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Aceto Corporation (NASDAQ:ACET)

F2Q10 Earnings Call

February 05, 2010, 10:00 a.m. ET

Executives

Ted Ayvas - Director Corporate Communications, IR

Doug Roth - CFO

Vincent Miata - CEO

Albert Eilender - Non-Executive Chairman of the Board

Analysts

Dan Rizzo - Sidoti & Company

Alan Brochstein - AB Analytical Service

Lenny Dunn - Freedom Investors

Toni Pollock - Maxim Group

Operator

Good morning, ladies and gentlemen and welcome to the Aceto Fiscal 2010 Second Quarter Financial Results News Release and Conference 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.

This conference call will contain forward-looking statements as that term is defined in the federal securities laws. All statements other than statements of historical facts may be forward-looking statements. Words such as may, well, expect, belief, anticipate, project, plan, intend, estimate and continue and are opposite and similar expressions are intended to identify forward-looking statements.

Generally these statements relate to our business plans initiatives or strategies projected or anticipated benefits or other consequences of Aceto's plans initiatives or strategies financing plans projected or anticipated benefits from acquisitions that Aceto may take or projections involving anticipated revenues earnings or other aspects of Aceto's operating results or financial position in the outcome of any contingencies.

The forward-looking statements contained in this conference call include but are not limited to statements regarding the company's strategic initiatives included but are not limited to providing vaccines for companion animals selling in to the Japanese pharmaceutical market, selling finished dosage from generic drugs and statements regarding the prospects for long-term growth. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances.

These statements involve risk and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements due to a variety of factors.

More information about these factors can be found in Aceto's filings with the Securities and Exchange Commission including but not limited to its latest Annual Report filed with the Securities and Exchange Commission on Form 10-K. Aceto undertakes no obligation to publicly update or revise any forward-looking statements whether as the result of new information, future events or otherwise.

I'll now like to turn the call over to Mr. Ted Ayvas. Mr. Ayvas you may begin.

Ted Ayvas

Thank you. Good morning and welcome to Aceto Corporation fiscal 2010 second quarter conference call and audio webcast. With me today are Albert Eilender, our Non-Executive Chairman of the Board, Vincent Miata, our CEO and President and Douglas Roth, our Chief Financial Officer. During this call, Doug will give an overview of the company's financial results for the fiscal second quarter ended December 31st, 2009 and Vince will discuss the performance of our business segment and provide an update on our various business initiatives. Following that we will open the call for questions.

I'd now like to turn the call over to Doug Roth to discuss the company's second quarter financial results. Doug?

Doug Roth

Thanks Ted, and good morning everyone. In the fiscal second quarter, net sales decreased a little more than 4% to $71 million from the $74 million in sales that we reported a year ago. Our gross profit decreased 8% to $11 million in the fiscal 2010 quarter compared to $12 million in the 2009 quarter.

SG&A expenses increased 37% to $14 million in the 2010 quarter compared to $10 million in the year ago comparable quarter. The fiscal 2010 quarter had been negatively, was negatively impacted by three, one-time pre-tax charges, which we previously discussed in our December 22nd 2009 press release. The first charge of approximately $2.6 million represents the cost associated with the separation of our former Chairman and CEO principally for salary and other related compensation.

The second charge approximately $1.2 million is related to the previously announced rationalization review of our SG&A. [Apps and Ps] charges, our SG&A would have been approximately $10.4 million. The third and final charge that negatively impacted our quarterly results was a $900,000 non-cash charge to the cost of goods sold related to the write-down of certain inventory items to their estimated net realizable value.

As a result, we ended the fiscal 2010 second quarter with a net loss of $2.5 million or $0.10 per diluted share compared to a net income of $1.1 million or $0.04 per diluted share in the 2009 quarter.

Had it not been for the charges resulting from these reviews and the cost related to the company separation with its former Chairman and CEO, we would have reported net income of $600,000 or $0.03 periods for the quarter.

Now, I would like to turn the call over to Vince Miata to discuss the performance of our business segments as well as our business initiatives. Vince?

Vincent Miata

Thanks Doug and good morning everyone. During the second quarter in our health science segment sales increased slightly more than 3% from last year's comparable quarter. Domestically the increase was primarily due to the realization of new products from our pipeline in the generics group and an increase penetration of our customer base in the domestic Nutraceutical products group, which was partially offset by sales in domestic pharmaceutical intermediates.

Overseas, our foreign operations experienced an increased level of reorders of existing products during the quarter. In order to more accurately put tray the scope of our business activities, we've changed the name of our chemicals and coloring segment, we call Specialty Chemicals. In the Specialty Chemicals segment, sales declined 16% on the same quarter comparison basis largely due to the tough economic conditions continuing to affect all of the chemical consuming industries that the Specialty Chemicals segment serves.

Sales in our Crop Protection segment declined almost 6% from the same quarter last year largely due to decline in the sales of herbicide primarily used on peanuts due to a reduction in the number of peanut acres planted.

I would like to now take a look at the company's business initiatives and proofread you with a brief update. Regarding Animal Vaccine Project the process would be USDA is still ongoing. Aceto was notified by the USDA this past November that the testing of a certain sample was unsatisfactory. They requested that we provide them with a new sample from the original lot of vaccine for retesting, which was provided to them at December, and we're still waiting their results.

Retesting of the same sample submitted to the USDA by the product manufacturer or supplier confirmed its original test results that the vaccine is within all specifications submitted to USDA.

In addition, we did submit the compilation of our field safety testing data, and at this point in time, we've provided all the information that the USDA has requested from us. Our initiatives to enter the Japanese pharmaceutical market continues to gain traction and we continue to view this as a good long-term business opportunity for the company.

This initiative represented a geographic expansion of an existing business model, and not a new business for the company. And as such going forward, we intend to treat Japan as another market within our health science business segment. Our effort to sell finished dosage form generic drugs continues to move forward, and we're working on further enhancing our product pipeline.

We continue to believe that this will prove to be a viable long-term business opportunity for us. In our Crop Protection business, we've begun to see the balance sheet effect of entering the Glyphosate market for the current growing seed. If you look at our financials, you will see that our cash position has declined while both our inventory levels and accounts payable have increased in large part due to purchases of Glyphosate.

During the past several months, we've conducted a comprehensive review of our operating structure both here in the United States and globally. As a result, we've restructured the way Aceto conducts its international business into a management metrics consisting of an international, regional, and local leaders.

We've adopted this approach from the success from implementation of our global nutraceutical business. I believe that these changes will result in Aceto being more focused than ever and will lead to a more profitable company.

Now, I'd like to open the call for questions. Operator, can you assist us in this endeavor.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operators Instructions) The first question is from Dan Rizzo from Sidoti & Company. Please go ahead.

Dan Rizzo - Sidoti & Company

Hi guys, I saw that the health sciences was up marginally for the quarter is that indicated that we've seen the bottom and we were coming of a little bit in terms of sales?

Vincent Miata

I like to believe that Dan in fact when I gave granular, I see that in the domestic side, we are up even more than the blended side and going forward, I'm seeing some very sanguine forecasts from our business managers here and abroad that suggest, the operative word is suggest that we might have seen the nattier in this segment.

Dan Rizzo - Sidoti & Company

And is that with specialty chemicals, is that mean that not the case?

Vincent Miata

No, in specialty chemicals actually the sales decline, you understand Dan that for the most part our specialty chemical business is North America centric. And for the most part when I did my personal analysis on the quarter-to-quarter, what was interesting is that the sales declined and sales decline was a lot more severe in decline in sales council which is a good indicator for us because its characteristic of a lower price pound centric business.

So, all pounds were of a mere fraction quarter-to-quarter which indicates to watch something in this business many years that the underlying demand, the demand for all the markets to bio-specialty chemicals is slowly starting to come back and that's commensurate with some of the other people in the chemical groups and they are reporting a recoveries in Q2.

Dan Rizzo - Sidoti & Company

Okay. Good. And with the Glyphosate, I mean, that thing is so now is what's the season for that, if we had?

Vincent Miata

Yes. The Glyphosate, you understand our business model, we have to make purchases from other [IPs], which expanded the cash and of course draw about the API like Doug putting his numbers. Its coming in now, we are about to begin formulation shortly. So, to be coming out of it and speak it quite soon and there again the forecast from our crop protection people are quite good. So, we are still excited about that there.

Dan Rizzo - Sidoti & Company

Okay. That's good. Okay. Actually that's all for now, I'll get back in queue.

Vincent Miata

Fair enough, Dan.

Operator

The next question is from Alan Brochstein from AB Analytical Service. Please go ahead.

Alan Brochstein - AB Analytical Service

Hi guys, first of all, let me thank you for this additional clarity, this is your second call as CEO and I'm very happy on that front. I had just two quick questions and then a broader question, the first one is on the, I can't pronounce it Glyphosate, generic, we'd just call generic round up. Just to go back there was this mystery of potential buyer that your predecessor has been talking about, and you won't go into do the deal told, the buyer was lined up was the way I understood it. Now, that you're not talking about that if I can read between the lines that's not necessarily the way this is going down, is that right?

Vincent Miata

Let me be very clear please. Absolute, what was said in the past, there is no mystery buyer here, okay? This is a normal extension of a business model that we've been in since the early 70s, okay? What makes this different and will perhaps you took away from prior comments was this is a true commodity, which is uncharacteristic of the specialty, crop protection, herbicide, another pesticide that we do, but in no way shape-of-form, is this to be taken as anything other than a normal pseudo endeavor, leveraging our supplier contacts and our relationships across the Board with all customers in totality, and that's what it is, clearly and simply and honestly.

Alan Brochstein - AB Analytical Service

Okay. Then let me, maybe Doug is the better person to answer the second part of that question. You guys are obviously trying up some capital here. Can you kind of walk through the economics in terms of what kind of turn on invested capital, what's driving you guys to make, what kind of assumption do you guys making, is this going to be normal margin ultimately for the company, or is this any different from your normal margin profile?

Vincent Miata

Alan, without getting to financial, Doug can feel free to chime in. I think, we've said this publicly that because of the cash outlays on this thing, and because of the commodity nature of this product, if you would look at segmental analysis and look at our typical gross margins on crop protection, they will definitely be a reduction in gross margins because of the commodities nature of this product. We still believe though of course we are going to see higher top-line and even with the gross margin reduction, as the standalone product, if I would get that specific it will be a profitable business for us.

Alan Brochstein - AB Analytical Service

Okay. My second line of question is just could you elaborate a little bit on nutraceuticals, its really kind of a high-growth area, I think, and just wondering, do you have any two or three key ingredient types that you guys are dealing with what is pro biotics, or each, I don't know what it would be but can you just shed a little bit more clarity on that?

Vincent Miata

Alan, I won't get too specific, but we are basically in the realm of nutritionals and what they call nutraceuticals. If you know the business, you know they what I call quasi pharmaceuticals meaning that for years the government speaking from the U.S. did not treat them with the same severity that they did APIs but that's very quickly changing. The FDA is clamping down on this business segment, as it becomes more popular.

We are involved in virtually the full gamut of nutritionals and nutraceuticals. Obviously, we have products strengthened to start now, as more so than others but it's the business that they contribute nicely both here and abroad and the important takeaway Alan is for you is, as the governmental agencies get tougher with purveyors because they recognize the people are consuming this, we are poised to do a much better job vis-à-vis other companies that trade in this because of our regulatory set up and because of our sensitivity the regulator product like APIs. So, it's a very, very, we are very optimistic, as I said in my written statement. We've actually couple of years ago globalize that business to take full advantage of all its possibilities and on the strength of the success proven to date, I have used that as a model to what the globalize the other businesses as part of the press release.

Alan Brochstein - AB Analytical Service

When I look at your overall health sciences, I don't think you gauging and breakout exactly what this is but can you give us some sort of scale of, how much is the nutraceutical grown over the last few years or approximately what percentages, is it of your overall business compared to just API on pharmaceuticals?

Vincent Miata

I can't give detail on that I think we just encompassed in our health science, it is growing at a nice clip, as I said and that was the impetus for us to even get more synergies out of it by taking what heretofore had been disbud business groups and bringing in more commonality. In fact, if you look at my structure about, you don't know my structure but the nutraceutical group now is a subset of health science does have a reporting directly to me which really, really conveys its importance to the enterprise even though we don't report it separately.

Alan Brochstein - AB Analytical Service

Okay. And then, my last question is just broader, I know, you've been CEO for a few months obviously you've been with the company for a very long time but just in the last few months, as you've taken on some additional responsibility and kind of tried to put your own stone for [inaudible] things are going to happen and the last time we spoke on the call you said you are more of a numbers guy but besides this obviously taking the structure from nutraceutical and applying it more broadly to the organizations are there any other major things you would like to point to that you are doing a little bit differently than before?

Vincent Miata

Well, let me give that answer in two parts, you know, you understand our business model, we are middlemen, we are distributors, okay and everyday and I have used this analogy, we wake up then we have to work to keeping our business in place. If we don't have IP, we don't have all, these are the patents that other purveyors do in the chemical or pharmaceutical arena. So, we are a people business, we leverage our relationships with suppliers and customers and why I restructured it was to take advantage of getting each and every ounce of synergy out of the talent we have on this side of the ocean and the talent we have in Europe and the talent we have in Asia. So, that's a critical component of our organic growth strategy. Okay that's part A.

Part B, and I think, this came on Board with the splitting up of the office between the CEO and the President which is that I hold and the non-executive Chairman which is Mr. Eilender is sitting next to me hold is to, one of ours valuable assist to me will be to bring his M&A experience, which I am honestly a little short-off coming up in the Aceto culture to find proper fix, proper combinations that make sense to Aceto to add to the organic growth.

Hopefully the combination of which is going to make shareholders like yourself very, very happy.

Alan Brochstein - AB Analytical Service

Okay. And then, one last question. May be a repeat from what I asked, I just want to make sure because when I talk to people about to, my clients about this, the one thing we worry about, we just can't get our hands around this, is this some sort of structural change where the middleman, forget about the nutraceuticals but just in the more traditional API business, is there any sort of structural change that's kind of diminishing your need. Are there any supplier some how finding your clients, I mean, is there any sort of dis-emendation

Vincent Miata

Alan, I've been in this business a long time, as you know, from time memoriam, the bugaboo of a distribution company particularly in the specialty area, where your margins tend to be higher than commodities, that is a constant concern, okay. We keep stressing the value we add as a middleman because the moment you don't add that value there is human inclination to this intermediate, so that's an ongoing issue for us, it’s not new.

Specifically, to answer your question in healthcare it is getting tougher, I spoke last quarter about the pressures on prices is more and more generic API players into the practice, I spoke about pressures from governmental agencies on healthcare of course both here with Mr. Obama and abroad with these bids and these tender systems. That's one of the motivating fact, as Alan why we are looking quite seriously and developed quite nicely into a downstream finished dosage form model in addition our traditional models of buying and selling APIs and buying and selling pharmaceutical intermediates and buying and selling a nutritionals.

So, there is some point in your question, it doesn't keep me awake at night but it motivates us like I said to look at a new wrinkle on our health science business model which is evidence by our all efforts in finished dosage pharmaceuticals, generic pharmaceuticals.

Alan Brochstein - AB Analytical Service

Okay. And this is really for Al I guess, and just kind of in response to what you are telling me…

Vincent Miata

Quickly Alan, please, we have got other people in the queue that we need to deal with, but go right ahead, go ahead quick.

Alan Brochstein - AB Analytical Service

My last question is, you guys are trading at or below tangible book value and when I hear that Al, you will add here is M&A potentially, I mean, shareholders put this troubles that you are facing. What are kind of the keepings that are driving you I wonder too, how we are going to recognize the value if you don't mind addressing that and that's it for me?

Albert Eilender

Well, its probably the key question but the value covered about number of ways but clearly, we are looking to improve the profitability of the business and we've talked in the past one other things we're focusing on more or so now that we may have in the past is how we can add to our business through acquisitions whether they be fixed or either drop-ins or whether they are somewhat complementary to our existing business.

People talk about the money that we had on our balance sheet, there are a lot of different factors now that are coming into play, as we look at that. One is acquisitions, and we're looking at those carefully. Another one is, we've talked about before is Glyphosate is in fact for the use of the portion of our balance sheet. We're looking at building relocations for the company; we've talked about that before.

So, there are a lot of things that we're doing simultaneously but the bottom-line is, I think, we're all focused on doing the things to enhance the value to shareholders, but it isn't necessarily a question of doing our share buyback, as being the only factor. It's one of a number of factors that we're evaluating all the time. We're cognizant of the fact that we have authorization, for share buy back. We've talked about it before, not to say what we're not going to do, but where other SEC restrictions in terms of black out periods and what have you so but its all being examined and talked about on a regular basis.

Alan Brochstein - AB Analytical Service

Thank you.

Operator

The next question is from Lenny Dunn from Freedom Investors. Please go ahead.

Lenny Dunn - Freedom Investors

Good morning. This is in so much a question, but a compliment. I appreciate the fact that I don't have to listen very carefully because you guys speak at a normal pace and I also appreciate the fact that you're giving a straight talk, which I believe that will pay benefits from people being more comfortable with their investment in the company. So, I guess, I wanted to say that and…

Vincent Miata

Thank you, Lenny.

Lenny Dunn - Freedom Investors

And I think that going forward things do look promising and obviously this animal vaccine is taken an interminably long-time and it's impossible to give the data but it does look like it will eventually evolve in our favor. Is that an accurate assumption?

Vincent Miata

We certainly hope so.

Doug Roth

I mean, I am still optimistic, but being very, very honest with you and you've cited the change in style here, I am optimistic, yes.

Lenny Dunn - Freedom Investors

Well, thank you very much.

Operator

(Operator instructions) Dan Rizzo from Sidoti & Company is back on line with a question. Please go ahead.

Dan Rizzo - Sidoti & Company

Just a follow up. In terms of the inform generics the final form and you see this progressing, could you guys give us any examples of that, I mean, or sales are likely to progress to a more reasonable level, to a more substantial level or how is that working?

Vincent Miata

Yeah. We are talking about the dosage what we call the finished dosage from inform generics, what we spoke, we've talked about a couple of [cad] that we've launched publicly when we call the pain reliever we indent to try and goodness to try, we've got a few behind that and more importantly we are working on that pipeline assiduously. I am not prepared to give you numbers in this forum but its finally growing Dan, remember, we re-tweak the approach at one point, we thought, we would beyond end-all of some of the stuff and we've taken on some capable partners now to deleverage their strengths with our strengths and if the winning combination I am seeing results and I am optimistic going forward.

Albert Eilender

Yeah. I would like to make a comment on that as well and that is when we talk about acquisitions, we've sort of broaden our horizon and we are not just looking at acquisitions but talking about in launching our partnerships and potential joint venture. So, this is clearly and area that we are optimistic about certain future and we are putting some effort into expanding it both internally and externally.

Dan Rizzo - Sidoti & Company

Okay. Great. And one final question on the, just on the crop protection, I know Glyphosate, the focus where now, I think you mentioned, you are pretty, suspension the pas that there are other drugs you are working on, is that still the case?

Vincent Miata

Dan, yes obviously you met that product. Absolutely, look Glyphosate took the center stage because of its prominence and its prevalence but behind that going back to our traditional model, which is still proven, quite viable, products like Halosulfuron, which we launched last year, we are varying products in various stages of EPA approval and sourcing considerations and customer discussions, so yes, its an absolute emphasis for us going forward. Glyphosate is the [inaudible] to watch, but the more importantly there will be hopefully new products on a regular basis at better margins, going back what I said earlier to Alan.

Dan Rizzo - Sidoti & Company

Okay. Alright, thanks guys.

Vincent Miata

You are welcome.

Operator

(Operator Instructions) The next question is from Toni Pollock from Maxim Group. Please go ahead.

Toni Pollock - Maxim Group

Good morning.

Vincent Miata

Good morning.

Toni Pollock - Maxim Group

Could you give us a little more feedback on Japan and the close possibilities there and how quickly you are going to ramp up and what's inhibiting the growth there?

Vincent Miata

Sure Tony. I was just in Japan, I did an Asia swing back in January and I sat down with our selling partners with the Chairman of the selling company and we talked about what we've done and more importantly where we are going. This and I think the prior Chairman has alluded to this, and this is absolutely true. This is a tried and trued model that works for us in other parts of the world North America and in Europe and its starting to work for us but the key here the operative work Tony is starting. The Japanese business is a very, very unique collaborative, consensual, difficult culture centric business that is not going to be crack, as quickly as others would have envision.

Giving you my personal view, it viable, we're going to put up some reasonable numbers, I won't quantify them, but what we're going to do is because its so part and parcel of what we do day-in, day-out, there's no reason to put it up on press releases or run it up a flagpole because its an extension of what we do. Our chairman back in November, our non-executive Chairman when he wrote his letter to the shareholders bifurcated this and it's important to keep this in mind.

Initiatives that are part and parcel of what we do everyday will be just that part and parcel of what we do everyday and we're going to hold down to promotion, we're going to deliver on the results and not promote the promises. New things like finished dosage forms, like the pet vaccine perhaps going forward could bear some publicity because of the newness of their nature versus our normal business. So, it's viable we're going to tuck it in to our pharmaceutical intermediate business and that's it.

Toni Pollock - Maxim Group

Are the products that you are bringing in to Japan are they competitive products or things that are already there from the Japanese, are there new products going in are they both?

Vincent Miata

They are essentially, Tony, what we do for other customers and other parts of the world we're addressing big Pharma in Japan, which are the proprietary, the ethical houses the inventors, who are coming under the same pressures, as the Japanese government looks to demographics of the people there, seize them getting over puts pressure on the big Pharma they had a low cost, they go internally and say, my god, how do we lower costs, cost of component of that is the chemical raw materials, we address them, we show them our strengths and sourcing correctly with proper regulatory support from places like China or India and slowly but surely they get the message and we start the process resulting relationships with them just like we do in the United States, just like we do in Western Europe.

Toni Pollock - Maxim Group

Great. Thanks.

Vincent Miata

You are welcome.

Operator

We have no further questions at this time. I'd now like to turn the call back over to Mr. Miata for closing comments.

Vincent Miata

I want to thank you all for your time hanging there, you probably sense the optimism in my voice, its based upon some empirical data and some instinctive data have been at this a long time. We will deliver for you going forward. Thanks very much and have a great day.

Operator

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

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