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American Pacific Corporation (NASDAQ:APFC)

F2Q 2013 Earnings Conference Call

May 9, 2013 4:30 pm ET

Executives

Linda Ferguson – VP-Administration and Corporate Secretary

Joe Carleone - CEO

Dana Kelley – CFO

Analysts

Gunnar Hansen - Sidoti

Operator

Welcome to the Q2 2013 American Pacific Corporation Earnings Conference Call. My name is Richard, and I’ll 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. I’ll now turn the call over to Ms. Linda Ferguson, Corporate Secretary. Ms. Ferguson, you may begin.

Linda Ferguson

Thank you and good afternoon everyone. Welcome to our review of the financial results for fiscal year 2013 second quarter. Joe Carleone, Chief Executive Officer; and Dana Kelley, Chief Financial Officer will each provide remarks. Following their remarks, we will be happy to take your questions.

Today’s call includes forward-looking statements. You can identify these statements by the fact that they use words such as “will,” ”expect,” ”anticipate,” ”believe,” and other words and terms of similar meaning. These forward-looking statements are not historical facts and are subjects 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 the risk factors in the forward-looking statement section of our earnings release furnished today to the SEC on Form 8-K, our most recent Annual Report on Form 10-K, and our filings 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 these non-GAAP measures to the most comparable GAAP measure.

Our earnings release can be found in the news release section of our website at apfc.com. I will now turn the call over to Joe.

Joe Carleone

Thank you, Linda. And good afternoon ladies and gentlemen, and thank you for joining our conference call. We are quite pleased with our second quarter performance. Bottom line results have actually exceeded our expectations attesting to the fact that our chemical operations are continuing to perform well.

Demand continues to be strong in both our fine and specialty chemicals segments. Because of the orders in hand for both core and development products and the improved operational performance to-date, we have high confidence in the increased annual guidance we have provided today.

As indicated on our prior conference call, the 2013 first half would be weaker than the second half. This is largely due to timing of sales and to a lesser extent the planned pharmaceutical plant shutdown for maintenance during the first quarter.

Let us now discuss each of the business segments beginning with our fine chemicals segment. We continue to see a growing number of new business opportunities in our pharmaceutical fine chemicals products. We believe the large part of this increase in the number of opportunities is driven by the pharmaceutical industry’s pipeline maturing and becoming much more robust. For example, the FDA approved 39 new drugs in 2012, almost twice the number approved just two years ago and the highest figure the agency has seen since 1996.

In the first calendar quarter of 2013, the FDA has approved 9 new drug entities. So, we are apparently on track for another good year for new pharmaceuticals and of course this is good news for the patients that these drugs help.

Our fine chemicals segment has nearly completed the validation of our major new antiviral drug. Our customer is projecting a strong demand for this drug. It could reach blockbuster status very quickly. Also this pharmaceutical was recently filed for approval with the FDA as well as in Europe.

We also now have a production contract to support the launch of this drug, and we will begin producing these quantities in the very near future with delivery starting towards the end of calendar 2013. This antiviral API, which emerged from our enhanced pipeline, will support this therapeutic area of our business as our older antiviral drug mature and demand for them diminishes. Our controlled substance activities continue to move forward.

We have now successfully completed validation of our first Schedule II controlled substance compound and are preparing our facilities for commercial production. So, our pipeline continues to provide the path for the future opportunities, potential growth, and it has been an essential part of the long-term stability of the fine chemicals segment.

Production products are continuing as planned for 2013 with antiviral and central nervous systems products making up a large portion of production activity. Our oncology products are becoming a larger percentage of total sales in fiscal 2013 compared to fiscal 2012. This is not only because of the introduction of three new oncology products, but also because of a modest increase in our legacy oncology products.

Moving on to the specialty chemicals segment, and we discussed last quarter, the specialty chemicals segment revenue would be weighted towards the latter half of the fiscal year. This is driven by a few large rocket-grade ammonium perchlorate deliveries in the fourth quarter.

On a full-year basis, we will see specialty chemicals actually increase in revenue compared to fiscal 2012. This is due to a number of new orders from our DoD Tactical Missile Programs as well as to a lesser extent increased sales in our fire suppression chemicals business.

Our major solid rocket motor customers are having success, which is solidifying our forecast as well. Alliant Techsystems or ATK recently reported that they successfully completed NASA's preliminary design review for the space launch system’s solid rocket booster and that the qualification motor test is scheduled for later this year.

They also reported that in April, the first upper stage solid rocket flew on the Antares launch vehicle, introducing a new solid rocket motor to the commercial launch market and that an upgraded motor design will begin flight on the 5th Antares mission. United Launch Alliance’s Altas-5 rocket is also gaining a lot of notoriety for its very successful reliability.

This vehicle uses Aerojet solid rocket boosters for certain missions. Demand for Atlas launches continues to be strong as well. We do, however, want to make it very clear that as stated in the past, these successes in launch programs will help stabilize our rocket grade ammonium perchlorate business. We are not expecting significant long-term growth for rocket grade ammonium perchlorate with over a long period relatively consistent demand.

The continuance of a viable United States industrial base capability for the production of ammonium perchlorate is strong and supported by the government agencies, specifically NASA and the Department of Defense.

In summary, both of our two major segments are forecast to provide strong results for fiscal 2013 as evidenced by the increase in guidance. We are very pleased with the performance of our operational teams for continuing to improve our manufacturing activities and the performance of our business development team for continuing to fill the pipeline. In addition, we are beginning to see the benefits of our strategy to diversify our customer base and expand our product line, especially in our pharmaceutical product areas.

I would like now to introduce our Chief Financial Officer, Dana Kelley, who will discuss the financial aspects of the quarter and our guidance for fiscal 2013.

Dana Kelley

Thank you, Joe.

As Joe indicated, we are pleased with our results today which provide a sound foundation to achieve our increased annual guidance. For our fiscal 2013, second quarter and six-months period, we are reporting increases in consolidated revenues to $50 million and $86 million respectively.

Our fine chemicals segment drove this sales growth. The most meaningful improvement in our financial performance is in our bottom line. For the fiscal 2013 second quarter, we are reporting net income of $2.7 million and diluted EPS of $0.34. Year-to-date, we have achieved net income of $3.9 million and diluted EPS of $0.49.

The marked improvement in our fine chemicals segment coupled with the benefits of our recent refinancing activities have resulted in net income and earnings per share that has more than doubled from the prior-year period. This is the first quarter that we see clearly a reduction in interest expense compared to our prior capital structure, which is a savings of more that $2 million per quarter.

Moving to other segment, our fine chemicals segment reported revenues of $37 million for our fiscal 2013 second quarter and $59 million year-to-date, increases of 81% and 39%. Revenues from our new oncology products which were commercialized in the latter part of last year led the growth. Development product revenues were also very strong and are on track to exceed 25% of segment revenues this year. With performance to-date and backlog, we are now anticipating that fine chemicals segment revenues will grow by more than 10% in fiscal 2013.

Current production scheduling indicates that revenues in the second half of the year for this segment will be heavily weighted to the third fiscal quarter. Our fine chemicals segment is continuing to report substantial profit improvements in fiscal 2013, compared to losses incurred a year ago. For the fiscal 2013 second quarter, this segment achieved operating margins of 10%.

Effective production boosted gross margins by 10 percentage points compared to a year ago. We anticipate that fine chemicals will sustain similar profit levels in the second half of this year.

Our specialty chemicals segment reported revenues of $12 million for the fiscal 2013 second quarter and $26 million year-to-date. Fiscal 2013 demand for rocket grade perchlorate was supported substantially by the tactical missile program. While fiscal 2013 revenues are lower when compared to the prior year, the results are consistent with out expectation of quarterly timing of revenues this year. We expect that this variance will reverse in the second half of the year.

Currently, substantially all of this segment’s expected revenues for the remainder of fiscal 2013 are under firm purchase orders or contract with deliveries scheduled heavily in our fiscal 2013 fourth quarter. Our balance sheet continues to be strong. We ended our second quarter with $27 million in cash and debt of $58 million. Our total leverage ratio was 1.3 times. Despite the increases in business volume, our networking capital has decreased over the last 6 months. Both of our primary segments have successfully negotiated and increased number of contracts with prepayments to help support working capital during our long production cycles.

In summary, fiscal 2013 is progressing very well for us. To-date and across our primary business segments, we are experiencing strong backlog and new business coupled with margin improvement through effective manufacturing. As a result, we are increasing our fiscal 2013 guidance to revenues of at least $205 million and adjusted EBITDA of at least $47 million.

That concludes our remarks, and we will be happy to take your questions, at this time.

Question-and-Answer session

Operator

Thank you. We will not begin the question-and-answer session. (Operator Instructions) Our first question online comes from Gunnar Hansen from Sidoti. Please go ahead.

Gunnar Hansen - Sidoti

Hey guys. Just wanted to touch a little bit more on some of the pipeline you guys have been referencing, particularly the developmental products in the fine chemicals segment, could you maybe just kind of give us a little more –bit more color into some of those products and end markets there?

Joe Carleone

Well, some of the new products that we introduced towards the end of Calendar 2012 were two oncology products that specifically used new inhibitor mechanisms, and those products are doing very well. Our customers have launched them, and they are gaining market share intwo very specific cancer areas. So, those have turned out to be very, very good products for us right now, and we expect that to continue.

The other one that was mentioned was we completed or nearly completed validation of a new antiviral that, you know, our customer community is predicting to be a blockbuster status in a very short period of time. So, they have gone out ahead and issued up the contract to produce launch quantities for that and expectation of doing that immediately after they get approval. They filed for approval from the FDA and in Europe during April, and they are hoping to get a fast track status which would -- which would mean approval in roughly 6 to 8 months.

Gunnar Hansen - Sidoti

Great. And just in terms of the new antiviral product, I mean, will this just kind of be incremental revenue to your additional or ongoing antiviral products or will there be some just natural cannibalization there?

Joe Carleone

Well, it’s a new area of antiviral for us, so it won’t exactly cannibalize our current products, but some of our current antivirals are approaching towards the end of their lifecycle, and we would expect the demand to start going down. So, as that demand goes down, we see the demand for this coming up and it uses some of the same equipment. So, we see this as a backfill stabilization, there might be a bit of an overlap which is creating some potential upside, but right now, we are forecasting as more of a replacement of older products.

Gunnar Hansen - Sidoti

Great. And I guess just in terms of the specialty chemicals segment, I guess, just trying to look into 2014, maybe just kind of talk about any of the kind of one-time sales you guys are going to have in fiscal 2013 and whether -- how that is kind of projecting into 2014, if you guys could?

Joe Carleone

Well, there have been some new orders that weren’t originally forecasted coming in, and that I think creates some lumpiness this year in that. We do expect to return to a more stable range as we get into 2014 and 2015. In terms of total volume, we continue to forecast that as flat, but again because of the nature of the business and the orders and the deliveries and how we have to book revenues and profits, you sometimes can bundle up such as we are this year in our fourth quarter. So, we do, however, expect that business to be – from a sales and profits point of view quite stable.

Gunnar Hansen - Sidoti

Great. And I guess, just kind of lastly touching on the point about fine chemicals segment kind of being pretty heavily weighted here in the third quarter, at least relative to the second half. I mean, any particular reason for that and maybe a little bit more insight there?

Joe Carleone

I think there is a timing of the big validation program that will complete in that period, and we will get a significant increase in revenue associated with that and the rest is just timing of the orders again. It’s when our customers want the material delivered that reflects that whether it falls in one quarter or another.

We do have long production cycles on these, sometimes they can take 5, 6 months or longer to produce the particular product, and you don’t book the revenue until the end, so when you things lining up in a particular quarter, you will get a larger quarter. So, it’s nothing to do with any type cyclicity in the market or anything like that.

Gunnar Hansen - Sidoti

Hi, guys. Thanks so much.

Joe Carleone

You are welcome.

Operator

(Operator Instructions). At this time, I’m showing no further questions.

Joe Carleone

Very good. Thank you very ladies and gentlemen for joining our call today and we hope you will tune in in another quarter. Thank you.

Operator

Thank you ladies gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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