American Pacific Corporation (NASDAQ:APFC)
F3Q13 Earnings Call
August 7, 2013 04:30 PM ET
Linda Ferguson - VP and Corporate Secretary
Joe Carleone - CEO
Dana Kelley - CFO
Terry Smith - Emerald Assets
Welcome to the third quarter 2013 American Pacific Corporation Earnings Conference Call. My name is Laura, 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 this conference is being recorded. I’ll now turn the call over to Linda Ferguson, Vice President and Corporate Secretary. Linda, you may begin.
Good afternoon. Welcome to our review of the financial results for fiscal year 2013 third quarter. Joe Carleone, Chief Executive Officer; and Dana Kelley, Chief Financial Officer will each provide remarks. Following their remarks, we will be very 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 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 the risk factors 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.
Thank you, Linda. And good afternoon ladies and gentlemen, and thank you for joining our conference call. We are pleased to report that AMPAC’s quarter three 2013 performance clearly met our expectations. Demand continues to be strong in both our Fine Chemical and Specialty Chemical segments.
Our core products continue to perform well and our new pharmaceutical development products continue on schedule. The fiscal 2013 outlook continues to be very positive and we are reaffirming our full year fiscal 2013 guidance of an adjusted EBITDA of $47 million. Dana will be discussing guidance in more detail for fiscal 2013 in her remarks.
Let us now discuss each of the business segments beginning with our Fine Chemical segment. Our focus business development approach is successfully addressing the growing number of new business opportunities in pharmaceutical Fine Chemicals products. We believe the growth and opportunities arises from two major shifts in the industry. First and foremost is the approval of new molecular entities by the Food and Drug Administration over the last two years with 2012 having the largest number of approvals in about 15 years, this trend is continuing in calendar 2013 with 40 new molecular entities approved through the middle of July.
Second and perhaps even more important for U.S. and European suppliers, large pharmaceutical companies are enhancing their supply chain strategy with a shift back to Western suppliers for the most promising drugs. We believe this is being driven by their insistence for impeccable quality, collaborative development of processes and stringent schedule requirements.
Recently, we have added a new oncology product to our pipeline. This product is about to enter Phase III clinical trials and uses the new inhibitor type mechanism in the treatment of cancer. This new product represents our third active ingredient in this category, and we believe it has a high probability of approval. You may recall that we have reported previously two new inhibitor type oncology products that have become core products for us within the last 12 months.
Our Fine Chemicals segment has recently begun production of large quantities for our major new antiviral active ingredient, after the successful completion of the validation campaign in our fiscal third quarter. Our customers projecting a very strong demand for this drug, it could reach blockbuster status very quickly. This drug has been acceptingly successful in a number of Phase III trials. FDA approval is expected to occur before the end of calendar 2013.
We’re very pleased with the growth in our development products. As reported previously, we now expect this group of development products will generate over 25% of our revenue in fiscal 2013 with the Fine Chemicals segment.
Our work in adjacent areas is also beginning to bear fruit. One area we are targeting is electronic chemicals. This initiative has now grown to four development products, and while revenues to-date has not been large, these chemicals have the ability to generate meaningful revenue in the next few years.
Our pipeline expansion strategy from both the customer and product perspective continues to provide the path for future opportunities for potential growth and is an essential part of the long term stability of the Fine Chemicals segment. Fine Chemicals’ core products are on track with sales of antiviral and central nervous system products trending in a very similar fashion to the first nine months of fiscal 2012.Oncology products sells are a larger percentage of total sells in fiscal 2013 compared to fiscal 2012. This is driven by the introduction of three new oncology active ingredients.
Moving on to the Specialty Chemicals segment, as 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. These deliveries are on track and we fully expect that Specialty Chemicals segment to achieve their fiscal 2013 objectives.
The solid rocket motor industry continues to report success. During the quarter, ATK, our customer, reported that their solid rocket motors supported three operational missions and a ground test of a new large class motor. These launches included the CASTOR 30 Motor, ATK’s GEM-60 motors and the Orion motors.
In addition, three ATK solid rocket motors powered a D5 missile on a successful launch in April, marking the 144th successful test of a D5 missile since 1989. ATK is also progressing towards the qualification motor test for NASA’s space launch system later in this year.
The Atlas 5 launch vehicle provided by United Launch Alliance is having success as well. This vehicle uses Aerojet rocket, solid rocket boosters for certain missions. The five solid boosters provided by our customer played a major role in the successful launch of the mobile user object system satellite into orbit in July for the U.S. Navy. The mission was launched from Cape Canaveral Air Force Station in Florida, aboard a United Launch Alliance Atlas 5 Rocket. Three additional launches of this identical satellite are planned.
We want to make it very clear that as stated in the past, these successes in launch programs will be healthy for the rocket motor industry. We are not, however, expecting significant long-term growth for rocket grade ammonium perchlorate. We continue to expect that that rocket grade ammonium perchlorate product line will provide consistent annual revenue.
In summary, our two major segments, our forecast to provide strong results for fiscal 2013 as evidenced by the reaffirmation of guidance. There is a motivation and performance of our operational teams that result in the continuing improvements in our manufacturing activity and of course the dedication of our business development team for continuing to fill the pipeline.
I would like now to introduce our CFO, Dana Kelley, who will discuss the financial aspects of the quarter and our guidance for fiscal 2013.
Thank you, Joe. For our fiscal ’13 third quarter and nine months period, we are reporting increases in consolidated revenue to 70 million and 156 million, respectively. Our Fine Chemicals segment continues to support our revenue growth, operating margins also improved reaching 20% for the fiscal ’13 third quarter and 15% year-to-date.
Our bottom line continues to report the percentage improvement from the prior year. For fiscal ’13 third quarter, we are reporting net income of 8.4 million and diluted earnings per share of $1.3. Year-to-date, we’ve achieved net income of 12.3 million as diluted earnings per share of $1.53.
Our marked improvement in our Fine Chemicals performance combined with our refinancing activity that reduced interest expense by more than 2 million per quarter each contribute to the net earnings growth.
Moving to our segment, our Fine Chemicals segment reported revenues of 44 million for our fiscal ’13 third quarter an increase of 22%. This quarterly revenue level is the second highest since API acquired this business in 2005. The increase in revenue reflects strong development product revenues due to the completion of a significant validation campaign for antiviral product that is in its late stage clinical trial.
Year-to-date, Fine Chemicals revenues up 103 million reflected 31% increase over last year. In addition to the aforementioned increase in development product revenues, the year-to-date comparison often reflects increases from our new oncology products which were commercialized in the later part of last year.
For the full fiscal year we continue to expect Fine Chemicals revenue to grow by more than 10%. Production and delivery schedules this year price more of Fine Chemicals annual revenues in the second and third quarters and conversely lesser amounts in our first and fourth quarters. Our Fine Chemicals Segment is continuing to report substantial profit improvement in fiscal 2013. Year-to-date this segment has achieved an operating margin of 10.5%.
Effective production and increased volume shave boosted growth margins by 6 percentage points compared to a year ago. Gross margin improvement were offset some by higher operating expense including additional investments in business development and research and development.
Our Specialty Chemicals segment reported revenues of 21 million for the fiscal ’13 third quarter and 47 million year-to-date. Fiscal ’13 demand for rocket grade perchlorate includes both tactical missile and base launch programs.
While year-to-date fiscal ’13 revenues are lower when compared to the prior year, the results are consistent with our expectation of the inter quarter timing of Specialty Chemicals revenue this year. currently substantially all of the segments revenues for the remainder of the fiscal are under firm purchase order or contract and we continue to expect that for the full year, Specialty Chemicals revenues will also increase by approximately 10% which is within the historical stable range for this segment.
Strong operating performance across our business segment and our capital restructuring is enabling our continued strong balance sheet; our cash balance of 61 million at June 30th exceeded our total outstanding debt of 57 million. Cash flow from operations was particularly strong during the quarter bringing our working capital to its lowest level in recent years. we are currently ahead of our cash forecast for the full fiscal year and anticipate that our operations will use cash during the fourth quarter. In particular in late June we received a substantial customer deposit which is intended for and will be used to purchase raw materials for the related production contract in Q4.
In summary fiscal '13 continues to progress well, we are reaffirming our full year guidance of revenues of at least 205 million and adjusted EBITDA of at least 47 million. That concludes our remarks and we would be happy to take your questions at this time.
Thank you and I'll begin the question and answer session, (Operator Instructions). Terry Smith from Emerald Assets is online with a question.
Terry Smith - Emerald Assets
The press release says that completion of the validation campaign for anti-viral and late stage clinical trials, I was just wondering if you could tell us how much longer this contract goes and if you'll be supplying commercial API to this product.
Yes, we do have a contract already for commercial quantities and have begun the production of those in anticipation of the launch of that product.
Terry Smith - Emerald Assets
So it could be a material source of revenue in fiscal 2014.
Yes, it could be a material source of revenue in 2014.
(Operator Instructions). And we have no questions at this time.
Okay, well thank you very much, I want to thank all of you for taking the time to join our call and for your interest in our company, we hope you join us again in our next call, thank you.
Thank you ladies and gentlemen, this concludes today's conference, thank you for participating, you may now disconnect.
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