American Pacific Corporation (NASDAQ:APFC) F2Q2011 (Qtr End 03/31/2011) Earnings Call May 12, 2011 4:30 PM ET
Linda Ferguson - VP, Administration and Corporate Secretary
Joe Carleone - President & CEO
Dana Kelley - VP, CFO and Treasurer
Good day, ladies and gentlemen and welcome to the second quarter 2011 American Pacific Corporation earnings conference call. My name is Derek and I will be your operator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (Operator Instructions)
I would now like to turn the conference over to Ms. Linda Ferguson, Vice President and Corporate Secretary. You may proceed.
Good afternoon, everyone. Welcome to our review of the financial results for the fiscal year 2011 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 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.
Thank you, Linda and good afternoon, ladies and gentlemen, and thank you for joining our conference call. Consistent with our expectations, and as we discussed with you in February, our second quarter results are not where we would like them to be.
The good news however is that our yearend guidance has not changed. We continue forecast $195 million of fiscal 2011 sales and an EBITDA of $29 million. Second half sales will approach $120 million with more than 50% of that in quarter four. This implies the quarter four will be a major quarter for AMPAC. It is important to note that $30 million of the second half sales is currently in deferred revenue.
Profits will be more concentrated in quarter four because of the product mix. Of course as with any plant, it has high concentration at the end of the fiscal year, a small timing slip could move some sales into the following fiscal period. As described in our last call 2010 was a year of repositioning our company, we are continuing this year of transition back to an improved profitability level by the end of the year.
We are building upon our core products which have come back considerably from last year. We are adding new products and customers especially in our Fine Chemicals segment. These activities will strengthen our company and secure a growth profile for the future. Let us now discuss each of the business segments beginning with our Fine Chemicals segment.
The major near-term focus is to return this segment to industry profitability levels. At the present time, the plant is nearly full and will remain so for the rest of the fiscal year with the likelihood of that situation continuing into fiscal 2012. This should provide EBITDA improvement in quarter four as many of the products manufactured currently will be sold in quarter four. All core product orders for the year are in hand. In addition, many of the development product orders are in hand. We continue to expect development product sales to represent 20% or more of the total annual revenue for the segment.
The Drug Enforcement Agency has recently alerted us, their application for facility approval has move forward to the next step. This step is to publish their intent to approve AMPAC Fine Chemicals as a manufacturer of Schedule 2 Products in the Federal Register for comments.
Our other new products initiatives remain on track. For example, we are near a firm multi-million dollar contract for continued development of a drug substance to support anti-terrorism activities.
Now moving on to the Specialty Chemicals segment. The production team in our Utah operations have adapted well to the diminished demand for Ammonium Perchlorate caused by lack of orders for NASA-related projects. Product quality and efficiencies have remained exceptional despite the plant running at volumes one thought nearly impossible. The Department of Defense remains the primary and consistent user of Rocket-Grade Ammonium Perchlorate.
Production in 2011 is primarily for tactical missiles and strategic missiles in rockets. The latest news on NASA-related solid rockets is positive, in that Congress funded the development of the new heavy-lift vehicle and designated the ATK Five-Segment Rocket Motor as a significant component of the base line for this new effort. In fact, NASA placed a spending floor of $1.8 million against the heavy lift vehicles for fiscal 2011. This action will help solidify the role of solid rocket boosters and enhance perchlorate in future space exploration.
It will take time however for this effort to create any significant demand for perchlorate. We believe some modest requirements may materialize in the late 2012 or early 2013 timeframe. Our other perchlorate and Halotron remain stable product lines for our Utah operations.
Let’s now briefly discuss the Aerospace Equipment segment also known as AMPAC In-Space Propulsion. Sales in the first half of fiscal 2011 were $26 million. This is a record for this segment and demonstrates that we are on-track for another growth year, as we had forecast for this segment. Profits improving to industry levels are evidence that investments in two major systems projects are no longer required as we move forward.
AMPAC In-Space Propulsion achieved another notable mission success recently. After traveling nearly seven years and nearly five billion miles, our LEROS 1b bipropellant engine fired for nearly 15 minutes in the early hours on March 18, 2011 to slow the MESSENGER spacecraft and place it into orbit around Mercury. New opportunities in this segment continue to provide a path for growth.
I would like now to introduce our CFO, Dana Kelly who will discuss the financial aspects of the quarter and her guidance for the remainder of fiscal 2011. Dana?
Thank you, Joe. We are reporting consolidated revenues of $42 million for our fiscal 2011 second quarter and $77 million for the sixth-months to-date. Despite our expectation, net revenues will increase by at least 10% this fiscal year. Each of these revenue measures is a decline over the prior fiscal year period.
As you know, the nature of our business is such that quarterly revenues tend to have highs and lows based on the annual delivery requirement of our customers. In prior years, the high and low quarters for our two largest segments have typically hit in different quarters of the year, resulting in somewhat into consolidated results.
For fiscal 2011 however, we are now anticipating that the fourth quarter will be the strongest for both Fine Chemicals and Specialty Chemicals. The reverse of that is also true, and that both segments are experiencing low volumes in the early quarters of this year.
Our operating loss of $0.1 million for the second quarter and $3.5 million for the six months period reflects a significant impact on this revenue cycle. Unlike our revenues, many of our annual expenses such as manufacturing, overhead and general and administrative expenses are incurred fairly easily over the fiscal year.
As a result, our operating results, they are approximately at the same level of fixed expenses per quarter. We expect that this low revenue cycle will continue in our fiscal 2011 third quarter before improving in the fourth quarter.
Beginning with our Fine Chemicals segment, the segment is reporting revenue declines for both the fiscal 2011 second quarter and sixth-months period reflecting lower sales volumes particularly for our anti-viral products. This is consistent with the expected timing of this fiscal year’s revenues which are heavily weighted towards year-end.
Our lower volume is negatively impacting profitability of this segment, while the second quarter loss of $0.8 million does not need our performance objective, it is a significant improvement over the immediately preceding quarter when productivity levels were at their projected lowest for the current fiscal year.
The length of a typical production cycle results in revenues that tend to last a quarter or so behind the related production period. The full benefit of our improved utilization levels should significantly improve margins in the late part of this fiscal year. This segment has also experienced elevated cost levels from re-processing and process changing.
Our Specialty Chemicals segment reported second quarter revenues of $11 million and six months revenues of $20 million each reflecting declines in NASA demand for AP. Specialty Chemicals is the second of our primary segments with expectations that a significant portion of fiscal 2011 revenues will be realized in the fourth quarter.
As such the revenue variances used to be – we’ll continue to see on a quarter-by-quarter basis for timing only. The declines in profit measured as the percentage of revenues are also the results of the reduced demand for AP.
As Joe mentioned, our Aerospace Equipment segment is reporting record revenue levels for the first half of this fiscal year. Revenue growth to $26 million is driven by Propulsion Systems contract awarded to our U.S. operations. With the significant growth this segment has focused on enhancing best practices and implementing process improvements over contract management. These efforts have been successful and the segment has returned to profitable operations.
Despite soft financial performance for the first half of this fiscal year, our liquidity and cash management is strong. We ended the quarter with cash of approximately $32 million. Working capital cash flow was particularly strong in this period due to increases in customer deposits and favorable contract term. We had no borrowings against our ABL facility.
As Joe indicated, we are reaffirming our fiscal 2011 annual guidance of revenues of at least $195 million and adjusted EBITDA of at least $29 million. Due to the magnitude of revenues we anticipate occurring in the fourth quarter of this fiscal year, we expect to report a consolidated loss through June 30 of 2011.
That concludes our remarks and we will be happy to take your questions at this time.
(Operator Instructions) And our first question is coming from the line of [Robert Gurben], a Private Investor. Please proceed.
Yeah hi, I have been following the company now as an investor for usually five to seven years. And I guess the question that I have is, I watched over the last three years; let's say about $45 million of CapEx spent and another $16 expected this year. So I guess the question is, what was your expectation of the return of that capital, then and what is it now because despite almost $60 million we spent we continue with the downward spiral in the revenue and EBITDA line, so maybe you can address because I am sure I am not the only one thinking the same thing.
Robert, I guess the best way to describe our expected return on our CapEx investment is that we target to receive a return on not only CapEx, but a return on assets that exceeds our cost of capital, our working capital, so that the net value provide provision for the corporation.
I observed your comments that the return needs to be against that in the recent fiscal year likely doesn’t need that target which is why much of our discussion today is focused on the new product development and the enhancements we have made to our corporation to bring those performance levels up to those that would be required for that type of capital investment.
Right. If you continue, you are going to spend another $16 million this year, at what point do we step back and say it's just not working or let’s just see if what we’ve spent will pan out down the road here because we can’t continue down this road obviously. I am just trying to get your thought process here because we’ve been kind of stuck in the same mode for I think a little bit too long.
One element of our CapEx this year that causes it to be higher than what we would consider to be kind of our maintenance capital level and some investments that we have made in capital equipment in our Fine Chemicals segment and that was not a speculative investment so to speak, it was very specific capital that we installed as a condition for receiving a premier contract for our largest anti-viral product. So there is some very targeted return that comes from that investment.
Okay. Can you actually break that down a little bit in terms of how much of it was maintenance CapEx and how much of it was for that particular project? Then we can just look down the road and we can see whether or not you are right or not and then have a further discussion?
Hey Rob, our typical run rate on the maintenance CapEx element is in $7 million to $10 million range.
For the whole corporation, yeah, not just for that segment; and then so anything incremental about that is typically targeted at a particular product line or product change.
Yeah, we think we have been very disciplined in that manner and have actual customer commitments before placing orders for any equipment required to deal with the volume. So, and on that particular product we've increased our volumetric capacity significantly through that investment and we do expect to get good returns on that.
And in recent periods, there was a pull-back in our core products. I think that's responsible for the significant lower than required returns at this point and we fully believe that we’ll come back from that and turn that around as we said in the fourth quarter this year.
Okay. All right thanks very much for your time.
(Operator Instructions) And at this time, I am showing no further questions. I would like to turn the call back to Mr. Joe Carleone for any closing remarks.
Well, thank you very much ladies and gentlemen for participating in our call today and we will see you in approximately three months.
Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect. Have a great day.
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