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

Executives

John Gibson - Chief Executive Officer

Joe Carleone - President & Chief Operating Officer

Dana Kelley - Vice President & Chief Financial Officer

Analysts

Zaheed - BWS Financials

Steve Raineri - Franklin Templeton

American Pacific Corp. (APFC) F3Q09 Earnings Call August 4, 2009 4:30 PM ET

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AMPAC’s fiscal 2009 third quarter financial results conference call. All lines have been place on mute to prevent any background noise. After the speaker’s remark there will be a question-and-answer session. (Operator Instructions)

I would now turn the conference over to Chief Executive Officer, Mr. John Gibson, please go ahead, sir.

John Gibson

Good afternoon and welcome to our review of the financial results for the third quarter fiscal year 2009. Joe Carleone, our President and Chief Operating Officer and Dana Kelley, our Vice President and Chief Financial Officer are with me. After my brief and general remarks, Dana will provide a more detailed review of the quarter. We’ll be happy to take your questions when Dana is finished.

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 under new release at www.apfc.com.

As we explained in May, this quarter’s performance was not unexpected. Two factors affected the performance of the third quarter and year-to-date. First, in our Fine Chemical business as explained in May, there were both cost and revenue issues. Unusual operating costs associated with the scale up and change in processing occurred during the first six months of the fiscal year.

Those excess costs are behind us, but continue to affect the year-to-date performance. On the revenue side, major customers have been balancing inventory thus lowering current demand. For Fine Chemicals, this demand change will effect the full fiscal year.

Second, revenue for Specialty Chemicals was severely reduced during the third quarter. This is essentially due to the timing of revenues and it significantly affected performance in the third quarter. We believe that year-over-year demand however will continue to be stable, and please note that in our new release we have reaffirmed our guidance for the fiscal year in 2009.

We have explained our current year performance with Fine Chemicals in essence with costs and demand. We have several promising projects underway at AFC, and consequently we believe that performance will return to more customary levels.

Aerospace Equipment on the other hand was very positive for this quarter. Third quarter sales exceeded last year by 2.5 times, while year-to-date sales were double of last years revenue for the same period. We are very excited about this business. We continue to explore opportunities for growth, but we are exercising great care in the preservation of our capital. We look forward to your questions. Dana.

Dana Kelley

Thank you, John and good afternoon everyone. Our consolidated results for our fiscal 2009 third quarter are inline with our guidance, that this quarter would be the lowest at the fiscal year in terms of both revenues and profits. Third quarter consolidated revenues of $31 million represents a decrease of 14% over last years third quarter. We are reporting a net loss for the quarter of $3.6 million.

On the year-to-date basis, consolidated revenues of $134 million are comparable to the prior year and we are reporting a net loss of $1.4 million. The modest increase in revenue year-to-date reflects strong growth of our Aerospace Equipment segment, which has grown organically by over 50% thus far this year. This increase is offset by demand decline for our Fine Chemical segment.

The net loss for the quarter and nine month period is primarily attributed to very low Grade I AP volume in our Specialty Chemicals segment during the third quarter. Third quarter AP I volume accounts for approximately 7% of our total expected AP I volumes for fiscal 2009. Third quarterly variance is strictly a matter of time of customer requirement within the year and at a normal variance to this segment. Also contributing to the losses is reduced profitability of our Fine Chemicals segment.

On a segment level, I’m starting with AFC. Our Fine Chemicals segment, fiscal 2009, third quarter and nine months revenue is up $16 million and $68 million, reflects decreases of 20% and 12% over the fiscal 2008 period. As we discussed in our last call and in comparison to fiscal 2008, AFC is in period a difficult year with expected declines in revenues and process.

For the third quarter revenue decline, we saw primarily from the decrease in CNF product sales, resulting from customer order deferrals that began last quarter. The nine months revenue declined, and this reduction in CNF products revenues in addition to oncology product revenues is primarily due to timing between the quarters.

For our fiscal 2009 third quarter, Fine Chemicals segment is reporting EBITDA of $2.5 million and an operating loss of approximately $800,000. For the nine months period, EBITDA is $9.3 million and an operating loss of approximately $400,000. The manufacturing performance improved significantly during the quarter.

Manufacturing inefficiency experienced in the first half of the year are now largely resolved. Nonetheless, the lower revenue and the lower gross profit contribution for the quarter was not sufficient to cover fixed manufacturing and general and administrative expenses, and as a result Fine Chemicals is reporting operating losses.

Specialty Chemicals segment revenues of $6.3 million, reflected a decrease of $5.6 million for our fiscal 2009 third quarter compared to the prior year third quarter. For fiscal 2009, the nine months period, the revenues reported $0.9 million consistent with the prior year.

As I indicated in my opening comments, the decline in the Specialty Chemicals revenues for the third quarter attributed to the timing of the Grade I AP sales, but the third quarter carrying for 7% of our expected annual volume.

Specialty Chemicals operating profit for the third quarter was approximately $600,000 compared to $6 million for the third quarter last year. On a year-to-date basis, 2009 and 2008 operating profits are consistent at approximately $15.5 million. The decline in operating profit for fiscal 2009 third quarter is again a function of volumes.

Perchlorate gross margins remain strong. The lower perchlorate volume affect the segment profit margins in two ways. First, in the third quarter perchlorate comprised only 70% of Specialty Chemicals revenue. This number is typically in excess of 90%. As a result of this change in mix among our Specialty Chemical product, our lower margin azide and Halotron product caused the Specialty Chemicals average gross margin percentage to decrease significantly.

The second factor contributing to some of our operating profits in the third quarter, is that some of our overall volume contributed less margin to cover the relatively fixed general and administrative expenses.

Our Aerospace Equipment segment continues to enjoy significant growth this year, both organically and through acquisitions. In addition to the $4 million in revenue contributed by our first quarter acquisition, this segment has grown organically by over 50% in fiscal 2009.

Third quarter revenues of $9 million, represent a record high revenue quarter. The growth reflects the broadening of the segment into its assistance and engineering aspects of their market, in addition to their historical revenues from faster production needs. Operating profits are also benefiting from the revenue growth.

On a year-to-date basis, this segment is now achieving double digit EBITDA margin, measured as a percentage of revenues. This improvement is due to the economies of scale, with G&A expenses increasing at a lower rate than the revenue growth. We generated approximately $11 million in operating cash for the first nine months that’s it for 2009 and close to third quarter with approximately $25 million in cash, after paying approximately $7 million for our AMPAC ISP Holdings acquisition earlier this year.

Operating cash flow generated in fiscal 2009 to-date, has decreased approximately $10 million, compared to fiscal 2008. Approximately $6 million of the reduction is due to our lower profitability, net of income taxes, with the remaining reduction relating to working capital increases in support of the rapid growth of our Aerospace Equipment segment. We had no borrowings against our revolver and we are in compliance with our banking covenants.

Looking to the remainder of the fiscal year, there has been no significant changes to our fiscal 2009 outlook during the third quarter, and as a result we are reaffirming our earnings guidance. We expect revenues of at least $193 million, and adjusted EBITDA to range from $29 million to $39 million.

This concludes our remarks. We will be happy to take your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Hamed Khorsand - BWS Financials.

Zaheed - BWS Financials

This is actually [Zaheed] calling for Hamed. A couple of questions, what is the contract activity you are seeing out of Europe?

John Gibson

Now say that again, I’ll listen clearly. Your question wasn’t clear.

Zaheed - BWS Financials

What kind of contract activity are you seeing out of Europe?

John Gibson

The contract activity out of Europe, in Aerospace it’s been healthy. We are involved in several proposals and we are very optimistic about the future. To kind of track the activity out of Europe, it affects us and our Fine Chemical business is also fairly stable. What’s typical among these customers is that they have balanced inventory, they cut inventories in certain cases, but we are still optimistic.

Zaheed - BWS Financials

With regards to gross margin, can you give an update on the efficiencies in the Fine Chemicals segment?

John Gibson

Well, my update would be that in the first half of the year; I think we explain previously, although Dana gave probably the better run rate of precisely what we said. Joe Carleone is here, he’s very familiar with the operation, but anyway we were attempting to scale up production and a certain degree of conversion to continuous process and we had problems with it, we think those problems are behind us.

What I mean by that is, that you have efficiencies and how long it takes to produce the batch and if it’s extended, then obviously that costs you the time and as I say, I think that’s behind us. Do you have anything you want to add to that Joe?

Joe Carleone

No, I think absolutely right. We did have a start up process and it took us a little longer to get there to meet our goals and that cause reductions in margins that we reported at the main meeting. We’ve seen those improved significantly and now are approaching our margin targets for that particular product.

Zaheed - BWS Financials

One last question, how certain are you that you’ll recognize revenue from the big quarter in September that’s expected?

John Gibson

I’m not sure what big order you’re referring to.

Zaheed - BWS Financials

It was a question direct from Hamed, so I’m assuming he had spoken to you about it.

John Gibson

Let me ask Dana to respond.

Dana Kelley

I think that Hamed’s question is probably in regard to a prior revenue guidance that had a range of revenue, and that range of revenue was contingent upon an order that we anticipated in the latter part of the year. In this guidance of revenue of at least $193 million, we have renewed that range contingency and so that renewed the contingency regarding that order.

Zaheed - BWS Financials

So, it’s still expected to happen?

Dana Kelley

Yes.

Operator

(Operator Instructions) Your next question comes from Steve Raineri - Franklin Templeton.

Steve Raineri - Franklin Templeton

Can you talk a little bit about the order flow for Fine Chemicals beyond the current fiscal year and how that’s looking?

John Gibson

I’ll ask Joe Carleone to respond to you.

Joe Carleone

Just to repeat the question you’re saying, the orders for 2010, is that what you’re asking about?

Steve Raineri - Franklin Templeton

Yes, what kind of visibility do we have?

Joe Carleone

Well, we haven’t finalized our 2010 plan right now, in fact our divisions are putting those together. We do see as mentioned in May, the CNS or the SMB, where we don’t see that coming back before the end of this calendar year, which puts us into our second quarter of 2010. Beyond that, we don’t have any reaffirmed orders at this point in time to point to that revenue level that will be in next year.

Steve Raineri - Franklin Templeton

I know you guys are working hard on generating new sales opportunities, can you talk about anything there?

Joe Carleone

Well, we are continuing to look at that. We have some promising new opportunities in the HIV area and in the cardiovascular area, but again, I think it will be a while before they mature into large revenue producing opportunities.

Steve Raineri - Franklin Templeton

Is there anything that tells you that what’s occurred over the past six months is just pipeline inventory adjustments and that that business is coming back, the SMB and CNF business? Do we feel like it’s coming back? What change since the last time we spoke several months ago that’ll give you more or less confidence about that?

Joe Carleone

Well, I wouldn’t say that anything has really changed. I think the pharmaceutical companies are putting their plan together in summer as they typically do and they usually give us an idea of the forecast in September, October timeframe and then place their firm orders in the December timeframe.

So we are a little bit ahead of where we need to be to accurately respond to your questions. I think we don’t want to respond in a negative sense and we haven’t been told anything more negative as we go forward.

Steve Raineri - Franklin Templeton

Nothing more positive either then….

Joe Carleone

Correct

Steve Raineri - Franklin Templeton

Just on corporate expenses, they’ve been pretty sticky I guess, is the word I would like to use. Although they are down in the current quarter, they are nine months there, they are up a tiny bit. Are we in a trend for lowering costs here and where do you think things shape out for next year?

Dana Kelley

The changes that you’re looking at in corporate expenses for this fiscal year reflects some factors in there, that for fiscal 2009 we at both Corporate and Fine Chemicals segment are not occurring or anticipating paying any incentive bonuses until that results in decreases in corporate operating expenses.

That’s being offset somewhat by increases that we have in this fiscal year for propellant expense. I think going back to our news that we had in fiscal 2008, but we only have four months to bring in 2008 as opposed to nine months and ultimately 12 months in this fiscal year.

I think looking forward to fiscal 2010, that operating expenses at the corporate level and company wide as a master of fact are something that we would target to make as sufficient as possible as we go through and build up our fiscal 2010 plan. Part of it, we work them altogether, to see how the revenue and operating profit is in China so it’s been accordingly across our business units.

Steve Raineri - Franklin Templeton

Most companies, when you’re in a difficult period you say, “Okay we’re going to try to cut 10% for next year.” Is there a budgeted plan in terms of cost reduction for next year?

Dana Kelley

We’re not at that stage of our budgeting process yet. It certainly is a normal way to put budgets together, but we are not at that stage of the budgeting process yet.

Steve Raineri - Franklin Templeton

Okay, and then finally my question I think I ask every quarter, potential dividends and whether or not we would think about paying one out.

John Gibson

We don’t anticipate paying a dividend at this time.

Operator

(Operator Instructions) There are no further questions.

John Gibson

Dana would like to correct one statement that may have been misunderstood in her remarks.

Dana Kelley

During my prepared remarks, I inadvertently stated that our adjusted EBITDA guidance for the year ranged from $29 million to $39 million. I intended to say, they range from $29 million to $32 million.

John Gibson

I would like to just add to Dana’s statement about cost control. We do have a very active program to cut costs wherever we can. I believe it’s publicly known that we did reduce our headcount in Sacramento, that’s at AFC and if we have do it elsewhere we will. So that’s under very active consideration.

Anyway, I’d like to thank you all for participating today and we will look forward to talking to you in December. Thank you very much and I will turn it over to you operator.

Operator

Thank you. This concludes today’s conference call. 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: American Pacific Corporation F3Q09 (Qtr End 30/06/09) Earnings Call Transcript
This Transcript
All Transcripts