Jody Burfening - LHA, IR Sal Guccione - President and CEO Doug Roth - Chief Financial Officer.

Gregg Gilbert - Deutsche Bank Ben Natter - Emrose Capital Steve Howard - Morgan Stanley Lester Patrici - Private Investor.

Welcome to Aceto Fiscal 2015 Third Quarter Financial Results Conference. My name is Hilda, and I will be your operator for today. 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. I will now like to turn the call over to Ms. Jody Burfening.

You may begin..

Thank you, Hilda. Good morning, everyone. And welcome to Aceto Corporation's third quarter fiscal 2015 conference call. Jody Burfening of LHA. With me today are Sal Guccione, President and CEO; and Doug Roth, Chief Financial Officer. Company issued its third 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 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. In addition, management will be referring non-GAAP net income and earnings per share.

Aceto defines these non-GAAP measures as the exclusion of acquisition-related transaction costs, separation, relocation costs, debt extinguishment and earn-out costs and amortization of intangibles. With those housekeeping items out of the way, I would now like to turn the call over to Sal. Good morning, Sal..

Great. Good morning, Jody, and good morning, everyone. Thank you. Thanks for joining us on Aceto's third quarter earnings conference call. I would like to start up by saying, I am very pleased with our performance in the third quarter fiscal ’15.

Overall, our results were generally in line with our expectations for growth relative to both last year’s third quarter as well as sequentially to the second quarter of fiscal ’15.

Compared to last year’s third quarter, we reported a 17% increase in sales, a 47% increase in gross profit and a 53% gain in GAAP earnings per share, which were $0.29 a share. Non-GAAP adjusted earnings per share were $0.34 versus $0.24 last year, which was a 42% increase.

Sequentially compared to the second quarter of fiscal ’15, sales grew by 18% and GAAP earnings per share grew by 26%. So, overall, I think the solid quarter in terms of growth and we are satisfied with that.

As Doug will explain shortly, we achieved this growth despite headwinds from the weakening euro, as well as continuous slowness in our Nutritional Products business and new generic product approvals.

I would note that we expect the sequential growth to continue into the fourth quarter, which would make the fourth quarter our strongest earnings quarter of this fiscal year and well above last year’s fourth quarter.

Overall, this means, we continue to expect to see a stronger second half of fiscal ’15, compared to the first half, which hopefully should set us up nicely as we head into fiscal ’16.

As in past quarters, our Human Health segment drove our growth in sales, gross profit and gross margin, reflecting a strong execution at Rising Pharmaceuticals, which as most of you know, is our generic, our finished dosage form generics business.

For the third consecutive quarter, Human Health was our largest business segment in terms of sales and gross profits. And on the year-to-date basis, our Human Health and Pharma Ingredients segments together accounted for more than two-thirds of our sales and three quarters of our total gross profits.

These measures are indicative of our ongoing evolution into Human Health oriented company and the good progress we are making towards that important strategic goal. We will now turn the individual segment performance, I will touch on some key points and then Doug will go into some further details.

Starting with the Human Health segment, sales grew by 66% in the quarter to $56.3 million and gross profit nearly doubled original level of $20 million.

The growth was achieved on the strength of our extended product portfolio since acquiring the PACK Pharmaceuticals business, as well as some benefit from the pricing actions we took earlier this year. In the quarter we also entered into a licensing and distribution agreement for a small branded product line that we acquired as part of the PACK deal.

That arrangement turns the selling and marketing of that particular product over to another party, who is much larger and much more focused in the area of branded products than we are. And it will allow us either to receive royalties and milestone payments from future sales of that particular branded product.

In terms of our pipeline of projects, we currently have 92 projects in our pipeline that includes 52 ANDAs that are on file with the FDA right now and those 52 ANDAs have over $4 billion in total IMS estimated annual sales.

Of those 52 ANDAs, half have been on file with the FDA for over two years now or 24 months, and nine which have been on file for over 37 months. So of those 26 products that have been on file over two years, those have estimated annual sales by IMS of over $1.7 billion.

Currently we're estimating that the average time to receive a decision from the FDA on a completed ANDA is about 42 months so that should be taken into account when reviewing our pipeline information, which is in our investor presentation that's available online in our website.

Regarding new products, in April we announced the launch of two new generic products for us, both those expanding and rising with our common portfolio. We launched the 0.25% and the 0.5% strengths of Timolol Maleate Ophthalmic Solution and a 0.3% strength of Ofloxacin Ophthalmic Solution.

These products are representative of our strategy of rising to focus on niche products, in this case obviously ophthalmics. The U.S. market sales for the Timolol products that we launched were about $60 million for the 12 months ended February of 2015 according to IMS and the U.S.

market sales for the Ofloxacin products that we launched for that same period were about $20 million. So, again in that kind of niche category. With respect to R&D spend, as many of you know most of our expenditures are milestone based and they represent investments in our generic finished dosage form pipeline.

Milestone progress is definitely picked up in this third quarter and R&D spend was $2.1 million in the quarter. We expect now full year R&D spend will be in the range of $6 million to $6.5 million for the fiscal '15 year, which would be about 20% higher than last year’s level.

The other part of our Human Health segment nutritional products reported ongoing softness compared to last year, that’s both in the U.S. and abroad and that continues the sluggish pace we’ve seen during the first half of this year.

And as it did in the first two quarters of this year, nutritional sales and profits contracted this quarter versus last year’s third quarter. Turning to the Pharmaceutical Ingredient segment, sales were $40.5 million in the quarter, which is a decrease of 15% versus the 2014 third quarter.

We saw slowness in this segment in both the active pharmaceutical ingredients as well as our pharmaceutical intermediates. That said, I would say that a high percentage of this segment’s business is conducted in Europe and the majority of the decrease in sales was due to the weakening of the euro relative to the U.S. dollar.

In Performance Chemicals, we had a solid quarter with sales increasing by 14% to just under $49 million and gross profit grown by 33% to $10 million in the quarter. The segment saw a solid growth in specialty chemicals broadly, as well as in the agricultural protection products.

A mix was favorable in the quarter and in particular due to the finished ag protection products. As a result, gross margin for the segment rose by 300 basis points this quarter to a little over 20%, which is well above the segment’s typical average gross margin of approximately 17%.

Although, we don't expect that 20% level to persist, we are continuing our efforts to improve the segment’s margins via pricing and product mix improvements and obviously, we are also pushing to continue to develop new business opportunities.

As we close out fiscal ’15, we expect to continue to realize benefits of the price actions taken on certain of the Rising products earlier this year. We also expect to see some benefit of the two generic products that I just mentioned that we launched recently.

Although as previously noted in general, new product activity within the generic space has been much slower this year than previously anticipated and we’ve talked about that given the slowness in product approvals. Our nutritional business continues to be slow. We do not expect that to reverse its negative quarterly trend in the fourth quarter.

Regarding foreign exchange, we had expected the weakening euro to create headwinds for our business in Europe. And in fact, that did occur and actually at levels higher than we had previously anticipated.

As a result, we now expect sales and earnings growth for the year to be in the mid-single digit range, which is slightly below the mid-to-upper single digit range we had talked about expected last quarter. However, while not for the further weakening of the euro, our expectations for growth would have been unchanged from the previous quarter.

So with that, I'll now turn the call over to Doug for a discussion of our financial results and then we will open it up to questions..

Thank you, Sal and good morning everyone. I will walk you through our financial results for the third fiscal quarter, starting with consolidated net sales. We grew net sales 16.8% to just under a $146 million compared to $125 million for the third quarter last year.

Total company gross profit was $36.6 million, an increase of 46.6%, compared to $25 million in last year's third quarter. Gross margins for the third quarter was 25.1%, compared to 20% in the prior year period.

On a reported segment basis, Human Health segment sales were $56.3 million, an increase of just under 66%, driven by the higher sales at Rising, due to the acquisition of PACK Pharma in April 2014 and recent price increases.

Slightly offsetting the sales boost from Rising were lower nutritional product sales, both in the U.S .and internationally, as high customer inventory levels resulted in soft reorders. Nutritional results were also impacted by approximately $600,000 decline in royalty income on certain proprietary ingredients.

Gross profit for the Human Health segment was $20 million, almost doubling last year's $10.1 million level. Gross margin in the second -- for the third quarter was 35.4%, compared to 29.7% in the third quarter of fiscal 2014.

This strong gain in gross margin was due to the combination of the additional PACK products and the price creases on certain Rising products. Pharmaceutical Ingredient segment sales were $40.5 million or 15% below last year's third quarter.

On a constant currency basis, the Pharmaceutical Ingredient sales were adversely affected by $4.3 million due to the impact of the strong U.S. dollar versus the euro. Gross profit was $6.7 million, a decrease of approximately 10%, compared to $7.4 million from last year's third quarter.

Virtually, all the decrease in our gross margin -- gross profit was caused by the weakening of the euro. Gross margin for the third quarter was 16.5%, compared to 15.5% for the prior quarter. Our Performance Chemical segment sales were $48.9 million, an increase of $13.7 compared to the third quarter fiscal 2014.

The gain was predominantly due to higher sales of agricultural, dye and pigment intermediates, as well as agricultural protection products. Gross profit was $10 million, an increase of 33% compared to last year. And our gross margin was 24 -- 20.4% rather for the third quarter compared to 17.4% in the prior year quarter.

The increases in both gross profit and margin were largely due to the product mix, including the agricultural protection product sales.

Our SG&A was $19.1 million, up $2.7 million or 16.4% over last year, of which $2.4 million was directly related to the addition of PACK, which included amortization expense associated with the acquired intangible assets of $1.2 million. Our research and development expenses were $2.1 million compared to $1.5 million in the prior year.

As I’ve stated in prior calls, the majority of our R&D expense are milestone based, and will fluctuate quarterly. Our operating income in the third quarter was $15.4 million more than twice last year's level of $7.1 million.

Our interest expense increased to $1 million compared to $300,000 last year, reflecting higher average balances outstanding under our credit facility, which we used to fund the purchase of PACK.

Interest and other income declined $2 million from last year's level, primarily as a result of $1.4 million or approximately $0.03 per diluted share recorded for unrealized foreign exchange losses, resulting from the mark-to-market valuation of our foreign currency future contracts.

Our net income was $8.4 million or $0.29 per diluted share, compared with net income of $5.4 million or $0.19 per diluted share for the third quarter fiscal 2014. Non-GAAP adjusted net income was $10 million in the third quarter compared to $6.9 million in the prior year, a 40% increase.

Non-GAAP adjusted earnings per share were $0.34 compared to $0.24 in the year ago third quarter, a 41.7% increase. And finally, our EBITDA for the third quarter was $17.5 million, an increase of $7.4 million or 73% over the prior year period.

As I mentioned in our last earnings call, our results have been adversely affected by the weakening of the euro compared to the dollar in fiscal 2015. Our nine-month results included a $2.1 million charge for unrealized foreign exchange losses related to the mark-to-market valuation of our foreign exchange future contracts.

On a constant currency basis, our revenue has been negatively affected by approximately 2% and our diluted earnings per share by approximately 5%. Now turning to our balance sheet. At March 31st, cash, cash equivalents and short-term investments were $35.5 million, working capital was $167.4 million and shareholder equity totaled $240.3 million.

Bank debt -- we had bank debt of $107.2 million at the quarter end, which included mortgages and a drawdown of our credit facility, primarily -- once again primarily due to the funding of the PACK acquisition. We believe that our capital resources continue to provide ample liquidity to fund our future growth plans.

Now, I’d like to open the call up to the -- for questions.

Operator, please?.

Thank you. [Operator Instructions] We have a question from Gregg Gilbert from Deutsche Bank..

Hi. Good morning. I have a few generic questions.

First, on the acquisition front, what types of deals are you considering there and what’s the range of sizes you would consider there and I’ll stop there and then I have some follow-ups?.

Sure. So, thank you, Gregg. So the acquisitions we’ve made in the past have been in the, say, the purchase price range of $50 million to $100 million. And so, I would say, kind of our sweet spot for acquisition might be these days in the range of $50 million to maybe $125 million or something like that.

We would look for companies that add pipeline for us potentially to --- at R&D or formulating capabilities for us.

But essentially, from an acquisition point of view, we’ve looked by companies that are very similar to the Rising pharmaceutical, in fact pharmaceutical company that we purchased, that’d be our sweet spot that’s what we’re looking forward. That’s not to say, we wouldn’t do a deal suitably larger or suitably smaller depending on the opportunity..

Are there specialty niche areas in generics that you're not interested in?.

No. Our model is a little bit different than some others in that. We partner our products with development partners and manufacturing folks. So we are not tied to any particular technology delivery form segment of the market. So we look more for the opportunity in terms of the product and its position in the marketplace.

And then we go out, find the right partner. So there’s no particularly as if we say, we’re looking for and not particularly as if we’d say, we’re not going to do..

Okay. And my other question is about the FDA environment, particularly the office of generic drug. You mentioned how right some of your NDAs are.

Have you noticed the new environment of late for more recent filings and that the FDA is picking up this team on reviews? Would you bucket in -- would you say that it depends on which bucket the NDA filings are in, in terms of timing? Thanks..

Thank you. So I would say, if theory was supposed to seeing that, absolutely. I’m not certain that I can actually say, right now that we've seen any material change in the processing. But we are optimistic that we will begin to see some improvement in that area. Thank you..

Thanks..

We have a question from Ben Natter from Emrose Capital..

Yes. Hi, guys.

Wondering if you could breakout the impact, it’s a full impact from the price increase that Rising reflect in the financial this quarter?.

In the third quarter, no. it would -- we expect to potentially get the full impact of the increases by the end of the fourth quarter..

Okay. Great. And then looking at that your fourth quarter looks really strong, implied by your guidance.

How much of a headwind should be active Pharmaceutical Ingredients segment be year-over-year from a profitability standpoint based on lower reorders of that high margin API, going into fiscal ’16?.

I’m sorry..

I’m sorry. Reflect, again, going into fiscal ’16..

Yeah. I think it’s been -- good question. It’s impacted our quarterly numbers up and down for the last couple of years as you know. And this year it's been significantly down as we expected, as the product is moving to more commercial state.

So, if your question is looking into next year, next year we expect probably, this is, again, it’s kind of early, but we think it will be flat to down, but not nearly impact that we saw this year versus last year..

Great. Now that’s helpful. And lastly, the R&D milestones, does that something based on approval of ANDA or is that more based on filing of ANDA, just like anything understand….

Yeah. It’s actually based on development steps along the way. So we’ll -- we have -- we will part with somebody in developing the ANDA before [Technical Difficulty] let say and we set certain goals coming up with the formulation, doing bio study, et cetera and then filing. And as we hit those various goals, we’ll make payments to the partners.

So it’s mostly steps along the way as we get to filing..

And success based..

Yeah. Success based..

And as you guys have this mature pipeline, I mean, as you start hopefully getting approvals, I mean, is there, historically, how long is it taking you to obtain your market shared goals in these products?.

So it’s a good question. I don’t have it down to the sizable, what I would say is, fairly quickly we -- we’ll get the approval and fairly quickly a month or two after that when the market and we are getting the most of the share that we expect. Because again you are planning this as time goes, before your launch.

But I would say it takes a year before you kind of settle in where you want to be..

Okay. That's very helpful. Thank you for your time guys..

Thank you..

Thank you..

We have a question from Steve Howard from Morgan Stanley..

Good morning..

Good morning..

The question I have is related more towards future PACK’s and Rising’s and what the acquisition landscape looks like the number of $50 million to $125 million came it is out there, is it that they don’t come walking by more than a couple of times a year or is it you are looking at a lot of them and you just need to fund the right one?.

Yeah. That’s a good question. No. It’s the performer. There are a not a lot of them out there. And so it takes us a while to establish the relationship find them a service relationship and then get the deal done. And I guess that's why spend -- acquisitions are definitely part of our strategy.

But the number one part is kind of building on our own and then every so often, hopefully, landing one of these acquisitions. But I would not say there are loads of those opportunities out there that's -- it takes some doing to find them..

Okay. And then on the API, which will, as you said, roll off to be a flat -- a flatter issue relative to year-over-year comparisons.

How well positioned are you to benefit from any future high margin API opportunities down the road? Is this something you are competing for regularly or is this something that just was a nice to have?.

So it’s a good question. No, this is not the norm okay. There aren’t many of those opportunities out there. We happen to have a very good position. And actually in this particular case, kind of I guess you’d say when above and beyond to secure this business for the customers.

And so it’s been a real partnership between the two of us and it’s worked out nicely. That's not the norm. The norm is more the typical API again for us distribution business and margins, which you are going to be in that 15%, 17%, 18% range, something like that..

That's helpful. Thank you very much..

Thank you..

[Operator Instructions] We have a question from [Lester Patrici] [ph] with the Private Investor..

Congratulations on a really solid quarter, fellows. It's really appreciated..

Thank you..

Yes. Just one question, the FX headwind to the bottomline of $0.03 was unfortunate. Of course everybody is faced with that.

But could you quantify the topline, the revenue, FX headwind, it must have been more than a few million dollars?.

Yes. I believe I comment on that, Lester..

We talked about the percentage..

Yes..

You gave us a -- I missed it, you gave us a percentage, I am sorry, I missed, what was the $100 million?.

Les, it’s about 2%, but Doug is actually going to look for just to give just a couple of separate theory might have actually for….

Yes. So in terms of our topline for the nine months, it was $8.5 million in the quarter. The quarter specifically was steep compared to last year and that was $6.3 million..

So, I mean, you have been a much more significant result without the current wall of the currency..

Yes..

So, can I ask you -- I mean, you put this fantastic number output with the slowdown in the nutritional, was getting very little approvals of new products. I mean, you just got two of eight and those haven’t -- I don’t think those have launched yet.

But it’s anyone’s guess what’s going to happen in the next two months of the year? I guess we could still get some more approvals.

But if I ask you just take a guess out, you included the next two months and all of 12 months of next year, how many products you think you might get launched, knowing the backlog at the FDA? And they keep promising 2016, 2017, they are going to clean it up.

Would you expect to get the six that are sort of really rip and then several more of it anticipated for 2016, if you can just give us a sense of what your thinking is?.

Sure. And this has become something that’s just very difficult for us, because of -- it’s just become very difficult to predict and that’s why we are kind of going on this ageing look. But what I would say is, again, our fiscal year ends here in June 30 of the next two months.

I’m actually not optimistic that we will launch anymore products this year, maybe one. Okay. But that’s kind of what I’m thinking for this year. And for next year, again, we haven’t done our budgets yet, so it is very preliminary. But I would say it previously had been, our goal at least to launch between 5 and 10 a year.

So, I would think that that’s kind of, as we go into next year, we’d expect something in that range. But we’ve become a little gun-shy to predict it because we have been very good at predicting that number. But that would be kind of our, maybe our open expectation for next year. But we’ll probably have more on that a quarter from now..

We are hearing that in all the conference calls. Everyone is disappointed at the FDA. So everyone is pointing out that they could do for money and they supposedly hired more people, the slippage just continues. So it must be really frustrating and it may affect your competitor position as things age with the FDA.

Anyway, congratulations on pulling it to the bottom line with all these headwinds. It's a terrific result. Thank you..

Thank you..

[Operator Instructions] We show no further questions at this time. I would like to turn the meeting back over to Sal for final remarks..

Okay. Thank you, Operator. And again thanks everybody for joining us here today. I just mentioned that we will be presenting at the Jefferies Healthcare Conference in early June. So hope to see some of you at that conference and then next time, we’ll get together, will be in September for our fourth quarter and full year fiscal ‘15 conference call.

So hope to see you at Jefferies. Otherwise enjoy the summer and I’ll talk to you in September. Thank you..

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