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American Pacific Corporation (NASDAQ:APFC)

F3Q12 Earnings Call

August 9, 2012 4:30 PM ET

Executives

Linda Ferguson – VP, Administration, Secretary

Joe Carleone – President & CEO

Operator

Welcome to the Third Quarter 2012 American Pacific Corporation Earnings Conference Call. My name is Jackie and I will be your operator for today’s call.

(Operator Instructions) And I will now turn the call over to Ms. Linda Ferguson. Ms. Ferguson you may begin.

Linda Ferguson

Thank you and good afternoon everyone. Welcome to our review of the financial results for our fiscal year 2012, 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 facts that they use words such as will, expect, anticipate, 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 material 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 Annual Report on Form 10-K and our other filings made with the SEC.

All forward-looking statements are made as of to-date hereof and we assume no obligation to update these statements expect as required by law. In addition, we will be referring to both GAAP and non-GAAP financial measures. Our recently published earnings release contained definitions of the 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. AMPAC’s third quarter fiscal quarter was a very significant one. First, we are reporting strong financial results and second, we have completed a divesture of our aerospace equipment segment for $46 million in cash. Since we previously have a separate call on the aerospace segment divesture in June. We want to elaborate further on the strategic aspects of this action today. But of course we will answer any of your questions on this topic during the Q&A session.

We have decided to use the proceeds of this transaction to reduce debt and interest which will enable on refinancing of the Company as Dana will describe in her remarks. We are pleased to report a very strong quarter for both our specialty chemicals and fine chemicals segments. This performance is largely driven by our fine chemical segments, increased production volumes and corresponding improved margins, combined with the consistent performance of our specialty chemicals segment.

A small portion of this performance is due to timing of sales on the part of both the segments. As we indicated in our call last quarter, in the first half of this year we would see a transition to improve profitability that would occur in the second half. Our third quarter results clearly demonstrated that we are on track to meet those second half objectives. We continue to build upon our core products and add new products and customers especially in our fine chemicals business. Our specialty chemical segment remained stable and profitable. We continue to look for approaches to improve product margins through our company wide operational excellence and cost reduction initiatives and are focused on keeping operating expenses as low as possible in the face of rising cost in main areas.

Because of this outlook we are increasing guidance for our continuing operations, we are providing guidance of $36 million in EBITDA in fiscal 2012, a 26% increase over 2011 based on continuing operations for both years. Dana will discuss guidance in more detail later in this conference call.

Let us now discuss each of the business segments beginning with our fine chemical segment. The fine chemical team exceeded our expectations for the third quarter, client utilization and throughput has improved resulting in improved profit margins. Also our cost reduction initiative especially in the area of solvent recycling has contributed to the bottom-line performance.

The increase in plant utilization is been driven by our major core products, our two large simulated moving bed, or SMB units are being fully utilized. You may be called and reported last quarter that we entered into a new 5 year agreement for the central nervous system product that utilizes our large SMB units.

Despite this product now been off patent, our customer continues to retain significant market share with AMPAC buying chemicals being the primary supplier of the active pharmaceutical ingredient. Our anti-viral products are also driving the increase in plant utilization as well as achieving targeted throughput. Our development product pipeline continues to bear fruit enabling us to bring new products to the market. We have successfully completed the validation of two new cancer drugs and are currently producing them at commercial scale, both use novel mechanisms to treat different types of cancer.

In addition, we anticipate bringing a third new product to market. We are currently validating the process for the production of our first controlled substance. This is a major accomplishment that will lead to continue new opportunities for our fine chemical segment. This area of controlled substances has significant barriers to entry and we are pleased to have been able to penetrate those barriers and be one of the few U.S. producers of pharmaceutical chemicals in this arena.

Development products continue to be a significant portion of the fine chemical segment sales for the second consecutive year. We continue to support a large number of both pharma and biotech customers and their development of new and exciting drug products.

Our pipeline remain strong provide new path for future opportunities, potential growth and ultimately the stability of this business, moving on to the specialty chemical segment. Our specialty chemical segment also had a very strong third quarter driven by exceptional performance of our operational team to meet customers accelerated delivery requirements of our perchlorate products. This includes various grades of ammonium, potassium and sodium perchlorates as well as improved Halotron deliveries. The timing of the demand for rocket grade ammonium perchlorate resulted in an increase in the amount of perchlorate sold in the third quarter.

We expect the total annual volume in fiscal 2012 to be similar to fiscal 2011. However, the mix will be different primarily caused by the return of NASA associated with the large solid boosters being developed on the new space launch system.

For the past two years the Department of the Defense applications have been the major end use of ammonium perchlorate for solid rockets. This has been a result of the sudden termination of the constellation program by NASA approximately two years ago. Nonetheless, we continue to supply product for NASA application as it employee’s large solid rocket motor for their heavy lift vehicle development project.

For strong support by the government agencies specifically NASA and the Department of Defense for the continuance of the United States Industrial Capability for the production of ammonium perchlorate. At the joint Rocket Propulsion Conference last week, the Director of the National Institute for Rocket Propulsion indicated that one of the major objectives of this organization is to facilitate the collaboration between NASA and DoD preserve the ammonium perchlorate industrial base and smooth production demand.

We would like to reiterate that we believe this business is sustainable with the demand from DoD alone. The continuance of NASA's commitment to heavy lift provides digital support to this product line.

In summary, we initiated a major strategic shift with the divestiture of our aerospace propulsion business. This allows us to refocus our efforts on our chemicals businesses especially in the pharmaceutical area and further facilitates the reduction of debt and interest. In addition, we are now seeing the benefits of our initiatives to diversify our customer base and expand our product lines. And of course we will continue to control spending, reduce costs and improve operational performance.

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

Dana Kelley

Thank you Joe. As Joe stated, we are very pleased with the result for our fiscal '12, third quarter. Before we begin discussing the results, I would like to cover one presentation matter. The divestiture of our aerospace equipment segment also known as AMPAC-ISP triggers and accounting presentation that reclassifies all AMPAC-ISP assets, liabilities and financial results in historical periods to be presented separately as discontinued operation. So as we proceed through the financial discussion, amounts referenced for revenues, margins and adjusted EBITDA are stated for continuing operations only.

Our third quarter consolidated revenues of just under 58 million brings our nine month consolidated revenues to 136 million. This represents a 46% increase in revenues over the fiscal '11 nine months period with all segments contributing to the improvement.

Overall, the revenue increase reflects two factors. First, we anticipate revenue growth for the full fiscal year. As such, part of the interim period increase reflects the anticipated growth in the business. The second factor is timing. Expected revenues for fiscal '12 are occurring earlier in the year than compared to fiscal '11. So our interim period comparison reflects larger year-over-year increases than are anticipated for the full year. We expect that our fiscal '12 third quarter will be the highest of our four fiscal quarters in terms of revenues and operating profits. This compares to last year when our fourth quarter was in that position.

Operating income for the fiscal '12 third quarter and nine months period was 11 million and 18.5 million respectively. Net income for the fiscal '12 third quarter and nine months period of 4.7 million and 5.9 million resulted in diluted earnings per share of $0.61 and $0.77 respectively. The results for operating income, net income and diluted earnings per share each reflects substantial improvement over the losses recorded in the comparative fiscal '12 period.

Moving to our segment, our chemical segment reported fiscal '12 third quarter revenues of 36.4 million and nine months revenues of 78.1 million improving by 29% year to date from the prior year. Significant sales of our key antiviral product continues to lead the improvement. Antiviral product revenue increases were offset somewhat by declines in revenues for our oncology products.

As just stated, this quarter was significant for us. In that we introduced two new commercial products into our oncology group. Nonetheless, here too revenues from these new products are not yet at a level that offsets the reduction in demand for a mature oncology product.

The timing of fine chemicals revenues within the fiscal year has also improved with a substantial portion of the anticipated revenue for the full year occurring earlier. The revenue increases in the first nine months of this fiscal year keep us on track for our estimated full year increase in fine chemicals revenues of at least 15%. Our fine chemicals segment returned to profitable performance in our fiscal '12 third quarter. So the higher volumes and improvements in operations have enabled our fine chemicals segment to significantly increase compared to a year ago.

Operating profit of 5.2 million for the fiscal '12 third quarter is the third highest quarter since we acquired of our fine chemical business in 2005. Of course this inter-quarter timing of annual volumes contribute to the record level but also demonstrates the effectiveness of our manufacturing enhancement.

Our specialty chemicals segment reported fiscal '12 third quarter revenues of 21 million and nine months revenues of 54.2 million, these significant increases from the fiscal '11 period. Compared to the prior year periods in this segment are highly impacted by the inter-quarter timing in each of the fiscal years. In particular, fiscal '12 revenues are occurring earlier in issuance compared to fiscal '11. For the full fiscal '12 year, we anticipate that specialty chemical segment revenues did increase slightly. This marginal improvement over our prior expectations results from our current order backlog and our expectations of a related timing of calculation.

The specialty chemicals segment is also reporting significant operating profit improvements in both the fiscal '12 third quarter and nine month period. These improvements are following much of the same trend as the revenue improvement with a larger proportion of the full year occurring in the first nine months of fiscal '12 than the first nine months of fiscal '11. For the full fiscal year, we anticipate that specialty chemicals segment operating margin will decline slightly as this segment transitions back to a more difficult mix of products.

Looking to the full fiscal year, we have also restated our guidance to be based on revenues and adjusted EBITDA for continuing operations. Our outlook for fiscal '12 has improved reflecting both greater confidence in the operating performance of our fine chemicals segment and anticipated higher annual volume from our specialty chemicals segment. As a result, we are increasing our fiscal '12 guidance to consolidated revenues of at least 175 million and adjusted EBITDA of at least 36 million.

The last topic we'd like to cover today is our cash invest structure. We ended the quarter with cash balance of 39 million and no borrowing on our credit line. Excluding cash associated with our AMPAC-ISP divestiture and refinancing activities, we expect to use cash in our fiscal fourth quarter as we find our remaining fiscal '12 capital expenditures and remediation expansion project. Of course completing the AMPAC-ISP sale on August 1st provided us with significant additional cash.

Concurring with our earnings release today, we made a second news release regarding the initiation of our refinancing activities which we anticipate to be a two phased process. Yesterday, our board of directors approved the redemption of 40 million of our outstanding senior notes at a full premium of 102.25. Funds for this redemption will come in part from the AMPAC-ISP sale net proceed of approximately 36 to 38 million and in part from our available cash balances. This process is commencing immediately and is expected to be completed by our fiscal year end.

We also initiated phase two of the process with the engagement of KeyBanc Capital Markets to assist us in arranging new senior debt facilities. We are targeting a facility that including both institutional term loans and involving credit loans. If we are successful in obtaining this new facility, the proceeds will be used to call the remaining outstanding senior notes. We anticipate Phase II will extend in to our fiscal '13 first quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions). And we have no questions at this time. Are there any closing remarks?

Joe Carleone

Well thank you very much ladies and gentlemen for joining our call. We will be beginning our full year earnings call approximately in the middle of December. We hope to see you then. 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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