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Executives

Amy Glynn - VP, IR Ruth Group

Albert Eilender - Chairman & CEO

Sal Guccione - President & COO

Ronald Gold President & COO, Rising Pharmaceuticals

Douglas Roth - CFO

Analysts

Bill Jones - Singular Research

Tony Pollock - Maxim Group

William Schaff - Phocas Financial

Lenny Dunn - Freedom Investors

Aceto Corp. (ACET) F4Q2012 Earnings Call September 7, 2012 9:00 PM ET

Operator

Welcome to the Aceto Corporation fiscal 2012 fourth quarter results conference call. My name is Sandra and I'll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

This conference call may contain forward-looking statements as that term is defined in the federal securities laws. All statements that address expectations or projections about the future are forward-looking statements. Although they reflect our current expectations, these statements are not guarantees of future performance, but involving a number of risks and assumptions.

We're due to review Aceto’s filings with the SEC, including but not limited to Aceto’s annual report on Form 10-K for the fiscal year ended June 30, 2011 for a discussion of some of the factors that could cause actual results to differ materially. Copies of these filings are also available at www.sec.gov. We do not undertake any duty to update any forward-looking statements.

I'll now turn the call over to Amy Glynn, Vice President of Investor Relations at the Ruth Group.

Amy Glynn

Thank you. Good morning and welcome to Aceto Corporation fiscal 2012 fourth quarter and year end conference call audio webcast. With me today are Albert Eilender, Chairman of the Board and CEO, Sal Guccione President and COO, Ronald Gold, President and COO of Rising Pharmaceuticals and Douglas Roth, CFO of Aceto.

During this call, Al will provide a strategic overview, Sal will discuss the performance of our business segments and Doug will provide an overview of the company's financial results for the fiscal fourth quarter ended June 30, 2012. Following that we will open the call for questions.

With that I'd now like to turn the call over to Al Eilender. Al?

Albert Eilender

Thanks, Amy and good morning everyone. We are very pleased with our results for fiscal year 2012 as we generated record sales, gross profit and net income. Our sales increased by 7.7% to a record level of 444 million, despite the fact that we withdrew for 2012 from the low margin glyphosate business that we were involved with in fiscal year 2011. If we excluded the 24 million in glyphosate sales generated in fiscal 2011, in order to provided apples to apple comparison sales increased by even more impressive 14%.

We experienced significant margin expansion largely due to the full-year inclusion of the higher margin rising pharmaceuticals generics business contracted to the six months in fiscal 2011 and also improved product mix. For fiscal 2012 we reported earnings per share of $0.63 a share compared to $0.34 of share in fiscal 2011, an 85% increase. After adjusting for one-time charges in both periods which were explained in the press we generated pro forma earnings per share of $0.65 in fiscal 2012 compared to $0.47 pro forma in fiscal 2011, an increase of 38%.

These results I feel clearly demonstrate that we continue to execute on our plan. With our renamed and reconfigured business segments, human health, pharmaceutical ingredients and performance chemicals, our core strategy continues to focus on expanding our product offerings by partnering with manufacturing sources to develop and ultimately distribute products, both domestically and internationally.

In fiscal 2012 we launched seven new finished dosage generic products in our Human Health segment through our rising pharmaceutical subsidiary which included three launches in fiscal fourth quarter. We expect to launch an additional nine products in fiscal 2013 and our pipeline remains very strong with visibility through fiscal 2015. Ron Gold of course will discuss this in more details later on in our discussion.

We remain optimistic about our growth prospects in all three of our business segments and are looking forward to reporting on our future successes in fiscal 2013 and beyond. We however would like to remind you that our business is difficult to project on a quarter-to-quarter basis due to the nature of the products we sell and the markets we serve and therefore quarterly earnings may fluctuate.

You may have noted we also announced that our Board of Directors has declared a regular quarterly dividend of $0.055 per common share which represents an increase of 10%, another indication of our optimistic view of the future. As we also announced this morning, it gives me great pleasure to turn the reins of the company over to Sal Guccione to serve as our new Chief Executive Officer effective January 1, 2013.

As you may recall Sal joined Aceto’s Board of Directors in May 2011 and then took on the role of President and COO in December of that year, all part of our succession planning. Having worked with Sal for these past 18 months or so, the board and I are confident that he is very well suited from an operational and visionary skill set to take the company to yet another level of growth and profitability.

I will remain as Chairman of the Board and together with Sal intend to continue to enhance the Aceto business through internal initiatives and with prudent acquisitions all the while focusing on both top and bottom line growth. With that, I'm going to hand the call over to Sal for a review of our segments and its performance.

Sal Guccione

Thanks Al and good morning everyone. I'd just like start off by thanking Al and the Aceto board for giving me this opportunity to serve as Aceto's next CEO. It is truly an honor and privilege to serve in that capacity and to be able to work for each and every Aceto shareholder. I look forward to working with Al and the rest of the Aceto management team to continue to drive increased value for our shareholders and I am extremely excited about the opportunities that lie ahead for Aceto, so thank you for that.

Regarding 2012, Doug will speak about the fourth quarter numbers in some detail. So I will focus my comments on the trends that we saw in each of our three business segments during the 2012 year. Starting with Human Health segment which as Al mentioned Ron Gold is here with us today and he is running that segment.

That segment had an excellent year in 2012. We achieved sales of a $105 million during the year which is an increase of 50% versus 2011. That performance reflects a couple of things, one is the inclusion of the full-year results of the Rising Pharmaceutical acquisition which as many of you know we acquired in December of 2010 but importantly in addition to that, it also reflects double-digit growth in both pieces of the Human Health segment, both the Rising Pharmaceutical business and a nutritional supplements business grew at double-digit rates, the core businesses is [going] with the course of the year.

New products launches fueled Rising’s growth, both new business development activities and new products from our development pipeline helped the nutritional business grow nicely during the course of the year.

Gross profits in the segment almost doubled in 2012 up to $30 million, up from $15.5 million in 2011, and margins also extended very nicely this year to 28% from 22% in 2011. The positive trend there also reflects again the full-year inclusion of Rising but also reflects the stable product mix that we saw throughout the year.

We remain especially excited about the process of the human health segment and Ron will be happy to answer questions and along with Amy today.

Turning to the Pharmaceutical Ingredient segment, that segment also had a good year in 2012. Sales there increased by 9% to a level of $163 million in 2012. The increase there was driven by growth in both parts of that segment both the active pharmaceutical ingredients as well as pharmaceutical intermediates grew nicely over the course of the year. New products as well as volume growth were behind that.

Margins in the segment remained relatively flat at about 15.5% resulting in $25.5 million in gross profit for the year, up some 6.5% versus 2011. So again that’s segment have nice performance in 2012. Regarding the Performance Chemicals segment, sales there declined by about 8.5% to 9% from 2011 to 2012 gone from $193 million to $176 million.

However, as Al mention earlier, the top line drop is largely due to our move away in 2012 from the Glyphosate business. We're not for that strategic shift sales in the Performance Chemical segment would have actually increased by about 4% in 2012.

In fact, the segment saw a good growth in certain product families including agricultural, pigment intermediates, coating products and an agricultural herbicide.

So, there was some good underline growth within that business. Reflecting that move away in product mix shift, we did see margin expansion in Performance Chemicals from 13.7% in 2011 to 15.1% in 2012.

So all-in-all I think each of these segments performed well. Obviously, some have just higher underlying growth prospects than others but they were pleased with the performance in each of the segments. There is work to do but we're optimistic about the future.

With that I'll turn the call over to Doug.

Douglas Roth

Thank you, Sal and good morning. In my remarks I am going to focus on the fiscal 2012 fourth quarter as Al and Sal have already commented on our full year performance. Net sales were $111 million a decrease of 8.5% from the $121 million reported in fiscal 2011 fourth quarter. Again, if we would back out the almost $13 million of Glyphosate that we recorded in 2011 fiscal fourth quarter to provide a like-to-like comparison, our total company sales for the quarter would have increased by 2.4%.

Sales in the human health segment increased by 18% which was again largely driven by the new generic product launches in Rising Pharmaceuticals as well as growth in the sales of our domestic nutritional supplements.

Sales in the performance chemical segment increased by 2.4% if we factor out the Glyphosate sales as mentioned before to provide a more apples-to-apples comparison.

These increases were partially offset by a sales decline of 5% in our pharmaceutical ingredient segment which was closed by timing of the customer orders.

Our total company gross profit increased 3.6% to just under $21 million as compared to $20 million in the prior year. Net income increased 14% to $4 million or $0.15 per diluted share compared to net income of $3.5 million or $0.13 per diluted share in last year’s fourth quarter.

We should point out that in fiscal 2012 fourth quarter, there was a one-time charge for an additional earn out cost due to the expected out performance of our December 2010 acquisition of Rising Pharmaceuticals.

So after adjusting for this one-time charge on a non-GAAP basis to fiscal 2012 fourth quarter net income would have been $4.4 million or $0.17 per diluted share.

Now finally to recap our financial position as of June 30, 2012 remains strong as we add cash and cash equivalents in short-term investments of [circuit] $26 million working capital of a $118 million and shareholder equity of $168 million.

We put a dent in paying down the bank debt this year. Our total bank debt was $46 million at June 30, 2012 which was $9 million down from the $55 million in June 2011.

This reflects Aceto’s ability to generate cash to continue to pay dividends or to pay dividends and pay down our debt. That concludes our presentation.

Now, I would like to turn the call over for questions. Operator can you please assist us.

Question-and-Answer Session

Operator

Yes thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question is from Bill Jones from Singular Research. Please go ahead.

Bill Jones - Singular Research

Hi guys congratulations on the year and the quarter. You had mentioned you did $0.17 excluding the charge, in the past you have given some forward guidance. Are you prepared to give any guidance, you mentioned you increased the dividend 10%, are you prepared to give any guidance for the upcoming year?

Albert Eilender

Well, as we talk about all the time. We are not comfortable providing guidance. We gave some general guidance, last year, talking about high single-digit topline growth and something greater than that, for the bottom line, that's pretty much all you're going to get from us in the way of guidance.

No we're certainly optimistic about the future. Our actual results over the last few years speak for themselves. The increase in the dividend, they're all signals that we're very optimistic about the future but again specific numbers are not something that we're going to be providing.

Bill Jones - Singular Research

Okay, fair enough. And certainly $0.17, particularly on the earnings side was a strong quarter. How about – can you talk about any more specifics on either recently launched products. I know in July, you launched generic version of Soma aspirin and sodium bicarbonate tablets. I hope if you can give any more color on that or an upcoming – I think you said you had nine products for 2013?

Albert Eilender

Overall, everything is on track or going well. Basically, the nine products that we planned to launch again, everything seems positive but keep in mind, things may move around a little bit and sometimes we plan to launch nine, it might be eight and one might move to the next year. But so far everything is positive, whenever we launched we are getting the market share that we hope for and if we don't have it yet, we're working on it and everything so far is positive.

Bill Jones - Singular Research

I knew there were three products in Q4, right. What was the other?

Albert Eilender

What was the other? I'm not sure what you mean by that?

Bill Jones - Singular Research

What were the three, Soma (Inaudible).

Albert Eilender

On prior year you had Carisoprodol, I don't have it in front of me but Carisoprodol with the aspirin Carisoprodol with aspirin and codeine, I don't recall what the third product was off the top of my head, but I'll figure it out during the call I guess.

Bill Jones - Singular Research

Okay. Fair enough you also mentioned in the prepared remarks about it's been about 18 months since the last acquisition and you mentioned your growth strategy includes acquisitions. Can you give any more color on that.

Albert Eilender

We're (Inaudible) talking to people privately as well as banking relationship et cetera, evaluating acquisitions, certainly we're not going to forecast any acquisitions but we're certainly heavily invested in the work and trying to add acquisition that are meaningful and stick with our strategic plan. We're not interested in bulking up for the sake of bulking up, but there are a number of businesses out there that are always being evaluated and looked at but quite honestly at the present time there's really nothing imminent. But we're certainly valuating a number of opportunities.

Ronald Gold

And just to answer your question, I believe the third item is Dexamethasone solution.

Bill Jones - Singular Research

Right, okay, that's all I have for now again thank you and congratulations on the $0.17 for the quarter, which was obviously a strong earnings versus my expectation. So again congratulation and I'll look forward to working with Sal going forward.

Albert Eilender

Okay.

Sal Guccione

Okay, thank you.

Operator

(Operator Instructions)

And the next question is from Tony Pollock from Maxim Group. Please go ahead.

Tony Pollock - Maxim Group

Good morning.

Albert Eilender

Good morning.

Sal Guccione

Morning.

Tony Pollock - Maxim Group

I was wondering if you could give us some idea of the size of the market or what type of percentage of the market on the nine products that you hope to have over the next year given any type of numbers, would be great.

Albert Eilender

Well the nine products basically each product stands on its own so depending on the number of competitors per product we'd determined the size of the market we would anticipate or forecast, but again most of these items are basically niche products. And we try to stay in a market where it's less competitive and we could be successful getting market share and profitability.

So again most of these items I think you see have market sizes of $10 million - $20 million in general and basically depending on how many competitors we basically in general get something 20% to 40% of the market. So it depends on each item and things change so it's hard to give you exact numbers and forecast them but that would be in general type of way of looking at the nine products.

Tony Pollock - Maxim Group

All right.

Sal Guccione

Just to summarize, Ron may have mentioned in general we go after more than niche products and market size might be $20 million - $25 million maybe $30 million depending on the products, some are little larger, some are little smaller.

Tony Pollock - Maxim Group

All right.

Sal Guccione

But not the blockbusters.

Tony Pollock - Maxim Group

Sure, I understand, thank you.

Operator

Thank you and the next question is from William Schaff from Phocas Financial, please go ahead.

William Schaff - Phocas Financial

Hi, Al, congratulation for transition and I appreciate the job you've done for shareholders.

Albert Eilender

Thank you.

William Schaff - Phocas Financial

Just trying to get a sense for your priorities for use of cash as it starts building up. Obviously, the margins are expanding and I would assume the cash will also build up, I'm just trying to get a sense of where your priorities for cash will be?

Albert Eilender

Well, generally speaking we have the dividend that we just increased by 10%, we're paying down debt, but besides those two things we really, the issue that usually comes up when people ask that question is they're really asking me about the share buyback.

We would prefer holding our cash for a possible acquisition, so at the present time that's really what I recall the allocation, the dividend policy, maintaining the dividend and maybe you know considering the increasing it going forward with no commitment on that score, paying down our current debt and having a nice bank roll there to help support any acquisitions that we might make, so that's the cash allocation.

William Schaff - Phocas Financial

Okay, and given that is priority, Rising was obviously very successful deal. Are you finding deals of that type readily available or people clearly more willing to sell in today's environment and what types of rates of returns on acquisitions that you're looking at?

Albert Eilender

Well, those are a lot of different questions but let’s start. You know, Rising was, I call that a win-win. It worked for us, it worked for Rising. We would take the Rising deals everyday of the week if they were readily available. There is clearly, what I would call an increased valuation going on in the marketplace for generic drugs.

So it's a competitive environment. We've looked at a number of things but we're looking for things that are synergistic. Some of our, we call it strategically speaking, we would like to make an acquisition in that area that would fit within Rising, running one label, one facility, one X, Y and Z sort of getting the synergies of having the Rising as our platform for growth.

We're looking at opportunities, nothing is really there. But I would say that generally speaking, finding something that’s quite that attractive from the get-go may not be really available. It's only we will call it the synergies that we could bring to an acquisition that would make it as attractive as the Rising deal.

So we’re looking all the time but we really haven't had one. When it comes to what we’re looking for in the way of called rates of return, I think we look at it a little bit differently. Not so much that what the rate of return is but we are willing to do something that would be dilutive in the first year of the acquisition but certainly would be accretive in the second year going forward and that sort of our criteria what we’re looking for.

All acquisitions would have to be on a pro forma basis, accretive after that first year. So that’s sort of our top of the shelf way of looking at acquisitions.

Operator

(Operator Instructions) The next question is from Lester Petruzzi Private Investor. Please go ahead.

Unidentified Analyst

Good morning, I also like to offer my congratulations not just for this year but for the whole string of years that Al Eilender has really reshaped the company and restructured the management as well as the board and I look forward to Sal Guccione continuing with that mantle and carrying us to another level entirely in the future.

And my question regards China, much talked about slowdown in China. How does that affecting our business? We're hearing from other managements in the industrial space that are sourcing precursor raw materials from China, it’s actually a net positive because they are seeing a price decline on their purchases out of China, as the Chinese suppliers fight for volume cutting each other’s throats on price. May be you can comment on that please?

Al Eilender

You sort of answer the question actually you asked and answered your own question. But that is exactly what's taking place in China. There is we call the softness going on in China, it’s giving us the opportunity to a little bit more leverage in our negotiations. We've been fortunate that the price concession that we've been able to obtain, we've been able to hold on to so you are getting some margin expansion on our side of the business. So at the present time the Chinese situation we will look and say it’s been favorable but it’s not a very meaningful thing but it certainly not a negative.

Unidentified Analyst

Great.

Sal Guccione

I was just going to add that Lest. It’s not dramatic, okay. It’s kind of slow steady change we've seen in the landscape, the one that probably continue but it’s not something that just so far has been dramatic overnight change.

Unidentified Analyst

Okay, great and could you just confirm the EBITDA for the full year?

Douglas Roth

Yes [Lester] the EBITDA for the full year is north of $32 million.

Unidentified Analyst

I'm sorry I didn't hear that.

Douglas Roth

As compared to last year which was just a little short of $24 million.

Unidentified Analyst

I am sorry could you just repeat this I didn't catch that.

Douglas Roth

$34 million.

Unidentified Analyst

Okay. Great thank you very much.

Douglas Roth

You are welcome.

Albert Eilender

Thank you.

Operator

Thank you. And the next question is from Lenny Dunn from Freedom Investors Corporation. Please go ahead.

Lenny Dunn - Freedom Investors

Good morning. First of all I wanted to congratulate you on the way you've restructured business where everything looks great going forward. I did want to just get your take on the new fertilizer plant that – the $1 billion deal that was announced the other day in Iowa. Would that be -- it confirms you're getting out of the business temporarily, but does that kind of make it something you probably never going to reenter now.

Albert Eilender

Well I'm not really aware of what you're talking about in Iowa, but I assume this is Glyphosate and someone getting into that business is that what that was about?

Lenny Dunn - Freedom Investors

Well it's fertilizer, the ammonia, but it's they're using [that] natural gas process in Iowa, [gave them] a bunch of subsidies, it's some very wealthy Egyptian family.

Albert Eilender

That's really not our business we get more involved in a sense in the generic agricultural crop protection products, so the ammonia plants in Iowa doesn't really affect us in anyway going forward with our business. We look for opportunities of again niche products in that segment that we feel could have an impact. And again I don't want to belabor the Glyphosate situation but we think in terms of entering the products that have very few competitors Glyphosate attracted two dozen companies so it really wasn't our kind of niche. But I don't the Iowa situation, which obviously I'm not aware of per se but I don't think it impacts our business at all.

Douglas Roth

I would just add to that, just to make sure that we're clear, while we backed away from the Glyphosate business in '12, a couple of things, one markets have somewhat, done somewhat better then, and opportunistically we might be in and out of that market, number one. Number two just to be clear – that's one product within ag, we clearly have not exited the agricultural business. We've got plenty of other products, for them to meet it, some finished products in that area.

Lenny Dunn - Freedom Investors

Both for going into the quarterly dividend and for bumping it, so I'm very pleased so that I don't have any complaints of any kind.

Albert Eilender

Well, you were one of the pushing forces for this quarterly payments so you're welcome.

Operator

(Operator Instructions)

And at this time we have no further questions.

Albert Eilender

Well, again thanks everybody for calling in. We look forward to our next call and having results that will be equal to past performance again, thanks again.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

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