Cambrex Corporation Q1 2010 Earnings Call Transcript

May. 5.10 | About: Cambrex Corporation (CBM)

Cambrex Corporation (NASDAQ:CYNO)

Q1 2010 Earnings Call

May 4, 2010 8:30 a.m. ET

Executives

Greg Sargen - VP and CFO

Steve Klosk - President and CEO

Analysts

Dan Leonard - First Analysis

Operator

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cambrex first quarter conference call. (Operator Instructions)

Mr. Greg Sargen, Cambrex's Vice President and CFO, you may begin your conference.

Greg Sargen

Thank you, Ashley, and good morning everybody. Welcome to Cambrex's first quarter 2010 earnings conference call. My name is Greg Sargen and I am the CFO of Cambrex.

Before we begin, I'll first provide the following customary Safe Harbor comments regarding forward-looking statements. Today's discussion will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities and Exchange Act of 1934.

These statements may be identified by the fact that words such as expects, anticipates, intends, estimates, believes, or similar expressions are used in connection with any discussion in the future financial on operating performance. These statements are based on Cambrex's current plans and expectations, and involve risks and uncertainties that could cause actual outcomes and results to materially differ from those included in the forward-looking statements.

For further information, please refer to our reports and filings with the SEC.

A replay of the call will be available shortly after we end today till next Wednesday, May 12, by calling 1800-642-1687 domestically, and 706-645-9291 internationally. Please use the conference ID number reference 71160398 to access the replay.

A webcast will also be available on the Investor Relations section of the Cambrex website located at cambrex.com and can be accessed for approximately a month following the call.

Today's call will begin with a business review by Steve Klosk, our President and CEO. I'll follow Steve with a few comments on our first quarter results of 2010 guidance, before opening up the call for Q&A.

With that, it's my pleasure to introduce Steve Klosk. Steve.

Steve Klosk

Thank you Greg, and good morning ladies and gentlemen. I would like to provide a few comments on our first quarter results followed by a brief description of our first quarter acquisition of IEP that we're very excited about. And finally, I will comment on the status of each of our key product categories.

First quarter financial results primarily reflect the impact of lower sales of three of our larger custom manufacturing products. For two of them, the impact is due to the timing of orders relative to last year, and the results for the third product reflect a disruption to our customers' supply chain that will likely result in little to no shipments through the first three quarters of 2010.

We expect our customer to rebuild their inventory levels beginning in late 2010 into 2011. In addition, there were no sales of an animal feed additives product that we exited.

Revenues from clinical phase projects which we call custom development were up slightly over last year, and our DEA controlled substances business continues to grow nicely. Sales of generic APIs were relatively flat year-over-year.

Excluding the impact of foreign currency, gross margins were down 1.5% compared to last year, largely driven by a price decline resulting from the extension of a contract to supply a product utilizing our drug delivery technology, and to a lesser degree, price declines on certain generic APIs.

We remain vigilant in our cost reduction efforts, with operating expenses down $800,000 during the quarter prior to the impact of foreign currency and expenses related to our acquisition of IEP.

Operating profits were down $4.6 million compared to last year, with roughly half of the decline being driven by the impact of foreign currency, and the other half coming from lower sales levels.

Now I'd like to make a few comments about our acquisition of IEP, a biocatalysis business based outside of Frankfurt, Germany. As indicated in yesterday's release, IEP has a large portfolio of proprietary enzymes, which it licenses and sells, often in conjunction with proprietary processes that enable our customers to perform chemical synthesis more efficiently.

IEP has many attributes that we find desirable; it gives our manufacturing teams' access to a valuable tool to potentially improve our production cost. This same capability is available to our customers through the licensing and sale of enzymes. And the business is IP based, (meaning) we believe we can build defendable and sustainable revenue streams based on this technology platform.

The platform consists of highly efficient enzymes, and as such there can be significant cost leverage in utilizing the technology to produce high volume products. While this business is relatively small today, with sales in the mid-single digit millions, we are excited about the opportunities and believe it has considerable upside potential.

We expect the business to generate both positive EBITDA and cash flow in 2010.

Now I'd like to provide a brief update on each of our product categories. First, I'd like to discuss our custom development business, where we provide products and services to our customers with pre-clinical and clinical stage drug development projects. We have commented several times that the funding environment for emerging biopharma companies has been difficult over the last two years, and this has negatively impacted the market for outsourced custom development projects.

For the first time in several quarters, we saw an increase in both the number and size of requests for proposals during the quarter. We are primarily focused on later stage molecules, and we were pleased to be able to bid on several promising late stage projects and commercial products within the quarter. We are hopeful this trend will continue and we will update accordingly as the year progresses. We have 12 products for which we expect to provide phase III materials in 2010.

As we explained a few months ago, we will see lower volumes in 2010 for three of our largest products within our custom manufacturing product category. We think the drivers of the lower volumes in each case are generally temporary, and that volumes should return to normal, or perhaps higher than normal as we head into 2011.

We continue to work with former companies with whom we have key relationships to identify recently commercialized products, where we may be able to develop cheaper, more efficient, or greener manufacturing processes in order to supplant or complement our customers' existing manufacturing arrangements. We expect to begin manufacturing commercial quantities of one product for an approved therapeutic this year, and expect volumes to increase in 2011.

We are currently working on developing improved chemical labs for several additional molecules, and we'll present our improved chemistry to our customers at the appropriate time when we conclude that we can develop a superior process.

Some of these late stage and commercial products have the potential to utilize our new continuous flow microwave assisted organic synthesis technology which would give our customers and Cambrex a technical and cost advantage. Within our drug delivery product category, in late 2009 we negotiated the renewal of the three-year contract for our largest product at lower pricing and volumes and under the prior contract.

With the renewal, we maintain a majority of the customers' volume and avoided the cost and uncertainty of litigation related to intellectual property owned by Cambrex. We continue to work on a variety of new opportunities for 2010 and beyond to return this product category to growth.

We expect to introduce one new drug delivery product during 2010, which is expected to grow in 2011, and qualify a second product in 2010 that should generate commercial sales in 2011.

We continue to explore promising opportunities for a variety of (case mass) over-the-counter products in a unique delivery form, combining our technology and a partner's technology. We are very pleased with continued strong growth in our DEA controlled substances business during the first quarter, and we continue to view the outlook for controlled substances very favorably.

We are constantly assessing new product and technology development opportunities within this market, and expect to introduce another new product in late 2010 or early 2011. For the first time in quite a while, our generic API business has seen a significant increase in orders versus the prior year. Generic API orders were up a little over 20% in the first quarter compared to the same quarter last year, and that trend has continued through April.

We believe that recent order levels for generic APIs indicate that our customers may have let their supply chains run too low and therefore need to replenish stock levels, and that the global trend to shift prescriptions to more cost-effective generic medicines is gaining momentum.

We are developing 15 new generic APIs and will start to generate revenues in 2010. The remainder will ramp up in 2011 and beyond. In addition, we're excited about the possibility to utilize our new platform of low cost proprietary enzymes to improve the competitiveness of some of our existing APIs and to partner with our customers to develop low-cost processes for their new generic products.

For some generic APIs, we believe the enzymology technology may generate the lowest cost manufacturing process. We continue to look to partner with or acquired companies that complement or supplement our existing capabilities, preferably with sustainable revenue streams supported by novel technologies.

In summary, our expectations for 2010 are in line with our prior guidance, and we are pleased with the progress we're making on our key growth initiatives. I look forward to updating you at the end of the second quarter.

I will now turn the call over to Greg.

Greg Sargen

Thanks, Steve. I'll add a few comments on the first quarter results and 2010 guidance and then open it up for questions.

The company ended the quarter with debt net of cash of $82.6 million. The $14 million increase over last quarter includes approximately $7 million related to the acquisition of IEP, and approximately $3 million due to the impact of currency translation on cash held outside the US. The remaining $4 million increase was due to seasonal increases in accounts receivable and inventory during the quarter.

We will continue to maintain our focus on cash flows, with numerous cost cutting initiatives and tight controls on capital spending and working capital. The provision for income taxes totaled $800,000, a 33% percent effective tax rate in the first quarter of 2010, compared to $2.5 million, a 34.7% effective tax rate in the first quarter of 2009.

The company's effective tax rates have been, and are expected to remain highly sensitive to the geographic mix of income due to the company's inability to recognize tax benefits in the US where there has been a recent history of losses.

Our sales guidance for 2010 remains between the decline of 5% and an increase of 1%, excluding the impact of foreign exchange, and we still expect EBITDA to be between $41 million and $47 million.

Capital expenditures are expected to be between $12 million and $15 million, and depreciation is estimated at $22 million to $24 million.

I would now like to open up the call for questions. Ashley.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Dan Leonard with First Analysis.

Dan Leonard - First Analysis

Steve, you sound more positive in your prepared remarks. While you didn't change your guidance, would it be fair to characterize your visibility on that guidance has improved versus a few months ago?

Steve Klosk

Well, I think Dan, you're right. I am more optimistic about certain aspects of the business. We talked about generics in general in terms of order patterns and some of our late stage branded products, and in addition the number of proposals and particularly the size of the proposals that we're bidding on in clinical development.

So, right now we're comfortable with focusing on the guidance we've got.

Dan Leonard - First Analysis

And then Greg, could you remind me, the strengthening US dollar, is that a positive or a negative for you?

Greg Sargen

It's a positive for one of our foreign businesses, the Italian business, and it tends to be a negative for our Swedish business. And that's just based on the fact that our Italian business has all of its costs in Euros, but does 40%, if not a little bit more of its sales in Dollars. So it helps their profitability, and then it tends, to just sum up, your translation impact hurt our Swedish entity who does very little in Dollars.

So depending on how the Swedish Krona is moving against the Euro and against the Dollar in tandem can kind of dictate whether or not it's a net positive or negative. It turned out this quarter that it was a net negative, and overall last year it tended to be a bit of a positive.

Operator

Your next question comes from Dmitry Silversteyn from Longbow Research.

Unidentified Analyst

Good morning, this is Eugene Fedotoff sitting in for Dmitry. Just one question on generic APIs; seems pretty strong orders in the first quarter. Do you think it's always stocking or you think some of that though repeat in the second and the third quarters?

Steve Klosk

The good news was that April held up with a nice increase over prior year. This business is a bit harder to forecast as you know because it's mostly done under purchase order. But we remain optimistic, we've got four good months starting at the end of '09. It was the same situation. So I think it's probably a combination of the restocking, but we also do think going forward we're going to see more volume in generic APIs.

Greg Sargen

Last year, kind of between April and I'll say September, we probably saw the lowest orders at least in my seven years here in the generics business that we've ever seen. So we'll see how the next six or seven months to go, there was really (inaudible) we didn't think it was really a seasonal impact so much as a macroeconomic impact and people just reducing stocking levels.

So hopefully, we will comp well against those months as we move forward, but we anxiously wait to see how the order levels continue.

Dmitry Silversteyn - Longbow Research

And can you also provide a little bit more color on custom development. Steve, you mentioned that number of orders and size of orders are increasing. What's changing there? Is the environment getting a little bit better for you guys?

Steve Klosk

Yes, I think that the macro environment is definitely improving. Venture capitals, funding for some of our smaller customers has improved; I think it's going to get better; it actually is not quite where it needs to be. But both big pharma and what we recall smaller biotech companies, which is a good percentage of the business in the United States seems to be the smaller companies and a good proportion of the business in Europe is large pharma.

So we have a good mix. And probably maybe the most encouraging thing is the number of late stage projects that seem to be high priority now. And of course, we track not only the number of requests for proposals, but also the dollars per proposal. And that's moved up pretty significantly.

Greg Sargen

Just a follow-on comment there. We prefer the later stage bigger projects and the commercial projects. The customers tend to take a little longer to decide on those projects because the impact of their business is more significant. This business, just to clarify, because I think sometimes people lose sight of it; as a percentage of our business in absolute revenue dollars it's pretty small, but it's an important kind of precursor to our ultimate custom manufacturing contracts that we hope to sign when these molecules make it through the regulatory process.

Operator

(Operator Instructions)

Greg Sargen

Well, actually I think if there is no one else left in the queue we can probably call it a wrap and thank everybody for their time very much.

Operator

That concludes today's conference. Thank you for your participation. You may now disconnect.

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