KMG Chemicals Management Discusses Q2 2013 Results - Earnings Call Transcript
March 8, 2013 12:40 PM ET
KMG Chemicals (KMG)
Q2 2013 Earnings Call
March 08, 2013 10:00 am ET
Eric Glover - Investor Relations Manager
J. Neal Butler - Chief Executive Officer, President, Director and Member of Risk Oversight Committee
John V. Sobchak - Chief Financial Officer and Vice President
Daniel D. Rizzo - Sidoti & Company, LLC
Good day, ladies and gentlemen, and welcome to the second quarter 2013 KMG Chemicals Earnings Conference Call. My name is Lisa, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Eric Glover, Investor Relations Manager. Please proceed, sir.
Thank you, Lisa. Good morning, everyone and welcome to the KMG Chemical Fiscal 2013 Second Quarter Financial Results Conference Call. I'm joined today by Neal Butler, our President and CEO and John Sobchak, our CFO. In a moment, we'll hear remarks from them, followed by Q&A.
Before we begin, I'd like to remind everyone that the information on 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 significant risks and uncertainties, including statements as to the future performance of the company.
I will now turn the call over to Neal Butler, President and CEO. Please go ahead, Neal.
J. Neal Butler
Thank you, Eric. Good morning, and again, welcome to KMG's Fiscal 2013 Second Quarter Conference Call. John Sobchak and I will take you through the financials and provide an overview of each of our businesses. We will then discuss our expectations for the fiscal third quarter of 2013 and our outlook for the fiscal 2013 year. After our comments, we'll be happy to answer your questions. Earnings release was issued this morning and we plan to file our 10-Q on Tuesday.
The second quarter operating environment was unusually challenging, characterized by year-end slowdown in semiconductor production and reduced customer demand within our Wood Treating Chemicals segment. Generally speaking, it's unusual for us to experience sales weaknesses in both of our Electronic Chemicals and Wood Treating Chemicals business within the same quarter, but that's what occurred in the fiscal second period.
Although we had anticipated and expected a short-term decline in global semiconductor manufacturing, the degree of slowdown in production and associated deleveraging of inventories was somewhat greater than what we had forecasted and communicated earlier. This was true in most geometries, including high-technology fabs. Rail tie treating and pole treating also slowed during the quarter and sales were adversely impacted by unplanned outages at customer plant sites, but demand is seeing significant signs of recovery.
Given these conditions, coupled with the expected demand downturn, we responded quickly and effectively to challenging macroeconomic operating environment, reducing manufacturing expenses where possible and continuing to work within our supply chain partners to achieve greater efficiencies. And as a result, we better aligned our cost structure to the temporary reduction revenues, minimizing the impact to earnings and cash flow. For example, within our Electronic Chemicals business, we have made several continual improvement initiatives, including increased utilization of rail freight to reduce supply chain cost for finished goods. We also refined our storage and distribution strategy by relocating certain finished goods inventory, more advantageous geographic locations, minimizing the transport and consignment stock and transporting more inventory by rail to reduce shipping costs.
Within our Wood Treating Chemicals business, we then took several initiatives that will help maintain our margins and position us to take full advantage of expected buying demand increases in the near future. More specifically, similar structured supply contracts and recent targeted pricing actions should begin to benefit our Wood Treating Chemicals business starting in the current third fiscal quarter.
In summary, these actions and others like them undertaken in the second quarter were instrumental in enabling KMG to bolster gross margins and reduce operating costs during a particularly challenging period. We believe these optimization efforts will have a lasting positive impact on our business, especially as improving end market demand drives higher manufacturing and shipment volumes.
With our strong balance sheet and robust acquisition pipeline, we remain well positioned to pursue additional acquisitions or other strategic opportunities to enhance our market-leading positions. We are pursuing potential acquisitions in our current businesses, as well as in the establishment of a new platform. By design, our acquisition processes is deliberate and disciplined, ensuring that any acquisition we make will satisfy our regular, strategic and financial criteria. As we noted last quarter, we have a strong pipeline of opportunities. We are actively pursuing these and are optimistic about our near-term prospects.
I'll now turn the call over to John who will discuss our financial results in greater detail.
John V. Sobchak
Well, thank you, Neal, and good morning, everyone. Before I begin I'd like to remind everyone that due to the sale of the Animal Health business in March of 2012, this former segment is now classified as a discontinued operation. Prior information has been reclassified to conform to the current period presentation.
Second quarter sales declined 15% year-over-year to $57 million from $67 million in the same period a year ago. By business segment, Electronic Chemicals sales declined by 7.8% year-over-year to $35.6 million and Wood Treating Chemicals sales declined by 25.4% to $21.2 million. These quarter-over-quarter declines were primarily volume related, as pricing generally was maintained and average gross margins increased.
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