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

Matt Hewitt - Craig-Hallum Capital Group John Vandermosten - Singular Research Steve Howard - Morgan Stanley.

Welcome to the Aceto Fiscal 2016 First Quarter Financial Results Conference Call. My name is Allen, 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 that this conference is being recorded.

I will now turn the call over to Jody Burfening. Ms. Burfening, you may begin..

Thank you, Allen. Good morning, everyone. And welcome to Aceto Corporation's first quarter fiscal 2016 earnings conference call. This is Jody Burfening of LHA. With me today are Sal Guccione, President and CEO; and Doug Roth, Chief Financial Officer. 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 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 those non-GAAP measures as excluding all transaction costs related to acquisitions. 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 thank you. Good morning, everyone. And thank you for joining us on Aceto's first quarter fiscal 2016 earnings conference call. I would like to start up by saying that, overall we are very pleased with our start to fiscal 2016.

Our net sales increased by just over 2% in the quarter to $133.5 million and gross profit increased by 25.1% to $34.6 million in the quarter. The performance gains were led by in particular our Human Health segment and to a lesser extent our Performance Chemicals.

Foreign currency headwinds again did impact results a bit, reducing net sales for the quarter by $6 million. Absence this impact, net sales would have grown by 6.5% during the quarter versus last year's quarter.

Our transition towards becoming the Human Health business continues on pace, for the first quarter of fiscal ’16, our Human Health and Pharma Ingredients business segments together accounted for 72% of our total sales. That’s an all-time high and it compares to 67% for the same time last year.

In part, because of our ongoing sales mix shift and in part because of operating leverage in our business, we continue to deliver strong operating income and earnings per share growth. For the quarter, operating income grew by 80% to $15.5 million and non-GAAP adjusted EPS grew by about 61% to $0.37 a share. That's up from $0.23 a share last year.

On a GAAP basis, earnings per share were $0.32, compared to $0.17 for the first quarter of fiscal ’15.

Turning to the individual business segments, Human Health sales grew by just over 17% in the quarter to a level of $57.5 million and that reflects continued solid performance by Rising Pharmaceuticals, as well as stabilization in our Nutritional Products business.

In addition to Rising strong organic growth efforts, Rising was also acquisitive during the quarter. First we purchased three FDA approved Ophthalmic ANDAs from Nexus Pharmaceuticals.

Rising began marketing those Nexus products under license back in 2008, and now with complete control over those products, Rising has increased its debt and control over its pharma’s portfolio, while at the same time also being able to capture greater margins.

Second, we purchased three FDA approved ANDAs from Endo International, those standing from its acquisition of Par Pharmaceuticals.

And even though the direct financial impact of the three acquired products is not expected to be significant for Aceto, the transaction is strategically important for us, because it's the first time Aceto has gone through the complete process for acquiring products of an FDC regulatory-driven divestiture.

So this experience will hopefully open the doors to future opportunities. Now that the regulatory authorities recognize Rising to be viable acquirer of products that become available when merged pharmaceutical companies are required to divest some of their product portfolios. So hopefully there could be more of that in the future.

Just to add for the close of the quarter, we launched two of the ANDA’s that were acquired from Endo. We launched Glycopyrrolate and Methimazole Tablets. In terms of pipeline, we currently have 105 projects in our pipeline, including 50 ANDAs on file with the FDA and eight approved -- attentively approved products for launch.

Of our 50 ANDAs currently with the FDA, 28 have been on file for over 24 months now. In Nutritional products, the business has largely stabilized as I indicated. And we did see modest sales gains both in the U.S. and abroad during the first quarter. Turning to Pharma Ingredients.

Sales were $38.4 million in the quarter, which is year-over-year increase of 1%. That topline growth in Pharma Ingredients was held back during the quarter by the continued strong U.S. dollar versus the euro on a year-on-year comparison, which Doug will discuss further in few minutes.

In Performance Chemicals, sales declined by about 14% in the quarter to $37.7 million. That decline is primarily due to reduced sales of agricultural, pigment and other intermediates as well as some certain chemicals used in surface coatings.

That said, the gross profit for the segment increased by 17% in the quarter to $8.2 million and the gross margin expanded by 580 basis points to 21.7%. That gain reflects favorable product mix as well as one-time lift from duty refunds which were renewed during the quarter as a two-year hiatus.

With the first quarter under our belt, the outlook we provided for fiscal 2016 on our last conference call remains in place. We continue to project sales growth in the mid-single digit range and net income growth in the low double-digit range.

We do expect that overall gross margin this year to expand versus last year but by less than the 230 basis point increase we saw in fiscal ‘15 over fiscal ‘14. Also, as we saw in fiscal ‘15, we expect this year to deliver higher sales and gross profits in the second half of the year as compared to the first half of the year.

R&D spending is still expected to be in the range of $8 million to $10 million for the year. Finally, I would like to note that I’m pleased with two balance sheets that we took recently. First, the filling of an Aceto shelf registration and second the refinancing of our credit facility.

These tests will better position the company for pursuing future growth opportunities particularly on the M&A side and Doug will expand upon this in his comments. So with that, I will turn the call over to Doug for discussion of financial results and then we'll open it up to Q&A.

Doug?.

Thank you, Sal and good morning everyone. I plan to walk you through our financial results for the first quarter. Net sales for the first quarter were $133.5 million, a 2.1% increase from the $130.8 million reported in the first quarter of fiscal 2015.

On a constant euro currency basis, net sales increased by 6.5% in fiscal 2016 compared to the same quarter last year. Our gross profit was $34.6 million, an increase of 25.1% compared to $27.7 million in the first quarter of fiscal 2016. Gross margin for the first quarter was 25.9% as compared to 21.1% in the prior year.

On a reporting segment basis, Human Health segment sales were $57.5 million, an increase of 17.1% from the first quarter of fiscal 2015. Rising Pharma sales increased by 19.4% due to pricing on certain products affected during Q2 of fiscal 2015 and new generic product launches that occurred over the last 18 months.

On the Nutritional side, the softness that we experienced throughout fiscal 2015 has leveled out, as we indicated in our last call and this business saw modest improvements in both domestic and foreign sales during the quarter.

Our Pharmaceutical Ingredients segment sales were $38.4 million, an increase of 1% versus the first quarter of 2015, as growth was tempered by the negative impact of a strong U.S. dollar versus the euro. Gross profit in the first quarter decreased slightly to $6.1 million, a $100,000 reduction from the prior year.

Applying a constant euro currency basis, sales were up by 11% and gross profit increased by 9.3%. Now finally, our Performance Chemicals segment sales decreased by just under 14% to $37.7 million, largely due to reduced sales of our agricultural, pigment and other intermediates, as well as chemicals used in surface coatings.

However, gross profit rose to $8.2 million, an increase of over 17%, compared to $7 million in the prior year's quarter. Gross profit benefited from a favorable product mix, a decline in the lower margin products and from a duty refund related to a tariff system that expired in 2016 (sic) [2013].

But was reapproved by Congress in 2015, so we were able to go back and declare some refunds during the two year period. Our SG&A expenses for the first quarter of 2016 declined from $18.3 million to $17.6 million, or 13.2% of sales, which is approximately 80 basis points lower than the first quarter fiscal 2015.

The absolute and percentage declines realized in the quarter were due to the inclusion of separation charge and bad debt provisions taken in last year's first quarter and the decline in our T&E expenses in the current year's quarter. In the first quarter, R&D totaled $1.4 million compared to $700,000 in the comparable year period.

Our higher gross profits, combined with lower SG&A were due to sharp gain in operating income to $15.5 million versus $8.6 million last year. Net income was $9.3 million, or $0.32 per diluted share, compared to net income of $4.8 million, or $0.17 per diluted share last year.

On a non-GAAP basis, our net income was $11 million, or $0.37 per diluted share for the first quarter compared to $6.6 million or $0.23 last year. EBITDA for the first quarter was just under $19 million, an increase of $7.1 million, or 61% over the same quarter last year. Now turning to the balance sheet.

On September 30, 2015, our cash and cash equivalents, short-term investments totaled $33.2 million. Our working capital was $202 million and shareholder equity was $265 million. As Sal mentioned during the quarter, we were busy on the capital front.

We filed a universal shelf registration statement with the SEC in mid-October, which will allow us the flexibility to raise capital. Additionally, we amended our senior credit facility to increase our borrowing capacity from $134.5 million to $150 million, with a $100 million expansion feature.

Together, we believe these two changes will provide us with the dry powder to continue our transformation towards Human Health oriented business. Now, I’d like to open up the call for questions.

Operator, please?.

Thank you. [Operator Instructions] Our first question is from Matt Hewitt with Craig-Hallum Capital Group. Please go ahead..

Good morning, gentlemen and congratulations on the progress..

Good morning. Thank you..

Thanks, Matt..

A couple of questions. First, I’m trying to understand the pipeline a little bit as there is lot of numbers there, just want to make sure I have everything accurate. So last quarter you had 60 ANDAs of the FDA, three have been approved and are waiting to launch.

Currently you’re at 50, I think I heard you say you had eight tentative approval, I’m not sure if that’s part of the decline from last quarter.

And then did I hear you have 10 approved products awaiting launch?.

Not 10, so just to clarifying that. I think, we said, we have eight -- we have eight products approved and getting ready for the launch. So, basically, in the nutshell, I don’t have the exact comparison from the last quarter. But basically, I think, last quarter was something like 57 with the FDA and now its 50, so that's a drop of seven.

But last quarters approved pending launch was like two or three and now that’s eight. So, in bulk you’ve seen a movement from the filed to approve. Now as you know, we don’t make announcements upon approvals, we make announcement upon launches. So that -- those will be coming as we launch, but that’s essentially the movement that we saw.

I think, in the quarter, we did maybe dropped one product and have one product sent back by the FDA, which we’re going to have to refile. So essentially the movement from filed to approved pending launch and a couple of drops would net out the numbers. I think last quarter, we're around 107 total pipeline and now we’re at 105 or something like that..

No. That’s -- it’s still pretty remarkable, I mean, to pickup eight approvals over the quarter that’s fantastic.

Do you have a market size for the 50 that are pending for us?.

I don’t have -- the 50 that are pending?.

Yeah..

Oh! We have a 50, yes. I think it’s just a hair under $6 -- $5.8 billion..

Okay. Great..

Our current IMS marking as we know by the time they get fully genera sized and we’re going to approve within our shares, obviously, much smaller number than that, but that’s the current IMS annual sales..

Okay. Great. And I guess, kind of, sticking on that front for one more question. Target action dates, several of your peers at September received -- I’m going to use -- plethora of target action dates for the old portfolio that is the pipeline pre-PDUFA year three.

Did you receive similar types of communications regarding your old pipeline? And if so, can you give us a sense for when -- not specific dates but when that window opens up and extends to?.

Yeah. So I can’t say that we receive the plethora of target action dates. We did receive, as I said, a handful of approvals here since the last quarter. And of the eight that are currently approved pending launch, I would say that we’re highly confident that we would get six of those launched this year.

Now again, there maybe some other approvals that occur between now and the end of the year and two of the eight are in a category that from a supply chain point of view are a little bit more challenging at this stage now that we’ve gotten the approval. So of the eight, I’m highly confident on the six..

Okay. Great.

And then regarding the Human Health segment and specifically the Rising segment, were there any price increases here in the past quarter where you would see chargebacks hitting in the first quarter but then you would get the full benefit of that price increase in Q2 and beyond?.

No. Nothing in the first quarter..

Okay.

Nothing in the first quarter, how about here in the second quarter?.

I don’t -- so far let’s put up it’s sweating..

Okay. All right, all right..

No, nothing so far..

Okay. All right. Well, I’ll jump off. Let somebody else jump in but congratulations on the progress so far..

Great. Thank you..

Thanks, Matt..

The next question is from [John Van] [ph] with Singular Research..

Hi, everybody. It’s John Vandermosten with Singular. Just had a question regarding seasonality and little bit your story than some of the other analyst wanted to seek if you could help me understand just kind of how we should flow throughout the year in terms of seasonal ups and downs? Thank you..

There is not too much seasonality in our business. As you look at the different segments in our agricultural products, we do have some seasonality.

Doug?.

Yeah, John, if you go back and look at the last, let’s say, eight quarters or so, you will see that the only business that we have that is truly seasonal will be our ag business. So our ag business is more concentrated in our fiscal third and our fiscal fourth quarter. So the other segments are not what you would call seasonal..

So as you -- again, you may have noticed what we said is we expect the second half of the year to be strong than the first half and that’s due to two primary factors. One would be what Doug just said, so some seasonality in the ag business.

And second, as we launch products rising, we would expect to have that impact in the second half?.

Okay. Thank you..

Thank you..

[Operator Instructions] The next question is from Steve Howard with Morgan Stanley..

Good morning, Sal..

Good morning..

Couple of quick questions.

One, on the chemical business, it was a very solid margin quarter, how should we kind of expect that, or couple of moving parts and things like that? How should we expect the margin profile going forward to look relative to this quarter? And then in terms of the ag and pigment and intermediates, how should that flow through, is that stuff that you expect to come back, or is that kind of rationalization of the portfolio as started year and half ago?.

So two things. One, in terms of the margin, as this point, at least, we do not expect that 21.7% gross margin to continue for the balance of the year. That’s a little bit on the higher side. We are trying, but I don’t expect that. We did receive and may be Doug know the percent. We received this one-time duty refund that helped the margins.

I think that business will be more than 19-ish percent range over the course of the year..

Yes, which is consistency with what we did last year, on a full year basis that segment in total was 19%. For this first quarter, we did 21s, is probably 1% in there due to that duty refund if you will.

So as we said before, we think there might be a little bit of upward room there, but we will probably be at the 19s or just short of 20 seems appropriate..

Something like, something in that range. With respect to the sales, I think it’s -- two things, some of the sales drop is primarily in the intermediates business, some of it is timing and we expect to recover later in the year. And some of it is actually big business that we lost this year.

I would not say that this was active pruning at this particular time. Some was just lower margin thankfully, but business that we just think getting better this year. And it’s 50-50 in terms of timing and lost business for that amount of drop this year, this quarter..

That’s helpful. And then just overall on pricing, that’s been touched upon a little bit.

But given the headlines that the larger scale areas of farmer, I want to get a sense kind of what your normalized expectations for pricing on the portfolio is as it matures and as we move forward through the year and into the future?.

I just missed the beginning of the question.

Could you just repeat it?.

On pricing of the farmer portfolio?.

Okay. So the pricing on the farmer portfolio, again we leave it to the guys who run the business. They basically assess the market over the course of the year. And if there are opportunities, they would try to take advantage of that. As you know, in this industry, there's continued price pressure down and then there are once in a while opportunities up.

And so -- honest, I don't have any crystal balls for the balance of the year. But as I mentioned earlier I think to Matt’s question, so far this year there are no price increases..

Right.

So just I guess broadly it’s business as usual as competitive and you’re trying to find but you can’t, but nothing has changed relative to the political environment?.

Exactly..

Okay. And then final one and this was also just touched upon, the 6 to 10 number that you’ve lined in your guidance last quarter and reiterated today.

Can we just walk through how that’s reconciled with the Endo stuff as well as the eight approved but not launched?.

Sure. So the two Endo that we brought and launched, they are launched, but that’s not in my opinion part of six to ten. The six to ten will come out of the eight that are currently approved pending launch as well as if we get another approval or two or whatever we might get over the balance of the year..

And given the eight versus six, I mean, is there risk between approval and launch that something might not go at this point? I know you’ve had to re-file when you’ve had one that didn’t make it through.

But at this point, do you have expectations that eight will be going through?.

Well, we feel those eight we feel very comfortable on six of them. And the other two, maybe this year they may slip to next year. We’re working through some manufacturing hurdles on the other two, so highly confident on six of those eight..

That’s very helpful. Thank you very much..

Thank you..

[Operator Instructions] And I’m not showing any further questions at this time. I’d like to turn the call back to Sal for closing remarks..

Okay. Well, again, thank you so much everybody for joining us here today. And as you can see from our results that we reported for first quarter, our growth continues to be driven primarily by the Human Health and finished dosage business.

We continue though to push hard on all of our segments and expect growth out of all three, but we’re pleased with the first quarter. So with that, we look forward to speaking with you again in February at our second quarter results and as well as possibly seeing some of you in our upcoming December shareholder meeting.

So thank you so much and see you soon..

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