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American Pacific Corporation (NASDAQ:APFC)

Q4 2009 Earnings Call

December 22, 2009 4:30 pm ET

Executives

John Gibson – Chief Executive Officer

Joseph Carleone – President, Chief Operation Officer

Dana Kelley – Vice President, Chief Financial Officer

Analysts

[Bruce Bauman – Franklin]

[Alex Hesman – Wells Capital Management]

[George Gets – Private Investor]

Operator

I would like to welcome everyone to the fiscal year 2009 and the fourth quarter conference call. (Operator Instructions) It is now my pleasure to turn it over to Mr. John Gibson, Chairman and CEO.

John Gibson

Good afternoon. Welcome to our review of the financial results for the fourth quarter and full fiscal year of 2009. Joe Carleone, our President and Chief 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 and year. 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 investors section of our website under News Releases at apfc.com.

As is noted in our earnings release, revenue declined approximately 3% in2009. The decline is accounted for in Fine Chemicals while both Specialty Chemicals and Aerospace exhibited gains compared to 2008. We believe that we have dealt with our operating issues in Fine Chemicals and that we are responding to a changing market.

There is a significant one time charge associated with 2009 and that is in the area of environmental remediation. We now have the experience of operating our remediation plant for several years. It has been successful and we are effectively decomposing in the ground water with the plant located at the toe of the plume.

The development which has made the new charge necessary is a more accurate understanding of the rate of flow of the ground water from south to north. We now understand that that flow is slower than originally estimated which in turn affects how long it will take to remove all Perchlorate.

Without modification to our earlier remediation efforts, it would take many more years than we had originally anticipated to fully remediate the ground water. Therefore, we are adding withdrawal wells farther south and thus we hope to shorten the total time of remediation. This change will be accomplished at a cost of $13.7 million and we have maintained an excellent relationship with the regulating agencies.

As we have previously indicated, we will continue to examine opportunities to grow our company through acquisition. We believe that we are well prepared for the new year. As a positive note for our company, Joe Carleone who is with us today will become CEO on January 1, just a few days away.

While I will miss the challenges of leading our company, I want to assure you that with Joe, it will be in excellent hands.

Dana Kelley

We concluded fiscal 2009 with revenues of $59.7 million and adjusted EBITDA of $32.6 million which is line with our guidance for the fiscal year. While total revenues represented a slight increase compared to 2008, adjusted EBITDA represented a significant decrease year over year.

As discussed during last quarter’s conference call, this decrease in revenue is primarily due to a decrease in demand for our Fine Chemical products. Increases in sales, especially Chemical products and the doubling of Aerospace Equipment products offset most of the Fine Chemical revenue decline.

The adjusted EBITDA decrease also results from the Fine Chemical decline in revenues compounded by increased costs during start up of our new Fine Chemical process. This new chemical process is now under control and margins on that product during recent quarters have increased considerably.

Specialty revenues decreased in adjusted EBITDA was offset by improved performance in the other two sectors. The net loss for the year was $6 million as a result of an after tax environmental remediation charge of $8.2 million.

In 2006 we began full scale remediation of ground water containing ammonium chlorate in Henderson, Nevada as a result of our historical operations which were there from 1955 to 1988. As John indicated, within the last few months conducted by our third party experts indicates that the progression of ground water towards our remediation is occurring much more slowly than originally estimated.

If no additional action is taken, the life of the project would have been well in excess of 50 years. We believe that we can reduce the project life significantly by installing additional equipment in more concentrated areas. This change resulted in a charge of $13.7 million to fiscal 2008 and 2009 earnings.

We believe that the benefit of overall comp reception as a result of reduced process life fully supports our investment in the additional equipment.

Turning to our segments, Fine Chemical revenue for the quarter was $27.7 million and $95.5 million for the year. The annual revenue represents a 23% decrease from fiscal 2008 revenue of $124 million. 2008 was a banner year for our antiviral products with one of our customer purchasing a single product that totaled nearly 50% of Fine Chemical sales.

With the decrease of this product in fiscal 2009 the increases in other products, while significant could not make up for this lost order production.

Fiscal 2009 segment EBITDA was $15.3 million or 16% of revenue which is significantly lower than the $29.1 million or 23% of segment revenue demonstrated in 2008.

As noted, much of the margin decline was due to the start up costs of the new chemical process. We saw significant increases in Fine Chemicals margins in the fourth quarter of 2009 which further demonstrates that these start up issues are now behind us.

Our Specialty Chemical segment reported an excellent year with revenues increasing to $62.2 million from $57.1 million. This increase came from a combination of greater proprietary volume and an average year price increase. The price increase results from a product mix of higher priced formulations.

The deliveries to the pharmaceutical industry outside of the United States also contributed to the sales increase. Segment EBITDA increased to $27.5 million from $26 million in fiscal 2008 primarily as a result of the increased sales volume.

Our Aerospace Equipment segment more than doubled year over year growing to $32.5 million. This segment improved $11.1 million by organic gains with the remaining $6 million growth coming from acquisitions.

Segment EBITDA also grew to $4.5 million or 13% of revenue compared to $1 million or 6% of revenue a year ago. This margin improvement we believe brings this segment closer in line with the Aerospace industry.

Operating activity improved $11 million of cash in fiscal 2009 and we ended the year with cash balances of $21.7 million and no borrowings on our revolver.

Our guidance for fiscal 2010 is revenue of $190 million and adjusted EBITDA of at least $30 million. We expect fiscal 2010 to be a repositioning year for Fine Chemicals with sales declining slightly compared to fiscal 2009. However, we have a much improved product which we believe will be the future of our core products.

For Specialty Chemicals while the forecast is to have lower core rate demand, unit prices will increase to largely offset the demand decrease. We expect revenues to be down year on year 10% in the segment which is within our expected range of performance for this stable, non growth segment.

We expect our Aerospace Equipment segment to continue to grow but at a more modest pace after a year of such intense growth. The satellite market continues to experience significant demand for our products and our intra propulsion system continues to expand throughout the U.S. and Europe.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Bruce Bauman – Franklin]

[Bruce Bauman – Franklin]

Could you elaborate a little more on the outlook? I was surprised that you’re expecting Fine Chemicals revenues to be down over the year just past and also surprised that you’re expecting a lower level of adjusted EBITDA.

Joseph Carleone

I think we’re still experiencing a reduced demand for our core products and development pipeline products have not quite yet matured to where they’re in full production and able to replace those revenues so we’re going to see a repositioning year I believe where you’re going to see the core product revenues be down, but our development product revenues will be up which points to a better future for that business.

[Bruce Bauman – Franklin]

When you talk about development products, does that term suggest that there will be a period of time during which your assets are employed producing something that you’re not selling?

Joseph Carleone

No, we typically produce everything under contract and it will be sold. There will be slightly less utilization factor on our equipment because those larger production runs have not yet materialized.

As far as development products, we make them in smaller quantities and those are for phase two and phase three production so those are not the very long runs of large production products. We define development products as those products that we’re working on in phase two but we also define them as working on development to get into something that’s already in production that we’re not currently producing.

So we’re working our organic growth in both of those areas and hope to get those to materialize in the very near future.

Operator

Your next question comes from [Alex Hesman – Wells Capital Management]

[Alex Hesman – Wells Capital Management]

Going back to the Fine Chemicals, could you tell us how many products you’re generally producing over the year and whether that’s changed from year to year?

Joseph Carleone

The quantity could change from year to year but we produce, we have six what we call core products that are routinely produced and the quantities of each of those will vary from year to year based on the inventory and sales of our customers and how they balance that load.

On the development side, we can pursue as many as 25 or more products in smaller quantities, everything from grams to hundreds of kilograms used in various phases of development.

[Alex Hesman – Wells Capital Management]

Do you have any of the core products come off patent over the year?

Joseph Carleone

One of our core products went off patent in the U.S. in this past year. It’s still on patent in Europe and other countries in the world. That does reflect in reduced quantities for that particular product over time.

[Alex Hesman – Wells Capital Management]

How about any in 2010?

Joseph Carleone

There are no other core products that go off patent in 2010. I do need to point out that a couple of our smaller core products in the Oncology area have been off patent for many, many years. They’re 30 year old products but we’re still the only producer of those. The generic companies just haven’t picked those up and we continue to manufacture them for the branded drug manufacturers.

[Alex Hesman – Wells Capital Management]

On the environment charge, was the decision to do that required by the government or did you just make that decision to speed up the completion of the project?

John Gibson

That was discretionary. We were not ordered to do anything. As we began to understand the flow of ground water which is very difficult in this geology, it became apparent it was slower than we had originally anticipated, which means you add years to how long you would have to remediate.

So we believe that that cost the additional years exceeded, putting in an additional well or two and piping that water to the remediation facility. But we work very closely with the State. They’re fully aware of everything we plan to do, have done and plan to do.

[Alex Hesman – Wells Capital Management]

Could you just remind us again of the process that’s going on? You’re withdrawing water and processing it and then re-injecting it. Is that basically how we can understand it?

John Gibson

Yes, but not exactly. What is different about ours is that we motivate for lack of a better word, in situ remediation, which means that we add a chemical to the water that we’ve withdrawn and that chemical then encourages the growth of anaerobic organisms in the water as it returns to the underground.

Those organisms then in search of oxygen; decompose and that become that organisms’ source of oxygen and the Perchlorate dust is decomposed. We believe this is a more efficient and less costly manner in which to treat the water than if you were trying to do the same all above ground.

[Alex Hesman – Wells Capital Management]

So by doing this upfront, or drilling more withdrawal wells, are we going to decrease the potential costs down the road?

John Gibson

That’s the whole idea. For a given period of time you decrease the cost by decreasing the number of years. But the point of it is that you will have water for lack of a better term, richer than you’re now injecting or more of it, so that shortens the period of time.

The annual cost may actually be a little bit higher, but the time that you operate the facility will be reduced significantly. I think initially I believe it was forecast as 40 years and we’re reducing that significantly by doing what we’re doing.

Dana Kelley

I agree with what John’s saying. They’re related to the discretionary decision that we made to invest in this additional technology and equipment. It is based on a discounted cash flow modeling analysis which looked at the expected cost and cash of running the remediation status quo compared to the cash flow that we would need to invest to make additional equipment, but then operate it over a shorter period of time.

And based on those analysis it easily supported our investment into the additional equipment at this point.

Operator

Your next question comes from [Bruce Bauman – Franklin]

[Bruce Bauman – Franklin]

Could you give us an idea what the CapEx budget is for the year apart from the remediation spending?

John Gibson

I think it’s $14 million.

Dana Kelley

We have guidance in the range of $10 million to $14 million with that range being discretion on the three projects that are under evaluation.

[Bruce Bauman – Franklin]

Do you expect to spend the $13.7 million in a single year or what’s the time frame for that?

John Gibson

No, this is over time.

Dana Kelley

Up to $13.7 million, just over $9 million is what is in non remediation instead of the capital investment expenses. So the time extends over a period of approximately two years. The balance of it is spread over the full life of the project in annual operating costs.

[Bruce Bauman – Franklin]

Is it discounted in any way?

Dana Kelley

It is not.

Operator

Your next question comes from [George Gets – Private Investor]

[George Gets – Private Investor]

Getting back to the remedial charge you’re been discussing, I take it the company has no recourse as far as a claim with its insurance carriers over some of the capital costs of the extra expense involved?

Dana Kelley

It’s not an insured claim.

[George Gets – Private Investor]

The company has filed an insurance claim or hasn’t?

Dana Kelley

It’s not an insured cost. It’s not an insured claim.

Operator

There are no further questions at this time.

John Gibson

Thank you all of you for participating today. We look forward to talking with you in February.

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