A Global Provider of Specialty Chemicals. May Jefferies Industrials Conference August 9, 2016

Transcription

1 A Global Provider of Specialty Chemicals May 2015 Jefferies Industrials Conference August 9, 2016

2 Safe Harbor Statement The information in this presentation 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 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 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, 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 liabilities, the ability to obtain registration and re-registration of products, increased environmental compliance costs of products and general political and economic risks and uncertainties. Non-GAAP Financial Measures This presentation includes certain non-u.s. GAAP financial measures. The calculation of these measures, and a reconciliation to the most directly comparable measures calculated in accordance with U.S. generally accepted accounting principles (GAAP), can be found in the Appendix. 2

3 Why Invest in KMG? Disciplined Growth Strategy Market Leadership Focused Management Financial Performance Acquire Integrate Optimize Leading positions in key markets Driving operational excellence Strengthened profitability & earnings 3

4 KMG Overview Three Business Platforms Electronic Chemicals Wood Treating Chemicals Integral to the semiconductor manufacturing process Industrial Lubricants Preserve and protect wood used for electric power and utility infrastructure Enable optimal valve performance and provide important safety benefits 4

5 Global Presence Riddings, UK Pueblo, CO St. Fromond, FR Rousset, FR St. Chéron, FR Milan, IT Hollister, CA Ft. Worth, TX (HQ) Matamoros, MX Tuscaloosa, AL Houston, TX 15 Global Sites: 814 in Sites: North America 6 in North America 55 in Europe 23 in Asia (Singapore) Johor Bahru, MY Singapore, SG (2 sites) 5

6 Our Growth Strategy Discovery Generic Consolidation Maturity KMG becomes interested Patent expires KMG initiates consolidation & optimizes operations Sales volume Profits Carve out mature, niche segments Unique products with higher value applications High barriers to entry Establish leading positions through consolidation and organic growth Maximize economic returns Realize operational and commercial synergies 6

7 Disciplined Approach to Growth Our Acquisition Checklist Strategic Criteria Mature, niche products Financial Criteria Strong cash flows Established commercial uses Growth potential Consolidation opportunity; clear path to leadership Target Acquisition Margin expansion potential through operating efficiencies Modest R&D/CapEx Barriers to entry Strong management and track record of performance Reasonably priced acquisition multiples 7

8 Value-Added Product Portfolio Our Products Represent a Minimal Portion of the Overall End Product Cost Electronic Chemicals Wood Treating Chemicals Industrial Lubricants Critical to the semiconductor manufacturing process Represent ~1% of the cost to manufacture a semiconductor chip Treating wood extends its useful life by decades in industrial applications Represent <5% of the cost of a treated wooden utility pole Essential for optimal valve performance and safety Lubricants and sealants comprise a small portion of valve maintenance costs 8

9 Wood Treating Chemicals Electronic Chemicals pure performance 9

10 Electronic Chemicals Overview Global footprint with facilities in North America, Europe and Asia $266 million in FY15 net sales Specialize in the purification, formulation, blending and packaging of value-added chemicals for the semiconductor manufacturing industry Serve many of the world s leading semiconductor manufacturers Strategic growth through consolidation Completed 4 acquisitions since

11 Strategic Consolidation: Electronic Chemicals Air Products high purity wet process chemicals business ($75M) General Chemical s Elec. Chemicals business ($26M) OM Group s Ultra Pure Chemicals business ($63M) Nagase FineChem ($2.8M) Identified attractive market segment (HPPC) in broader Electronic Chemicals market Acquisition included state-of-the-art facilities and leading customer base Gained leading HPPC market share in US Transitioned production from 4 facilities to 2 Increased US capacity utilization Became first global supplier of HPPC Attained leading HPPC market share in Europe Restructuring program generating cost-savings and synergies Manufacturing capability establishes platform for future growth in Asia Capital investment to expand capabilities will drive growth in sales and EBITDA 11

12 Electronic Chemicals Manufacturing Consolidation Evolution 2013 & Prior North America Dallas, TX (Toll Manufacturing) Bay Point, CA 2016 North America Pueblo, CO Pueblo, CO Hollister, CA Fremont, CA Milan, IT (Manufacturing) Europe Hollister, CA Milan, IT (Warehouse) Site Optimization Milan, IT (Warehouse) Europe St. Fromond, FR St. Chéron, FR St. Fromond, FR St. Chéron, FR Rousset, FR Riddings, UK Rousset, FR Asia Riddings, UK Singapore, SG (Manufacturing) Asia Singapore, SG (Warehouse) Singapore, SG (Warehouse) Johor Bahru, MY Johor Bahru, MY 12

13 High Purity Process Chemicals: $1.5 Billion Market Opportunity Global Electronic Chemicals market = ~$8 billion annually KMG identified high-value segment: High Purity Process Chemicals HPPC represents 20% (approx. $1.5 billion) Key products sold to semiconductor industry: sulfuric acid, hydrofluoric acid, isopropyl alcohol, ammonium hydroxide HPPC: $1.5B KMG is the only global supplier of HPPC Critical materials for semiconductor manufacturing Reliably supply semiconductor customers in North America, Europe and Asia Global EC Market ~$8B Leading HPPC market shares in US and Europe Expanding and growing presence in Asia 13

14 Leading Customers and Diverse Markets We are the leading global supplier providing high quality chemicals and services to many of the world s major semiconductor manufacturers Mobile Devices Memory Data Center Servers PCs Automotive Internet of Things 14

15 Semiconductor Manufacturing Process Wafer production Photomask & wafer processing Post-fab wafer processing Semiconductor packaging & test KMG supplies high purity process chemicals and provides chemicals management services 15

16 Favorable Semiconductor Market Trends Increasing complexity of semiconductor devices drives greater HPPC volume usage Global Wafer Forecast (MSI): CAGR=3.1% Ongoing advances in semiconductor processing technology require ever higher chemicals purity Chip miniaturization/mobile device proliferation drive demand for ultra-pure electronic chemicals Source: Gartner Customer fab expansions Expand available market opportunity Enhance organic revenue growth Global Foundries semiconductor fab in Malta, NY. 16

17 NFC Acquisition Highlights Acquired Singapore-based Nagase FineChem (NFC) in April 2016 for US$2.8M NFC is a preferred supplier of electronic chemicals serving the LCD, electronics and semiconductor markets Strategic acquisition strengthens our presence in Singapore and significantly enhances our long-term growth opportunity in Asia Establishes platform for future growth in Asia by providing manufacturing capability Adds bulk chemical handling capability Enhances our ability to serve our global electronic chemicals customers One-year toll manufacturing arrangement for NFC's existing business NFC acquisition expected to be immediately accretive One-year tolling arrangement with Nagase Singapore Ltd. Forecast adj. EBITDA contribution of at least US$500,000 in first 12 months 17

18 Elevating Our Presence in Asia Asia is the world's largest market for semiconductor production Asia wafer production forecast to grow at 4.5% CAGR over next three years, exceeding global CAGR of ~3% Expanding and enhancing our capabilities in Asia is key to driving our long-term growth in the region Plan to invest growth capital of US$8-10 million at NFC site over next 3 years Investment will enhance our manufacturing, packaging and purification capabilities Expanded product line will enable us to better serve global semiconductor customers Expect margin expansion through local manufacturing Forecast adjusted EBITDA contribution in excess of US$5 million by the fourth year Global Wafer Production by Region (2018 Forecast) Source: Gartner 18

19 Electronic Chemicals: The Right Strategy for the Right Markets Leading-edge (<65nm) fab utilization consistently has exceeded 90% 88% 94% 96% 91% 90% 94% Utilization kept higher in newer, more advanced fabs due to high capital investment Leading-edge fab utilization benefits KMG due to focus on higher purity for advanced process technologies Source: Gartner E Total Utilization Leading-Edge Utilization Top 5 Semiconductor Manufacturers by HPPC Usage Semiconductor Rank Company Application 1 TSMC Logic 2 Samsung Memory/Logic 3 GlobalFoundries Logic 4 Intel Logic 5 Micron Memory Source: IC Insights and KMG Logic chips require significantly more HPPC volume per wafer produced than memory chips KMG serves four of the top five manufacturers adjusted for HPPC usage intensity 19

20 Wood Treating Chemicals Wood Treating Chemicals 20

21 Wood Treating Chemicals Overview Original growth platform for KMG Fundamental to KMG s development and early success Successfully pursued growth-through-consolidation strategy Serve the industrial wood preservation market Electric power and telecommunications utilities rely on wood treating chemicals to protect their utility pole infrastructure Manufacture pentachlorophenol (penta) Penta preserves and protects utility poles from weather, insect damage and decay 60-plus year track record of environmental safety Penta-treated poles can last 50 years or more Operate two sites in North America Matamoros, Mexico and Tuscaloosa, Alabama Divested creosote business in January

22 Penta Overview KMG is the only manufacturer of pentachlorophenol for the industrial wood preservation market Sole supplier of EPA registered penta in North America Favorable demand trends from pole replacement programs in western U.S. and upgrade of electricity distribution infrastructure Attractive margins and solid cash flow Large end market provides significant volume opportunity Two million wood utility poles purchased annually in the U.S. Penta is the preferred treatment for western species wood Treated wood remains the most economical choice for utilities Maintenance of wood-based infrastructure for power transmission fuels long-term demand Severe weather can significantly drive short-term demand 22

23 Wood Treating Chemicals Industrial Lubricants 23

24 Val-Tex Acquisition Highlights Completed acquisition in May 2015 for $23.7 million in cash Immediately accretive to EBITDA, EPS and cash flow Wood Treating Chemicals Val-Tex manufactures and distributes high quality, cost-effective valve lubricants and sealants, as well as related application equipment and fittings Serves the ~$200 million global valve maintenance market Oil and gas storage, pipeline and gas distribution Value-added specialty products enable optimal valve operation and help prevent costly downtime at customer facilities and pipelines Provides attractive opportunities for organic growth Strong brand and market presence in North America Our global infrastructure and distribution capabilities can expand Val-Tex s participation in international markets 24

25 Financial Highlights and Outlook 25

26 FY16 Key Accomplishments Further optimized European Electronic Chemicals operations Completed manufacturing consolidation Drive operational excellence Integrating Nagase FineChem employees and operations with our existing Singapore operations Wood Treating Chemicals Tolling arrangement serves existing customers Utilize the NFC site and capabilities to enhance our product offering for customers in the electronics market in Asia Further expanded Electronic Chemicals market positioning Mobility, IoT and cloud applications are focus areas Continue to deepen relationships with global customers Leveraged global infrastructure and technology to enhance Electronic Chemicals supply reliability and optimize product value Global ERP system implementation Enhance working capital management and overall corporate efficiency 26

27 Growth in Adjusted EBITDA 1 & Margins ($ in millions) $ % $ % 15.6% 15.0% 16.0% 13.3% 14.0% $ % 12.4% 11.3% 12.0% $ % 9.9% 9.7% 10.0% $ % 6.0% $ % $ % $0.0 Q3 FY14 Q3 FY15 Q4 FY14 Q4 FY15 Q1 FY15 Q1 FY16 Q2 FY15 Q2 FY16 Q3 FY15 Q3 FY16 0.0% Adj. EBITDA Adj. EBITDA Margin Key factors driving these gains: Growth in Electronic Chemicals segment Benefits from manufacturing consolidation strategy Addition of Industrial Lubricants business in Q3 FY15 1 Non-GAAP measure. See Appendix for reconciliation. 27

28 Adjusted EPS Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY14 FY15 FY16 1 Non-GAAP measure. See Appendix for reconciliation. 28

29 Balance Sheet Highlights As of April 30, 2016: Paid down debt by $44.5 million over past 21 months Current debt/equity ratio = 0.3 Debt/EBITDA currently less than 1.0x Borrowed $23.5 million to acquire Industrial Lubricants business (May 2015) New credit facility reduced annual run-rate interest expense by approx. $1 million ($ in millions) FQ3 (April 30, 2016) Cash 10.5 Net Working Capital 48.2 Total Assets Debt 41.8 Shareholders Equity Type / Maturity Revolving Credit Facility $150 million capacity October 2019 April 30, 2016 Balance / Rate $41.8 million LIBOR + 1.0% Borrowed $2.8 million to acquire Nagase FineChem (March 2016) 29

30 FY16 Adjusted EBITDA 1 Guidance ($ in millions) $37.1 $43-45M Targeting upper end of range (approx. 20% y/y growth) $30.6 FY14 FY15 FY16 Guidance FY16 growth drivers: Efficiency improvements from the restructuring and realignment of manufacturing operations Margin expansion driven by enhanced market positioning in Electronic Chemicals A full-year contribution from the Industrial Lubricants business FY16 adjusted EBITDA includes estimated stock-based compensation expense of $5 million vs. approx. $3 million in FY15 and $1.2 million FY14 FY16 headwinds: Estimated foreign currency translation impact of approx. $600,000 1 Non-GAAP measure. See Appendix for reconciliation. 30

31 Building a Billion Dollar Business Management brings substantial large company and international experience to KMG Chris Fraser, President & CEO Former President & CEO, Chemical Lime Former President and CEO, OCI Chemical KMG Chairman of the Board since Dec Marcelino Rodriguez, CFO 27+ years domestic and international experience in accounting, financial reporting, operating processes and systems and IT KMG Corporate Controller and Chief Accounting Officer from Feb June 2016 Former CFO of Paul Mueller (OTC: MUEL) and Lhoist North America Ernie Kremling, Vice President of Operations VP of Operations since years with Dow in positions of global responsibility Andrew Lau, Executive VP, Global Electronic Chemicals Former President & GM, Linde LienHwa (Linde Group) Former head of Global ESG Supply & Greater China Electronics (Taiwan) Chris Gonser, Vice President of Human Resources Former Vice President of HR at Lhoist and Celanese 31

32 Investment Highlights Proven growth strategy Strong cash flow generation and margin improvement Leadership positions in strategic and growing markets Solid pipeline of acquisition candidates Global leader in high purity semiconductor chemicals market Key supplier to many of the world s largest semiconductor manufacturers Semiconductor industry consolidation favors our global capabilities Advances in semiconductor manufacturing require higher purity chemicals Ultra Pure Chemicals integration generating significant cost savings NFC acquisition provides platform for future growth in Asia by establishing manufacturing capabilities and enhanced product offering Established new strategic growth platform Val-Tex acquisition provides entry into profitable and established industrial lubricants and sealants market Accretive to EBITDA, EPS and cash flow Opportunities for further consolidation and geographic expansion Focused management team Significant experience at large, multinational companies Intense focus on execution and generating operating efficiencies to enhance long-term shareholder value 32

33 Appendix Reconciliation of Operating Income to EBITDA and Adjusted EBITDA ($ in thousands) Fiscal 2014 Fiscal 2015 Fiscal 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Operating Income $ 3,055 $ (1,603) $ 2,914 $ (415) $ 2,819 $ 3,167 $ 4,761 $ 5,842 $ 7,320 $ 6,137 $ 7,029 Other income/(expense) (315) (120) (105) (291) (28) (131) (339) 2 (17) 149 (375) Depreciation and amortization 3,464 4,318 4,359 6,185 6,019 5,678 3,894 3,580 3,651 3,479 3,772 EBITDA 6,204 2,595 7,168 5,479 8,810 8,714 8,316 9,424 10,954 9,765 10,426 Acquisition and integration expenses CEO transition costs 1, Restructuring & realignment charges* - 3, (54) Impairment c harges , Corporate relocation expense Adjusted EBITDA $ 7,984 $ 6,015 $ 7,638 $ 9,004 $ 8,794 $ 9,031 $ 9,145 $ 10,088 $ 11,444 $ 11,049 $ 11,239 * Excludes depreciation FY14 FY15 FY16 YTD Operating Income $ 3,951 $ 16,589 $ 20,486 Other income (expense) (831) (496) (243) Depreciation and amortization 18,327 19,171 10,901 EBITDA 21,447 35,264 31,144 Acquisition and integration expenses 1, CEO transition costs 1, Restructuring & realignment charges* 3,925 1,264 1,233 Impairment charges 2, Corporate relocation expense - - 1,122 Adjusted EBITDA $ 30,642 $ 37,058 $ 33,732 * Excludes depreciation 33

34 Appendix Reconciliation of GAAP Financial Measures to non-gaap Financial Measures ($ in thousands, except per share amounts) Q3 FY16 Operating Income Net Income Diluted EPS GAAP measure $ 7,029 $ 6,362 $0.53 Acquisition & integration expenses Restructuring charges Gain on purchase of NFC - (2,069) (0.17) Corporate relocation expense Non-GAAP measure $ 8,032 $ 4,944 $0.41 Q2 FY16 Operating Income Net Income Diluted EPS GAAP measure $ 6,137 $ 3,979 $0.33 Restructuring charges Corporate relocation expense Non-GAAP measure $ 7,421 $ 4,814 $0.40 Q1 FY16 Operating Income Net Income Diluted EPS GAAP measure $ 7,320 $ 4,591 $0.39 Restructuring and realignment charges Non-GAAP measure $ 7,916 $ 4,978 $0.42 Q4 FY15 Operating Income Net Income Diluted EPS GAAP measure $ 5,842 $ 3,328 $0.28 Restructuring & realignment charges Acquisition & integration expenses Non-GAAP measure $ 6,506 $ 3,759 $0.32 Q4 FY14 Operating Income Net Income Diluted EPS GAAP measure $ (415) $ (822) ($0.07) Realignment charges 5,784 3, Restructuring income tax expense Integration expenses Non-GAAP measure $ 5,600 $ 3,163 $0.27 Q3 FY14 Operating Income Net Income Diluted EPS GAAP measure $ 2,914 $ 1,226 $0.11 Restructuring charges 1, Restructuring income tax expense Acquisition & integration expenses Non-GAAP measure $ 4,333 $ 2,388 $0.20 Q2 FY14 Operating Income Net Income Diluted EPS GAAP measure $ (1,603) $ (2,744) ($0.24) Restructuring charges 4,031 2, Restructuring income tax expense - 1, Integration expenses Non-GAAP measure $ 2,588 $ 1,396 $0.12 Q1 FY14 Operating Income Net Income Diluted EPS GAAP measure $ 3,055 $ 1,352 $0.12 Integration expenses CEO transition costs 1, Non-GAAP measure $ 4,835 $ 2,511 $0.22 Q3 FY15 Operating Income Net Income Diluted EPS GAAP measure $ 4,761 $ 2,135 $0.18 Restructuring & realignment charges 1, Acquisition & integration expenses Gain on sale of creosote business Environmental site cleanup reserve Non-GAAP measure $ 6,299 $ 4,099 $0.35 Q2 FY15 Operating Income Net Income Diluted EPS GAAP measure $ 3,167 $ 5,490 $0.47 Restructuring & realignment charges 2,659 1, Loss on sale of creosote business - (3,693) (0.31) Non-GAAP measure $ 5,826 $ 3,526 $0.30 Q1 FY15 Operating Income Net Income Diluted EPS GAAP measure $ 2,819 $ 1,185 $0.10 Restructuring & realignment charges 2,573 1, Non-GAAP measure $ 5,392 $ 2,857 $