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American Pacific Corporation (NASDAQ:APFC)

F2Q 2012 Earnings Call

May 9, 2012 4:30 pm ET

Executives

Linda G. Ferguson – Vice President, Administration and Corporate Secretary

Joseph Carleone – President and Chief Executive Officer

Dana M. Kelley – Vice President, Chief Financial Officer and Treasurer

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2012 American Pacific Corporation Earnings Conference Call. My name is Lisa, and I’ll 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 Instruction)

I would now like to turn the conference over to your host for today, Ms. Linda Ferguson, Corporate Secretary. Please proceed.

Linda G. Ferguson

Good afternoon. Welcome to our review of the financial results for fiscal year 2012 second 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 the 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 release furnished today to 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 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.

Joseph Carleone

Thank you, Linda, and good afternoon, ladies and gentlemen, and thank you for joining our conference call. I’m pleased to report that our second quarter results for 2012 are on track, and have demonstrated improved performance over previous quarters. Production across the corporation is meeting our expectation. Our Fine Chemicals segment continues to see expansion from our core and new products, especially in the coming two quarters. Because of this outlook, we are confirming guidance of at least $220 million in sales and $35 million in EBITDA for fiscal 2012.

Dana will discuss guidance in more detail later in this conference call. As we indicated in our last call, in the first half of this year we would see a transition to improved profitability. This is certainly the case as our second quarter results demonstrate a clear bottom line improvement over the previous quarter. We are expecting this improvement to continue, especially in our Fine Chemicals segment as the second half of fiscal year progresses.

Our Fine Chemicals and Aerospace Equipment segments continue to build upon our core products and add new products and customers. Our Specialty Chemicals segment remains stable and profitable. We continue to look for approaches to improve product margins through our operational excellence and cost reduction initiative, and are focused on keeping operating expenses, as low as profitable in the face of rising costs in many areas. Success with these products related and cost reduction activity will make us more profitable and provide a path for our growth profile in the future.

Let us now discuss each of the business segments beginning with our Fine Chemicals segment. While our second quarter gross margin in this segment has improved compared to the previous quarter, we remain significantly lower than our expectations for the third and fourth quarters.

We have successfully restructured operations to streamline production in this segment, and have increased growth by means of operational excellence tool. More specifically, we have implemented solid recycling for a number of our products, which not only reduces costs, but also provide benefits to the environment.

We will see the full benefit of these improvements coupled with greater plant utilization in the third and fourth quarter. This performance improvement is a result of a major increase in throughput for a major anti-viral product. We are also pleased to announce the recent five year extension of our major central nervous system product. Despite this product now being off patent, our customer continues to retain significant market share with Ampac Fine Chemicals being the primary supplier of the active pharmaceutical ingredient.

Our development product pipeline has given rise to two new production products being introduced in fiscal 2012. One is the controlled substance product. This is the new area for us with a lot of promise. We have successfully overcome the substantial barriers to entry in the controlled substances area. We are very pleased and fortunate to have moved into this exciting area of the pharmaceutical business.

The second is the new cancer product. While we have been in oncology for a long time, this is a new type of cancer product that uses modern inhibitor type mechanism; it also has other clinical applications that are in late-stage clinical trials at this time.

Development products continue to be a significant portion of the Fine Chemicals segment sales for the second consecutive year. We continue to expect development products to represent 20% of the sales in this segment for fiscal 2012. Our pipeline continues to be strong providing the path for the future growth and stability of this business segment.

Moving onto the Specialty Chemicals segment. For the past two years, the Department of Defense application have been the major end use of ammonium perchlorate for solid rocket. You may recall, this was a direct result of the self-determination of the Constellation Program by NASA, approximately two years ago.

While DoD will continue to be the major user, the continued byproduct and support of the new space launch system and its associated heavy lift vehicle or HLV will help support the demand for ammonium perchlorate. Note that HLV, uses the large size segment solid motors similar to those on Constellation and are produced by ATK, our customer.

Fiscal ’12 saw the space launch system receive $1.8 billion of funding. Recent report from both the House and Senate appropriation liberation for fiscal ’13 show a similar amount to be the appropriated for this NASA project in fiscal ’13. This will be very helpful to the solid rocket motor industrial base. We see the demand for rocket grade ammonium perchlorate evolving in fiscal 2012 to be about the same total volume as fiscal 2011. There is a difference in the product mix however.

We would like to reiterate that we believe this business is sustainable with the demand from DoD alone. The continuance of commercial applications and NASA’s commitments to heavy lift provides additional support for this product line. Quantities for our other Specialty Chemicals product including Halotron remained stable in fiscal 2012 and consistent with fiscal 2011. Let's now briefly discuss the aerospace equipment segment or Ampac in space propulsion.

Our aerospace equipment segment product lines continue to have success in the marketplace with strong order booking during our fiscal 2012 second quarter. Liquid propulsion rocket engines also called thrusters, continues to be the driver for the near-term performance of this business.

Platinum alloy thruster sales are expected to increase, propulsion systems for both satellites and missile continue to provide opportunities for growth. There is a large effort being applied to improve the bottom line on systems projects, which represents an opportunity and a challenge for our in space propulsion team. We continue to build a strong engineering team around these systems integration project.

In summary, we are continuing to maintain strong customer relationship by reliably providing value-added products and services, grow in alignment with our strategy to diversifying our customer base and expanding our product lines and reduce cost and improve operational performance.

I would like now to introduce our CFO, Dana Kelley who will discuss the financial aspects of the quarter and our guidance for fiscal 2012.

Dana M. Kelley

Thank you, Joe. Overall our consolidated results for the first six months in second quarter of fiscal ’12 reflect substantial improvement over the fiscal ’11 period and we are retracing to our plan for the full year.

Consolidated revenues of $106 million for the fiscal ’12 six months period reflected an increase of 38% from last year, with all segments contributing to the improvement. Operating income for the six months period improved to $8 million compared to a loss of $3.5 million in the prior year. This improvement was lead by the performance of our Fine Chemicals and Specialty Chemicals segments.

We are reporting net income of $1.1 million for the quarter and $1.2 million for the fiscal ’12 six months period, resulting in earnings per share of $0.14 and $0.16 respectively, improving significantly from the losses reported last year. We expect that this trend of improving profits will continue into the second half of this year.

Moving first to Fine Chemicals segment, our Fine Chemicals segment reported fiscal ’12 second quarter revenues of $20.6 million and six month revenues $42.1 million improving by more than $12 million from the prior year. Significant sales under the long-term agreement to produce our key anti-viral product lead the improvement.

Anti-viral products revenue increases were offset somewhat by declines in revenues from our oncology products. The oncology product line is one in which we are currently validating and commencing commercial production for new products. However, due to the timing of revenues in fiscal ’12 from these new products are not anticipated to overcome the declines in revenue from our mature oncology products. The timing of Fine Chemical revenues within the fiscal year has also improved with a substantial portion of the anticipated revenue for the full year occurring earlier.

For the first six months revenues increased 40% compared to the prior year, which provides a solid foundation for our estimated full year increase in Fine Chemical revenues of approximately 15%.

Both the higher volume and operational changes has enabled our Fine Chemicals segment to significantly improve its financial performance compared to a year ago. For the fiscal ’12 six-month period, the adjusted operating loss was reduced by more than $5 million. As Joe indicated, we anticipate continued operational progress from this segment and a return to profitability in the second half of this year.

Our Specialty Chemicals segment reported fiscal ‘12 second quarter revenues of $19 million and six month revenues of $33.2 million, each a significant increase from the fiscal 2011 period. The timing of revenue between the fiscal quarters continues to be the driver of the variances. In particular, fiscal ‘12 revenues are occurring earlier in the year when compared to fiscal ‘11.

Based on our current shipping schedule, we expect that the accelerated timing of fiscal ‘12 revenue will become more accentuated next quarter as we are forecasting a very active third quarter for this segment.

For the full fiscal ‘12 year, we continue to forecast that Specialty Chemicals segment revenue will decline by upto 10%, which we believe is within the stable range targeted for this non-growth segment. Substantially, all of the remaining sales for fiscal ’12 are a back log at this time. Specialty Chemicals segment is reporting significant operating improvements in both the fiscal ‘12 second quarter and six month period.

This increase in profit is probably much of the same trend as the revenue improvement with a larger portion of the full year occurring in the first half of fiscal ‘12 than in the first half of fiscal ‘11. For the full fiscal year, we anticipate the Specialty Chemicals segment operating profit will decline by a slightly greater percentage than revenues as this segment transitions back to a more typical mix of products.

Our Aerospace Equipment segment or ISP is reporting second quarter revenues of $15 million and six month revenues of $27.8 million, increases of 5% and 8% effectively. Revenue from in-space propulsion engine continues to support this segment’s growth. The Aerospace Equipment segment broke even for the fiscal ‘12 second quarter and reported operating income for the six month period of $29 million.

During the fiscal ‘12 second quarter, ISP invested substantial efforts and associated costs to meet a key delivery milestone on a major systems contract. While successful in achieving the contract milestone, the surge efforts negatively impacted profit.

We anticipate for the full year that fiscal ‘12 operating margins will be more comparable to fiscal ‘11. We ended the quarter with $21.2 million in cash, and no borrowings on our credit line. For the first six months of fiscal ‘12 we used approximately $10 million to fund working capital. Much of this was recovered in April with significant accounts receivable collection.

As a result of our year-to-date performance and the visibility of product orders provided by our customers, we are reaffirming our outlook for fiscal ’12, which includes revenues of at least $220 million and adjusted EBITDA of at least $35 million. That concludes our remarks, and we’d be happy to take your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) I will now like to turn the conference back to Mr. Joe Carleone, for closing remarks.

Joseph Carleone

Thank you very much, and we’d like to thank all of our listeners for joining in, and we hope to join with you again in three months from now. Thank you.

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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