Adicet Bio, Inc. (ACET) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the ACETO Corporation Fiscal 2014 First Quarter Earnings Call. My name is Dawn, and I will be the operator for today's call. [Operator Instructions] Please note that the conference is being recorded. I will now turn the call over to Stephanie Carrington, Ms. Carrington, you may begin.

Good morning, everyone, and welcome to ACETO corporation's fiscal 2014 first quarter conference call and audio webcast. With me today are Sal Guccione, President and CEO of ACETO; and Douglas Roth, CFO of ACETO. During this call, Sal will provide a strategic overview of the company and discuss performance of each business segment. And Doug will review the company's financial results for the first quarter fiscal 2014. Following that, we will open the call for questions. I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as believe, expect, anticipate, plans, projects, seeks and similar expressions and involve numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied in these forward-looking statements, as a result of certain factors as set forth in the company's filings with the Securities and Exchange Commission. With that, I would like to turn the call over to Sal Guccione. Sal?

Great. Thanks, Stephanie, and good morning, everyone. Thanks for joining us here on the call today. As you might guess from our earnings release, I'm extremely pleased with the start of our fiscal 2014 year. This was a really solid quarter for us. We continue to execute on our strategic plans and, once again, achieved very strong financial results and also set several new records, so I'm pleased with that. Our total company net sales this quarter improved by nearly 16% versus last year to $129 million versus the $112 million achieved last year first quarter. More notably, I'm happy to say that we reported record quarterly net income of $11.3 million this quarter, which is more than double the net income of $4.8 million achieved in the first quarter of fiscal 2013. With respect to diluted net income per share, the first quarter of fiscal '14, we achieved $0.40 a share, which is also a new record, and is also more than double our EPS of $0.18 achieved in the first quarter of last year. So really a tremendous job by our team all the way around. In particular, the quarter's excellent results are due to strong performances by both our Human Health and our Pharma Ingredients business segments. The Human Health segment grew by 46% in the quarter, now to nearly $39 million in the 1 quarter versus $26.5 million last year, so that segments continued to grow extremely well for us. It's benefited, as it has in the past, it's benefited nicely from carryover effect of products that we've launched over the past 12 months or so. And in particular, our Rising Pharmaceutical business is continuing strong and has been continues to be a strong contributor to ACETO's recent success. Having said that though, I also remain very excited about our Nutritional products business, which is part of the Human Health segment. That business experienced a nice uptick in sales in this quarter, also along with Rising. And its customers have shown increased demand for its new products also. So again, very strong quarter for Human Health and hope to keep that going. The Pharma Ingredient segment also had a very good result, as sales grew by 19% this quarter versus the first quarter of last year, and reached a level of $49.4 million in revenue. That growth, as expected, was driven by large reorder of one of our Active Pharmaceutical Ingredients and also driven by some strong sales performance in certain pharma intermediates. I'm very pleased with that news and I'm looking forward to future similar successes in this segment. Having said that, I would note at this time that we expect a return to somewhat more normalized order patterns for the future. Regarding our Performance Chemicals segment, we experienced a 5.8% decline in sales this quarter to a level of about $42 million. That drop was due primarily to a decrease in sales of low-margin broad-spectrum herbicides. We also saw some lower sales of some domestic pigment intermediates. That said, I'm very pleased to report that the margins in this segment extended during the quarter, mostly due to improved product mix. The margin expansion drove a 7.5% increase in gross profit to $7.3 million in the quarter, up from about $6.8 million achieved in the first quarter of last year. Again, so overall, a really good quarter across the board for us. For our profit perspective, all segments contributed to the profit growth. Looking ahead to the balance of 2014. I'm confident in our ability to execute on our plans and I believe we're well-positioned for another solid year. We plan to use our strong balance sheet and cash flow to continue to reduce our debt, fund our internal growth initiatives, as well as seek strategic acquisitions so that we can continue to create long-term shareholder value. Finally, before I turn the call over to Doug, I'd just like to make 2 relevant reminder notes. First, is that Rising recently launched its first new product of fiscal 2014. We didn't do any formal announcement because the product is expected to be relatively small one. But nonetheless, it did release its first product of the year. Second, earlier this week, our Specialty Chemicals business unit closed on a product-line acquisition, which is going to be situated primarily in Europe. And although it's a small transaction, I think it should be noted for a couple of reasons. First, it's consistent with our strategy of expanding our Specialty Chemicals business outside of the U.S. And second, it's also consistent with our goal of keeping all 3 of our business segments healthy and growing. Pharma tends to get quite a bit of press here in ACETO, but it's our goal to make sure that all 3 of these segments are healthy and contributing to ACETO's growth. So we're pleased with that small product-line acquisition. With that, I'll turn the call over to Doug, and I will take some questions after that. Doug?

Thank you, Sal, and good morning, everyone. Let me start the detailed financial discussion by focusing on the fiscal 2014 first quarter results. As Sal mentioned, net sales for the first quarter of fiscal 2014 were $129.3 million, an increase of close to 16% from the $111.8 million in the same period last fiscal year. On our reporting -- on a reporting segment basis, Human Health sales rose by 46.5% to $38.7 million. Pharmaceutical Ingredients increased by 19.2% to $48.4 million. And Performance Chemicals declined by almost 6% to $42.1 million. Gross profit for the first quarter of the fiscal year was $33.7 million, a 56.9% increase from the first quarter of fiscal 23 [ph], owing to strong results from both our Human Health and our Pharmaceutical Ingredients business. Gross profit in the Human Health segment was $11.1 million for the quarter, 37.5% higher than the year-ago period and $15.3 million in the Pharmaceutical Ingredients segment, which was an increase of 132% from the fiscal 2013 first quarter. Our SG&A expenses for the quarter were $15.7 million or 12.19% of sales, which is approximately 57 basis points higher than the first quarter of 2013. Our net income for the 3-month period was $11.3 million, or $0.40 per diluted share compared to $4.8 million or $0.18 per diluted share in the first quarter of fiscal 2013. Our EBITDA for the 3-month period was $19.8 million, an increase of 100% over the first quarter of fiscal 2013. So our robust first quarter fiscal 2014 performance allowed us to reduce our bank borrowing by $5.8 million, leaving us with bank debt of only $26.3 million as of September 30. Our financial position as of September 30 continues to be strong, with cash equivalents and short-term investments of $37 million, working capital of $139 million and shareholder equity of $208.4 million. Now I'd like to turn the mic over to -- now I'd like to turn over to open it up for questions. Operator, could you please assist us?

[Operator Instructions] Our first question comes from Daniel Rizzo from Sidoti & Company. Daniel D. Rizzo - Sidoti & Company, LLC: The strength in Pharmaceutical Ingredients, was that the same product that really kind of drove or fueled growth in that segment, I think, back in the third quarter?

Yes. Again, there was a few things. We had some pharma intermediates that there's also some nice sales. But primarily, yes, it's the same -- the same product, the same application that we saw in the third quarter of last year. Daniel D. Rizzo - Sidoti & Company, LLC: Could we expect -- I mean, I know this is somewhat lumpy business, could we expect something similar, I mean, maybe not next quarter but a couple of quarters down the road where they would be up again?

To be honest, we honestly don't know. We rely on our customers and their level of success in the marketplace to kind of drive the answer for that question. Our current thinking right now is that the product should begin to kind of form to a more normal pattern, a more normal order pattern. We don't know if that's quarterly or if that's semi-annually. And because they've gotten the launch behind them now. So I don't know if we should expect spikes like just we saw in Q3, as well as now. We think it will be a little bit more consistent but at lower, lower amounts. Daniel D. Rizzo - Sidoti & Company, LLC: Okay, got you. And then with the Performance Chemicals and just kind of the weak herbicide sales but they're so large margins, is that maybe a business you're considering like exiting and focusing on maybe some of the higher-margined, more traditional chemical?

Yes. I would say, again, so we have various Agricultural Chemical intermediates, as well as finished products. So I would not give any indication that we're looking to exit the business in total. There are several intermediates and/or finished products within ag that are low-margin and I would say, we certainly deemphasize those. In certain cases, we might stay in the business to support our customers' needs because you can't win them all, so to speak, so at certain products it's just not profitable but who you want to continue to support your customer base. But clearly we are deemphasizing those lower margin type products. Daniel D. Rizzo - Sidoti & Company, LLC: Okay. Then finally, with the product pipeline in our Human Health, is that still like around 35, 40 products in the pipeline?

Yes. I think our current roadshow has about 40 products.

Our next question comes from Frank DiLorenzo from Singular Research.

Just to follow on the last question regarding APIs. Assuming this was -- not that necessarily, assuming this was sort of generic launch. Do you see other opportunities out there in the market for these types of launches where you could play a part and plus we have similar large orders, not necessarily for this product but maybe some other opportunities are out there for future generic launches or by your partners?

Yes, a couple of them. One, I'm not confirming or denying whether it's a generic product or not, number one. But in general, that's kind of our business. We're out there both on the API side and the finished dose side, constantly looking for these types of opportunities. We think there are other opportunities out there, they don't come along near too often in this competition. But yes, we continue to pursue this type of activity.

Within Human Health, could you give us the percentage of Human Health at Rising Pharmaceuticals currently comprises? I'm just wondering if you might have a comparable figure for the first quarter of 2013 also?

Yes, I mean, we don't supply that information in our 10-Q and I don't have it handy right now.

Well, within Rising, I mean, you do have a higher. I was wondering how that transition was going within Rising Pharmaceuticals? And separate from that, if you can finally give us a little more granularity on what your thinking is on the acquisition front -- side assuming that a strategic acquisition would center around something that would complement the Rising business?

Sure. So 2 questions. I think the first one first. In terms of the transition, we're very pleased the way things have gone. As we've said in the past, Ron Gold and Dave Rozen did a great job for us and they continue to support us and they support us through this transition, so that's been great. In the meantime, Satish, he's joined us now, what, it was about 4 months ago. It feels like he's been here for much longer time than that, he's really gotten his arm around the business quite nicely and has brought on a very experienced team. So I feel that we've gone through this transition extremely well and things are going well with Rising from managing point of view. The -- I forgot the second question was -- the M&A. I guess, we're always looking, we're trying, we also, at the same time, want to remain disciplined. There's a lot of money chasing kind of too few properties and so we have to kind of stay the course. But to extent we find a company that fits with one of the strategic efforts of ACETO, we're going to try to and make that acquisition.

Just one other quick question. Just for this fiscal year that you're in, 2014. Do you have a figure for the number of projects that are going to be launched and the number of those projects that -- or products that are going to be first to file opportunities within Rising? I just wanted to get [indiscernible] to hear if there might be some upside there.

It's the same as it's been, right now, at least. And again, it can change as the year goes on. But we're expecting to launch 6 new products this year. We announced we did the 1 already. And in this year, we currently anticipate that none of those will be first to file, so that's kind of this year's projection. Next year looks like, little bit more robust.

Is the market size for those opportunities similar to what we've seen in 2013?

Yes. On a product basis, we continue to pursue basically the same types of products that we have in the past. So similar market size, similar market dynamics.

Our next question comes from Paul Nouri with Noble Equity Funds.

For the past few quarters, you've gotten your gross margin at 20% range, is that an area we can feel comfortable with going forward?

Yes. The margins, on a blended basis, yes, I think that what we saw in this fiscal first quarter was margins at or positively affected by the business in our Pharmaceutical Ingredients business. So they will probably come down a little bit in the future quarters but they should be above 20%.

[Operator Instructions] Our next question comes from Kevin McKenna from Main Line Capital.

Great quarter. You've rewarded the faithful here for sure. On the SG&A line, I know that your Rising division has brought on 3 key employees and that's going to increase that. What do you see that number doing over the next year? It came from what about $13 million, it's now, what, $15.7 million?

Well, yes. It certainly is at $15.7 million without the R&D and it was $13 million this time last year. The $15.7 million, when you see our 10-Q, it's a little bit heavy because of our success -- the success in the first quarter. We did take a charge for additional performance award of, I think, it was $900,000. So the $15.7 million, really, if you back out the $900,000, it's more like a $14.8 million run rate. That's about, it will be in the 14s, the mid-14s going forward, without R&D.

Our next question comes from Lester Petruzzi[ph] .

Nothing to be disappointed about in this report, except your guidance going forward. How do we -- can you help us translate your statement from return to more normalized order patterns to some kind of an earnings projection? If you'll give a little background. If we look at our own guidance, the terms letter to the shareholders for the last 5 years is usually amended to the proxy. There's a nice chart or table in there that shows the dramatic sales growth, EBITDA growth and the earnings per share growth. Last 2 years, I think the earnings per share grew at 38%, and maybe the year before that, 30% and then 20%. So we're clearly on some kind of an earnings power curve and it's just very difficult to model that, to call that normalized. And I'm wondering if you can give us just a sense, maybe a bracket of what you think you might achieve this year or maybe this quarter that we're 1/3 of the way through?

I appreciate the question. As you know, we just -- we don't get give specific guidance. Our business is not an easy one to predict quarter-to-quarter and so we just don't -- what we've tried to indicate, and maybe I could say it in different way, that what we've accomplished in the first quarter of this year, we do not expect to continue at those rates. I would say, normalized, we don't -- we just -- we don't know at this point what the next quarters will bring. We feel comfortable that we'll continue to execute on our plans and we feel good about the year. But more than that, at this point, I can't give you.

But you see the downside to that, in my opinion, is the result is maybe 1 of the 2 analysts that lost his way recently without having some kind of a bracket that it could be the quarter end, it could be up as high as 40%, or it could be $0.40, it could be as low as $0.25. I mean, if we just have some sense, I think it would give everyone a better sense of modeling than just throwing darts. We kind of played that, I wonder if you could give me the clean EBITDA for the quarter.

Yes. I mentioned it earlier, Les, but it's $19.8 million, which was more than twice as much as this same quarter last year.

Is there anything more you could add to my question on the earnings projection?

No. I mean, we could take your comments into consideration. But at this point, no.

I mean, it seems to me that since the transformation of several years ago, it's clearly a different company and there is no normalized GDP kind of rate of growth chemical business that's worked here. I mean, we are accelerating the roll out of products. And I think that it's not the -- out of the realm of the possibility. The consensus for 2015, you actually achieved in 2014. If you just take the quarter that you've reported, you even get a good haircut. But maybe you can consider that in the future giving more at least annualized earnings guidance. Lastly you, as promised, have broken out the R&D, as we talked in the past, the R&D is mostly, if not all, just the cost of getting the generic drug approvals and maybe some of the labels and registration in the ag side of the business. There is probably a direct correlation relationship, maybe exponential between dollars spent on R&D and what the future mature sales of that particular product is. Can you comment on that, I mean, what should we think of as the dollar spent, could it generate $10, $20, in new product sales maturity for each discrete product? I think what we want to see is that R&D line expand as quickly as -- with some care or less order spend. That shouldn't be looked at as a normal chemical business R&D that's blue sky that you hope to get some return for. That's a very tacit investment, that should have a very tacit, almost linear exponential return. And can you tell us what maybe you expect to budget this year in R&D? And then also...

A few things on there, Les. A couple of things. One, as you know, I agree, this is not blue sky R&D that we're doing. So there is a more hopefully predictable relationship. Although, again, when you talk about getting products approved through the FDA, there's also some things that can go in your favor or against you. And different changes can -- not everything gets approved, so you just can't say it's kind of a one-to-one relationship. I would say that it's a lumpy business, also, in terms of the spending. So this quarter was down, that's timing. For this year, I think we plan to spend more than last year. We plan to spend somewhere between $3 million and $4 million on R&D. We want to continue to increase that over time as a reinvestment of our business and hope it continues to accelerate in our growth.

I will now turn the call back to Sal Guccione for closing remarks.

Okay. Well, again, thank you for dialing in. As I said, we feel really good about the quarter that just occurred and looking forward to the balance of this year. And we'll speak with you in the next quarter -- at the next quarter's call, so thank you and have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.