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KMG Chemicals Likely To Beat Q1 EPS Estimates

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KMG Chemicals Inc. (KMG) is likely to beat earnings per share or EPS estimates, when it reports first quarter results on December 11, after the bell. Analysts are modeling earnings of $0.63 per share vs. $0.48 year-ago and revenues of $106.6 million, representing 39% growth from year-ago revenues of $76.5 million.

The company formulates and distributes specialty chemicals, flaunting a value-added portfolio that includes

*Electronic chemicals critical to Semiconductor manufacturing, but representing approximately just 1% of costs to manufacture a chip.

*Wood-treating chemicals that extend useful life of wood by decades in industrial applications, but representing less than 5% of the cost of a treated wooden utility pole.

*Products and services to enhance pipeline performance and safety, but representing a minimal portion of overall pipeline operating costs.

Wood-treating chemicals served as the original growth platform for KMG. Utilities rely on wood-treating chemicals to protect utility pole infrastructure and about 4 million wood utility poles are replaced annually in the US - driving up demand.

First quarter results of KMG are expected to benefit from the impact of Irma and Harvey on utility poles that are being replaced. KMG also sees a positive impact from early October fires in the West, as entire trees smashed into PG&E's power lines. The company says that PG&E deploys 100% Penta utility poles, because of Douglas fir used in these poles. KMG is the only North American producer of Penta, which protects wood poles from insect damage and decay, and provides a 50-plus year service life.

Fiscal 2017 was an outstanding year for KMG, in the company's own words, with adjusted EBITDA growing 33% to $60.2 million vs. last year, marking its third consecutive year of record adjusted EBITDA and third straight year of adjusted EBITDA growth exceeding 20%. Looking ahead to fiscal 2018, the company sees adjusted EBITDA of $110 million to $115 million, and sales of $435 million to $450 million vs. $333.4 million in 2017.

The specialty chemical producer has grown through targeted acquisitions, identifying opportunities in niche, growing segments of larger markets, and unique products with high-value applications and barriers to entry.

Key products sold by KMG to the semiconductor industry, include sulfuric acid, hydrofluoric acid, hydrogen peroxide, ammonium hydroxide, and isopropyl alcohol. A strategic entry into the $1.5 billion High-Purity Process Chemicals or HPPC market in 2008 with the acquisition of the HPPC business from Air Products and Chemicals, Inc. (APD) was a key catalyst in positioning KMG as the only global supplier of HPPC with leading market shares in the US and Europe. Through this acquisition from APD, KMG inherited an estimated 40% HPPC market share in the U.S. and 20% market share in Europe and doubled its annualized revenues.

High-Purity Process Chemicals, which represent 13% of the $12 billion global semi fab materials market, are used to clean, etch, and otherwise prepare the surface of semiconductor products. Electronic device proliferation and rising complexity of semiconductor device architectures boost HPPC volume usage and demand.

KMG's $495 million Flowchem Acquisition this year complemented its pipeline performance platform strategy. Flowchem makes Drag reducers additives or DRA used by pipeline operators to improve throughput and reduce energy costs. Turbulent liquid flow through the pipeline can lead to reduced throughput and energy loss. DRAs injected at multiple segments along a pipeline immediately improve throughput. The company said the acquisition adds significantly to its EBITDA, margins and adjusted EPS. KMG has increased its free cash flow conversion rate from 69% in FY14 to 78.2% in FY17.

by RTT Staff Writer

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