Good day ladies and gentlemen and welcome to the third quarter 2011 American Pacific Corp. earnings conference call. My name is Derrick and I will be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate and question and answer session towards the end of the conference. If at any time you require operator assistance, please star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Miss Amanda Ferguson, Vice President and Corporate Secretary. You may proceed.
Good afternoon. Welcome to our review of the financial results for our fiscal year 2011 third quarter. 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 statements section of our earnings released furnished today on the SEC on Form 8-K, 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 other 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.
Thank you Amanda and good afternoon ladies and gentlemen and thank you for joining our conference call. Consistent with our expectations, we have shown strong sales for our third quarter. We are also reaffirming guidance for sales and EBITDA of at least $195 million and $29 million respectively.
We are however, somewhat disappointed that profits in our Fine Chemicals segment are lagging behind our expectations. This reaffirmation of guidance clearly implies that Q4 will be a major quarter for impact.
Fourth quarter sales are expected to be at least $65 million. Profits will be more concentrated in Q4 because of the product mix. Of course, as with any plan that is so concentrated at the end of the fiscal year, a small timing change could move some sales between fiscal 2011 and 2012 in either direction.
In addition, we were required to take a substantial environmental charge this quarter. As you may recall, we have been designing an improvement and expansion of our remediation facility in Henderson, Nevada. Prior to this quarter, our existing reserves were based on conceptual models and estimates developed during the pre-engineering phase of the project.
During Q3, detailed designs, using updated data, were finalized to a point where hard bids could be obtained. We have received the firm quotes for the new equipment, pipeline, construction and installation costs.
These quotes, together with updated operating cost estimates came in $6 million higher than our forecast developed approximately two years ago. On the plus side, the expanded capacity of the project could reduce the overall life of the project by four years.
Our year of transition back to profitability remains on track as we continue to expect at least $29 million of adjusted EBITDA compared to $24 million reported for fiscal 2010, a nearly 21% increase. We are building upon our core products and adding new products and customers in both our Fine Chemicals and our Aerospace Equipment segments.
In addition, our operating costs for the first nine months have improved considerably compared to historical levels as a result of our operational excellence, cost reduction initiative. We have improved $2.6 million for these first nine months compared to the first nine months of fiscal 2010 and an even greater amount compared to earlier years.
These product related and cost reduction activities will make us more profitable and secure our growth profile in the future.
Let’s now discuss each of the business segments, beginning with our Fine Chemical segment. As we stated last quarter, the major near term focus is to return the segment to more typical profitability levels. We have made some progress towards this goal, but there is still more improvement required.
We are restructuring operations to streamline production in this segment and increase through put. We expect our Fine Chemicals core product to generate significant fourth quarter revenue that is consistent with our guidance.
Also, substantially all of the core and development product orders for our fourth quarter are in hand. We continue to expect development product sales to represent 20% or more of the total annual revenue for this segment. Efficient production execution will be a significant key to a successful fourth quarter and beyond.
As you may recall, the Drug Enforcement Agency or DEA, recently published in their schedule register, the Impact Fine Chemicals application as a bulk manufacturer of Schedule Two products for a comment period. The comment period has now expired with no comments received by the DEA.
The next step in the process will be an inspection and final approval by the DEA. We expect to be producing controlled substances in the first quarter of the next calendar year. While immediate revenue will not be large, this will be a landmark milestone as we enter new markets and position this business for the future.
Our other new product initiatives also remain on track. Of special note is the signing of an agreement with Chimerix on a smallpox treatment to address the threat of bioterrorism. Chimerix, as part of their contract with Barda, has agreed to fund the validation of our process for their drug. This validation work will begin in meaningful quantities before the end of the 2011 calendar year.
Now moving on to the Specialty Chemicals segment, ammonia perchlorate for solid rockets continues at low production quantities with Department of Defense programs being the primary and stable user of rock grade ammonia perchlorate for tactical and strategic missiles.
Price adjustments, increased production of other perchlorate and right sizing of parts of our production process have enabled this segment to perform well. Our Special Chemical segment is poised to have a remarkable fourth quarter with sales forecasted at over $30 million.
We have reached an end of an era with the last launch of the space shuttle. I would like to congratulate NASA on a very successful final shuttle mission and a very successful space shuttle program over a long period of time.
I also want to thank AmPac employees at our Cedar City facility, who have supported this program for many years through the manufacture of an exceptional product to support our direct customer, ATK, in the production of the solid boosters for shuttle.
Furthermore, our team has now adapted to the much smaller demand for ammonium perchlorate and it’s performing excellently with DOD as the major end user. This business is sustainable with the demand from DOD alone.
On the other hand, we do see the return of the large shuttle type boosters for the NASA new space launch system. NASA has been guarded in the disclosure of their architecture and their strategy, much to the frustration of some in the House and the Senate.
But we believe that NASA’s architecture for the heavy lift mission will include solid rocket motor propulsion for the required initial thrust during the first minutes of launch as it has in the past. Our customer, ATK, has reported this belief as well. Solid boosters have been a successful capability for NASA. We believe that will continue.
In the short term NASA has sustained the development of the five segment booster, which will be tested in Utah in September. Our other (inaudible) and Halotron remain stable lines for our Utah operations.
Let’s now briefly discuss the Aerospace equipment segment, also known as AmPac In Space Propulsion. Sales in the nine month period of fiscal year 2011 were $35 million. This is a record for this segment and demonstrates that we are on track for another growth year as forecast for this segment.
Profits have improved from a year ago and are returning to more historical levels. Investments made that were necessary to enter the systems business are beginning to pay off. New opportunities in this segment continue to provide a path for growth.
I’d like now to introduce our CFO, Dana Kelly, who will discuss the financial aspects of the quarter and our guidance for the remainder of fiscal 2011.
Thank you Joe. We are reporting consolidated revenues of $52 million for our fiscal 11 third quarter and $129 million for the nine months to date. Strong revenue performance in our fiscal 11 third quarter, combined with our expectations that fourth quarter revenues will be at or near a record quarterly level, keep us on track for a consolidated revenue increase of at least 10% this fiscal year. Essentially all of our fourth quarters are in backlog and we are working hard to execute our plan.
Segment operating income, which excludes corporate remediation costs improved to $4.6 million for the fiscal 11 third quarter compared to break even in the prior year third quarter. Year to date, segment operating income of $8.8 million represents a decline from segment operating income of $13.8 million last year. We anticipate this trend will reverse by September as we close the fiscal year strong.
The profit improvement, and greater business volume and successes from our cost reduction initiatives. For example, segment operating expenses were reduced by $1.4 million for the fiscal 11 nine month period compared to last year.
In addition, corporate expenses of $10.6 million for the fiscal 11 nine month period were reduced by $1.2 million. Operating expense reduction was a target for this fiscal year and we are achieving results.
Moving to our segments, our Fine Chemical segment is reporting a revenue increase of 55% for the fiscal 11 third quarter, which brings the fiscal 11 nine month revenue more in line with the prior year. With comparably strong fourth quarter ahead of us, we are anticipating reporting year over year revenue growth for Fine Chemicals in fiscal 11.
Our third quarter revenue improvement reflects increased business in each of our core therapeutic areas as well as in our development product revenues. Most notable, is the return of significant revenue from our core anti-viral product.
You’ll recall that we renewed our three year supply agreement last winter and immediately began production. This product has a long production cycle. As such, Q3 is the first quarter of this year that we begin to see the production efforts result in recorded revenue.
Fine Chemicals has continued to incur operating losses for the fiscal ‘11 period, resulting from two primary causes. First, production costs and the resulting profit levels are highly sensitive to the rate of manufacturing through put, or the volume we can produce in a given period of time.
Further, with target future through put levels when pricing our orders. Our fiscal ‘11 production costs are higher because we have not yet achieved our targeted levels of through put. We anticipate that it will take another quarter for this situation to improve.
Second, profit levels are also very sensitive to capacity utilization because a large percentage of manufacturing costs are fixed overhead. The low volume in the early part of this fiscal year drove overhead rates higher and negatively impacted profits.
Our Specialty Chemical segment reported third quarter revenues of $11 million and nine month revenues of $31 million. Year over year, this is slight decline due to substantially reduced NASA demand and the timing of quarterly revenues that originate from stable DOD annual demand.
Profits or this segment remain stable but have declined somewhat when measured as a percentage of revenue. This reflects the change in the product mix resulting from the reduced demand for rocket grade.
As Joe mentioned, our Aerospace Equipment segment is reporting another record level of revenue for the first nine months of this fiscal year. The 32% revenue growth of $36 million is largely driven by compulsion systems contracts, which were awarded to our US operations.
Of equal importance is this sectors legacy product line of compulsion thrusters. IT thrusters are having continued market success and are a primary contributor to the growth rate.
We’ve seen a nice turn around in the profits of this sector. Operating income of $0.7 million for the fiscal ‘11 third quarter and $2.8 million this fiscal year to date, each represents significant increases from the losses reported last year.
This segment is highly focused on enhancing best practices and implementing process improvements to program management. These efforts have been successful and the segment has returned to profitable operations.
We have maintained our cash balances in excess of $20 million and have funded both working capital and capital expenditures. We have achieved this by negotiating favorable customer contract terms, which enable us to carry less working capital.
We have no borrowings against our AVL facility this quarter. Overall, fiscal ‘11 has been challenging. Nonetheless, we started the year with a plan to improve our business performance. We are on track and as Joe indicated, we are reaffirming our fiscal ‘11 annual guidance which includes revenue of at least $195 million and adjusted EBITDA of at least $29 million.
That concludes our remarks and we’d be happy to take your questions at this time.
(Operator Instruction) And our first question is coming from the line of Bruce Bauman [ph] from Franklin. Please proceed.
Bruce Bauman [ph] – Franklin
Hi Joe. I appreciate that you’ve reiterated the strength you’re looking for in the fourth quarter. What do you expect to see in the first half of the next fiscal year? Is this a surge that’s just going to return to more recent levels or just how do you see the earnings profile going out in front of us?
Well, we’re in the process of finalizing our fiscal ‘12 plan so I really can’t be quantitative at this point. But if you look at the Fine Chemicals revenues, they’ve been fairly high for two quarters – well third quarter and forecast for fourth quarter.
We at a much higher run rate than would be expected for full year. If you just take third quarter, we’re at a run rate of 30 times four, which would be much higher than any forecasted year. So we would expect those revenues to slow down somewhat, but we do expect profitability improvement because we’ll have our through put next year overall at a much higher level on the average than we had in fiscal ‘11. Therefore, I would expect with sales coming down a bit, but margins increasing somewhat on an annual basis.
Bruce Bauman [ph] – Franklin
Okay. And I’m not – can’t remember now whether you’ve ever said one way or the other whether you expect to be profitable for the full year, fiscal year 2011. Have you said anything about that?
For the full fiscal year 2011, we do anticipate being at the guidance reconciled to a net loss of $2 million. We referenced – there is some incremental details that’s included in the outlook section of our release. That would be after interest and taxes and remediation charges.
Bruce Bauman [ph] – Franklin
All right. Thank you. And then one final question if I may. Do you anticipate being free cash flow positive for the full year?
Bruce Bauman [ph] – Franklin
And at this time, I’m showing no further questions in queue. I would like to turn the call back to Mr. Joe Carleone for any closing remarks.
Well thank you for joining us today and taking time out of your valuable schedule to be with us. Our next call will be for our year end closing and therefore will be in December, in the middle of December sometime. So we’ll be looking forward to talking to you again at that time. Thank you.
Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.
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