ACET - NASDAQ

Jody Burfening - Investor Relations, LHA Albert L. Eilender - Chairman William C. Kennally, III - President and CEO Douglas Roth - SVP and CFO Walter Kaczmarek, III - COO

Dewey Steadman - Canaccord Genuity Matthew Hewitt - Craig-Hallum Capital Group Steve Schwartz - First Analysis Securities Greg Eisen - Singular Research Kevin McKenna - Main Line Capital Unidentified Analyst - Private Investor

Good morning and welcome to the Aceto First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jody Burfening. Please go ahead.

Thank you, Anita and good morning everyone and welcome to Aceto Corporation's first quarter fiscal 2018 earnings conference call. With me today and providing on this call are Bill Kennally, President and CEO; and Doug Roth, Chief Financial Officer. Walt Kaczmarek, Aceto's Chief Operating Officer is also with us today to participate in the Q&A session. The company issued its first quarter earnings press release yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investor Relations section of the company's website at www.aceto.com. Before starting the call, 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 that involve numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied by these forward-looking statements as a result of certain factors that are set forth in the company's filings with the Securities and Exchange Commission. Also on today’s call, management will be referring to certain non-GAAP financial measures. These measures Aceto's adjusted net income and Aceto's adjusted earnings per share are defined as net income excluding amortization of intangibles, debt extinguishment, and amortization of debt discounts and debt issuance cost, cost related to transactions and the impact of accounting standards update 2016-09. These non-GAAP measures allow investors to compare results of operations in the current period to prior period results based on the company's fundamental performance and analyze operating trends of the business. To start today's call Al Eilender, Aceto's Chairman is going to make a few introductory remarks. Good morning Al.

Thank you Bill and good morning everyone. Net sales for the first quarter were 185.3 million, an increase of just under 45% from the 128 million reported in the first quarter of fiscal 2017 reflecting in large part the addition of Citron products. Gross profit was 40 million, an increase of 29.7% compared to 30.8 million in the first quarter of fiscal 2017. Gross margin for the first quarter was 21.6% compared to 24.1% in the prior year. On a reporting segment basis human health segment sales were 106 million an increase of 58.1 million or 121% from the first quarter of fiscal 2017. Of the 58 million -- of the 58.1 million variance sales from Citron and Lucid products which were acquired in December 2016 contributed 55.1. In addition, our legacy Rising business realized its first year-over-year sales gains since the final quarter of fiscal 2016 and nutritional sales were up modestly during the quarter. Our gross margin -- pardon me, our gross profit increased 73.5% to 24.6 million reflecting again the addition of Citron and Lucid sales partially offset by lower gross profit from certain other legacy Rising products. Human health gross margin was 23.2% compared to 29.7% last year and is consistent with the gross margin run rate where the prior two quarters were subsequent to the product acquisition. The decline in gross margin was primarily due to the lower gross profitability of the Citron and Lucid products and a lower gross profit on legacy Rising products reflecting unfavorable product mix and price erosion on certain products. Our pharmaceutical ingredient segment sales were 36.6 million, a decrease of just under 10% versus the first quarter of 2017 due in large part to reduced orders of a customer launch API. Gross profit in the first quarter decreased 16% to 5.8 million from 7 million in the first quarter of 2017 primarily due to lower domestic sales of API as well as API product mix. Our gross margin was 16% compared to 17.1% last year. The performance chemical segment sales increased 8% to 42.7 million from 39.5 million in the first quarter of 2017 largely due to higher specialty chemical sales of agricultural and pigment intermediate. Gross profit was down 1.9% to 9.5 million reflecting a less favorable mix of specialty chemical products. Our gross margin was 22.3% compared to 24.5% last year. Our SG&A expenses increased from 21 million to 31.1 million. The absolute increase of 10.1 million in the quarter included a $5.4 million attributable to the amortization of intangible assets associated with the recent Citron product purchase and $4 million of onetime costs associated with the departure of the company's former CEO and 1 million of transition and administrative services costs associated with services related to the Citron and Lucid products. Also in the first quarter SG&A was a $900,000 environmental charge related to the remediation of our closed Arsynco facility in New Jersey. Research and development expenses were 1.6 million compared to want 1.1 million in the comparable period last year as milestone achievements and project initiations remain uneven on a quarter-to-quarter basis. With SG&A and R&D growth modestly outpacing our gross profit growth, operating income dropped to 7.2 million compared to 8.8 million last year. Our net income was 500,000 or $0.01 per share compared to net income of 4.4 million or 15% per share on a GAAP basis. On a non-GAAP basis net income was 10.7 million or $0.30 per share for the first quarter compared to 8.3 million or $0.28 last year. Our EBITDA for the first quarter of 2018 was 15.8 million, an increase of 3.6 million or just under 30% versus 12.1 million in the prior year quarter. Just wanted to point out that are effective tax rate being reported in the first quarter looks like 79%. The tax provision includes a charge of 1.1 million related to the accounting change under ASU new accounting pronouncements. If you were to exclude this charge we expect our effective tax rate to be consistent with our previous run rates. Turning to the balance sheet, as of September 30, 2017 cash and cash equivalents and short-term investments totaled 75 million. Our working capital was 240 million and our shareholder equity was 409 million or $13.38 per share. Our total bank and convertible debt was 331.6 million including approximately 206 million under our senior credit facility. Our senior secured net debt leverage ratio was 3.71 times. As Bill mentioned earlier our trade receivables decreased by 20.3 million to 240.6 million at quarter-end versus 260.9 million for our fiscal year-end June 30, 2017. As a result our consolidated DSOs came down to $0.74, pardon me, 74 days at June 30, down from the 99 days as of June 30, 2017. Collections from the Rising customers were particularly strong in July and August as we continued to benefit from lack [ph] price reductions on select products that we have discussed over the past two quarter. Rising DSOs at 9/30/2017 were 79 days versus 114 days at 6/30/2017. Rising's net trade AR at 9/30 was approximately 57% of the company's total trading -- net trade receivables. However, while we're pleased to have Rising DSOs at a sub 80 day level we know a few things went our way this quarter and this run rate is likely not sub 80 is likely not sustainable in the coming few quarters. Finally, this morning we filed an 8-K in which we have disclosed that we identified and recorded an adjustment related to the misapplication of cash in the year-ended June 30, 2015. The correction resulted in a $4 million decrease of trade receivables and sales as of June 30, 2015 and a reduction of net income of 2.6 million for fiscal 2016. We are determined this adjustment is not material to our fiscal 2015 financial statement. We will expect to file an amendment, the 10-K(a) amendment to our annual report on Form 10-K(a) for the fiscal year ended June 30, 2016 to reflect this -- pardon me, for the year-ended June 2017 to reflect this matter. We believe that we have remediated the underlying causes of this material weakness as we will more fully describe it in our upcoming of Form 10-Q for the quarter ended September 30, 2017. The company will continue to monitor and test the remediation to ensure its effectiveness on a go forward basis. Now I would like to turn the call over back to the operator for questions.

[Operator Instructions]. The first question comes from Dewey Steadman with Canaccord. Please go ahead.

Great, thank you very much for the questions.

The next question comes from Matt Hewitt with Craig-Hallum Capital Group. Please go ahead.

Great, thank you. One last one from me, then I will hop back in the queue, were there any whack changes or cuts done in the most recent quarter and in Q1 or was that just an impact from the last two quarters? Thank you.

The next question comes from Steve Schwartz with First Analysis. Please go ahead.

The next question comes from Greg Eisen with Singular Research. Please go ahead.

It's okay, thanks.

The next question comes from Kevin McKenna with Main Line Capital. Please go ahead.

The next question comes from Lester Patrisie [ph] a private investor. Please go ahead.

Good morning fellows, two questions maybe the first I would suggest Douglas Roth takes a crack at it is just simply what was the EBITDA for the quarter Doug? And the second thing I'm still confused about is the share count outstanding. It looks like you're now including the 5.1 million shares, is that true over the Citron deal consideration. I thought those were going to come in, in equal quarterly amounts but it looks like maybe you accelerated the fourth serial quarter into this quarter, is that true or is there yet a step up next quarter and something else has increased?

I don't -- Lester let me answer the first question first. The EBITDA for the quarter was 15.8 million versus last year of 12.1 million. And in terms of the outstanding shares we have included the 5 million shares that were issued to the seller. Well they weren’t technically issued yet but for accounting purposes we do need to include them in our -- in the basic and diluted share count. That is consistent from the transaction.

Okay, so going forward we shouldn't see too much of a change. I mean the full dilution isn’t your amount?

Correct Lester. The 35 million in change that should hope for the future.