Jody Burfening - IR, LHA Sal Guccione - President & CEO Doug Roth - CFO.

Matt Hewitt - Craig-Hallum Capital Group Claire Mencke - Sidoti & Company John Vandermosten - Singular Research Steve Howard - Morgan Stanley.

Welcome to the Aceto Fiscal 2016 Second Quarter Financial Results Conference Call. My name is Allen, and I will be your operator for today’s call. [Operator Instructions]. 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 second quarter fiscal 2016 earnings conference call. With me on the call today are Sal Guccione, President and CEO and Doug Roth, Chief Financial Officer. The company issued its second 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 would 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.

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

Good morning everyone. Thank you for joining us on Aceto's second quarter fiscal '16 earnings conference call. We’re very pleased with the second quarter results both in terms of profitability and profit growth as we continue to make progress in our transition towards human health.

Our strong operating income and EPS growth is a function of our ongoing sales mix shift and demonstrates the operating leverage that the shift provides. For the second quarter of '16 our Human Health and Pharma Ingredients business segments collectively accounted for over 70% of our sales and over three quarters of combined gross profit.

Net sales for the quarter increased by about 6.5% to just under $132 million and gross profit increased by 19.5% to $35.9 million, so we’re pleased with that growth.

Once again growth was led by gains in particular in Human Health segment and also as was the case in the first quarter foreign currency was a headwind for us this quarter reducing net sales by about $4 million in the second quarter. Absent that FX impact net sales would have grown by about 9.5% in the quarter.

Operating income in the second quarter grew by 32% to a level of $14.1 million and GAAP EPS grew by 21.7% to $0.28 a share that’s up from $0.23 a share last year. On a non-GAAP basis earnings per share grew by 28.5% to $0.36 a share and that compares to $0.28 a share on a non-GAAP basis for the second quarter of fiscal '15.

Taking a look at the individual business segments, Human Health sales grew by 6.5% in the quarter to $59 million in particular on another solid performance by a rise in pharmaceuticals business, growth led by a rise more than offset a modest sales decline in our nutritionals business. During the quarter we launched four products.

In October we launched Glycopyrrolate tablets which are used for peptic ulcer treatment. We also launched Methimazole tablets which are used for treatment of hyperthyroidism.

In November we launched Dutasteride which is a soft gel capsule used to treat prostate illness and in December we launched Olopatadine Hydrochloride which is an ophthalmic solution used for the treatment of allergic conjunctivitis.

So four products launched in the quarter and actually we began this third quarter launch of our fifth product of the year, Zolmitriptan which is used for migraine headaches.

So as you can see launches have picked up and those launches I noted show a variety both in terms of indication as well as form which highlights the benefit of rise in partnership based development model we can -- we're not married to anyone particular therapeutic indication or delivery form.

We currently have 105 products in our pipeline including 52 ANDAs on file with the FDA. Those 52 have an IMS estimated end market sales approximately of $5.9 billion. Off those 52 ANDAs 31 now have been on file for over 24 months. In addition we currently have six ANDAs that are approved pending launch.

Consistent with what we noted on prior updates we continue to expect to launch between 6 and 10 products for this fiscal year. Turning to the Pharma Ingredients segment, sales were $34.3 million in the quarter which is a year on year increase of about 5.3%.

I would note again that the top line growth in this segment was somewhat restrained by a strong U.S. dollar versus the euro. In Performance Chemicals sales rose by 7.2% to a level of $38.3 million that’s primarily driven by strong sales of agricultural protection products.

Gross profit increased by about 18.5% to $8 million for the quarter and gross margin expanded by over 200 basis points getting to just a hair under a 21% gross margin.

This increase in margin reflects our continued emphasis on higher margin products in specialty chemicals as well as lower production costs, lower product cost that we’re seeing in that business as a result of devaluation of Chinese currency.

Turning to the balance sheet, during the quarter we completed convertible debt offering which gave us net proceeds of about $125 million. All in all we're very pleased with both the timing and the terms of the offering. We think we picked it at just the right time for us.

They represented the third step of the capital planned which included filing - also included filing a $200 million shelf registration as well as increasing our borrowing capacity under our credit facility. That capital plan puts our house in order from a balance sheet perspective and gives us greater flexibility to execute on our growth plans.

With that solid performance of Q2 and the first half of fiscal '16 behind us we're looking to the balance of the year and we do have some modifications to our fiscal year outlook to go over with you. First, we’re seeing a potential for increased competition in the generic pharmaceuticals business as compared to earlier expectations.

And second, the financing we did in the second quarter did bring some dilution to us on a GAAP basis. So with that as a result we are changing our GAAP earnings forecast from the previous low double digit estimate now to a high single digit low double digit range.

We're also modestly cutting our top line growth estimate for the year and now expect to realize revenue a little bit below the mid single digit range of our previous guidance. The primary reasons for the sales change are two.

First, some lower than planned sales of certain specialty chemical products as the year is unfolding, and second, an impact on specialty chemicals arising from the devaluation of the Chinese yuan.

So that devaluation has both a positive and a negative impact on us on the one hand as I mentioned our product cost goes down when the currency devalues so that’s a benefit for us.

On the other hand we do pass some of that along in terms of pricing and net-net we're seeing lower costs and higher profitability but it is moderating the top line a bit for us. All that said we still expect to generate higher sales and gross profit for the second half of this year compared to the first half.

We also continue to expect R&D spending to be between $8 million and $10 million for the year again up from about $6 million last year and finally we still do expect to achieve earnings growth on a non-GAAP basis in the low double digit range.

So with that I think it's a good start to the year and I will turn it over to Doug for some financial discussion and then we will open up the call to questions..

Thank you, Sal, and good morning everyone. I'll walk you through our financial results for the second quarter. Our net sales were a 131.7 million, an increase of 6.4% from the 123.8 million reported in the second quarter of fiscal 2015. On a constant euro currency basis net sales increased by approximately 9.6% compared to the same quarter last year.

Our gross profit was just shy of 36 million, an increase of 19.5% compared to 30 million in the second quarter of fiscal 2015. Our gross margin was 27.2% approximately 300 basis point increase over the prior period. On a reporting segment basis, Human Health segment sales were 59 million, an increase of 6.5% from the second quarter of fiscal 2015.

Rising Pharma sales increased by 4.5 million primarily reflecting the benefit of pricing actions we took on selected products in the second quarter of last year while sales on the nutritional side declined modestly. Gross profit in the Human Health segment rose to 21.7 million, a 33.1% gain from the prior year quarter.

As a reminder rising sales and gross profits were negatively impacted in last year's second quarter by a price protection measure related to the price increases. Pharmaceutical Ingredient segment sales were 34.3 million an increase of 5.3% versus the second quarter of 2015.

On a rise in API sales from our foreign subsidiaries specifically from Singapore and Germany. Gross profit in the second quarter decreased to 6.1 million from 6.9 million the year earlier as a result of a drop in re-orders of a certain API which typically yields a significantly higher gross margin.

Also the unfavorable of the impact of the euro rate variance for the quarter compared to last year was 2.6 million in sales and a 0.5 million in gross profit for this segment. Performance Chemical segment sales increased 7.2% to 38.3 million largely due to higher sales of our agricultural protection products.

Gross profit rose to 8 million, an increase of 18.6% versus 6.8 million in the prior year's quarter. As Sal, mentioned gross profits benefited from a decline in the sales of lower margin products in our specialty chemical business and the devaluation of the Chinese currency vis-à-vis the USD.

On our SG&A expenses for the second quarter of 2016 were 19.2 million roughly equivalent to last year's level. R&D totaled 2.5 million compared to 400,000 in the comparable period last year.

Our R&D expense represents investment in our rising generic finished [indiscernible] form product pipeline and the majority of these expenses are milestone based and therefore tend to fluctuate quarter to quarter.

Higher gross profits combined with good SG&A control expense led to a strong gain in operating income to 14.1 million versus 10.7 million last year notwithstanding the jump we had in R&D expense. Reported net income was 8.3 million or $0.28 per share compared to net income of 6.6 million or $0.23 for the second quarter of last year.

Non-GAAP adjusted net income was 10.7 million or $0.36 for the second quarter compared to 8.2 million or $0.28 last year. Now let's just spend a minute on our GAAP versus non-GAAP earnings.

Included in our second quarter non-GAAP calculation we’re for the first time charges related to the issuance of convertible debt totaling approximately 1.1 million. These costs include non-cash interest expense, amortization and debt issuance cost and terminations of an interest rate swap cost.

These charges increased the spread between our GAAP diluted earnings and our non-GAAP adjusted diluted earnings from $0.05 in the first quarter to $0.08 in the second quarter. The costs associated with the issuance of the convertible that rounded up to approximately $0.02 for the quarter.

We expect to report ongoing costs including noncash interest associated with convertible debt of roughly $0.03 on a diluted EPS basis for each the third and the fourth quarter. As a result we expect the ongoing spread between our GAAP and non-GAAP adjusted diluted earnings will be approximately $0.08 for the current year.

Our EBITDA for the second fiscal quarter was 18.1 million, an increase of 3.6 million or 25% over the same quarter last year.

Finally turning to our balance sheet as of December 31, 2015 we had cash, cash privileges and short term investments of 54.3 million, our working capital is 226 million and our shareholder equity was just under 286 million or $9.67 a share.

As a result of the convertible debt we had long term debt of a 113 million and no outstanding balance under our senior credit facility. I'd like to now open up the call for questions.

Operator?.

[Operator Instructions]. Our first question is from Matt Hewitt with Craig-Hallum..

Good morning, gentlemen, and thank you for all the details that you provided in the prepared remarks especially on the convert, and how that impacts the adjustments.

Couple of questions, first of all the competition that you expect to see in Rising, have you already seen some approvals or is this just based upon what we've been hearing from the FDA recently regarding a more expedited approval process.

You just anticipate that you’re going to see approvals over the course of this year and going forward?.

Couple of things, one is certainly an anticipation as we look out in time. We’re seeing more approvals we would expect that others are going to see more approvals so that’s going to increase the general level of competition.

We haven't seen any specific other approvals but we are in our market intelligence seeing some noise of some increased potential for specific competition on our lines also. So some is more general, some is a little more specific and we will know more as the year unfolds..

And then I guess looking at your pipeline, thank you for the update, 52 ANDAs currently on file.

How many of those have you received target action dates and within that as you look out maybe over the next couple of quarters how many fall within that timeframe?.

I don't have the exact number with me. And maybe before the call is off I can get it, but I believe it's somewhere around maybe about a quarter to a third of those have target action days but I can try to get that before the call is out..

And then one of the things that we've been hearing from some of your peers is that at least so far the target action dates appear to be close maybe not on the exact date but the companies are getting these approvals relatively timely in comparison to those dates.

Is that allowing you and your partners to, I don't know how to put this, to prepare for the launches a little bit faster, it used to be six months from approval to launch.

Now if you can get a better sense for when those approvals are coming you can order packaging, you can order labeling, all those types of things and maybe shrink that time to launch from six months to maybe say three or four months is that consistent with what you're seeing and what you've been able to do?.

We’re seeing that and depending on the product you make a calculation that we have a high level of confidence and so we will go ahead and start accelerating and some others you don't but in general the answer to your question is yes..

And then real quickly on China, and thank you for the clarity there, I just make sure that I'm completely understanding this, so the devaluation of the Chinese currency provides or creates a bit of a headwind on the revenue side but it's also going to help you on the margin side as you're able to purchase I guess go through new contracts with some of your suppliers there to actually get a benefit on the gross margin side, is that correct?.

Yes. And that’s what we have been seeing actually. So we’re getting better cost, better margin and given some of that back but overall improving the margins..

Okay, and I guess one last one, did you see some of that impact in the second quarter but there should be more coming Q3, Q4 or was that basically the lion’s share in Q2?.

It's actually the devaluations kind of been occurring in little spurts for a little while now so you know there might be a little bit more but at this point I'm not you know -- it's hard to predict I'm not really expecting the margins to go up much more than where we're at now..

The next question is from Claire Mencke with Sidoti..

Hi, good quarter by the way.

I just want to ask about the ag business it being strong in the second quarter and it's usually concentrated in the third and fourth quarter if I'm not mistaken and I wondered if there was any shift of any of that into the second quarter?.

There may be a little shift from the third quarter into the second. Overall we think ag has been strong and continues to be. There may be some shift from third to second. But you know we do expect that division to continue to perform pretty well for the balance of the year..

The next question is from John Vandermosten with Singular Research..

Just had a question on India as well, you didn't mention it, but I think maybe the currency devaluation I just want to see if there's any impact on sourcing from India as well as you've discussed from China?.

Not to the same extent that we've been seeing. That business is a little bit different, I don't think - we’re have not really seen that..

Okay. And I just want to understand a little bit better just based on your adjusted earnings guidance that it seems like the reduction in the top line will be pretty much offset on the cost side of things so that when we get to the bottom line it should be essentially the same.

Is that an incorrect assumption?.

Did you say on a GAAP or non-GAAP basis?.

On an adjusted basis after taking out the financing items you brought up..

Yes. I think you can draw that conclusion that on an adjusted basis we’re still going to be reporting low double digit growth over the prior year. In addition to taking down the top line Sal mentioned it's related to the yuan and also you know potential increased competition. So those two, yes, will affect the net income..

Okay. And then on the Pharma Ingredients, you mentioned in the release that there were few foreign markets that were pretty strong there.

Can you highlight which one those were?.

We mentioned which markets with the Pharma Ingredients, I mentioned Singapore and Germany..

I think over time that your U.S.

exposure is increased over time, is that continued on into the first half of FY ‘16?.

You’re not just not coming through clear, could you repeat it again, we apologize..

Over time the exposure to the U.S.

has increased over time and I guess has that trend continued into the first half of fiscal '16?.

U.S. exposure. I think it's pretty much stable. It's been more U.S. but I don't think, it's probably increased a little bit as our rising pharma business continues to grow which is essentially domestic So I don't have the exact numbers but proportionally it probably is a little bit more U.S. based.

By the way, I will just interrupt here one second, 30 of our 52 ANDAs is with the FDA currently have target action days..

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

Just a quick question related to perhaps the size and scale of those approved but pending launches..

So they are the typical [indiscernible] rising type products, generally niche in nature there is a couple of little larger, couple little smaller but not any that we’re expecting dramatic changes to the top or bottom line, it all be contributing in their bits and pieces..

In terms of the looking at the second half EPS, you have called out it's [indiscernible] stronger than first half and then on last fourth quarter call you also said don’t try to annualize the strong quarter numbers.

Can you provide any indication is there going to be sequential strength from here by quarter and the second one if you allow to be more specific, do you anticipate year-on-year growth on each quarter..

We certainly spoke about the second half as compared to last year and as compared to it will be stronger than our first half of this year, we haven't really gotten into the rhythm of each quarter per se. So, I don't know if we want to do that now..

I am just trying to kind of reconcile some of the -- not too many consensus estimates or estimates and consensus but they are fairly all over the place for the second half. I just want to make sure that I get my expectations in sync with what the reality should be given the very strong fourth quarter last year..

Yes, as we said we had stronger second half than first and I would say in terms of the fourth quarter because of the things we talked about last year I would not expect I think there is going to pretty flat fourth quarter on fourth quarter, I don’t know..

They are pretty much even, what we will see this year..

The next question is a follow-up from Matt Hewitt with Craig-Hallum..

Just one more, what do you see on the M&A landscape? I mean are you seeing any opportunities whether it's for product or product portfolios or maybe even a small company, what are you guys seeing and how are the valuations looking today versus maybe where they were six months or a year ago? I would think that those have come down..

So we're not seeing much change in terms of the say availability, there is always companies for sale, there is always companies we’re speaking who are not for sale we're trying to do to get them to come our way. But I can't say that I’ve seen significant increase or decrease in the overall number.

So that's pretty much steady and in terms of the -- and again we are looking for the product lines to sizable company acquisitions. In terms of the multiples, maybe it's beginning to come down but I don’t think sellers have really adjusted their expectations yet.

The equity markets have come up but I think sellers are still looking back at deals that were done last year and expecting those kind of multiple. So, I think it's probably going to still be difficult market and little expensive market for a while..

The next question is from Lester Patrice [ph], Private Investor..

I just have one question maybe I missed it, I apologize, what was the EBITDA for the quarter and for the first half? Thank you..

Yes Lester, so the EBITDA for the quarter was 18.1 million and the EBITDA for this six months was just short of 37 million..

Well that's fantastic.

Just short of 37?.

36.9..

[Operator Instructions]. And it looks like we have no further questions at this time. I'd like to turn the call back to Sal Guccione for closing remarks..

Okay. Thank you. Okay everybody well thank you so much for joining us on the call today. As you can see we're committed to trying to continue to grow each of our segments but also committed to the transition towards Human Health. We think that’s going well and look forward to delivering on the second half of the year. So we will speak to you in May.

Thank you..

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..