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Executives

David Burke

Salvatore J. Guccione - Chief Executive Officer, President and Director

Douglas Roth - Chief Financial Officer, Principal Accounting Officer, Treasurer, Chief Administrative Officer, Senior Vice President and Assistant Secretary

Analysts

Frank Charles DiLorenzo - Singular Research

Aceto (ACET) Q4 2013 Earnings Call August 29, 2013 9:00 AM ET

Operator

Welcome to the ACETO Corporation Fiscal 2013 Fourth Quarter Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to David Burke, Vice President of Investor Relations at the Ruth Group. David, you may begin.

David Burke

Thank you. Good morning, and welcome to ACETO Corporation's Fiscal 2013 Fourth Quarter and Year-End Conference Call and Audio Webcast. With me today are Sal Guccione, President and CEO of ACETO; Douglas Roth, CFO of ACETO. During this call, Sal will provide 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 fourth quarter and year ended June 30, 2013. Following that, we will open the call for questions.

I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as believe, expect, anticipate, plan, project, seeks and similar expressions that involve numerous risks and uncertainties. These actual results could differ materially from those anticipated or implied by such forward-looking statements, as a result of certain factors as set forth in the company's filings with the Securities and Exchange Commission.

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

Salvatore J. Guccione

Great. Thanks, David, and good morning, everyone. Well, I'd first like to start off by saying that we're very pleased with our performance in fiscal 2013, both from a strategic point of view, as well as our actual financial results.

Regarding the numbers, net sales this year reached a new record high of just about $500 million. That's a 12.5% increase over 2012. Net income also reached a new record level of $22.3 million for the year, which is up 31.5% compared to 2012.

As for earnings per share for fiscal '13, we reported a record $0.81 a share, compared to $0.63 a share in fiscal 2012, or a 28.5% increase. I'd also like to note, after adjusting for $3.2 million in accrued contingent consideration related to the Rising acquisition, we generated $0.89 a share on a non-GAAP earnings basis in 2013. That's an increase of 37% versus the $0.65 achieved in fiscal 2012. So overall, I think very good numbers.

With regard to our segments, all 3 of our business segments grew in 2013, with particularly strong performance from our Human Health segment and our Pharmaceutical Ingredients segment. The Human Health business performed extremely well, with sales increasing by 23% to $130 million this year.

Rising Pharmaceuticals outperformed our expectations through a combination of organic business growth and generic product launches, with a total of 9 new generic drugs launched in fiscal 2013; 3 of those new products were launched in the fourth quarter of '13, and therefore, should carry over into 2014.

As you know, our finished dose products carry a higher gross margin than products from other business units, and therefore, contribute to overall margin expansion. We continue to see strong interest in the recently launched generic products.

I'm also happy to note that as we continue to invest in our Rising pipeline in 2013, we almost doubled our R&D spend to $2.8 million versus the $1.5 million spent in 2012. Regarding our Pharma Ingredients business, we also achieved strong sales growth there, growing at 13.5% in fiscal '13 to $185 million.

This segment saw strong reorders of existing products. We also launched several new products, including one significant product in the third quarter of '13, as you might recall, and the commercialization of the API Group's first co-investment product. Just to follow-up on that product that contributed significantly to the fiscal '13 and the fiscal '13 Q3, in particular, results, I'm very pleased to let you know that we received the orders now for fiscal 2014, and so we currently expect that sales and profits associated with that product will be at least as much in fiscal '14 as they were in fiscal '13.

Having said that, as we have discussed previously, our business is difficult to predict on a quarterly basis due to the timing, size and nature of our orders.

Performance Chemicals segment sales increased by 5% during fiscal 2013, also to a level of $185 million. And that was fueled primarily by sales of our Agricultural Protection Products business. So again, all 3 segments grew nicely in 2013.

We ended 2013 with a solid balance sheet with over $35 million in cash, cash equivalents and short-term investments. And our strong operating performance allowed us to reduce our bank debt by about 32 -- by about $13.7 million to a level now of $32 million. So essentially, at this time, we have 0 net debt.

We enter 2014 with good momentum, and we're well-positioned to invest in our internal growth initiatives, as well as continue to pursue strategic acquisitions.

Regarding the Rising pipeline, it remains healthy, as we have approximately 40 projects in the pipeline, and we currently expect to launch 6 new generic products during fiscal '14. Obviously, that number can go up or down over the course of the year as those development projects progress.

Just an update on the management transition at Rising. The transition is going smoothly, with Satish Srinivasan taking over the reins at Rising in July. He's our new President and COO there. He's done a good job assimilating into the business and taking over things through both his years of industry experience, as well as continued support from Ron Gold and Dave Rozen.

Satish is building out the Rising sales and marketing force, as well as its development effort, and he's brought on some other seasoned executives into Rising. Specifically, just this week, two folks, Paul Krauthauser and Sherri Leonard, joined us. Paul in the position of Senior Vice President of Sales and Marketing, and Sherri in the position of Vice President of Portfolio Strategy.

Paul has almost 20 years of generics industry experience. He joins us from Sandoz, where he was Director of National Accounts. And prior to that, he spent significant time both at Apotex and mostly with Teva Pharmaceuticals. So really excited about his joining us. And Sherri has over 25 years of generic industry experience. She served in a variety of areas, but in particular in business development, R&D and portfolio strategy. And she's been with the likes of OrchidPharma, Corepharma, Pfizer and Endo Pharmaceuticals. So again, we're -- I'm extremely excited by the talent that's been brought onto Rising, and I think we're well-positioned for the future.

Finally, I'm pleased to convey that the ACETO Board of Directors has declared a regular quarterly dividend of $0.06 per common share, that represents a 9% increase on an annualized basis. And this quarterly cash dividend will be distributed on September 27, 2013 to shareholders of record as of September 16, 2013.

With that, I'll now turn the call over to Doug.

Douglas Roth

Thanks, Sal, and good morning, everyone. Let me start with a detailed financial discussion by focusing on the fiscal 2013 fourth quarter results.

Net sales for the fiscal 2013 fourth quarter were $123 million, an increase of 11% from the $111 million we reported in fiscal 2012 fourth quarter. On a segment basis, for the fiscal 2013 fourth quarter compared to the same fiscal 2012 period: Human Health sales rose 37% to just over $37 million; our Pharmaceutical Ingredients segment increased by 3% to $42.7 million; and finally, our Performance Chemicals rose by 2% to $43.3 million.

Fourth quarter fiscal 2013 gross profit was $24.5 million, which was just over 18% higher than last year, which was driven mainly by our Human Health business.

Gross profit in the Human Health segment was $11 million for the quarter, 59% higher than the same quarter last year. Gross margins widened to 30.3% compared to 26.2% last year. As Sal mentioned earlier, this margin expansion is primarily due to the continued strength of recent product launches from our Rising Pharmaceutical business.

Our SG&A expenses for the quarter increased 7.3% to $16.1 million. However, I would note that part of the increase is due to the $400,000 earn-out charge related to the Rising acquisition, and increased accrual for performance awards, related to the overall performance of the company, and increased R&D expense at Rising, which also contributed to the increase in SG&A.

Our reported net income for the quarter was $5.4 million, or $0.19 per diluted share, compared to $4 million, or $0.15 per diluted share, in the prior period. After adjusting for the Rising contingent consideration charge, ACETO's net income, on a non-GAAP basis for the fiscal 2013 fourth quarter, was $5.6 million, or $0.20 per share.

The $400,000 earn-out charge represents the final purchase price earn-out charge related to the Rising acquisition, so there'll be no more charges in the future.

Turning to the full year fiscal 2013 financial results. Sales were strong, up 12.4% to just under $500 million, compared to $444 million in the year-ago period. Gross profit for the 12 months ended June 30, 2013, were $98.3 million, an increase of just under 20%, compared to gross profit of $82 million in the prior year period. SG&A for the year was up 12.7% versus last year. This, again, was primarily due to the previously mentioned expense for the additional Rising earn-out consideration, as well as increased R&D spending, again, at Rising.

So finally, net income for the 12 months ended June 30, 2013 was $22.3 million, or $0.81 per diluted share, compared to $17 million, or $0.63 per diluted share in the prior year. This reflects an increase in net income of 31.5% for the 12-month period.

Adjusting for the Rising contingent consideration charge, ACETO's net income for fiscal 2013, year-to-date, was $24.3 million or $0.89 per diluted share.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from Frank DiLorenzo from Singular Research.

Frank Charles DiLorenzo - Singular Research

I had a question on the projects that you plan on launching in 2014. The average market size for these products, could you give us a little guidance if it's going to be similar to what we saw in 2013, a little bit larger? I was wondering where those products are going to fall into place as far as the size of the potential market.

Salvatore J. Guccione

Yes. In general, the products that we're launching in '14 are of similar nature to the ones we launched in 2013. So again, the Rising general strategies to go after products that are smaller in nature with a little bit lower level of competition. So in general, I'd say, roughly in that same size category, which takes it to, on average, a product that's expected to do maybe $2 million, $3 million a year in revenue at peak.

Frank Charles DiLorenzo - Singular Research

Okay. And also, on the R&D spend, you've increased it, which I think makes sense quite a bit in 2013. Do you have any idea where the growth rate might be in '14? Is it high single-digit, low double-digit, or you don't really have that type of guidance at this point?

Salvatore J. Guccione

So we have an idea. The R&D number at Rising -- again, since a lot of our work is done in partnership with other folks, does bounce around on us from quarter-to-quarter. But we do plan, again, to increase that number probably 25% to 50%, I'd say. It might be $800,000 to $1 million higher in 2014 as it was in '13.

Operator

[Operator Instructions] And we did have another question from Frank DiLorenzo from Singular Research.

Frank Charles DiLorenzo - Singular Research

Just a follow-up. The growth in Human Health for the fourth quarter was really strong. I was wondering if you had a specific number for the other 2 segments as far as what the growth might've been just for the fourth quarter on a percentage basis, and also, the total dollar amount? I don't know if you've broken that out for us.

Douglas Roth

Yes, Frank, we have that. I mentioned it in my commentary. But just the Performance Chemicals for the fourth quarter sales increased by 2% to just over $43 million, and the Pharmaceutical Ingredients increased by 3% to, again, $43 million.

Frank Charles DiLorenzo - Singular Research

Okay. Just one other question, I'll be done. And that is with regards to the pipeline. I know in the past you've provided a lot of detail, and you said you have about 40 projects ongoing. But as far as separate from that, just opportunities, do you see, aside from those 40 projects, similar more opportunities than what you may have seen this time last year? And also, can you maybe provide us with an update on the acquisition front, as far as what might be going on there over the next year?

Salvatore J. Guccione

Sure. Sure. So a couple of things. One, with respect to the pipeline, I think I would characterize it by saying, in terms of the number of opportunities, it's probably the same as a year ago. I can't say there's a lot more or a lot less. Each year, more products come off patent as you look out, 2, 3, 4, 5 years, and so the number of opportunities that are out there to us is large, and so we feel good about that. I'd also note, as I said, we've got 40 products in the pipeline right now. Just to remind you, those are products that are -- those are projects that are approved projects. We have another group of potential projects behind that from which this is kind of a treadmill, right? So as products fall off in '13 as you launch them or they fall away, whatever the situation is, you start looking out to '17 and '18, and that list is a list that's another sizable group. And so, in total, we feel the opportunities are just abundant now as 1 year ago. With respect to acquisitions, I think that was the other question. Again, as I said on other calls, we are looking. We've been very happy with the Rising acquisition, and so we'd love to find another company with similar characteristics as Rising. And nothing to report yet, but we are looking.

Operator

And we have a question from Lester Petrizzi [ph], a private investor.

Unknown Attendee

Sal, you disclosed to us that the bulge in the third quarter last year, or this year, related to this, I think, you said a couple of new APIs that were launched. You're now informing us that, that will actually repeat maybe to the same extent. Is it uniformly over the next 4 quarters, the quarter we're in and the next 3? Or is it going to repeat just once like a big bonus in the third quarter again? And Doug, if you would just -- the EBITDA for the year, is it just under $45 million?

Salvatore J. Guccione

Okay, I'll handle the first part, Les, and I'll let Doug answer the second part. So Les -- appreciate the question. The -- as I mentioned, the orders are -- they're in hand. So at this moment, again -- and business -- our business is a little bit difficult to forecast and orders kind of come in sporadically, so to speak. But at this moment, we expect it to be more in line as a bolus [ph] and it would be Q1.

Unknown Attendee

Okay. And did you disclose -- is that a generic customer product or is it a branded pharmaceutical?

Salvatore J. Guccione

We didn't disclose that and -- neither the product nor the customer due to confidentiality reasons.

Unknown Attendee

Fair enough.

Salvatore J. Guccione

Doug?

Douglas Roth

Okay. And Lester, on your second question, you are correct. Our EBITDA for the -- on a GAAP basis was $43.6 million compared to just under $34 million last year, so an increase of 29%.

Operator

And that was our final question. I'll turn it back over to you, Sal, for any closing remarks.

Salvatore J. Guccione

Okay. So again, thank you, all, for calling in, appreciate your thoughts and comments and support. I wish you all a great Labor Day weekend, finishing up the summer. And we'll see you next quarter. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.

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