KMG Chemicals Inc F2Q08 (Qtr End 01/31/08) Earnings Call Transcript

| About: KMG Chemicals, (KMG)
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KMG Chemicals Inc (KMGB) F2Q08 (Qtr End 01/31/08) Earnings Call March 17, 2008 10:00 AM ET


Neal Butler - President and CEO

John Sobchak- CFO


Ryan Connors - Boenning & Scattergood

Daniel Rizzo - Sidoti & Co

Arthur Friedman - Friedman Asset Management


Good morning and welcome to the KMGB second quarter 2008 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 risk and uncertainty, including statements as to the future performance of the company. Although the company believes that the expectations reflected in the forward-looking statement 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, a loss of primary customers, successful implementation of internal plans, product demand, the impact of competing product, 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 product, increased environmental compliance cost of products, and general, political and economic risk and uncertainty.

With that, I would now like to turn the call over to Neal Butler, President and CEO. Neal, please go ahead.

Neal Butler

Thank you. Good morning and welcome to KMG's second quarter 2008 conference call. We do appreciate your participation today and look forward to speaking with you. John Sobchak, our CFO, and I will take you through information on second quarter results and update on the first month of our ownership and integration efforts with the High-Purity Process Chemicals business and our outlook for the remainder of the year.

In our last conference call, we provided a forward view of fiscal 2008 with the acquisition of Air Products and High-Purity Process Chemicals business still pending. On December 31, 2007, KMG closed on the acquisition of this business, and we now have one month's operation with our new business, KMG Electronic Chemicals.

The HPPC business sells high purity with chemicals, which are used primarily to clean and etch silicon wafers in the production of semiconductors. This acquisition effectively doubled the annual revenue of KMG, and we are pleased with the result to-date. We expect the HPPC acquisition will contribute significantly to cash flow, especially after the end of this fiscal year when we anticipate the business will be fully integrated into our operations.

We incurred no goodwill with this acquisition. In fact, the appraised value well exceeded the purchase price. The acquisition includes state-of-the-art manufacturing and warehousing facilities in Pueblo, Colorado and Milan, Italy.

159 Air Products employees were aligned with the business, and all 159 accept the job offers with KMG. We now have a very experienced and motivated team in our electronic chemicals business, and our new team members have demonstrated that they are indeed enthused with the opportunity to be part of a smaller but growing company.

KMG now has an approximately 40% market share in the US, and roughly 15% in Europe, with sales also in the Middle East, and a small portion in the Far East. Approximately 80% of this business is presently conducted in the US.

As part of purchase agreement, Air Products entered into a tolling agreement with KMG to produce certain products supplied by Air Products facility in Dallas, Texas. KMG correspondingly will provide Air Products certain products under the tolling agreement out of our Milan facility, plus we will provide warehousing services for Air Products in Italy.

We've made significant progress in the integration of the HPPC business, both domestically and internationally. I have personally met with key accounts in the US and across Europe, dictating KMG's business strategy and commitment to the electronic chemicals business and correspondingly to our customer base.

To-date, all customers had accepted the change, and they now look to KMG to continue to provide current products and jointly work to develop and provide new products as the semiconductor business moves to increasingly more stringent purity criteria. As a matter of fact, in January, our electronic chemicals team successfully secured a significant new product qualification from a major global customer, and we began supplying to them in February.

In conjunction with the acquisition, we entered into a transitional services agreement with Air Products. Under this agreement, they will provide accounting services, supply chain services, warehousing and distribution services, procurement services and customer service support. They will also provide distribution on an interim basis in certain European countries.

The transitional services agreement is designed to ensure a seamless transition. We anticipate the business will be fully integrated into our operations, and we will terminate transitional services before the start of the new fiscal year on August 1.

As noted in the last conference call, we fully expect the High-Purity Process Chemicals acquisition will be accretive to earnings and cash flow in fiscal '08. But earnings will be notably affected this year with a significant cost associated with the integration. These are costs that should not extend beyond this fiscal year, and John will provide more detail on them.

We believe that the HPPC sector of the electronics chemicals provides notable opportunity for consolidation, and we are exploring those opportunities. Today, we will cover key components of our business, and then address any questions you may have.

I'll now turn the call over to John to take you through details on the financials.

John Sobchak

Thank you, Neal.

Revenues in the second quarter of fiscal 2008 increased 66% to $31.5 million. For the first half of the fiscal year, revenues increased 47% to $52.8 million. The largest contributor to that increase was the addition of the HPPC acquisition. Not including the electronic chemicals segment, revenues in our heritage business increased 20% for the quarter and 23% for the year to-date period.

The wood treating segment accounted for 66% of the growth in second quarter revenues from our heritage business due to pricing, while animal health accounted for the rest of the increase on greater sales volumes.

Gross profits increased by 50% for the quarter to $10.1 million. The increase in gross profit dollars was primarily due to the new electronic chemicals business, although all segments contributed to the increased gross profits. Gross profit margin was 32.2% for the quarter. That's down from 35.5% last year.

We've been successful in achieving price increases to our Creosote customers, but those increases have not been sufficient to fully cover the increased cost we've seen for the purchase of Creosote, resulting in lower gross margins for this segment. The decline was also due to sales mix, with our largest and lowest margin product, Creosote, growing at a faster pace due to pricing than Penta. Penta is a higher margin product.

And while margins are strong in the animal health segment, this is the off-season for the animal health segment. So the segment's impact was nominal.

The HPPC business was historically operated with gross profit margins in the range of 30% to 35%. When we purchased the business the property, plant, and equipment had a historical cost basis on Air Products books that was over 50% higher than our allocated purchase price.

Our lower cost basis were translate into an estimated $2.6 million reduction in depreciation and amortization expense, which will favorably impact all cost of goods sold versus the historical results for that business. And we filed an 8-K/A today with the audited historical result for that acquired business.

Moving on to our SG&A. SG&A was $7.1 million in the second quarter, that's a 75% increase over the prior year. As a percentage of revenue, SG&A was 22.7% versus 21.4% in the second quarter of 2008. We include distribution expenses as an SG&A item and distribution expenses in the wood treating segment increased approximately $280,000 in the quarter primarily tied to increased cost of rail car maintenance.

Sales and marketing expenses in our animal health segment increased $430,000. And I'll note that that this spending is in advance of the main animal health selling season, which is going to occur in the second half of the year. Accounting and legal expenses increased about $350,000 and we also incurred SG&A expenses of approximately $2.5 million in the quarter associated with the one month that we operate the electronic chemicals business for the quarter.

Beside the normally recurring SG&A, we would expect for this business, we've also incurred an additional $187, 000 of fees pay to outside accounting and IT consultant associated with the integration of the HPPC business during the second quarter.

Also, as Neal mentioned, the transitional services that we purchase from Air Products is based on their overhead cost structure as reflected in our 8-K filing. We estimate that our overhead cost structure would reduce that expense by over $175, 000 per month.

We anticipate that the SG&A spend rate for the electronic chemicals business will incrementally improve as we gather more experience in the coming month and achieve greater efficiencies, but our great savings will occur, however, in fiscal 2009 after we have fully integrated the business and have moved of transitional services.

Operating income increased 12% to $3 million in the second quarter over the previous year. For the six-month period, operate income increased 2% to $5.6 million. The small increase in operating income occurred as the increase in SG&A expenses, mitigated the benefit of higher growth profits. We anticipate this situation to improve as we move into the second half of year in the main animal health selling season. As from that the animal health segment generates most of its contribution to the Company's operating income.

Most of the improvements in the contribution to operating income from the electronic chemicals segment will be realized again after the completion of the integration effort.

The word about taxes, our income tax rate was 38.7% in the second quarter as compared to 36.2% for the same quarter last year, primarily due to the addition of our electronic chemicals business. And please note in Italy our subsidiary KMG Italia S.r.l. is subject to a higher local tax rate than in the United States.

Discontinued operations were reported last quarter that was associated with our MSMA business. Accordingly, the financial results of that segment have been removed from our reporting of the results of continued operations for the current and prior years. MSMA is a agricultural product that's used mainly on cotton in the United States, and we manufacture it at our Matamoras plant. It is our smallest segment with sales of $3.6 million during fiscal 2007.

Moving onto earnings, net income for the second quarter was $1.6 million, a 7.5% increase over last year, and equating to $0.14 per diluted share as compared to $0.13 per diluted share earned last year. Income from continuing operations was also $1.6 million in the second quarter, which is a 4% decrease from the second quarter of 2007. The decrease resulted from increased interest expense associated with the acquisition and increased income taxes associated with the higher tax rate.

For the six-month period, the Company earned $3.1 million, which is a 3% increase over 2007. Earnings per diluted share were $0.28 versus $0.27 last year. Income from continuing operations declined by 4% in the first half of the year versus last years $3.2 million. That was driven primarily by higher interest expense, again, due to the acquisition.

Moving on to our balance sheet. Net working capital remains strong at $36 million, and a current ratio of 2.3 to 1. The components of that is cash and cash equivalents, which were $3.7 million as of January 31, '08. Trade receivables were $31.9 million, that's up from $11.7 million last year. Inventories increased $12.3 million to $25.4 million in total. Payables increased $7.6 million to $15.8 million in total.

The biggest contributor to the increase in networking capital is the HPPC acquisition, accordingly this largely represents a new level of working capital funding, required for the company. However, this is also the time of the year, when our animal health business builds inventory and receivables as we begin to enter the main selling season for the segment. The cash cycle for the animal health business largely completes in June and July, as payments are received against receivables.

A word about our debt; total debt including the current portion of long-term debt was $69.5 million at quarter end, versus $14.1 million at the end of the last fiscal year. Debt at year-end consisted of a $6 million left on a seller note to Occidental Chemical. That seller note is fixed at 4% interest rate and we're paying $2 million per year towards principle along with accrued interest each June.

On December 31, we financed our acquisition of the HPPC business and refinanced our then existing bank debt with an amended and restated credit facility lent by Wachovia Bank. The new facility consists of a $35 million five-year term loan under a revolving credit facility. The interest rates floats and was initially set at 2.25% over LIBOR. The revolving credit facility is the $35 million as well, but we only borrowed $9 million to finance the acquisition.

Additionally on December 31st, we sold $20 million of non-amortizing fixed rate notes that have an interest rate of 7.43% and we sold those to Prudential Capital. The notes have a term of seven years.

We anticipate paying off the $9 million that we borrowed on the revolver by the end of the fiscal year, with a cash flow the company is expected to generate over the next four months.

I now want to summarize the purchase accounting for the acquisition. The total consideration paid for the acquisition was $70.8 million and that included $67.4 million in cash that was paid to the seller, also, $2.4 million of transaction related costs and $1 million of accrued retention bonuses we offered to US employees who joined us from Air Products. The assets were appraised by third parties and the aggregate fair-value was significantly greater than the purchase price resulting in no goodwill as Neal had stated.

The purchase price allocated to accounts receivable were valued at $11.8 million, inventory at $11.6 million. Property, plants and equipment was by far the greatest portion of the purchase price at $48.4 million. Intangible assets comprised $1.2 million and included a non-compete agreement, patents, trademarks and the manufacturing agreement for Air Products to continue to produce certain products for us out of their Dallas plant.

Now I am going to hand it back to Neal.

Neal Butler

Thank you. John. As a consequence of the High-Purity Process Chemicals acquisition, we added two operating companies KMG Electronic Chemicals and KMG Italia. These two companies managed the global High-Purity Process Chemicals business.

The electronic chemicals segments generated $8.6 million of revenue in January. This represents an annualized rate of sales of $103 million. As disclosed in our 8-KA filing, the business generated $91.2 million during Air Products last fiscal year and $24.8 million or $99 million annualized during the three months prior to our acquisition. We believe the business is on an upswing and we are encouraged by the recent success of the Electronic Chemicals team that has had in landing new businesses that I mentioned earlier.

As far as the wood treating business; During our first quarter conference call, we communicated that we expected demand for Penta and Creosote to remain relatively steady at 2007 levels. We continue this trend through the second quarter, and believe that sales volumes of Creosote and Penta will remain basically flat, with potentially a minor decrease in demand to balance of fiscal 2008.

We are seeing some softening in demand in utility poles as utilities slowed their maintenance programs. Both Creosote and Penta markets are demand driven, with volume of sales directly tied to maintenance decisions made by railroads and utilities.

Creosote revenues for the second quarter were up by 23.6% and its contribution to operating earnings decreased by 6% driven by increased raw material prices. Through the first half of the year, revenue and operating earnings increased by 33% and 5%. We have experienced notably higher raw material cost and we increased prices this January 1st to effectively cover the cost of the raw materials going forward.

Creosote distillate is product that can move alternative markets and is tied directly to price of oil. Thus increases in raw material pricing through not directly indexed to oil are very much influenced by the price. The Railway Tie Association forecast rail tie demand to be roughly 20 million ties, down from the record 22 million ties in 2007. However, it's worth noting that through six months our volume of sales is within 1% of last year.

During the second quarter, sales volumes were 108% of prior year, revenues were 6.8% greater than Q2 of 2007 and operating profit increased by 18.6%. Six-month performance shows a 4% volume increase, a 3% increase in sales revenue and a 2% increase in operating profit.

As with Creosote, a price increase was implemented in January to cover increases in raw material costs when demand remains relatively stable for the treatment of utility poles in the US and Canada. In January, however, we did see a small decrease in demand as utility slowed maintenance programs. As with Creosote, the price of oil can impact demand since Penta is blended by wood treaters with specific grade of refined oil. Volume demand through the remainder of this calendar year should range from 90% to 100% of 2007 levels.

Penta and Creosote are EPA red sheet products and both are undergoing re-registration. These registrations are our franchise to do business and they represent a significant financial barrier to entry. We expect Creosote and Penta re-registration should be finalized this year by EPA, and we are confident in the long range health of both products.

The demand for animal health products is, as John noted, very seasonal and traditionally lowest in the first two quarters of the fiscal year. The segment's operating margins followed the same seasonality due to the fixed cost structure of the business. Segment sales during this period of fiscal 2008 were up 52% over the same period last year. This is partially driven by greater pre-season inventory build up at the distributor level, which effectively brings forward some third quarter sales, and we anticipate third quarter 2008 sales to be slightly less than the third quarter of last year as inventory moves to end users.

We don't forecast segment revenues to end the year significantly ahead of 2007 as we see year-to-date, but we are confident fiscal 2008 revenue will be 10% to 20% greater than fiscal 2007. Looking forward, we are actively pursuing greater animal health sales in Latin America and the Western US. We recently obtained registrations in several Latin American markets, and we'll see marginal sales in those countries in fiscal 2008.

Demand for our new Avenger tag is expected to be strong, and we anticipate sales of our other product lines for 2008 to increase over 2007. Additionally, we have expanded our product line to include three new product offerings, and we'll be initiating field trials on at least one new product in the spring. These products will not generate revenues as significantly as did Avenger, but will be important contributors to our animal health portfolio.

In fiscal 2007, we achieved roughly $90 million in sales with earnings of $0.80 per share. With the inclusion of the HPPC business in January this year, we will achieve revenues in excess of $135 million. As stated earlier, the acquisition will be accretive to earnings despite significant integration and transitional cost, and will contribute to our goal of double-digit earnings growth in fiscal 2008. We will not, however, see the same significant percentage increase in growth that we experienced in 2007.

As most of you know, we do not provide guidance on earnings, but our stated goal is to annually deliver double-digit earnings growth. We do not anticipate seeing earnings growth as high as 30%, which is our four-year average. Electronic chemicals business will be a contributor to this year's earnings, but with a significant one-time integration and transitional cost referred to earlier. And the outlook for the wood treating segments for the balance of fiscal 2008, we do not perceive corporate earnings growth at that higher level.

The HPPC business will contribute more significantly in fiscal 2009 with a full year of sales and the major integration and transitional cost behind us. We currently are working on the integration of the HPPC business, as we stated. However, we continue to focus on our core growth strategy, which is acquiring and optimizing businesses that are accretive to cash flow and earnings. We remain committed to spent in material based to chemical product lines, serving niche markets, which are typically available from large companies that have outgrown the target business.

An important element of our growth strategy is the strengthening of management and leadership talent. We recently hired Ernie Kremling, a 20-year veteran from Dow Chemical, as our Vice President of Operations. He comes to us with extensive domestic and international experience. He will be the lead for our global manufacturing and supply chain functions. We additionally have targeted the key management positions that will be filled with carefully selected professionals who have a broad experience and proven track record.

A point we made in our recent conference calls, and one that we feel is worth reiterating is the three core competencies that are key to KMG's success. First is to maximizing our free cash flow from operations, which gives us the ability to pursue and fund acquisitions and maintain a strong balance sheet. The second is identifying and closing on acquisitions that meet our criteria and metrics. And a third is effective and efficient integration of new businesses, thus minimizing the timeline to maximize cash flow. We are convinced that when implemented correctly, this becomes a perpetual effort that builds upon itself and provides an effective conduit to strengthening our position in selected markets.

We are focusing on continuing to deliver double-digit growth in earnings on an annual basis. Our growth on average will come 80% through acquisitions and 20% organic. We manage the company for annual and long-term growth versus being driven by quarter-over-quarter improvement and firmly believe that it provides for more stable and intelligently managed business. We will continue to build and refine our acquisition pipeline and are optimistic about our growth opportunities beyond the HPPC acquisition.

Now before taking your questions, I'd like to point out that we will be presenting at the Sidoti & Company 12th Annual New York Emerging Growth Institutional Investment Forum on March 26th at 8:30 am. In addition, Melissa Dixon of the Equity Group will be scheduling investor meetings for us on March of 25th in New York. If you'd like to participate you can call her at 212-836-9613.

Now, I'd like to open up the call for questions now. Operator, I'd ask you to give us assistance with that please. Thank you.

Question-and-Answer Session


Thank you. (Operator Instructions)

Your first question comes from the line of Ryan Connors of Boenning & Scattergood.

Ryan Connors - Boenning & Scattergood

Good morning, guys.

Neal Butler

Good morning Ryan.

John Sobchak

Good morning, Sir.

Ryan Connors - Boenning & Scattergood

Yeah, certainly, very comprehensive remarks, didn't leave a lot of loose ends here, but a couple of follow-up questions. Number one, just one issue of Creosote being tough to source in an environment where energy prices are high, obviously, just in the last two weeks here, since the second quarter ended, the oil prices have taken another leg up. I just wondered if you can talk about, how that's impacting that market, that Creosote market in the present tense, as oppose to the second quarter?

And what we should expect in terms of margins for that product line, if energy prices would have sustained their most recent spike and maybe even go higher than that?

Neal Butler

We've seen an increase in that raw material rather notably the first six months of this fiscal year. And at this juncture, even with the price of all where it is today we're not anticipating any notable increases going forward, certainly through the end of this fiscal year. And actually I'm not for sure that I would almost say the same thing through the end of calendar year even though that maybe stressing out a bit too far.

But right now, I believe that with the agreements that we have in place that the prices that we have going forward will be close to where they are now, and, if there is an increase I just don't foresee it being significant.

Ryan Connors - Boenning & Scattergood

Okay. And then the other issue I'd like to get your thoughts was on just, obviously the macroeconomic situation is less than ideal right now. And if you could just talk a little bit about that how, how that impacts you guys, if at all, and really in particular the acquisition program, is that a negative or might we even view that as a positive, and then it might create some new opportunities and some new assets that might go on into the market?

John Sobchak

I think with regards to the acquisition program, the current economic situation is going to work in our advantage. I believe that the credit crunch helped perhaps to accelerate the progression of this last acquisition we did. We've always tried to maintain a very strong balance sheet and when we were negotiating with the seller at the time, we didn't have net debt on our books, which certainly helped our position.

Of course, now our debt structure gives considerably more debt. As I said, they pay down $9 million of that in the next four months. And considering that we look at acquisitions that are going to be accretive to our balance sheet, accretive to cash flow, the banks have taken a great deal of comfort from our approach.

And meanwhile, I don't think there is a lot of competition out there pursuing these types of asset. So I think on the acquisition side it's going to work in our favor. With regards to perhaps our core business, I'll let Neal address that.

Neal Butler

I think you know the core business will be pressured, at least our heritage business, predominantly looking at wood treating business. It will be impacted on a direct line basis simply by the decision that the railroads and utilities may make, in terms of their maintenance programs because again our relationship to demand is a direct line or a direct response to the demand or to the demand from the users as they ramp up their maintenance programs or ramp them down. As we are looking through the balance of this year, we anticipate that softening somewhat but we don’t see a precipitous decrease coming or anything.

Ryan Connors - Boenning & Scattergood

Okay. That’s very helpful. Thanks for all the details guys.


Your next question comes from the line of Daniel Rizzo of Sidoti & Co.

Daniel Rizzo - Sidoti & Co

Hi, guys. Could you just give a little color on the three new products you mentioned in the animal health segment? I know you motioned it briefly but just, I'm sorry, can you go over it again please?

Neal Butler

These are product line extensions where we are taking two dust products and an ear tag product that we are putting in the market place, actually have put into the market place and they are product line extensions of products that we have right now. They were just some voids in our portfolio where there were some opportunities on customer shelves. So that we juts didn’t have the offering, and we thought it was important to put on those on there to more fully build our portfolio.

The products that we are putting out there now will have a very positive impact on our business, but one of the points that we made, I guess is a bit of a qualifier. You are not going to see the significant uptick as you did with the introduction of the Avenger Ear Tag. We have one other product that I'd mentioned that we are putting in field trials right now; they'll be in field trials this spring, and we think that this is a product that has some notable opportunities, and we would probably have it ready for the marketplace. And it would take a 18 months from now probably.

Daniel Rizzo - Sidoti & Co

Okay. And you said that the creosote cost increase didn’t keep up, I am sorry, prices didn’t keep up to the cost increases, are you still raising prices for creosote to catch up?

Neal Butler

Yes, we raised the prices this January the 1st, in an effort to catch up with the raw material cost that we saw through the first six months. And it's fairly difficult because the same thing happened last year, there was a little bit of a catch up in some instances and that’s what this is. But we did raise the price January 1st and what you see thus far is just one months worth of the increased prices in our revenues.

Daniel Rizzo - Sidoti & Co

Okay. Alright, did you plan on price raising again, at this point?

Neal Butler

It is hard to tell. We will judge it against what our raw material costs do. But right now we put a price increase that keeps us competitive in the marketplace, and cover as much of the raw material increases that we can cover right now. Going forward, what the pricing is going to do, I can’t really know that, some of that is obviously going to be driven by our raw material cost. But outside of raw material cost going up again, we probably will not increase prices.

Daniel Rizzo - Sidoti & Co

Okay. And finally, in terms of the acquisitions, you said, acquisition were obviously still a good part of your strategy, are you looking to do something along the sizes of the HPPC acquisition, or possibly smaller? what is your target there?

John Sobchak

Through the balance of this fiscal year, we are concentrating fully on the integration of this business and I think the biggest bang for our buck is going to be how well, how quickly we integrate and then begin to optimize that operation.

Moving into 2009, Neal stated, we think there are further consolidating opportunities within electronic chemicals and our initial focus is going to be focused on electronic chemicals space and also the animal health space. We still think there is opportunity there.

Neal Butler

And we are actively pursuing those and one thing to keep mind is nine times out of ten, we look into acquisitions with any degree of seriousness from the day that we initiate that to the date we actually close on it, it's never less than a year anyway.

John Sobchak

With regards to electronic chemicals space and particularly the high purity wet process chemicals, Air Product was the biggest player. So, it wouldn't be something of that same size.

Daniel Rizzo - Sidoti & Co

Well, thank you guys.

John Sobchak



(Operator Instructions) Your next question comes from the line of [Arthur Friedman of Friedman Asset Management].

Arthur Friedman - Friedman Asset Management

Hi, good morning gentleman. Again I would like to also thank you for the level of detail on your report. I thought it was excellent. I have just few questions. The first one has to do with the acquisition of High Purity Process Chemicals, HPPC and I was wondering in January and February did they receive or win any new contracts?

John Sobchak

To answer to your question is yes. One of the things that the team that came with Electronic Chemicals business had been working on and were very successfully in January, in closing was a new qualification for a product from a major global customer of ours and we actually started supplying that material in February. And we will see that the volume that goes by customer will gradually ramp up over the course of this calendar year as we shift to their global sales.

Arthur Friedman - Friedman Asset Management

Okay. And do you plan on having a press releases when they win contracts as part of the integration process because I am not sure I remember seeing those?

John Sobchak

We didn't put out a press release with this particular new business that was won. It being staged in, so initial sales in this quarter won't be as much and I know they'll start to ramp up and it actually ramps up over the next year and a half. So if there was a material contract that would impact the results, we certainly would disclose that and put out in 8-K on that.

Arthur Friedman - Friedman Asset Management

Okay. And are there opportunities in China for the new acquisition?

Neal Butler

At this juncture, I would say probably not, one of the things that we will be looking at is business in the Far East, but our focus is going to be on US, the Europe and Middle East over the course of the next, probably 18 months or so. Is there opportunity in China and in the Far East and places like Taiwan? And the answer is there may well be, but we just haven't investigated that business to the depth, where we can sit say that we're going to pursue it. There are fabricating shelters being put in over there, a number of them are producing some of the hi-tech semiconductors that you see coming out the US and Europe, however, and it is the higher end demand, the higher purity process chemicals.

Arthur Friedman - Friedman Asset Management

Okay. One last question, very quickly. Thank you for those. Could you give us -- maybe it just mean not I am understanding this because you gave a little more color on the relationship with Koppers because on February 20th when they did their earnings calls, they mentioned that they had an increase sales of distribution poles and treatment chemicals. And so, I interpreted that to be a positive for you guys because of the relationship, but maybe I had misunderstand it.

Neal Butler

Well in Koppers and in Arch Chemicals as well, when Koppers announced as an increased in their business, in the utility segment, keep in mind what they are selling typically is not the chemical, what they are selling is the finished product. In other words they are selling the treated rail road ties and they are selling treated utility poles. So when they increased their market share, the market share increase is typically coming as the consequence of business they maybe taking away from some of the traders that we do business with.

Arthur Friedman - Friedman Asset Management

Okay, okay that helps me. Thank you very much.

Neal Butler



There are no further question. I would now like to turn the conference back to management.

Neal Butler

Thank you. We truly to appreciate everybody's participation today. Again, one of the things that we want to remind you that we are optimistic about KMGs short and long-term prospects. We are very solidly positioned in each of our market sectors and we thank all of you for participating. We thank you for the questions you asked today and we would encourage you to contact us if you have additional questions. With that we thank you.


Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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