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American Pacific Corporation (NASDAQ:APFC)

F3Q08 Earnings Call

December 11, 2008 4:30 pm ET

Executives

John R. Gibson - Chairman of the Board & Chief Executive Officer

Joseph Carleone - President, Chief Operating Officer & Director

Dana M. Kelley - Chief Financial Officer, Vice President & Treasurer

Analysts

Hamed Khoursand – BSW Financial

[Daniel Rizzo]

[Lee Opper]

Operator

My name is Tameka and I will be your conference operator today. At this time I would like to welcome everyone to the American Pacific fiscal 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

John R. Gibson

This is John Gibson. Welcome to our review of the financial results for fiscal year 2008. Joe Carleone, our President and Chief Operating Officer and Dana Kelley, our Vice President and Chief Financial Officer are both with me. I have brief remarks which will be followed by Dana’s review of the last quarter and fiscal year. Following her remarks we will take your questions.

Today’s call includes forward-looking statements. These forward-looking statements are not historical facts and are subject to risks and uncertainties. Our actual results may differ materially. For a description of the factors that may cause actual results to differ materially from our forward-looking statements please refer to our most recent quarterly report on Form 10-Q and other filings we have made with the SEC.

All forward-looking statements are made as of the date hereof and we assume no obligation to update these statements except as required by law. In addition we will be referring to both GAAP and non-GAAP financial measures. Our recently published earnings release contains definitions of these non-GAAP measures and a reconciliation of the most recently comparable GAAP measures to the non-GAAP measures.

The earnings release can be found in the Investor section of our website at www.APFC.com. Consolidated revenue, net income and earnings per share increased for the quarter and for the year. In segment performance revenues for Fine Chemicals increased for the quarter and for the year. Operating income remained relatively for the same periods due to product mix. On the other hand revenues for the quarter and for the year were flat for Specialty Chemicals while operating income rose.

Again these performance results are affected by product mix. Revenues for Aerospace Equipment were down about 6% for the quarter and for the year. This was in part related to a supplier component quality issue which has now been resolved. As we announced in October we acquired the European business of Marotta Controls. The facilities are located in Dublin, Ireland and Cheltenham, England.

These facilities are being incorporated into our In-Space Propulsion, ISP, business and we look forward to growth in our European business in the future. We continue to examine other growth opportunities especially in fine chemicals. We are seeking an acquisition complementary to our excellent facilities in Rancho Cordova, California. Adjusted EBITDA performance for the year was relatively flat year-over-year down about 3%.

Within our segments year-over-year EBITDA was improved for Specialty Chemicals. We continue to operate and perfect our remediation plant in Henderson, Nevada. We are quite aware of general economic conditions in our country. Our business has not as of this time been seriously affected by those conditions. We look forward to your questions.

Dana M. Kelley

We concluded fiscal 2008 on track with our expectations for the year. revenues of $203 million reflect an increase of 10% over last year and also the achievement of a significant milestone as it’s the first time in our 50 year history that we have exceeded the $200 million revenue mark. Fourth quarter revenues of $71 million are also a record high.

To a large extent our strong fourth quarter revenue reflects the upside of our lumpy quarterly revenue trends as much as the production activities from the preceding quarters turned to revenue in the fourth quarter. Our operating income increased 4% in fiscal 2008 and 3% for the fourth quarter compared to the prior period. In addition to the improvement in operating income our below the line results trended better than in fiscal 2007.

Interest income improved, interest expense and related debt refinancing charges declined and our effective tax rate was reduced each compared to 2007. Both the improvements in operating income and non-operating interest and taxes contributed to our 76% improvement in diluted earnings per share which increased to $1.18 compared to $0.67.

Our Fine Chemical segment, or AFC, reported Q4 revenues of $47 million and fiscal 2008 revenues of $124 million both of which are record highs for this segment. The fourth quarter revenues benefited from the completion of the revenue recognition cycle of a number of products that were in production or in their acceptance period in the preceding quarter. You will also note the related decline in our deferred revenues on our September balance sheet when compared to June of 2008.

For the full year AFC’s fiscal 2008 revenue growth includes 45% and 21% volume increases for its two larges anti-viral products. For the larger of the two the increase in demand was to support the customers build up of safety stock inventory of the final drugs. Fiscal 2008 operating margins declined to 13% of revenues compared to 16% in the prior year largely due to a decline in AFC’s aggregate gross margin percentage.

There are two primary drivers, first the fiscal 2008 growth came from products that have margins lower than those products which did not grow in terms of revenue thus the change in product mix over fiscal 2007 reduces the aggregate margins. This is not saying that the growth products have low margins, it’s really just a relative comparison.

Second, in the fourth quarter we initiated a new production process for one of our large volume anti-viral products and experienced start up difficulties that negatively impacted margins. We are making progress on overcoming these difficulties. However we do expect the effects to continue into the early part of fiscal 2009.

Our Specialty Chemicals segment is reporting revenues of $17 million for our fourth quarter and $57 million for fiscal 2008 reflecting the stable annual revenue environment for our perchlorate products. Fiscal 2008 perchlorate volume increased 13% and the related average price per pound declined 10%. This is a function of the contractual price volume nature that extends through 2013.

Specialty Chemical operating margins remained strong at 41% and 38% of revenues for fiscal 2008 year and fourth quarter respectively. 2008 operating margin improved approximately nine percentage points over the prior year.

You will recall that during the second quarter we completed the amortization of acquired book of business that we purchased from [Keer McGee] in 1998 and which we’ve been amortizing at a rate of $3.9 million annually for the last 10 years. Elimination of this amortization expense improved gross margins by approximately four percentage points in fiscal 2008.

The balance of the improvement results from the higher production levels of Grade I AP which in turn resulted in improved absorption of fixed manufacturing costs. For our Aerospace Equipment segment they had a slightly down year in terms of revenue but a very successful year in terms of new contract awards. The year-over-year revenue decline occurred largely due to the new contract award occurring later in fiscal 2008 than we had anticipated.

The most significant 2008 contract awards which we have covered with you on our second and third quarter calls include awards related to ballistic missile defense systems, Landsat satellites and Orbcomm satellites. We generated over $20 million in cash flow from operations in fiscal 2008 and ended the year with $26 million in cash and no borrowings against our revolver.

Looking forward our guidance for fiscal 2009 is revenues of at least $195 million, EBITDA of at least $37 million and net income of at least $6 million. Our revenue expectation reflects an approximately 10% decline in revenue from AFC. The decline really gets to the heart of the risk that we carry from both customer or product concentration and our ability to mitigate that risk.

The decline originates from an expected 85% decrease in annual volumes in fiscal 2009 for our largest anti-viral products as this customer desires to reduce their inventory levels. To date we have successfully mitigated a substantial portion of the decline of this product through expected increases in revenues from other existing products and new business the net effect which is a 10% decline in AFC revenues.

Longer term we continue to be bullish about the growth opportunities within the fine chemicals market. Our strategy is to pursue these opportunities through continued focus and investment in this segment. We expect that our Specialty Chemicals segment will continue with stable revenue levels and our Aerospace Equipment segment will achieve substantial revenue growth in 2009 from both new contract awards and the addition of the Marotta Europe business which we acquired in October.

This concludes our remarks and we’d be happy to take your questions at this time.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll pause for a moment to compile the Q&A roster. Your first question comes from Hamed Khoursand – BWS Financial.

Hamed Khoursand – BSW Financial

Just a question on the AFC side, with the loss of this one product are you seeing an increase in other areas from a standpoint of you guys being bumped up from being the number three manufacturer to the number two and number one?

Joseph Carleone

We do see some increases in other products that have made up for major decline. I want to mention that we did not lose the product, we will continue to produce the product as far as we can see into the future but at a lower level especially at a lower level in 2009. We really look at that as an inventory problem.

I didn’t quite understand being bumped up from three to two to one. What were you referring to there?

Hamed Khoursand – BSW Financial

Your status as a manufacturer for active pharmaceutical, you guys in the past have said that you’re usually the third choice for manufacturers and sometimes become number one and number two. I just want to see if there’s been any status change in some of your bigger products since you have guys have moved up from a number three status to number two, specifically the [inaudible] off of your product?

Joseph Carleone

[Inaudible] product as we mentioned in the last call we got a firm three year contract with minimum quantities and there’s only two producers, we believe the other producer has slightly more than us but we’re not sure of what the quantities are.

Hamed Khoursand – BSW Financial

On the Aerospace Equipment, is there any kind of smoothing in terms of the revenue recognition with the acquisition that comes on?

Dana M. Kelley

That segment typically does not experience the same lumpy revenue trends that we get in the Fine Chemical and Specialty Chemical segments because its revenue recognition method is the percentage of completion method. When we do get decreases or increases in that segment they tend to be as a result of the timing of contract awards.

Hamed Khoursand – BSW Financial

Because in fiscal ’08 it was lumpy from a percentage standpoint quarter-over-quarter, that’s why I asked that question.

Dana M. Kelley

In fiscal ’08 that segment in the middle part of the year where we were anticipating the contract awards coming in and they ended up coming in a number of months later than that, but did come in and that’s what kept them with the good booking award rate during 2008.

Operator

Your next question comes from Daniel Rizzo.

Daniel Rizzo

I don’t know if you mentioned anything about acquisitions, is that still something you’re looking at. I would think you are but is it still in Fine Chemical segment?

John R. Gibson

Yes, primarily. We retained Lincoln International and we’re seeking complementary kind of business and we completed the Marotta deal in October and we are active in seeking the right kind of thing for us. It’s got to pay obviously, it’s got to be hopefully accretive and what we primarily see are opportunities in fine chemicals that would complement the business we already have.

Daniel Rizzo

Is there a particular size you’re looking at?

John R. Gibson

No, we haven’t limited it by size. We will look at any proposition that is within our means.

Operator

Your next question comes from Lee Opper.

Lee Opper

Any further updates on the environmental product we’re trying to develop?

John R. Gibson

You’re talking about the azide environmental product?

Lee Opper

Yes.

John R. Gibson

No, I wish I could tell you that things have changed. I think the EPA is waiting until the, I’m supposing this is part of it, but I believe the new Administrator has to be on the job and then perhaps it will move quicker but that is the remaining obstacle is a listing by EPA and I cannot minimize that because we have performed every study we’ve been asked to do or requested to do.

But we cannot yet say what the timing on this effort will be.

Operator

At this time there are no further questions.

John R. Gibson

I want to thank you all for participating. We look forward to talking to you again soon.

Operator

This concludes today’s American Pacific fiscal 2008 financial results conference call.

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Source: American Pacific F4Q08 (Qtr End 09/30/2008) Earnings Call Transcript
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