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Executives

Neal Butler - President and CEO

John Sobchak - CFO

Analysts

Arnie Ursaner - CJS Securities

Eric Prouty - Canaccord

Jay Harris - Goldsmith & Harris

Mike Mork - Mork Capital Management

KMG Chemicals Inc. (KMGB) F4Q10 (Qtr End 07/31/2010) Earnings Call October 12, 2010 10:00 AM ET

Operator

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.

We are aiming to get these plants running at over 80% of capacity. Apparently they are running at about half capacity. Once the consolidation is complete, we expect the synergies realized from combining the operations, a sharp reduce in tolling fees paid to third parties will add 200 basis points to operating margins for our U.S. Electronic Chemicals segment. With this acquisition we have in excess of a 50% share of the U.S. market for acids and solvents used to manufacture semiconductors.

We also now own the largest high purity sulfuric acid bottle delivery fleet. And have the largest high-purity nitric acid purification capability in the U.S. along with a basic position in high-purity hydrofluoric acid. Over the last year, we have begun supplying high-purity processed chemicals to European photovoltaic manufacturers. We are also working to expand our position in the semiconductor market by working with manufacturers to meet the requirements for product with increasingly tighter purity levels.

Our customers are developing new processes and technology to reduce the size of the semiconductors, which as a result reduces energy consumption. We believe we can capture our greatest share in this expanding market. Following increasing sales and demand through fiscal 2010, we recently have experienced a leveling off in demand for our electronic chemicals consistent with trends in the overall semiconductor market.

Longer term, we see significant organic growth opportunities stemming from investment being made by our customers in our North American fabrication facilities. We anticipate that these opportunities will evolve into sales in fiscal 2012.

Now moving to our wood treating chemicals business. Sales were $22 million in the fourth quarter compared to last year's $23.8 million. The quarter-over-quarter decline was due to a decrease in demand by our utility and railroad customers as they reduced their maintenance expenditures. For the past several years, rail tie replacement rates in the U.S. have been at the high end of their historical range.

But starting in fiscal 2010, demand began to return to more normal levels. Also in fiscal 2010, we experienced a lessening of utility pole treating due to overall economic conditions. We believe that demand has leveled off and do not expect to see further softening from our current levels in fiscal 2011. Fourth quarter operating income for wood treating was $5.4 million versus $9.8 million in the fourth quarter of 2009.

In addition to lower sales volume, high raw material and supply cost have caused our penta and creosote margins to recede somewhat from the atypically high levels we experienced in the second half of fiscal 2009 and the first half of 2010. For the fiscal year, wood treating contributed $25.4 million to operating income up from $24.7 million in fiscal 2009.

With a high threshold set in the first quarter of fiscal 2010, we expect first quarter 2011 comparisons in sales and operating profits to be down. But look for fiscal 2011 quarterly operating profits for wood treating chemicals to approximate our average over the last three quarters of fiscal 2010.

Regarding our animal health business. Fourth quarter net sales are up slightly to $3.9 million from $3.8 million in last year's fourth quarter. And for the year as a whole, sales were $10.6 million, off slightly compared to $10.9 million in fiscal 2009. Animal health's contribution to operating income declined to $19,000 in fiscal 2010 from $200,000 in the previous year.

Fiscal years 2008 and 2009 and the first half of 2010 suffered from severe macro-economic factors in the animal health industry which caused prices to escalate for necessities of livestock farming such as feed, fuel and fertilizer along with depressed beef and poultry prices. This in turn caused the decline in discretionary purchases by cattle growers.

Overall the cattle and poultry market seem to have improved slightly starting in the third quarter of fiscal 2010. With our product portfolio expansion at the end of fiscal 2010, which included the distribution and marketing alliances signed with R&D Life Sciences, AgriLabs and Solvay, we are looking for an upturn in sales, coupled with improved operating profits due to a leaner organization in this segment in fiscal 2011.

We are seeing early benefits from these arrangements and believe they will have a positive effect on future sales and profit which are expected to be comparatively better in fiscal 2011 than in fiscal 2010. Going forward, we're looking to further expand our product offering to leverage our distribution network in North and South America. We also continue to pursue additional acquisition opportunities to meet our internal criterion of gaining a leadership position in this market segment.

I'll now turn the call over to John to provide additional information on the quarter and fiscal year, as well as discus certain balance sheet and cash flow highlights.

John Sobchak

Thanks, Neal, and good morning, everyone. As we had previously recorded, KMG had already set a new record for annual earnings after the first nine months of fiscal 2010. For the year as a whole, we achieved a 50% improvement in our bottomline on a 9% increase in net sales. For the 2010 fiscal year revenues increased by $17.9 million to $208.6 million versus the year earlier period.

Electronic Chemicals revenues increased by $26.2 million primarily due to the rebound in the semiconductor industry compared to the lows of 2009, and the addition of a new electronic chemical acquisition. Wood Treatment sales declined by 8% or $8 million and Animal Health sales declined by $300,000 as compared to the 2009 fiscal year.

Gross profit margins were essentially flat in fiscal year 2010 at 33.4% of sales, as compared to 33.6% of sales in fiscal year 2009 and gross profit margins were 30% in the 2010 fourth quarter compared to 40% in the same period last year. Gross profit margins in the fourth quarter of fiscal 2009 were unusually robust due to low raw material cost in the Wood Treating business. Also, our most recent Electronic Chemicals acquisition will be dilutive to our overall margins in that business while we are still integrating those operations.

Gross profit increased by 8.6% to $69.7 million in fiscal 2010 compared to $64.2 million in fiscal 2009, primarily on increased Electronic Chemicals revenues. Approximately $1.8 million of 2010 gross profits was related to the inclusion of the new Electronic Chemicals acquisition.

To improve visibility to investors as of the 2010 fourth quarter, we began presenting distribution expenses as a line item separate from SG&A expenses in our consolidated statements of income. Also, we have begun reporting North American and international Electronic Chemicals as one reporting unit. With our latest acquisition, we now have production from all three of our plants being shipped globally. Prior year information has been reclassified to conform to this presentation.

SG&A was $6.6 million in the fourth quarter, or 10.6% of net sales compared to $5.5 million or 11.3% of last year's fourth quarter sales. For the 2010 fiscal year, SG&A was $22.8 million or 10.9% of net sales versus $22.7 million or 11.9% of net sales in fiscal 2009.

Distribution expenses were $5.7 million, 9.2% of net sales in the 2010 fourth quarter compared to $4.7 million or 9.7% of net sales in the 2009 fourth quarter. For the fiscal year, distribution expenses were $19.9 million in fiscal 2010 versus $22.7 million in 2009. That represents 9.5% of net sales in 2010 versus 10.8% of sales in 2009.

Now, as we've disclosed in our earlier releases, during fiscal 2010 we were particularly effective at driving greater efficiencies into our Electronic Chemicals supply chain operations, significantly reducing those costs as a percentage of segment revenue.

The fiscal 2010 results also include approximately $1.1 million of transaction and integration costs associated with our most recent acquisition, which closed two months into our third quarter. Those costs are primarily included in our SG&A expense.

During the four months in fiscal 2010 that we owned the recently acquired business, the transaction contributed approximately $13.7 million of net sales and was dilutive by approximately $2.8 per share including integration cost. And that's consistent with earlier expectations.

For the fiscal 2010 year, operating margins improved to 13% from 11% in fiscal 2009. For the fourth quarter, operating margins declined from 19% in 2009 to 10% in 2010. The decrease was driven by the comparative reduction in gross profit margins from the exceptional levels of the 2009 fourth quarter, discussed earlier.

Interest expense for the fiscal year declined to $2.3 million from $3 million, and for the fourth quarter period, interest expense declined slightly in 2010 to $618,000 from $636,000.

Our income tax rate was 37.5% for the year versus 31.5% in fiscal 2009. The effective tax rate in 2009 varied from the statutory rate, primarily due to the recognition of an evaluation allowance in connection with our deferred tax asset pertaining to our operations in Italy. The reduction in the 2010 effective tax rate was driven by a reduction in that previously recorded allowance, following profitable results from that country.

For the fourth quarter period, net income was $3.4 million or $0.30 per diluted share versus $4.9 million or $0.44 per diluted share in the fourth quarter of 2009. Net income for the year increased to $15.3 million or $1.34 per diluted share from $10.2 million or $0.91 per diluted share in fiscal '09.

Moving to our balance sheet, net working capital at the closure of the fiscal year was $43.4 million, up from $29.7 million one year earlier. Included in that was $4.7 million of cash. The increase in working capital over the quarter was primarily due to the additional inventory and receivables associated with the business acquired during the third quarter.

Total debt on July 31 was $59.3 million, which included $20 million borrowed on our revolving facility to partially fund our acquisition. At year end, we had $19.3 million outstanding on our term loan. During the fourth quarter, we paid an interest rate equal to 1.75% of the LIBOR on our term loan and revolver borrowings.

Cash flow from operations was $14.9 million for fiscal 2010. Worth noting that this figure was reduced by the approximately $13 million used to fund the working capital requirements of the newly acquired Electronic Chemicals business.

We anticipate repaying a significant portion of our revolver borrowings during fiscal 2011 with cash flow from operation.

Shareholder's equity at July 31 was $84.8 million, or $7.42 per diluted share. As of July 31, we have 11.2 million basic shares and 11.4 million diluted shares outstanding.

Neal Butler

Thanks John. Now for some final follow-ups on our expectations for the new fiscal year. Our strategy of re-segmenting and consolidating mature Specialty Chemicals markets continues to work, and work well. The integration of the acquired business onto our platform is going smoothly and on schedule, and we are enjoying increased market share and will soon begin to realize the synergies associated with combining the two businesses.

For 2011, we expect the acquisition led over $30 million in sales with comparable quarter growth for the first three quarters by virtue of having it for the full 12 months of the year. As noted earlier, we expect our latest acquisition to be significantly and progressively accretive to earnings in fiscal 2011, and more notably in fiscal 2012.

We also look forward to gains in fiscal 2011 in our smallest segment, Animal Health. We expect fiscal 2011 to be another record year overall for KMG. We've begun our search for the next market platform to integrate into KMG's proven business model of acquiring, optimizing and growing Specialty Chemicals businesses.

For the 2010 and 2014 timeframe, we look forward to keeping you apprised of our progress. And lastly, before answering your questions I would like to point out that we will be presenting at the New York Emerging Growth Institutional Investor Forum on November 15 and the Ingalls & Snyder Specialty Chemicals Seminar on November 16. Both conferences will be in New York City. We hope to see some of you there.

We appreciate your participation today, and now open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Arnie Ursaner with CJS Securities.

Arnie Ursaner - CJS Securities

My first question is, in your prepared written remarks, you indicated that the wood treating chemicals should approximate the average over the last three quarters of fiscal '10, but I know you don't release Q4 until you put out your K.

So we're kind of missing a piece of the puzzle. Can you give us the Q4 margin in Wood Treating so that we can finish that up?

John Sobchak

Actually in Wood Treating, we do have the margins disclosed for the business overall. In the fourth quarter, Wood Treating contributed $5.4 million to operating profits, and revenues in Wood Treating were $22 million in that same quarter. We'll have a breakdown by the segments in the K.

Arnie Ursaner - CJS Securities

There was about a 24.5 margin. So you were 35, 23.3, and 24.5 which is pretty close to a 25% view for the next few quarters. Is that about the right way to think about it?

John Sobchak

That is correct.

Arnie Ursaner - CJS Securities

And in your prepared remarks, the other thing I wouldn't mind having you make sure I understand what you're saying, what is modest growth to you for the upcoming year? What would you define as modest?

John Sobchak

Modest growth has to be somewhere between a single-digit growth to mid-teens.

Arnie Ursaner - CJS Securities

So modest could be bracketing low double digits?

John Sobchak

Yes. I mean it's modest relative to what we have been doing historically.

Arnie Ursaner - CJS Securities

And the final question I have is, one of the things in terms of the transition to the Hollister facility is, your customers have to re-qualify products. Can you update us on the status of that and if that is on the plan that you had envisioned previously?

Neal Butler

It is actually going according to schedule. We are going through the re-qualification process with certainly our largest customers. And right now we see no issues arising. It is going according to plan. It is operating within budget and it is operating within the timeframe that we had set out. So it's going very positively.

Operator

Your next question comes from the line of Eric Prouty with Canaccord.

Eric Prouty - Canaccord

Question on the Electronic Chemicals side. Maybe you guys could get into a little bit more detail on how you're seeing from a P&L standpoint to the integration ploughing out. I mean, at what point during the fiscal year '11 should we kind of switch over from dilutive kind of integration expense all of a sudden to seeing the accretion from the integration being completed?

Where, from a calendar standpoint is that going to start kicking in or should we see that transition?

John Sobchak

Let's start to see accretion from the acquisition right now in the first quarter. As reported earlier, we had thought that some of the integration costs we're going to be paying to third party consultants to help us with the, primarily ERP integration was going to run about $250,000 a month. We actually came in a little bit below that. A lot of those costs have gone away.

What we are really looking at now is a little bit of project management expenses. We continue with the integration of the manufacturing operations, but we also don't have the full efficiency that we are currently producing product from essentially four plants (though).

So as we consolidate those operations primarily into the two plants we own and Hollister and Pueblo, we will continue to improve on the margins in that business. But for now, if you looked at those integration costs that hit in the fourth quarter and you took them out of the equation, you would see that we would have been accretive to earnings even in the fourth quarter.

Eric Prouty - Canaccord

And then the benefit from the full consolidation, I know the majority of that is going to hit in 2012, but should we see some of that in the back-half of 2011, i.e. if I was looking at how your guidance will flow through the year, we should look for kind of flattish quarters in the first half of the year but then more of a step-up in the back-half of the year as the integration occurs and you get the benefit from that.

John Sobchak

When we first started on this project, we were anticipating that most of that benefit of the efficiency gains would occur in the second and third fiscal quarter of our 2011. But due to accommodating customers with their re-qualification schedules, because some of them are being asked to re-qualify a very large number of products, we shifted that back a quarter.

So now we anticipate most of those efficiencies growing into the business in the third and fourth quarter of our fiscal 2011. Although we are going to see some incremental benefits even now in the first quarter, we've already started moving products over.

Eric Prouty - Canaccord

So looking at the model, I mean you would anticipate the April and July quarters of next year to see some pretty significant year-over-year net incomes/earnings increases.

John Sobchak

As we've disclosed, it's the second half of the fiscal year that's going to really be driving the year-over-year improvement in earnings. And that's despite the reduction we're anticipating in the first quarter, due to the relative reduction in operating profits in the Wood Treating sector.

Eric Prouty - Canaccord

And then just final question. Baked into your own anticipation, is it kind of the current semiconductor environments are slow and steady growth? Or what are you baking into your own 2011 expectations from an industry standpoint in your guidance?

Neal Butler

We basically are flat-lining going through this in terms of demand through the end of our fiscal year.

Eric Prouty - Canaccord

So an increase in economic activity or industry activity in semis could lead to a more bullish view on that sector in particular?

Neal Butler

Absolutely.

Operator

Your next question comes from the line of Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

The first question's on Electronic Chemicals. How much of the revenues in the fourth quarter of $36.5 million were acquired? You indicate what the four months acquisition of revenues were; what was the quarter acquisition of revenues?

John Sobchak

Quarter acquisitions were $11.5 million.

Jay Harris - Goldsmith & Harris

So that means that the business that you're happy for the General Chemicals acquisition has just gotten back to $100 million rate?

John Sobchak

If you remember, we had (set) over the ERP system for the acquired business on July 31. So associated with that is a delay in some of the shipments as we are moving the ERP system over.

So some of the sales that we normally would have seen in July were actually realized in August.

Jay Harris - Goldsmith & Harris

When you did the General Chemicals acquisition, you indicated that the revenues for calendar year 2009 were $43 million. You showed a fairly steep consecutive quarterly ramp in your own Electronic Chemicals business from let's say March of 2009 or April of 2009 going forward.

It doesn't appear the way you are talking about the General Chemicals business that they had a similar ramp. Can you clarify that for me?

John Sobchak

It was a similar ramp, but slightly less than our legacy business. But, yes, we did see a ramp up of the classic General Chemicals business. If you were to back out what their revenues were in the other months of the year, we provided pro forma revenue and operating income impact so you can see what their sales had been.

But I would say in general, that business probably did not see quite the same ramp up that we have seen.

Jay Harris - Goldsmith & Harris

And what do you attribute that to?

John Sobchak

It's probably a number of factors, Jay. Probably one of the primary factors in the difference between our legacy business and the General Chemicals business in reference to the ramp up is the segment that we were primarily deploying out of our legacy business.

A great majority of our business is serving the very high end purity levels. Some of the General Chemicals business was serving the parts a billion level. So we saw the demand on the higher end coming back and being a little bit greater than the other.

Jay Harris - Goldsmith & Harris

If I look at the ramp in your business, I would have thought that the General Chemicals business would have been a $50 million to $55 million business for this calendar year kind of same. And the $11.5 million in your July quarter says that (technical difficulty)

John Sobchak

They didn't see he same decline that we had seen and the downturn also. I mean nominally, we were looking at is about $50 million a year business. We wouldn't expect to seem much more than $50 million a year from that business.

Jay Harris - Goldsmith & Harris

Alright, and will that business erode somewhat as the feature size domestically declines?

Neal Butler

Well, no, I don't think you'd say that business is going to erode because that business will be rolled into ours. That will be at our manufacturing facility. So we will be actually supplying marketplace with legacy type of purity levels, not just the general chemical kind of levels prior to this.

Jay Harris - Goldsmith & Harris

Thank you. I wonder if I could roll over to some balance sheet questions. Well, I'm not going to start quite there. You indicated that absent the General Chemical acquisition, your operating cash flow would have been about $28 million?

John Sobchak

Yes, that's right.

Jay Harris - Goldsmith & Harris

What was you capital spending in the fiscal year?

John Sobchak

We had disclosed that, (Jerry), that'd be in the K, but it wasn't anything exceptional. I think we had disclosed that. We pretty much completed the Hollister capital expenditure to expand that plant to accommodate the increased volumes. And that expenditure was $2 million. Besides from that $2 million there weren't any other significant extraordinary CapEx items.

Jay Harris - Goldsmith & Harris

And you capital spending for the year we're in now. How much more than the $4 million will that be?

John Sobchak

Well, our normal maintenance CapEx is about $3.5 million now.

Jay Harris - Goldsmith & Harris

So, it'd be about $7.5 million for 2011.

John Sobchak

Absent any CapEx that we might spend on distribution infrastructure like tank trucks in order to capture new business.

Jay Harris - Goldsmith & Harris

So those trucks run what? Cost.

John Sobchak

Trailers run about $200,000 each. Those are the trailers.

Jay Harris - Goldsmith & Harris

So should I use a range of $7.5 million to $9 million?

John Sobchak

You'll be able to see more detail on it.

Jay Harris - Goldsmith & Harris

What I'm driving at is if you're earnings are going to be up, and you're going to spend, let's say $8 million on capital, they your free cash flow will be $22 million or north of $22 million. Is that a reasonable conclusion?

John Sobchak

The problem I had, (Jerry), is that I've noticed investors all define free cash flow differently.

Jay Harris - Goldsmith & Harris

I'm defining it as operating cash flow less capital expenditures.

John Sobchak

That's right.

Operator

Your next question comes from the line of Mike Mork with Mork Capital Management.

Mike Mork – Mork Capital Management

My question is just kind of a clarification. You said that your net income would grow modestly 2011 versus 2010 and we've already had a description what you meant by modest, which was very interesting. But my question is on your statement, you say that on your reported figures, your net input was $15.3 million, pro forma is $16.3 million. So are you talking about the modest increase from the actual reported or from the pro forma included in the acquisition?

John Sobchak

No, off the actually reported.

Mike Mork – Mork Capital Management

So we're talking about the high single digit, possibly mid teen growth on the $15.3 million then?

John Sobchak

Yes. Let me mention something about the pro forma numbers. Those are calculated by using the historical contribution of that business to the sellers business on top of our numbers for the period that we didn't own the business. But in actuality, what is happening as we put the two businesses together, there is a period of time when we are actually having double headcount because we're hiring people existing plant to train them and get ready for the movement of the products to those plants. And so for a transitionary period, the cost of goods sold is actually higher than what the pro forma would indicate.

Of course after the integration of the businesses, we'd be looking at an improvement because we'd be able to capture the synergies from convincing floor plans that are servicing the business down to two.

Mike Mork – Mork Capital Management

And this is why this year modest growth only 10%, 12% should be fine. The 2012 number would be really starting to accelerate again?

Neal Butler

Yes, the 2012 which we will likely harvest full year, the synergies from the acquisition and the subsequent integration.

Operator

We have a follow-up question from the line of Arnie Ursaner with CJS Securities.

Arnie Ursaner - CJS Securities

I think you basically gave us a pretty good feel for your CapEx in the upcoming year, can you give us a best guess for D&A and tax rate please?

John Sobchak

Tax rate, we still have some kind of lower balance that we anticipate will continue to be burned off in fiscal 2011 which should be in our tax rate, perhaps in surprises from Washington which will would remain in that 37.5% rate we realized in 2010.

Arnie Ursaner - CJS Securities

In D&A in the upcoming year?

John Sobchak

For D&A in the upcoming year, you'll be able to look at our 2010 fourth quarter and basically annualize that.

Arnie Ursaner - CJS Securities

And you won't give us that till K comes out on Thursday?

John Sobchak

Yes.

Arnie Ursaner - CJS Securities

And following up on the previous question, I just want to make sure I am trying to understand this. It looks like your run rate revenue, if I am understanding you right, is roughly $45 million on the acquired business, that's minimal growth from where it was in '09. And still materially below where it was in '08. Given the recovery we're seeing in semiconductor, why aren't we seeing a little more growth in this business?

Neal Butler

The growth that we are seeing in the acquired is the general chemicals business. Again, this tends to be servicing a different sector of the market than we're servicing predominantly with our products out of Pueblo and out of Dallas solvents facility. And if I go back to the higher IP, we think for our products we've seen a greater demand and higher IP customers than we have in a more memory kind of sectors in that. We're just seeing the demand ramp up a little bit more rapidly and more significantly in that sector.

Arnie Ursaner - CJS Securities

And shifting gears back to wood, can you just spend an extra minute on the cost or raw material issues you have in treated wood? And what your outlook is for that for the next couple of quarters?

Neal Butler

We're anticipating right now pretty much a flat line in terms of cost relative to first quarter, second quarter relative to the fourth quarter of 2010. We have our basic raw materials for creosote because we purchased the finished product. The penta business is driven predominantly by chlorine and vinyl pricing. Those are the two biggest raw materials we have in that product. And again, with those we're anticipating fairly flat line costs at least in the first couple of quarters.

Arnie Ursaner - CJS Securities

Remind me again on the visibility you get from your customers, typically if they're going to need these products treated. I assume they are going to the whole manufacture themselves trying to fix this. What visibility do you have or what are you hearing from your customers?

(Technical Difficulty)

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