Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Amy Glynn - IR, The Ruth Group

Sal Guccione - President & CEO

Ronald Gold - President & COO, Rising Pharmaceuticals, Inc.

Douglas Roth - SVP & CFO

Analysts

Daniel Rizzo - Sidoti & Co.

Bill Jones - Singular Research

Gregg Gilbert - Bank of America/Merrill Lynch

ACETO Corporation (ACET) Q2 2013 Earnings Call February 8, 2013 9:00 AM ET

Operator

Welcome to the ACETO Corporation Fiscal 2013 Second Quarter Results Conference Call. My name is John, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

This conference call may contain forward-looking statements as that term is defined in the Federal Securities Laws. All statements that address expectations or projections about the future are forward-looking statements. Although, they reflect our current expectations, these statements are not guarantees of future performance, but involve a number of risks and assumptions.

We urge you to review ACETO’s filings with the SEC, including but not limited to ACETO’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 for a discussion of some of the factors that could cause actual results to differ materially. Copies of these filings are available at www.sec.gov. We do not undertake any duty to update any forward-looking statement.

I'll now turn the call over to Amy Glynn. Amy, you may begin.

Amy Glynn

Thank you. Good morning and welcome to ACETO Corporation’s fiscal 2013 second quarter conference call and audio webcast. With me today are Sal Guccione, President and CEO; Ronald Gold, President and COO of Rising Pharmaceuticals and Douglas Roth, CFO of ACETO.

During this call, Sal will provide a strategic overview of the company and discuss the performance of each business segment and Doug will review the company's financial results for the fiscal 2013 second quarter ended December 31, 2012. Following that we will open the call for questions.

With that, I would like to now turn the call over to Sal Guccione. Sal?

Sal Guccione

Okay, thanks Amy and good morning everyone. This is our first conference call we’ve held since I was appointed CEO. I would like to start by thanking you all for joining me on this call. I would like to take a moment to thank Al Eilender, who remains with ACETO as Chairman of the Board for his many contributions to ACETO both as a Board Member for12 years and a CEO for the last four years. Al provided us with great vision and leadership over that period of time and I look forward to his continuing contributions to ACETO in the future. And also I would like to thank the Board of Directors for forwarding me the opportunity to take the lead in continuing the execution of the company's growth strategy.

Regarding our business performance we are now halfway through our fiscal 2013 year. We’ve had a solid first half of 2013 with sales up 6.5% and adjusted earnings per share up just under 10%. This performance reflects the continued execution of our strategies and we remain excited about our business prospects for the second half of the year.

Our fiscal 2013 second quarter results with sales up 2.9% compared to 2012 and earnings relatively flat. We are now in line with our expectations and reflected the variability of our order stream. As we discussed on our last conference call, we had some acceleration in our order frame in our first quarter of 2013, particularly within the Performance Chemicals segment.

Taking a look at our segment performance for the 2013 second quarter, sales within the Human Health segment grew 9.3%, driven by continued strength in Rising Pharmaceuticals and partly upset by some softness in the Nutritionals business.

Gross profit in Human Health increased by 5.1% to $8.9 million, up from $8.5 million in the second quarter of 2012. Gross margins were 29.8% compared to 31% last year due to less favorable product mix, specifically product royalty in Rising Pharmaceuticals which is phasing out. Within Rising, we launched four new generic drugs in the second quarter for a total of six new launches this fiscal year-to-date. These launches included the signing of an agreement to market an authorize generic of the 10 milligram strength of Tranylcypromine an FDA approved authorized generic version of Covis Pharma's Parnate product. This is our first authorized generic drug and is part of what is an ongoing activity within Rising.

Our pipeline of Rising remains robust with strong visibility and we expect to launch three new generic drugs in the second half of fiscal 2013 for a total of non-product launches targeted for the full-year. I would also like to note that we significantly stepped up our R&D spending at Rising this year as we continue to invest in this new business opportunities.

Turning to the Pharmaceutical Ingredient segment, that segment has sales increase of 2.9% in the quarter as strengthened demand for APIs and intermediates in our international locations was partially offset by weaker demand domestically. Gross profit in the Pharma Ingredient segment was $5.5 million for the quarter versus $5.7 million last year. Gross now at 13.8% compared to 14.7% last year due to less favorable product mix on certain APIs sold in the international locations.

Performance Chemicals sales declined by 1% compared to last year. This decline can be attributable to a few factors including the strength of our order pattern experienced in the first quarter of this year, the decline of sales of some agricultural intermediates and some adverse impact from Hurricane Sandy in October of 2012 as some of our customers temporarily pulled back on production.

We achieved $6.3 million in gross profit in the Performance Chemicals segment in Q2 compared to $6.5 million last year. Gross margin was relatively flat at 14.3% compared to 14.5% last year.

With a strong balance sheet, we are very well positioned to invest in our internal growth initiatives and to continue to pursue strategic acquisitions. Overall, we remain optimistic about our growth prospects and all three of our business segments and are looking forward to reporting on continuous successes for the balance of fiscal 2013.

Before I turn the call over to Doug, I would like to make a comment about our expected fiscal third quarter results. As we have previous discussed, our business is difficult to forecast on a quarterly basis due to the timing, size and nature of our orders, which is one of the reasons why we refrain from providing specific guidance.

However, based upon business received to-date and particular within the Pharmaceutical Ingredients segment, I am pleased to note that we expect to report a spike in the company’s fiscal third quarter earnings per share to an amount significantly beyond that which we reported in either of our first or second quarters of this year.

With that I will now turn the call over to Doug.

Douglas Roth

Thank you, Sal and good morning everyone. Our net sales for the fiscal 2013 second quarter were $114 million, an increase of 2.9% from the $111 million we reported in fiscal 2012 second quarter. The total company gross profit was $20.7 million about in line with the prior year period.

With the gross margin of the 18.2% which is slightly up the fiscal 2012 second quarter. This resulted in our reporting net income of $4.5 million or $0.17 per diluted share compared to $4.6 million or again the same $0.17 per diluted share in the prior year.

As Sal mentioned, our fiscal second quarter results reflected variability of our order strength. As you recall, we reported a strong fiscal first quarter particularly in the Performance Chemicals segment. You will see that the first quarter strength reflecting the results for the first six months of fiscal 2013 with our sales is up 6.5% to $225.7 million compared to $212 million in the year ago period.

Gross profit for the six months ended December 31, 2012 was $42.2 million and the increase is 7.8% compared to the gross profit $39.2 million in the prior period. Net income for the six months ended December 31, 2012 was $9.3 million or $0.34 per diluted share as compared to $7.6 million or $0.29 per diluted share in the prior period. So this reflects an increase in net income of 22.5% in the six months period over last year.

Now please note that in the first six months of fiscal 2012 included a one-time charge related to the separation of certain executive management employees. After the adjustment for this one-time charge, net income for the first six months of fiscal 2012 was $8.2 million or $0.31 per diluted share.

Finally, our financial position as of December 31, 2012 continues to be strong as we had cash, cash equivalents and short-term investments of about $25 million and working capital of $131 million and shareholder equity of $179 million. You will note on the balance sheet that our inventory position increased to $97.3 million which is higher than our historic levels. The inventory buildup is a result of products that were ordered to fulfill expected shipments over our next two fiscal quarters. We expect the inventory to come down over the next two quarters and to our more historic levels.

With that said, I would like now to open up the call for questions. Operator, could you please assist us?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Daniel Rizzo from Sidoti & Co. Please go ahead.

Daniel Rizzo - Sidoti & Co.

You indicated that the margins contraction in the second quarter was due to a unfavorable product mix in a couple of different segments, is this product mix or this margin what we can expect going forward or do you think its going to kind of move back or fluctuate over the next few quarters?

Sal Guccione

I think it will fluctuate or move back. The mix was a couple of specific reasons; one I think on the pharma segment I mentioned it was more geographic mix than product mix and the other as within human health and that was related to some product royalties being phased out at rising. So we should see things move back up.

Daniel Rizzo - Sidoti & Co.

Okay, and then I think in the press release you just said that Pharmaceutical Ingredients are going to be strong next quarter which is great but is there any particular reason for that, are you launching a new product or new API or something like that?

Sal Guccione

There are few things that are going on in the third quarter. Clearly, a product launch or actually two are driving some very good results for us and but and that's kind of within the Pharma Ingredients segment that we talked about and then our other segments and particularly the human health is looking pretty good right now too but the launch is the main thing behind it.

Daniel Rizzo - Sidoti & Co.

Okay, and then its great that you (inaudible) three additional products fairly soon, is the pipeline beyond that still what it was before like 30 to 35 products or is that expanded or contracted at all or…

Sal Guccione

No, it’s pretty much where it’s been. It’s staying steady.

Operator

(Operator Instructions) And we have a question from Bill Jones from Singular Research. Please go ahead.

Bill Jones - Singular Research

I just was wondering now you have about $25 million in cash on the balance sheet and it’s been a while since the Rising acquisition. I know in the past you said you would love to do something like that again. Is there any, have you been looking at anything or should we expect anything in that on the acquisition front?

Sal Guccione

Look, we are always looking. Rising is a strategic initiative of ours and we do look for acquisitions, but we don’t forecast and we don’t budget on them. And as you know, it's very difficult to do and really impossible to predict. So I guess I’d say, the answers we're looking but I have no more than that to say on.

Bill Jones - Singular Research

And obviously, your performance in this segment is tied to the economy, the pharmaceutical ingredients and Performance Chemicals, particularly. How is your overall feeling, you know, I always like to get the feel from Executives on feeling on the economy.

Sal Guccione

Our view of the economy is we’re in a period of and what's going to be elongated slow expansion, like we've seen in the past, which is kind of we went through the recession and things have picked up and fixed and started. But we're going to see a longer period of, you know, you picked up the number 2% or 3% growth over a period of time.

Bill Jones - Singular Research

You mentioned that you stepped up R&D in Human Health. This year we expect nine new products. Would you see going forward, say for the following year something in that range or.

Ronald Gold

You know, we have like some one mentioned, we mentioned over 30 items in the pipeline in different phases and again, I think we mentioned in the past about 4 to 8 new products is expected every year. Obviously we can’t control the FDA, so we state that range about 4 to 8. So we believe that it will continue.

Operator

And our next question comes from Tony (inaudible) from Aegis. Please go ahead.

Unidentified Analyst

Could you give us an idea of the R&D expense this quarter versus last year’s quarter?

Sal Guccione

I am sorry Tony can you repeat that please I…

Unidentified Analyst

I am a little hoarse excuse me. Could you give us an idea of the R&D expense this quarter versus last quarter last year?

Douglas Roth

I can Tony for the six months Tony we had R&D expense this year of a little over a $1 million and last year it was at this time it was a little less than $20,000. For Q2 ’13 it was about $150,000 and last year it was zero.

Ronald Gold

I think the big thing as Sal mentioned is going forward we anticipate that to grow. We expect it to grow, so the end of the fiscal year you will see a total growth. May be those quarters that Doug mentioned really don’t reflect it, but the next two quarters will. At the end of the year you will the increase more definitively.

Operator

And our next question comes from Gregg Gilbert from Bank of America/Merrill Lynch. Please go ahead.

Gregg Gilbert - Bank of America/Merrill Lynch

My question is about your generics strategy as it relates to acquisition. I know you can’t predict deals, but would you say that your strategy there is more to see what’s available and assess whether it’s right for you or are there certain elements you are trying to accomplish like taking more control over manufacturing or sending into new dosage forms or simply getting more (inaudible) into your process. Could you shed a little more light about what would be ideal for you, should you find the right thing?

Sal Guccione

Ideal for us would be another rising, and as you know the rising model which does not have manufacturing or in-house R&D around the works with partnerships model. So that’s kind of number one on our list. However, we are not opposed to and we are looking at companies that might either bring along with them manufacturing and in-house R&D. For us the most important thing that we will look forward in acquisition is the pipeline, and we’ve got a good pipeline in Rising and we want to add to that and that's objective, and a strong pipeline within the year of pharma.

Gregg Gilbert - Bank of America/Merrill Lynch

That's helpful, and what your philosophy on taking on leverage to do deals versus what you’ve done in the past sort of philosophically?

Sal Guccione

Similar to that, when we did Rising, for example, we took on debt and we are in process of slowly paying that down and we will do the same thing.

Operator

(Operator Instructions) And our next question comes from (inaudible), Private Investor. Please go ahead.

Unidentified Analyst

Just a quick question, I am a long term shareholders so I respect your decision sometime ago, your reluctance to provide quarterly earnings guidance specific earnings guidance. And what seemed to me, you statement about the significant spike in the third quarter, and you made the statement associated with it that its business in hand like its, so I took that to mean business is already been shipped. Perhaps in the back, can you just give us a little more color and can you quantify significant, I think anyone would interpret that significant means more than 25%. Could it be 50%, could it be 100%, something it between any color would be very helpful.

Sal Guccione

Sure, thanks, I appreciate that. You know just on the point of guidance, as I said, we don't make a habit of or we don't give specific guidance because our business is difficult to predict on a quarter-over-quarter basis. In this particular case, we thought it was important because it is a little bit of an unusual increase versus maybe the normal path that we've been on so I appreciate your question. I don't have an exact number for you right now in terms defining significant because we are not even halfway through the quarter. But to give you kind of a sense as far as we can tell right now and assuming no unusual circumstances occur between now and the end of the quarter; looks like our EPS should be up at least 50%. So I would define significant as 50% and possibly little bit higher then that. And just to be clear over the Q2 performance.

Unidentified Analyst

Over the Q2, it’s just reported.

Operator

We have no further questions at this time. So thank you ladies and gentlemen. This concludes today's conference. Thank your for participating.

Sal Guccione

Thank you all for joining us on the call. We will talk to you next quarter.

Operator

Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ACETO's CEO Discusses F2Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts