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American Pacific Corporation (APFC)

F1Q10 (Qtr End 12/31/09) Earnings Call Transcript

February 10, 2010 4:30 pm ET

Executives

Linda Ferguson – VP of Administration & Corporate Secretary

Joe Carleone – President & CEO

Dana Kelley – CFO, VP & Treasurer

Analysts

Bruce Baughman – Franklin Templeton

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2010 American Pacific Corporation earnings conference call. My name is Glenn and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) I will now like to turn the conference over to your host for today, Ms. Linda Ferguson. Please proceed.

Linda Ferguson

Good afternoon. Welcome to our review of the financial results for the first quarter of fiscal year 2010. Joe Carleone, Chief Executive Officer and Dana Kelley, Chief Financial Officer will each provide remarks. Following their remarks, we will be happy to take your questions.

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 Annual Report on Form 10-K 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 these non-GAAP measures to the most comparable GAAP measures.

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.

Joe Carleone

Thank you, Linda, and good afternoon ladies and gentlemen. And thank you for joining our conference call. As we forecasted in our prior earnings release, we have just completed a difficult quarter. These results are consistent with our expectations for full year performance, however. Furthermore, we are on track for fiscal 2010 and are reaffirming our guidance. As we progress through the year, we have a number of opportunities and a few challenges to meet our objectives of diversifying our customer base, expanding our product lines, and driving down cost.

Let’s begin with a discussion of our Fine Chemicals segment. While sales were low this quarter caused primarily by timing of orders, we do see evidence of margins improving. This is an affirmative [ph] indication that the operational difficulties reported in the early part of last year are now behind us. On the business development side, the good news is that our pipeline of products and our customer list both continue to expand compared to last year. We are receiving some excellent development product increase and orders. Customers have been experiencing difficulties getting these new pharmaceuticals approved and in the market. This has been and continues to be an industry-wide issue. Not so long ago, drugs making it into Phase III trials had an excellent probability of making it to market. Today, however, this is not the case. In fact, during this quarter, we were disappointed by one of our late phase III projects being discontinued. We have redoubled our marketing efforts to ensure we capitalize on the many opportunities we see out there.

The pharmaceutical fine chemicals industry in the West is going through a shake-out and consolidation of sorts as products mature and new products are slow to make it out of clinical trials. For example, Lonza, one of the largest custom manufacturers of fine chemicals recently announced the closing of its Pennsylvania facilities just a few years after the closing of its California facility. It appears that other smaller plants in the U.S. may be closing soon as well.

AMPAC, however, has not been affected to this degree because of our technological position. While our technologies can support drugs in a variety of therapeutic areas, we continue to focus on antiviral, oncology, and Central Nervous System disorders. We believe all three areas have high growth potential for the Fine Chemicals business.

Furthermore, we continue to align our new technology initiatives with customer needs. We are introducing new reaction technologies that simply the synthesis of antiviral building blocks. We are also exploring new technologies that will provide us with a competitive advantage such as technologies to control particle size. This technology focus is coupled with building relationships in Asia to take advantage of extremely low-cost but high quality starting materials.

Finally I would like to point out that our unique high security facilities are ideal for the production of controlled substance pharmaceuticals. In fact the Drug Enforcement Agency has just approved AMFAC Fine Chemicals for handling Schedule II through Schedule IV materials.

Our Fine Chemicals business has one of the strongest management teams in this industry, supported by a top-notch technical team of chemists, engineers and manufacturing experts. Therefore, after the shake-out, we believe we will continue to be one of the top API custom manufacturers in the Western hemisphere.

Let’s now move to our Specialty Chemicals segment. Our Specialty Chemicals segment performed well this quarter. Driven by our perchlorate products, this segment’s sales are expected to be down somewhat from fiscal year 2009. While the Department of Defense ammonium perchlorate requirement for ballistic and tactical missiles remain rather consistent, the new NASA budget proposal, if it should hold, terminates the consolation program in fiscal 2011. We do not foresee this impacting 2010.

The Ares rocket produced by our customer ATK is a major part of the Constellation Program. We are of course the major supplier of chemicals for this program, and it is a significant portion of the perchlorate demand. There is, however, strong Congressional resistance to this new direction for NASA. On the bright side, NASA’s budget request maintains the funding for heavy-lift launchers, which will use solid rockets. In addition, Atlas V, Torres II [ph] and other vehicles also use solid propulsion for various space launch configurations.

So, future space opportunities should be there in the future in addition to the defense requirements. The management and technical team in this segment have long experience with this product and we are confident that they can adapt to potential change in demand quantities if so required. The demand for other types of perchlorates and chemicals such as Halotron remains stable.

And now moving to our Aerospace Equipment segment, also know as AMPAC In-Space Propulsion. Just the purchase of our liquid propulsion business in late 2004 together with a small European acquisition in 2008, this segment has become a significant part of our growth. This business has grown dramatically in fiscal 2009 by doubling in sales volume compared to fiscal 2008. The growth continues in 2010, but of course at a much more modest rate.

The first quarter demonstrated quarter-over-quarter revenue growth but we did experience operational as well as problematic [ph] issues that impacted this segment’s bottom line performance. We see this as a temporary situation and fully expect profitability to get back on track for the rest of the year.

To address the rapid growth, this segment is adding a large number of engineers. The management team has dealt with these growing pains and assisted by the unemployment situation in the U.S. we have been able to attract some very talented people. Effective shop testing operation is coming on line in the U.S. operations.

We are also continuing our penetration of the European market and are completing the new clean room at our Dublin, Ireland facility. Dublin also introduced a second shift in our machining operations there to support the growth.

We were awarded a position on the BepiColombo project, which is the European Space Agency’s Mission to Mercury. There were also a number of satellite opportunities in Europe for which we have submitted bids. The decision on these bids will be announced shortly.

Our U.S. opportunities continue as well. AMPAC’s unique Thruster technology using platinum-rhodium alloys and other space-age materials is continuing to be competitive discriminator.

Our Company continues to have significant long term growth opportunities. We are looking at cost across the Corporation to improve our margins as well as operational excellence activities to improve our productivity. We see 2010 as a year of repositioning our businesses to prepare to capitalize on new opportunities.

I’d like now to introduce our CFO, Dana Kelley, who will discuss the financial aspects of the quarter and our guidance for the year.

Dana Kelley

Thank you, Joe. For our fiscal 2010 first quarter we are reporting revenues of $30.41 [ph] million, which as Joe indicated is in line with our expectations. Consolidated adjusted EBITDA for the quarter was $4.5 million.

Business volume can vary significantly during our fiscal year quarters. The lower business volume for the first quarter was not sufficient to cover our relatively constant quarterly G&A and interest expense, and, as a result, we are reporting a net loss of $1.4 for the quarter.

Segment performance is also on track with our annual expectations for the year. Fine Chemicals revenue for the quarter was $9.5 million reflecting decreases of each of our core therapeutic areas. We are anticipating that AFC’s fiscal 2010 annual revenues will be down slightly compared to fiscal 2009.

This coupled with the fact that most of our customers order on a calendar year basis contributed to the slow start (inaudible). Despite the more than 50% decline in revenues compared to last year’s first quarter, AFC was able to reduce its net operating loss for the quarter to $740,000. This was achieved through a strong operational performance and no growth in general and administrative expenses.

You will recall that during last year’s first quarter AFC was experiencing margin declines from manufacturing inefficiencies due to the startup of the new process. This problem was in the past.

Our Specialty Chemicals segment reported revenues for the first quarter of $12.8 million. Total perchlorate volume is down for the quarter which is consistent with our expectation that volume will decline by approximately 50% in fiscal 2010. Contractual and (inaudible) price increase substantially offset the volume decline.

Margins for this segment continue to be very strong. In addition, the fiscal 2010 first quarter had some extra benefit. For the full fiscal year, we are anticipating that those declines and the manufacturing cost and the AP per pound will increase because of the expected lower volumes. However, in the first quarter we sold some inventory, which was manufactured last year and had a lower unit cost. This benefit margins for the quarter.

Our Aerospace Equipment revenues for the first quarter continues this segment’s trend of top line growth. Revenues of $8.3 million represents the strongest first fiscal quarter since we acquired the business in 2004. Revenue growth is coming from both the U.S. and European based operations with particular strength in (inaudible) engine revenues for the quarter.

As Joe indicated, the dramatic growth in this segment resulted in often very small and problematic [ph] issues. This translated into an increased cost as increase in estimate cost to perform at a certain of its long term pistons contract. Charges for this expected cost growth were recorded in the quarter and resulted in this segment reporting an operating loss. In addition, general and administrative expenses are increasing as we continue to invest in building our European infrastructure to target European market opportunities.

Cash flow for the quarter was very strong generating $18.1 million in cash flow from operations. The biggest driver of the cash flow for the quarter was the collection of accounts receivable. Some of this cash was returned to working capital as we built Fine Chemical inventories to support product deliveries in the coming months.

Our balance sheet is strong. The cash flow for the quarter reduced our net leverage ratio to 2.4. We have no borrowings on our revolver and we are in compliance with our binding covenant.

We are reaffirming our fiscal 2010 guidance at revenues of at least $190 million and adjusted EBITDA of at least $30 million.

That concludes our remarks and would be happy to take your questions at this time.

Question-and-Answer Session

(Operator instructions) Our first question comes from Bruce Baughman of Franklin. Please proceed.

Bruce Baughman – Franklin Templeton

Hi.

Joe Carleone

Hi, Bruce.

Bruce Baughman – Franklin Templeton

Hi. The – let’s see the forecast talks about CapEx of around $10 million to $14 million. Can you break that down as to how that’s going to be spent?

Dana Kelley

Hi Bruce.

Bruce Baughman – Franklin Templeton

Hi Dana.

Dana Kelley

The capital expenditure range of $10 million to $14 million, the – as we put estimates toward the $10 million you could probably characterize that as maintenance capital. The – between the $10 million and the $14 million are discretionary growth capital project that we will make decisions on during the year as we some of those – the projects particularly in the Fine Chemical area roll out.

Bruce Baughman – Franklin Templeton

But I am wondering because in the opening remarks Joe was talking about various technological initiatives and I was trying to get a feel for what that’s going to cost.

Joe Carleone

It’s mostly in the areas of R&D investment and that fills into our budgeting plan. A lot of those innovations will not require new CapEx. We are using a lot of the (inaudible) equipment especially in the Fine Chemicals area although we do have some new equipment going into to maintain the facility and so forth.

Bruce Baughman – Franklin Templeton

Okay. And then what do you expect to spend this year and maybe yearly on the environmental remediation?

Dana Kelley

The total spend for the remediation including this first quarter, so the total for the full fiscal year is about $2.5 million.

Bruce Baughman – Franklin Templeton

2.5?

Dana Kelley

Yes.

Bruce Baughman – Franklin Templeton

Okay. Okay alright and then when you – you talked about the leverage ratio coming down. I think you said it was 2.5 to 1. That’s your debt or is it net debt to EBITDA, how do you figure that?

Dana Kelley

That’s the net debt. It’s a net debt to EBITDA ratio.

Bruce Baughman – Franklin Templeton

They are projected $30 million of EBITDA?

Dana Kelley

On the trailing 12, yes.

Bruce Baughman – Franklin Templeton

Okay. Alright thanks. That’s all I had.

Joe Carleone

You’re welcome.

Operator

(Operator instructions) There are no further questions at this time. I will now like to turn the call over to Joe Carleone for closing remarks.

Joe Carleone

Well, thank all of you for joining our call and we’ll be talking to you in three months. Good bye.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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