is there anything in there that's kind of out of price with current market conditions that would necessitate maybe an extraordinary charge or how comfortable do you feel that a good deal of that high priced inventory is kind of behind you.

John Sobchak

We feel very good about it. We review our inventory on a monthly basis so anything that needs to be written down, we're doing so on a monthly basis.

David Yuschak – SMH Capital

So you're current. Your inventories right now are in pretty good shape as far as costs are concerned though.

John Sobchak

That's right. I'd like to add to that just so there's no confusion, we haven't seen price declines. It's the sales price decline that would be the biggest initiator of an inventory write down.

David Yuschak – SMH Capital

On the rail roads, you expressed some caution about spending. Are you seeing anything right now that suggests that given what's happened in the first quarter or is it more just intuitive right now thinking that given the current economics and potential for traffic growth for 2009 that that's likely to happen?

Neal Butler

It's a bit more intuitive. We've seen reports that there has been some decline in rail freight and I recall I saw a report the other day that it was something between 9% and 11% if I recall correctly, but it's just a leading indicator. Obviously the maintenance and repair lags that and as you commented a moment ago, we actually sort of intuitive believe utilizing that as a leading indicator that they may back off the maintenance somewhat. We just think it's important to take a rather conservative outlook on it.

David Yuschak – SMH Capital

But this first quarter had to be a pleasant surprise for you as far as the volume growth at this point in time given what your results were in the quarter.

Neal Butler

That's a very true statement. Absolutely.

David Yuschak – SMH Capital

As far as Penta is concerned, is there anything out there that suggests that maybe the utilities could be coming back given the lower cost of Penta relative to competitors given the lower prices of the mix?

John Sobchak

The lower diesel prices certainly help. Given the economic uncertainty of these times, I don't think we're ready to go out on a limb and say it's going to cause utilities to put in more poles. Frankly when diesel prices shot up so aggressively during the spring and summer time, we didn't see a dramatic reduction in Penta usage, so I wouldn't expect the inverse to be true.

David Yuschak – SMH Capital

Thinking about that, the market never got affected because of the higher prices even through there could have been a competing solution that could have been prices more favorably.

Neal Butler

The products that we compete against have historically had a notable price advantage over us if price is the only reason you were purchasing a product, the utilities that purchase the Penta poles are typically purchasing it for physical characteristics not for pricing.

David Yuschak – SMH Capital

But given the rise you had, that phenomena has still stayed intact is what I'm trying to reach for.

Neal Butler

Yes.

David Yuschak – SMH Capital

It does go back to basic thesis, there is a pretty good demand for the product longer term even in an inflationary environment like we've experienced in the last six months.

Neal Butler

We tested it pretty hard last year.

Operator

Your next question comes from Larry Brooks – Maloney Securities.

Larry Brooks – Maloney Securities

In this current market that we're in, this general market are you seeing more opportunities for acquisitions? What's the pricing look like in reference to that?

Neal Butler

I believe that this environment will generate more opportunities in general in the M&A market. We have not typically competed with private equity. I don't anticipate it's going to change our competitive landscape. We target, and we've been talking about this for eight years or more, we target purchasing property, plant and equipment, the long lived assets of a business for an EBITDA multiple of four times or less.

We're not typically buying companies so there's a lot that's not coming along with that acquisition. But because we're just buying those long lived assets and have to build the infrastructure like we did for the Air Products acquisition, there was a lot we had to build in order to incorporate that business into our operations.

Because of that we don't typically come into competition with private equity and other such purchasers. I don't anticipate it's going to have much of an impact on the prices we would pay. I do expect that there might some of the companies that might have been thinking about selling a particular business or set of assets given the current market conditions might push them over the edge on that and get them to sell.

Larry Brooks – Maloney Securities

When you do make an acquisition, is through your revolver or something else?

John Sobchak

We've always funded through premier bank debt and cash on hand. Our plans, right now we have I think a very good bank facility in place. Our plans are through the next three quarters of this fiscal year to pay down the $6 million remaining on our revolver and that would give us a $35 million facility there available.

And also we'll be building significant cash position over the next several months towards the end of the fiscal year, so again, that revolver and cash should be sufficient to fund any of the acquisitions we have in our cross hairs at the time.

Larry Brooks – Maloney Securities

And you're suggesting that could happen or you're looking for something to happen in 12 months, 18 months? What kind of time frame and along with that what type of dollar amount are you looking at as far as what type of revenue amount would you be looking at in the range?

John Sobchak

We're looking at a total investment capital, and that would include the working capital that we would have to invest in the business, we're looking at total invested capital of $40 million or less.

Neal Butler

As far as the time frame, our intention is to close an acquisition in fiscal 2010. Obviously means that's going to be somewhere probably in the 12 to 18 month time frame.

Larry Brooks – Maloney Securities

That would represent how much in revenues of an acquisition? $50 million?

Neal Butler

It really depends, and I know that's not a definitive answer, but I think it depends on which one of the businesses we were to make an acquisition in because some of them obviously operate smaller margins that the others so it really depends on which sector we purchase in. But certainly we have always made acquisitions that have been anywhere from 50% to one time sale.

Operator

There are no further questions. I will now turn the conference back to management.

Neal Butler

We certainly want to thank all of you for your participation today and for your continued interest in KMG. We are indeed very enthusiastic about KMG's prospects for fiscal 2009 and continued growth over the long term.

With that, John and I wish all of you a very happy holiday season. Very merry Christmas and best of New Year.

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Source: KMG Chemicals Inc. F1Q09 (Qtr End 10/31/08) Earnings Call Transcript
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