Jody Burfening - IR Sal Guccione - President and CEO Doug Roth - CFO.

Matt Hewitt - Craig-Hallum Capital Steve Howard - Morgan Stanley Jeremy Hellman - Singular Research Ben Natter - Emrose Capital.

Welcome to the Aceto Fiscal 2015 Fourth Quarter Financial Results Conference Call. My name is John, and I will 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 the conference is being recorded. And now, I’ll turn the call over to Jody Burfening.

Jody, you may begin..

Thank you, John. Good morning, everyone, and welcome to Aceto Corporation's fourth quarter fiscal 2015 conference call. With me today are Sal Guccione, President and CEO; and Doug Roth, Chief Financial Officer. Company issued its fourth 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 to non-GAAP net income and earnings per share on today’s call.

Aceto defines these non-GAAP measures as excluding all transaction costs related to acquisition. With those housekeeping items out of the way, I would now like to turn the call over to Sal. Good morning, Sal..

Good morning, Jody. Thanks, Jody and good morning everyone, and thanks for joining us on Aceto's fourth quarter and full year fiscal 2015 earnings conference call. Fiscal 2015 was another successful year for Aceto both in terms of financial performance as well as in terms of continued execution of our strategic plans.

During the year, we successfully completed the integration of PACK Pharmaceuticals into our Rising operations, while at the same time continued the positive momentum within our Human Health business.

We established a Soft Gel delivery platform at Rising through the acquisition of three Soft Gel ANDA's from Par Pharmaceuticals, and we also expanded our Ophthalmics platform with the launches of Ofloxacin and Timolol Ophthalmic Solutions.

We continued to invest in our internal product development pipeline, increasing the total number of finished dosage generic pipeline from 95 candidates last year to 107 candidates now.

Regarding market position and we saw both our SIC and GICS codes change from their former more industrial classifications now to drug and healthcare related indications, which we believe probably reflect today’s Aceto. So from a strategic point of view, we are very pleased with the developments at Aceto in fiscal 2015.

Regarding the numbers, our fourth quarter was the strongest profit the quarter in the company’s history, and that strong quarter gave us a record finish to a record year here in 2015, primarily driven by our growth in the Human Health segment.

Compared to last year’s fourth quarter, we reported a 5% increase in sales, a 42% increase in gross profit, and 142% gain in GAAP earnings per share with GAAP EPS reaching the level of $0.46 per diluted share. On a non-GAAP basis, adjusted earnings per share were $0.48 versus $0.26 last year, so a healthy 85% increase.

Looking at the full year results for fiscal 2015, we reported record results for sales, gross profit, operating profit, net income, and earnings per share.

Net sales were $547 million, which is a 7% increase over fiscal 2014, gross profit was $135 million, which is an 18% increase over the prior year, and net income was $33.5 million, which is an increase of 15.5% versus the prior year. On a GAAP basis, EPS increased 12% to $1.14 a share; and on a non-GAAP basis, EPS increased 9% to $1.33 a share.

Our Human Health segment continued to drive our annual growth reflecting strong execution, particularly at Rising Pharmaceuticals. In addition, our Human Health and Pharma Ingredients businesses collectively accounted for 68% of our sales and 76% of our total gross profit for the year.

These measures are indicative of our continued evolution into a Human Health oriented company, and the promise that we’ve made towards that strategic goal. I’ll now turn a bit to the individual segments, and I’ll touch on some annual highlights, and Doug then will follow with further details.

In our Human Health segment, sales grew by 41% during the year to $225 million and gross profit increased by 56% to just under $76 million. That growth was driven by Rising on the strength of its expanded product portfolio as well as due to the benefit of pricing actions taken earlier in the year.

The other part of Human Health segment, our Nutritional business did experience soft demand throughout the year, both in the US and abroad, but at this point, the goodness appears that that softness has leveled off.

In terms of our development pipeline, we currently have 107 total projects in our pipeline including 57 ANDA’s currently on file with the FDA. Those 57 ANDA’s have current total IMS estimated end-market annual sales of about $7 billion – a little over $7 billion. I’d note to you that that figure is up from approximately $6 billion just a year ago.

And importantly, within those 57 ANDA’s that are on file, 29 have been on file with the FDA having a total value of about $2.3 billion on an annual basis. They have been on file with the FDA for over 24 months. And of those 29, 13 with an estimated annual sales of just over $1 billion have been on file with the FDA now for over 36 months.

So given those data points, the ANDA is filed with the FDA for quite some time now, our confidence in receiving new product approvals in fiscal ’16 is certainly increasing. With respect to our R&D spend, as many of you know, our expenditures are milestone based and represent investments in our finished dosage form generics pipeline.

For the 2015 year, we spent $5.9 million for R&D, which is 13% higher than the $5.2 million we spent in fiscal '14. Nearly half of the $5.9 million occurred in the fourth quarter as we saw healthy rate of milestone achievements, as well as project initiations.

We are very eager to carefully expand the R&D budget in fiscal '16 as we continue to grow our pipeline. Turning to the Pharma Ingredients segment, sales in that segment were $149 million during the year, which is actually a decrease of 15% versus 2014. There are two primary reasons for the decrease.

First, because of the fact that high percentage of this particular segment’s business is conducted in Europe, the weakening of the euro relative to US dollar did create significant headwinds for this segment in the course of 2015. On top of that and significantly as expected, we did manage a sizable decline in sales of our high margin API.

This favorably impacted our results in fiscal 2014. So as a result, gross profit in this segment declined by 27% in the year to just under $27 million. And I will turn to Performance Chemicals. Sales were steady at $172 million for the year.

We are very pleased that through the concentrated efforts on product mix as well as pricings, gross profit grew by 12% in fiscal 2015 to $33 million. And as a result of that, gross margin for the segment rose by 200 basis points to about 19% in fiscal '15.

We're very pleased with those actions and with those margins, and we plan to stay right around those levels in 2016. Overall, as we enter '16, ACETO is well-positioned to grow both revenue and profits for the year.

As we’ve seen in prior years, we do expect profit growth to outpace revenue growth as we continue our transition to the higher margin Human Health business. While the FDA approval process remains slow and difficult to predict, we do believe we are well-positioned now to launch between 6 and 10 new generic products in fiscal 2016.

We also expect to benefit from the price actions and product launches that occurred in fiscal '15. Conversely, on the [indiscernible] we do expect to see a continued, albeit smaller decline in sales of the high margin API that favorably affected us in 2014 as well as in 2015, but to a much lesser extent in 2015.

Also we expect to experience some continued year-on-year pressure from the strengthening dollar versus the euro which would likely shave a couple of percentage points off our total sales growth for 2016. Lastly, we plan to increase our R&D spend at Rising in fiscal '16 to between $8 million and $10 million versus the $5.9 million we spent in 2015.

So taking all the various factors into account and the current exchange rates, we are currently projecting sales growth for the year to be in the mid single-digit range and net income growth to be in the low double-digit range.

I would remind you that our business could be lumpy on a quarterly basis and that our full year results are more indicative of our operating performance rather than any specific quarter might be.

So I think what that means for those of you who are building financial models is that you should not take -- simply take our fourth quarter 2015 results which obviously are very good and we're pleased with, you cannot just take those and annualize them. You need to look at us on an annual basis.

So rather if you look at us on a year basis, but I would say keep in mind that, at this point, as we saw in fiscal '15, we are currently expecting performance in fiscal '16 to be somewhat stronger in the second half of the year than it was in the first half, so hoping that gives you a little sense for how we are thinking about the year ahead.

So with all that said, I’d like to note that we are very pleased with our fiscal '15 performance and developments and we're excited about the year ahead. We look forward to continue to grow our business as well as our shareholders. With that, I will now turn the call over to Doug for more details on the financials.

Doug?.

Thank you, Sal, and good morning, everyone. I'll walk you through our financial results for the fourth quarter and then for our full fiscal year. Net sales for the fourth quarter were $146.6 million, an increase of 5% from the $139.6 million reported in the fourth quarter of fiscal 2014.

Gross profit was up $41.2 million, an increase of 41.8% as compared to $29 million in the fourth quarter of fiscal 2014. Gross margin for the fourth quarter was 28% compared to 20.8% in the prior year period. On a reported segment basis, Human Health segment sales were $64.5 million, an increase of 35% from the fourth quarter of fiscal 2014.

Rising Pharmaceuticals sales increased by just under 64%, mainly due to the acquisition of PACK Pharmaceutical Ingredients which occurred on April 30, 2014.

Strong unit sales of two products which we had recent price increases and the true up in our estimate of product returns based on our recent trends and experience, we review our accruals quarterly and to ensure they reflect the most recent trends we are experiencing.

The change resulted in a favorable sales adjustment of $9.5 million and increased gross profit of $3.5 million recorded in the quarter. On the nutritional side, the sluggish pace of reorders we've experienced in our first three fiscal quarters this year extended into the fourth fiscal quarter.

The absence of royalty income from our proprietary product realized in the prior year's quarter also continued to negatively impact the year-over-year comparison. On the nutritional side, the sluggish pace of reorders we’ve experienced in our first three fiscal quarters this year extended into the fourth fiscal quarter.

The ability -- pardon me, the absence of royalty income from a proprietary product realized in the prior year’s quarter also continued to negatively impact year-over-year comparison. For the segment, gross profit increased 74.8% to just under $25 million, reflecting a higher proportion of Rising sales.

Our Pharmaceutical Ingredients segment sales were $38.2 million, a decrease of just under $11 million compared to the fourth quarter of 2014, due to the absence of several product reorders and the negative impact caused by the strong U.S. dollar versus the euro.

Gross profit in the fourth quarter increased 12.3% to $6.9 million due to a more favorable product mix. Our Performance Chemicals segment sales decreased by $10.6 million to $43.9 million largely due to a reduced sales of our specialty chemicals.

However, gross profit for the segment increased 8.3% to $9.3 million, reflecting an improved product mix in our agricultural protection products and continued strong demand for a fungicide used to prevent disease on pecan crops.

Our SG&A expense for the fourth quarter of 2015 declined from $18 million to $16.8 million or 11.5% of sales, approximately 140 basis points lower than the fourth quarter of fiscal 2014.

The absolute and percentage declines in the quarter were due to a $3.5 million reversal of contingent consideration related to the PACK acquisition, which was offset somewhat by $1.6 million environmental remediation charge related to our Arsynco subsidiary. Also, as Sal mentioned, our investment in research and development continued to increase.

In the fourth quarter, R&D was $2.7 million compared to $2 million in the comparable period last year as we saw a healthy rate of milestone achievement and project initiation that Sal spoke to earlier. Higher gross profits combined with our lower SG&A led to a sharp gain in our operating income to $21.6 million versus $8.4 million last year.

Net income was $13.6 million or $0.46 per diluted share compared to net income of $5.6 million or $0.19 per share for the fourth quarter of last year. Our non-GAAP net income was $14 million or $0.48 per share for the fourth quarter compared to $7.6 million or $0.26 last year.

Our EBITDA for the fourth quarter was $26 million, an increase of $14.1 million or 117% over the same quarter last year. For the 12 months ended June 30, 2015, our net sales were $547 million, a 7.2% increase from the $510 million for fiscal 2014. On a constant currency euro basis, net sales would have increased by 10.1% in fiscal 2015 over last year.

For the full year, segment sales in Human Health were $225.3 million, an increase of just under 41%. Pharmaceutical Ingredients segment sales were $149.3 million, a decrease of -- pardon me, 15.4% and our Performance Chemicals sales were $172.4 million, a decrease of just under 1%.

Gross profit was $135.4 million, an increase of 18% compared to gross profit of $114.7 million in the prior year. Our full year gross margin expanded to $24.8 million, a 228 basis point increase. Gross profit for the Human Health was the driver at $75.7 million, an increase of over 56%.

Pharmaceutical Ingredients gross profit decreased -- pardon me, decreased by 27% to $26.7 million and Performance Chemicals gross profit increased 11.5% to $33 million. Our Human Health and Pharmaceutical Ingredients business collectively accounted for 68% of our sales and 76% of our total gross profit for fiscal 2015.

These measures are indicative of our evolution into a Human Health-oriented company and the progress we’ve made towards that strategic goal. SG&A expenses were $73.2 million, a 12.2% increase.

In fiscal 2015, $7.8 million of the total SG&A was attributed to the new PACK business, of which, $4.8 million was due to the amortization expense of the acquired intangible assets. In fiscal 2014, SG&A included $2.4 million of expenses related to the acquisition of PACK.

Other expenses, which impacted the SG&A in 2015 as mentioned earlier, included a 3.5% reduction of contingent consideration related to the PACK acquisition and $1.6 million environmental remediation charge related to our Arsynco property. Research and development expenses totaled $5.9 million compared to $5.2 million last year.

Our operating income was $56.3 million compared to $44.3 million last year, a 27.2% increase. For the full year, reported net income was $33.5 million or $1.14 per diluted share compared to $29 million or $1.02 per diluted share for 2014, an increase of 15.5% and 11.8% respectively.

Our non-GAAP net income was $38.9 million compared to $34.7 million last year, a 12% increase. Our non-GAAP earnings per share were $1.33 compared to $1.22 last year, a 9% increase. Now turning over to our balance sheet. Our trade receivable increased to $161 million, a $39 million increase over June 2014.

The entire increase was related to Rising, which reflects their strong end of quarter sales and an increase in our DSOs, due to the -- primarily due to the industry consolidation. We believe our DSOs looking forward have stabilized. As of June 30, 2015, cash and cash equivalents and short term investments totaled $37.4 million.

Our working capital was $185.3 million and shareholder equity was $254 million or 8.73, just under $9 per share. Financially, ACETO remains strong and has ample capital resources to support our future growth. I’d now like to turn the call over to our operator to field the questions.

Operator?.

Thank you, everyone. I will begin the questions-and-answer session. [Operator Instructions] And our first question is from Matt Hewitt from Craig-Hallum Capital. Please go ahead..

Good morning, gentlemen and congratulations on a record quarter and year..

Thank you, Matt. Good morning..

I’ve got a handful of questions.

First off, do you have a breakdown for Q4 for the Human Health segment? How much of that was price versus the two new products that launched in the quarter?.

I don’t have that. And I don’t know we’d actually disclose that kind of information in the past to be honest, Matt. But I don’t have it with me..

Okay.

Without getting into specifics, I guess, would you say it was primarily the new products that were launched or just given that you’d already had a quarter and a half of benefit from the price?.

No, I would say it was more due to the pricing, we took them earlier in the year and then it started to build -- the impact sort of built up over the course of quarters three and four. So off the top of my head, I’d say it was probably more the pricing than the new products..

Okay.

And then, I guess, kind of sticking with that segment a little bit, gross margin obviously a phenomenal quarter across the board, but in the Human Health in particular, is that type of gross margin in the Human Health segment, is that sustainable or will that have some fluctuation as we look at ‘16 and beyond?.

I think there is always fluctuation. That margin, I think is maybe a little bit higher than we would get on a go forward basis. New products will probably increase that margin over time; there is always constant erosion due to competition on older products that brings it down.

I’d say though for this quarter, it’s probably a little bit higher than sustainable.

Doug?.

Yeah. Matt, if you remember, we took a price increase and a charge if you will in our second fiscal quarter, and the benefit of the price increase we said would roll out in the third quarter, and then the full effect would be in the fourth quarter.

So, I think we saw that, but don’t forget in the fourth quarter, as I mentioned earlier, we had a -- we always review our accruals and we took a favorable adjustment that affected our gross profit by about $3.5 million in the fourth quarter, so that’s in there too..

Okay, alright..

If you strip that out, I think that would be a sustainable margin..

Okay. That’s helpful. Thank you.

Kind of moving down the income statement a little bit, SG&A, are there some additional leverage opportunities from the PACK acquisition or are we kind of seeing that integration at this point?.

The fourth quarter really represents the full integration of PACK, and so I would not expect to see further consolidation savings there..

Okay..

Matt, just I want to clarify one point. We just talked about when we said we actually strip out the $3.5 million that would be kind of a more of a normal [indiscernible], however, that $3.5 million did impact our P&L earlier in the year.

Doug?.

Well, I mean on its own, if you were to look at the fourth quarter, if you would have made this adjustment earlier in the year, then you would strip out the $3.5 million, but it would have been favorably adjusted by like $700,000..

So my point being, it is kind of an ongoing -- when you look at it on an annual basis, they should be stripped out so to speak..

Correct. But I’m just speaking to the fourth quarter run rate..

Just wanted to clarify that..

Okay. Thank you.

Quick clarification on the ANDAs, I think in your prepared remarks, you said 57, but the press release said 60, just want to clarify what is the right number and when you look at this year, the 6 to 10 launches that you’re anticipating, are those products that have already been approved or how many of those have been approved or are those all new?.

Yeah. So the 57 are products that are currently on file with the FDA. We do have three that have received already approval, have gone through the system and are waiting launch and there are different things around those, whether it’d be supply chain or just timing of things like that. So the 60 is the accurate number, but 57 are on file with the FDA..

Perfect. Thank you.

And then as you look at this upcoming year, so you’ve got three of the 6 to 10 you said you anticipated launching this year, the other three to seven are those than ones that you’re anticipating just based up on the ripeness of that portfolio?.

That’s correct. Yeah..

Okay.

And then sticking on that theme, how many of your ANDAs were have been submitted in [indiscernible], so they would fall into that expedited timeframe?.

So let me see if I’ve got this, I think that’s on our roadshow. Let me just put out what we have here. It’s seven, I believe seven have been in the [indiscernible]..

Seven, okay. So just based upon -- assuming the FDA is going to hit their targets just based upon those seven, you’d anticipate something like three of those approved within the first or within 15 months, so that’s additional great news.

As far as looking at the R&D, obviously a big step up in FY ‘16, its sounds like a lot of that is going to be anticipated milestone and new projects, but are any of those ACETO driven or are these still through partnerships?.

Well our model is, when you say ACETO driven, they are driven by us in terms of product selection, but they are, our model is still partnership so they are in conjunction with development partners..

Okay, okay. Maybe a couple more and then I’ll hop back in the queue.

First, from an M&A perspective, obviously the market remains pretty high particularly on that, especially generics side of the business, but what are you seeing, are you still actively looking for more targets whether they’d be products, portfolios of products, or entire companies?.

Absolutely, we are looking at both products as well as entire companies. We’re seeing not that this is you know means that we’re going to end up closing anything, but we are seeing more, slightly more properties becoming available.

So, that’s somewhat encouraging, because for a while there is actually just kind of very limited opportunities, we’re seeing more opportunities both in terms of products as well as companies, now we’ll just have to see where it takes us forward, definitely looking..

Okay.

And then, one last one on me, and I guess this is more on especially chemical side of the business, but the Chinese manufacturing market has been weak it’s been all over the news recently, what type of impact could that have on your business, I know you’re not selling into that market but obviously you’re sourcing from that market, how can that -- how does that impact your business?.

We look at it as a neutral to slightly positive. As that market weakens that increases how our supply partners desire to do business and hence potentially puts us in a better position from a cost point of view. Obviously our customers are smart also and so they will look to push back on us but we see there is neutral to slightly positive..

Okay, great. Thank you very much for taking the questions and congratulations again..

Thank you, our pleasure thank you..

Our next question is from Steve Howard from Morgan Stanley..

Hi Sal, good morning thanks for taking the call..

Good morning Steve, how are you?.

Good, in terms of the full-year guidance, what’s doing the bulk of the heavy lifting, is it the maturation of the fiscal ’15 later launches in the pricing or is it the six out of ten new product launches?.

I would say, it’s right down in the middle, it’s both those. But launches will occur as the year goes on, so they’ll have greater impact in the second half of the year -- they’ll have a greater impact in the first half of the year..

Okay.

And then, in terms of the broad portfolio of guidance and acknowledging the quarterly lumpiness, would you feel comfortable with that low double-digit bottom line number with six new launches instead of ten, or is that kind of the midpoint needed to achieve that double digit number?.

It’s an interesting question. It’s one thing that kind of depends, it depends on which products get approved because some are large and some are lower, so I hate to hedge it but I then would feel, I then would feel comfortable with the six, assuming it’s the right six, let’s put it that way..

Okay, thank you very much, good luck..

Thank you..

Our next question is from Jeremy Hellman from Singular Research..

Hi guys I apologize I was going to ask you about the M&A landscape as well which the first questioner asked about. Sorry about that..

No problem..

And we have a question from Ben Natter from Emrose Capital..

Hi, just wondering on the accrual, what was the revenue impact of that, I’m sorry if I heard that it might be different from the gross profit impact..

What we said was the revenue impact in the fourth quarter was $9.5 million..

Okay, great.

And as you guys look at working capital, I think you said it would be stable, did you mean in terms like in relationship to sales, like on a DSO basis or did you mean in terms of dollars as you move throughout the rest of the year?.

On your former, in another words on a DSO basis..

Okay, okay, great thanks for the strong quarter and good luck for the rest of the year..

Thank you..

Thank you..

[Operator Instructions] And I have no further questions at this time..

Okay, well in that case then, again thank you all for joining us here today. As you could see from our results and today’s discussion we’re very pleased with 2015 and we’re looking forward to ’16. We’ll see you or talk to you in November for our first quarter results. Thanks again and enjoy the last few days of summer here, we’ll see you..

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