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Executives

Linda Ferguson – VP of Administration & Corporate Secretary

Joe Carleone – President & CEO

Dana Kelley – CFO, VP & Treasurer

American Pacific Corporation (APFC) F2Q10 (Qtr End 03/31/10) Earnings Conference Call May 6, 2010 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2010 American Pacific Corporation Earnings Conference call. My name is Jennifer 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) As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Linda Ferguson, Corporate Secretary. Please proceed.

Linda Ferguson

Good afternoon and welcome to our review of the financial results for the second 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. You can identify these statements by the fact that the use of words such as will, expect, believe and other words in 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 statements section of our earnings release produced today to the SEC on Form 8-K and also to our most recent quarterly report on Form 10-Q 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 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 expected the fiscal 2010 second quarter results were considerable improvement compared to the first quarter. For the remainder of the year however we see the sales in our Fine Chemicals segment falling below our initial expectations.

Therefore we have reduced our guidance. While this is certainly a disappointment, we see opportunities in the near future that will allow us to return to a path of organic growth. As indicated in our last call, 2010 will be a year of repositioning our businesses to prepare for new opportunities we see emerging.

To capitalize on these opportunities we have charged our business units with four objectives namely, protect our core businesses, diversify our customer base, expand our product lines and most important, improve our profitability. Success on these four important objectives will produce value added growth for AMPAC.

Let’s begin with a discussion of our Fine Chemicals segment. We continued to see Fine Chemicals margins improve compared to last year, reaffirming that last year’s inefficiencies are behind us. The sales forecast for the remainder of the year however is disappointing. It is important to note that in spite of this decrease our core pharmaceutical products remain sound albeit at reduced volumes.

Demand for some of these products has been reduced because of increased competition faced by our customers from new products and in one case from generic intrusion. This is why it’s imperative that our pipeline generate new commercialized products for us. The positive news is that the opportunities for new business continued to be strong in this segment. For example, our initiatives to enter the control substance market is beginning to bear fruit.

We expect to be qualified to produce schedule to controlled substances by the end of the year. The controlled substance area experiences less intrusion from foreign competitors because there is a preference for buying these drugs from domestic sources. Our announced relationship with Codexis allows us to employ new technology for the production of drug substance building blocks with no additional capital expenditures.

Our marketing partner in Japan, Inabata is helping us expand our capabilities in technologies into Japan. Both relationships will help us to diversify our customer base. Our current core customers are also providing us numerous opportunities on their development products. In addition our entry into chemicals for drugs to combat potential bio-terrorism is progressing well.

Because of the fine chemical industry consolidation in the United States, we are able to purchase the assets of an excellent plan in LaPorte, Texas for less than $500,000. This FDA approved plant gives us an additional 30% capacity and positions us for growth at a fraction of the capital expenditures that would be required to build this facility. The plant is relatively new with top of the line equipment. Further more it has the capability to handle energetic reaction including commercial scale hydrogenation as well as azides, phosphine and cyanide reactions.

As the chemical pharmaceutical industry rebounds, we will be there to serve our customers increasing needs. Before is in the heart of the chemical industry in Houston area, giving AMPAC Fine Chemicals access to some of the best infrastructure and personnel resources in the world.

Let’s now move to our Specialty Chemicals segment. This segment performed well this quarter inline with our expectations. As demonstrated and expected sales volumes were down compared to last year, but profit margin percentages were consistent with historical values. The pressing issue for this segment is the future quantity of our largest product in this area ammonium perchlorate, which is used in virtually every solid rocket motor. The defense department requirements for solid rockets remains consistent since tactical and strategic rockets will need ammonium perchlorate.

The major unknown for 2011 and beyond is the NASA requirement. Historically both NASA and DoD supported the solid rocket motor industry. The NASA’s budget proposal for 2011 however leaves it unclear as to what support it will give in the area of large solid rocket motors. Many members of Congress have expressed serious concerns with the new budget proposal. More specifically Senator Nelson of Florida had specifically noted that large solid rocket motors will be required in the future of the space flight and has proposed specific budget levels for this activity.

These potential fluctuations in demand for ammonium perchlorate are mitigated to a certain extent by our long-term contractual arrangements and the fact that we are the sole United States supplier to the rocket motor industry. Our team is prepared to produce at reduced levels in 2011 profitably should that be required. But our congressional efforts in Washington D.C have given us a positive outlook on the fate of the solid rocket motor industrial base.

There is still a long-time before the 2011 NASA budget will be finalized. The other chemical production in this segment remains stable. Some interesting new opportunities for our fire suppression have emerged. We are developing a new chemical for use in the aircraft industry and we are in the process of teaming on a project using nitrogen generators for fire suppression.

And now moving to our Aerospace segment also known as AMPAC In-Space Propulsion. Our Aerospace segment exhibited strong sales this quarter keeping the business inline with growth expectations, which is at least 10% for the year. The core business in this area remains strong. Customers for our traditional products are consistently winning satellite production contracts.

There also continues to be a growth in new program opportunities in both the US and Europe. The profitability of this segment however has been impacted. Forecasted growth in cost on two systems contracts (inaudible) deterioration of project margins. This continues to be a result of the growing fames associated with the rapid expansion of this segment. Recently we have been having success in hiring required engineering staff to get these projects and our ongoing production contracts back on schedule.

I would like to highlight in reporting new projects in our European business, where our relationships with the Irish government, we were able to secure a funded project for valve development, specifically aimed at the European markets. The valve will be coupled with our European developed thrusters. Our strategies for this segment remains on track, to pursue propulsion systems, build a strong technical team and grow our presence in the European space marketplace.

In conclusion I believe you will see that considerable long-term growth opportunities exists for AMPAC. In addition we are focusing on our cost structure and operational excellence to improve margins.

As we stated earlier, 2010 is a year of repositioning our businesses to capitalize on new opportunities as they arrive. 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 second quarter, we are reporting revenues to $59 million compared to $56 million for our second quarter last year. Consolidated adjusted EBITDA for the quarter was $9.4 million. Net income was $1.1 million resulted in diluted earnings per share for the quarter of $0.15.

Fine Chemical segment revenues for the second quarter were $33.7 million compared to $31.7 for our second quarter last year. The quarter-over-quarter increase reflects timing differences between the quarterly period, and we are anticipating that Fine Chemicals segment revenues for the fiscal 2010 year will decline in the range of 15% when compared to last year. Operating profits and EBITDA for the quarter improved both in terms of dollars and percentages. This was driven by an improvement at the gross margin line.

AFC’s gross margin improved three points largely due to more efficient productions than a year ago. Our Specialty Chemical segment reported revenues for the second quarter of $14.1 million driven by sales for strategic and tactical missile program. Total perchlorate volume is down for the quarter which is consistent with our expectation that volume will decline by approximately 50% in fiscal 2010.

Much of the effect of the decline in demand is offset by contractual and catalog price increases. As a result, we continued to forecast Specialty Chemicals segment revenues for fiscal 2010 at an approximate 10% decline from fiscal 2009. Which we believe is within our expected stable range for this segment. Gross margins, operating profit margins and EBITDA margins for this segment remains consistent and strong.

Second quarter revenues for our Aerospace Equipment segment are $10.2 million reflect a 43% quarter-over-quarter growth and a continuation of this segment’s topline growth trends. Revenue growth is coming from both its US and European based operations with particular strengths in thruster engine revenues for the quarter. This segment is having success in the market through both product line diversification and capturing market share.

We are optimistic about this segment growth potential and continue to estimate that segment revenues should grow by at least 10% this year. With 43% growth in revenues year-to-date we have already achieved much of our targeted annual growth. This means as we looked to the second half of fiscal 2010 we should see a leveling out of the comparison to prior years.

Operating margins for the second quarter was approximately breakeven, while this is less that we would expect from this business it is an improvement over our first quarter loss. As Joe indicated in his remarks, we are working diligently to get our contractor performance back on track.

Despite operational declines we have maintained our cash flows through reduced overall working capital requirements. We ended the quarter with $32.5 million in cash and no borrowings on our revolver. We are adjusting our fiscal 2010 guidance primarily to reflect our updated expectation of Fine Chemical revenue performance and the related effects on profits.

For fiscal 2010, we anticipate revenues of at least $180 million and adjusted EBITDA in the range of $26 million to $28 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions at this time.

Joe Carleone

Well thank you very much. We appreciate you interest in our Company. We remain excited about our opportunities for the future and we look forward to keeping you updated in the future. Talk to you in three months.

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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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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