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American Pacific Corporation (NASDAQ:APFC)

F4Q 2013 Earnings Conference Call

December 12, 2013 04:30 PM ET

Executives

Linda Ferguson - VP and Corporate Secretary

Joe Carleone - CEO

Dana Kelley - CFO

Analysts

Paul Berger - Hammock Investors

Operator

Welcome to the Q4 2013 American Pacific Corporation Earnings Conference Call. My name is Robert, 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. Ms. Ferguson, you may begin

Linda Ferguson

Good afternoon. Welcome to our review of the financial results for fiscal year 2013. 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. 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 other 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.

Joe Carleone

Thank you, Linda. Good afternoon ladies and gentlemen, and thank you for joining our conference call. Our fiscal 2013 financial performance highlighted a remarkable year for AMPAC. Our work force performed exceptionally well and responded to some very significant challenges in demand and product scheduling to achieve this outcome.

Fine Chemicals continued its steady growth path not only through the increase in core product revenue but also through developing new products and new customers over time. Specialty Chemicals had a strong, but very unusual year marked by production and sales volume levels of perchlorates not recently seen in this segment. Of course we forecasted the segment to return to pre-fiscal 2013 stable levels in fiscal 2014.

The financial guidance for fiscal 2014 is an adjusted EBITDA of $45 million. Dana will be discussing guidance for fiscal 2014 in more detail during her remarks.

Let us now discuss each of the segments beginning with our Fine Chemicals segment. Fine Chemicals experienced another year of sales growth and brought a major new product through the validation process, a clear demonstration of the strong performance of our Fine Chemicals team. Our highly technical capabilities in this business continue to grow as well in both depth and breadth.

The most significant news is the approval of the new antiviral drug we have been discussing during the past few quarters. As just mentioned we have completed the validation of this new drug, and since then we have been manufacturing pre-launch commercial quantity of the active pharmaceutical ingredient for our customer. This approval is a major step for our customer and of course with the AMPAC Fine Chemicals team. We continue to produce this commercial API in fiscal 2014. Antiviral core products will continue to be the largest component of sales in fiscal 2014.

Central nervous system and oncology core products will also remain as major contributors in fiscal 2014 as well. Our new oncology product introduced in fiscal 2012 is maintaining its demand and is the meaningful portion of our oncology product sales in fiscal 2014. While our development product revenue will decrease in fiscal 2014 because of the completion of the development of our new antiviral product and its transition to a core product, a number of excellent development opportunities exist in the oncology, antiviral and controlled substances areas.

Our pipeline expansion strategy from both the customer and product perspective continues to provide the path for the future. Our work in adjacent areas is also beginning to mature. One area we are targeting is electronic chemicals. This initiative has now grown to multiple development products and while revenue to-date has not been large these chemicals have the ability to generate meaningful revenue in the next few years. Overall we expect the Fine Chemicals segment to organically grow the top line by approximately 10% on an annual basis.

To support this growth we are investing in new capital equipment to expand our capability. One major expansion project is an $8.5 million project to increase our midscale capacity often referred to as semi-works capacity which will come online at the end of fiscal 2014. This and other capacity expansion projects will provide the capability to sustain this growth rate in the near term.

Moving on to the Specialty Chemicals segment; our Specialty Chemicals segment had an exceptional fiscal 2013. The team responded to a major product mix and schedule changes throughout the year. The most notable being the production of a significant volume increase of ammonium perchlorate compared to fiscal 2012. While this increase in volume would not be shipped until fiscal 2014, quality and schedule requirements dictated that it’d be manufactured during fiscal 2013. The team stepped up to achieve this remarkable feat without adding personnel. Of course we expect in fiscal 2014 that ammonium perchlorate production volumes will be significantly less than the prior year production volume.

United States solid rocket motor industry, the major consumer of our ammonium perchlorate, continues to report success. During the quarter our customer, Alliant Techsystems or ATK, reported that their aerospace group won a groundbreaking contract from Orbital Sciences to produce solid rockets for the Stratolaunch Systems Air Launch Vehicle. This new system if successful will expand the use of ammonium perchlorate based rockets into the commercial launch market. ATK also supported Orbital Sciences’ new Antares launch vehicle that uses the CASTOR 30 motor as its second stage as well as two successful Delta 4 launches that used the GEM-60 motors.

The Atlas 5 launch vehicle provided by United Launch Alliance is having success as well. This vehicle uses Aerojet solid rocket boosters. We see the launch manifest for Atlas to be very strong through 2016 at this point with every indication that this will continue beyond that date. DoD, Department of Defense, programs continue on track. We would like to emphasize that as stated in the past these successes in launch programs will stabilize our rocket grade ammonium perchlorate business. We are not expecting significant long term volume growth, but over a long term relatively consistent volume demand for our perchlorate product.

In summary our two major segments are forecast to provide strong financial results for fiscal 2014 albeit not to the combined level of the exceptional results of fiscal 2013. Our business outlook remains positive, opportunities for growth are strong, and our operational teams continued to be highly motivated. I’d like now to introduce our Chief Financial Officer, Dana Kelley, who will discuss the financial aspects of the quarter and our guidance for fiscal 2014.

Dana Kelley

Thank you, Joe. As just stated, we are very pleased with our fiscal ’13 results, which exceeded our expectations for the year. Before I cover actual results I’d like to call your attention to a method of presentation. You’ll recall from last year that our fiscal ’12 results included several unusual and infrequent items, both gains and losses. In addition, fiscal ’13 include charges related to our earlier refinancing activities. To facilitate our year-over-year comparisons, we have excluded these amounts from our as adjusted results. Please refer to today’s earnings release for further details on these adjustments.

For fiscal ’13, we are reporting the 16% increase in consolidated revenues to 215 million with each of our segments contributing. Operating income increased to 41 million and our operating margin improved to 19%. Adjusted income from continuing operations for fiscal ’13 of 24.9 million is a substantial increase from 10.1 million last year. In addition to our improvement in operating income, our refinancing activity made a major contribution to the improvement in our bottom line with interest expense being reduced by more than 7 million. As a result, adjusted diluted earnings per share for fiscal ’13 improved to $3.08 from $1.32 last year.

Moving to our segments; our Fine Chemicals segment revenues increased 12% to 124.9 million for fiscal ’13 which is a record high annual revenue for this business. Aggregate core product revenues were consistent in fiscal 2013 when compared to fiscal ’12. Within core product revenues, oncology products increased by approximately 130% supported by higher volumes of new oncology products that were commercialized last year; oncology product revenue increases were offset by declines from our core antiviral product.

It is important to note that the annual demand for our primary core antiviral products did not decrease rather key capacity were utilized to meet a very aggressive production schedule for the antiviral validation campaign that Joe just discussed. As a result development product revenues which include the validation campaigns increased 64% to 32.5 million in fiscal 2013.

Our Fine Chemicals segment is reported an increase in operating income for fiscal 2013 to 11.3 million with adjusted operating margin improving from 6% in fiscal 2012 to 9% in fiscal 2013. Growth and product mix provided increased gross profit which was offset somewhat by additional operating expenses. We are focused on our growth strategy for this segment and accordingly are continuing to increase our investment in business development and research.

Our Specialty Chemicals segment reported revenues of 82.6 million for fiscal 2013. We generally expect stable performance from this segment; however, fiscal 2013 included unexpended fixed type volume for both rocket grade growth and non-rocket grade perchlorate. This unexpected fixed type volume had favorable effects on operating margins.

In addition, fiscal 2013 was an unusual production year. Our Specialty Chemicals segment operates in the substantially fixed cost environment. Typically production volume and revenue volume are relatively close. In fiscal 2013, production volume substantially exceeded revenue volume because we produced a very large order for shipment in fiscal 2014. This had the impact of over absorbing fixed manufacturing cost and increasing margins.

The reverse is expected for fiscal 2014. We expect that in fiscal 2014 revenue volume will substantially beat production volume causing an under absorption of fixed overhead and a corresponding margin decline. When you look at fiscal 2013 and 2014 combined, however, there is no substantial economic impact due to the production shifting. However, when you look at the fiscal years individually the production shift results in higher than average margins in fiscal 2013 and lower than average margins in fiscal 2014.

Moving to the balance sheet and cash flow, we had an exceptional cash flow year generating nearly 52 million from our operations and ending the year with 61 million in cash. Despite our growth in fiscal 2013, we will able to reduce our working capital by approximately 14 million. Reductions in interest, environmental remediation spending and pension funding also contributed to the improvement.

The primary driver behind the working capital improvement with favorable contract term which enabled us to receive upfront payments to fund inventory and project ramp up, we anticipate that this cash flow benefit will reverse in fiscal 2014 with working capital returning to more normalized level and increasing by approximately 15 million.

Capital expenditures in fiscal 2013 were approximately 14 million with a forecast to increase to approximately 22 million in fiscal 2014. As just stated, we are continuing to invest in midscale capacity for our Fine Chemicals segment to support its growth. Looking to fiscal 2014, we expect consolidated revenue of at least 225 million which is an expected increase of approximately 5% from fiscal 2013.

Our fiscal 2014 adjusted EBITDA guidance is at least 45 million. We expect Fine Chemical segment revenue to increase by at least 10% supported by expected growth in revenues from new core products. Fine Chemical segment margins in fiscal 2014 are expected to be comparable to fiscal 2013. Given the unique and favorable circumstances that drove fiscal 2013 results for our Specialty Chemical segment, we’re anticipating the Specialty Chemical revenue for decline in fiscal 2014 by a range of approximately 5% to 10%.

We expect a corresponding decline in Specialty Chemical margin with reduced production volume have an additional impact on the fiscal 2014 margin. That concludes our remark and we’ll be happy to take your questions at this time.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) and our first question comes from Paul Berger from Hammock Investors. Please go ahead.

Paul Berger - Hammock Investors

Great year, guys. Couple of questions, at one point you were developing a product using [the azide] [ph], I think for fertilization or fertilizer. Is that project still viable?

Joe Carleone

No, it is not viable primarily because of EPA regulatory hurdles to get the product approved, products work straight but EPA is not looking very favorably on approving a workable end point for the requirement for that product. So, at the present time we are looking to sell the intellectual property associated with that product.

Paul Berger - Hammock Investors

And also, I mean years ago when you started the Halotron project, you thought it was going to be extremely successful based on the problems they have with the chemicals they were using before for fire. Is this ever going to take off or is it just kind of like a, just hum along where it is?

Joe Carleone

I think it’s more the latter, I think it’s generating nice margins, it’s a small product line for us that we make out of our Utah facilities and it’s a nice product for us, we are looking at further expansions of it if possible, and we have one new chemical coming along in that same category of a clean agent that is being tested right now.

So, while we don’t expect huge growth out of that product, we do think it is a good product for us and contributes nicely in a small way to the bottom line.

Paul Berger - Hammock Investors

And one final question. During the quarter there was press that you guys might be involved in a major transaction, is anything going on there or is it just pure speculation?

Joe Carleone

Well, let me elaborate on that a little bit. I think, first of all the company did not put out the press release as you referred to and I think those press releases referred specifically to something called strategic alternatives which means a lot of things to a lot of different people. And I think the way we look at strategic alternatives can mean anything from what product lines am I in. Am I going to buy a new product line? Am I going to drop a particular product line, sell a portion of the company or buy an acquisition or make an acquisition issued today, and those types of things.

So the implications are very broad when that statement is made. And I would like to refer back to the presentation that we make to stockholders in March of this past year or this year, fiscal, in March of calendar ’13, I gave a presentation to the stockholders that reviewed our strategic objectives and there were five strategic objectives specified. And in fact if you go to our website you can find this presentation under the investor relation page if you click on websites and presentations and then on presentations. You can still find it. But those five strategic objectives, the first letter of each spelled the word PRIDE. The first one was P, was protect and strengthen our core businesses. The second one was R, review strategic alternatives. The third was improved profitability and return on capital. The forth was diversify our customer base and the fifth was expand our product line.

So, the term review strategic alternatives was used by us back in March and I don’t know if that is the genesis of what people are referring to or not. But again, we looked at that as a broad thing that the Board and management do on a continuing basis to review where we’re going and how we can best create value for our shareholders. So, I believe that, we continue to look for the direction of the company; I believe we’re really on a very good direction right now. But we’re also looking how best to deploy our capital and how best to deploy our other resources.

So, we tend not to respond to these rumors if you will and when we see undocumented reports that come from unknown and unidentified sources, it becomes very hard to provide, to give anyone who is willing to report in that irresponsible manner any credence whatsoever.

Paul Berger - Hammock Investors

Okay. Again Joe you had a great year, thanks and if you would pass my regards onto my old buddy Keith Rooker.

Joe Carleone

Oh yes, just saw him yesterday, in fact, so that’s great. Yeah, he is still on our Board. I will do that.

Operator

And I’m showing no further questions at this time.

Joe Carleone

Okay then, thank you very much and I thank all of you for joining our call. We hope you will join us on our next call which is scheduled, which will be scheduled; it's not scheduled yet, in February for the report of our fiscal 2014 first quarter results. Thank you.

Operator

Thank you ladies and gentlemen; this concludes today's conference. Thank you for participating. You may now disconnect.

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