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Edited Transcript of ACET earnings conference call or presentation 3-Nov-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Aceto Corp Earnings Call

Lake Success Nov 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Aceto Corp earnings conference call or presentation Friday, November 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert L. Eilender

Aceto Corporation - Chairman

* Douglas Roth

Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary

* Jody Burfening

Lippert/Heilshorn & Associates, Inc. - MD and Principal

* Walter J. Kaczmarek

Aceto Corporation - COO

* William C. Kennally

Aceto Corporation - President, CEO & Director

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Conference Call Participants

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* Dewey Steadman

Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst

* Greg Alan Eisen

Singular Research, LLC - Research Analyst

* Kevin McKenna

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Aceto First Quarter 2018 Earnings Conference Call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Jody Burfening. Please go ahead.

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Jody Burfening, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, Anita, and good morning, everyone. And welcome to Aceto Corporation's first quarter fiscal 2018 earnings conference call. With me today and providing comments on this call are Bill Kennally, President and CEO, and Doug Roth, Chief Financial Officer. Walt Kaczmarek, Aceto's Chief Operating Officer, is also with us today to participate in the Q&A session.

The company issued its first quarter earnings press release yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investor Relations section of the company's website at www.aceto.com.

Before starting the call, I 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. They can be identified by words such as believes, expects, anticipates, plans, projects, seeks and similar expressions that involve numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied by these forward-looking statements as a result of certain factors that are set forth in the company's filings with the Securities and Exchange Commission.

Also on today's call, management will be referring to certain non-GAAP financial measures. These measures, Aceto's net income and Aceto's adjusted earnings per share, are defined as net income excluding amortization of intangibles, debt extinguishment and amortization of debt discounts and debt issuance costs, costs related to transactions, and the impact of Accounting Standards Updates 2016-09. These non-GAAP measures allow investors to compare results of operations in the current period to prior periods' results, based on the company's fundamental performance, to analyze operating trends of the business.

To start today's call, Al Eilender, Aceto's Chairman, is going to make a few introductory remarks. Good morning, Al.

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Albert L. Eilender, Aceto Corporation - Chairman [3]

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Thank you, Jody. Good morning, everyone, and thank you for joining us this morning. My purpose today is to act as a bridge from the old to the new. As a company starting in 2009, we have embarked upon a transition to one focused on the pharmaceutical industry, and more specifically, on finished dosage generic drugs.

In the last 2 years, a number of external forces have buffeted our generic drug business unit, Rising. The consolidation within the distribution channels, coupled with intense competitive pricing pressures, have been historically unprecedented. As these external events were starting to come into focus, we took an important strategic step through the acquisition of Citron and Lucid assets to increase our generic drug commercial offerings, to increase our future pipeline of products, and to partner with a reputable manufacturer of significant scale.

The board's thinking about the company, its strategic direction, and the importance of scale remains unchanged. Over the course of the past year, we've seen shareholder value at many firms substantially eroded and many generic companies rationalizing their operations, shuffling their lineups, in order to bring fresh perspective to this tumultuous business. The board came to the conclusion that to continue moving the company forward, the company would benefit from having a pharma-experienced executive leading its efforts.

Having served on Aceto's board since September of 2016, Bill Kennally has played an active role in board-level discussions about managing the generics industry challenges, and was involved in approving the decision to acquire Citron and Lucid products. He has helped craft the company's strategy and understands the company's business model. Importantly, Bill brings a wealth of industry experience and achievement to the CEO role and a dynamic leadership style that we believe will ultimately drive long-term growth for the company.

With that being said, I would now like to turn the call over to Bill, who's going to share some of his initial observations about Aceto and provide a brief overview of the first quarter results. Bill?

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William C. Kennally, Aceto Corporation - President, CEO & Director [4]

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Hey, thank you, Al. And good morning, everyone. And I have to say, I'm really excited to be here before you for my first conference call. And so, I'd like -- it might be helpful to provide all of you with a bit of my background and how my experiences are relevant to Aceto and the path we're on to transition to a Human Health organization.

I'd also like to share with you my initial observations about the company, and from there, I'll recap first quarter performance before turning the call over to Doug, who will give you a more in-depth analysis of the results.

By trade, I'm a sales and commercial guy. I started out with Upjohn in the late '70s carrying the bag, where I moved through a series of sales positions in my first 10 years, and then rose to district manager, where I took on a variety of frontline management assignments over the next 10 years. When Upjohn merged with Pharmacia, I had the opportunity to join the corporate end of the business and discovered this hidden gem called Greenstone, an authorized generic company designed to launch branded products in a generic label, competing against generics. We captured revenue and earnings that would otherwise have been lost to competition. It was there where I learned the ins and outs of the generics business.

When Pfizer acquired this business as part of the pharmacy acquisition, the model captured the interest of senior management, and for the next 6 years we launched numerous Pfizer products, including a number of blockbuster drugs that made the corporation a tremendous amount of revenue and earnings. Our success with Greenstone gave me the opportunity to lead and manage Pfizer's established products business in North America, where I was responsible for running 5 separate businesses with a combined P&L of just under $7 billion in annual revenue. During my time in that role, we built a top-tier generic injectable business from scratch that eventually led to the Hospira acquisition.

When I left Pfizer, I had the privilege to serve on Aceto's board as an independent director, brought on primarily for my generic industry knowledge and expertise, as well as a strong pharma commercial background. Serving on the board exposed me to the inner workings of Aceto and provided an opportunity to help shape the strategy of the company, especially in the Human Health arena. When presented with the CEO opportunity, I jumped at the chance to return to running a business and leading people, which has always been my passion, and I look forward to providing meaningful leadership in moving Aceto towards its strategic objectives. What I bring to Aceto in my new role is my pharma experience in building small businesses into larger ones and creating successful product franchises from the ground up.

So turning to the generic industry. As you know, it's a dynamic yet complex industry to master. It's an exciting environment where every day is different and multiple decisions are generally required every day and sometimes every hour. It's risky, and you have to have an appetite for risk in order to be successful. A former leader and mentor once told me if I was not making mistakes then I was not taking enough risk. Well, I'm not advocating making mistakes, but the point is, it's acceptable to take risks as long as they're fully vetted, and I can tell you it's really empowering to hear your boss encourage you to take risks.

What I've learned is that success in generics requires creating a culture that's fast, flexible and focused, and you need an ever-present sense of urgency in your day-to-day dealings, and that means everyone in the organization needs to drive towards that end goal to where it becomes a norm in the organization. And that's part of creating an ownership culture where colleagues own their own part of the business. And along with ownership comes accountability and employee engagement. And I've had the chance to witness firsthand how creating a culture of ownership drives engagement and results. So my goal is to instill a vibrant culture here that works best for the business we operate. It's a process, but I'm confident we'll get here.

Over the past few weeks, I've started looking under the hood, and I'm very impressed with the quality of people in our organization, and I'm learning why they're good at their jobs. A recent example in China is our folks there have responded beautifully to a crackdown by the Chinese government on thousands of plants that have been closed -- that -- due to environmental hazards to the country. Our colleagues there have done an amazing job ensuring that the risk to all Aceto businesses is mitigated successfully. We think we have this contained to where any potential risk is not material, and I'm proud of the team and how they've stayed ahead of this real challenge.

I've also had the correspondences from potential partners reaching out to me, asking if they can do business with us. And I think that speaks to our reputation around the globe. We continue to source partners we want to work with, and it's terrific that others want to be part of our plans. We have extraordinary partner reach that should help us with our developmental objectives in all our markets.

So when I look at near-term priorities, it's to work the company from the inside out, meaning meet with Aceto colleagues, understanding the challenges they face, and make every effort to remove obstacles. In addition, I plan to meet with our customers and partners, trying to best understand how we can be a preferred supplier. We're building the functional and platform support that we will need to effectively compete in all of Aceto's markets. However, we're not there just yet, and these are critical steps to put the company on a path to sustainable success.

Longer-term, we have an asset-light model that offers a lot of whiteboard opportunities to move up the generics industry value chain, which is depicted in the backup slide in our updated investor deck, as well as finding ways we can expand our partner relationships and leverage our API resources. We also need to do a better job on our gross profit, and I'll be looking for ways to raise our margins, not just in Human Health but across the board, in our Pharma Ingredients and Performance Chemical segments. We have work to do, and it will be exciting to see how the company's path to successful outcomes evolves.

Turning now to the first quarter performance, which I now own, our results were generally in line with the expectations and compare favorably to our final quarter of fiscal 2017. We generated net sales of $185.3 million, compared to $128 million last year. Net income was down to $0.5 million, compared to $4.4 million. On a non-GAAP basis, adjusted net income was $10.7 million, up 29.1% over the $8.3 million we reported last year, and non-GAAP EPS was $0.30, compared to $0.28, a modest 7% increase.

Our legacy Rising business posted first year-over-year increase in sales since our third quarter of fiscal 2016 as new product launches, market share increases on select inline products, and select favorable pricing dynamics more than offset the negative impact of competitive pricing. Our other two segments, Performance Chemicals, which showed favorable revenue and gross profit increases, and the Pharmaceutical Ingredients business, remained steady generators of cash for us this quarter. And kudos have to go to Doug and the Rising team for improving our receivable collections during the quarter and for paying down our long-term debt by $24 million.

At Rising, we continue the complete task of integrated all facets of the acquired assets of Citron while preparing for the implementation of a new ERP system and warehouse. We have made a strategic decision to delay the implementation date of the ERP system by 90 days to allow a robust integrated point-of-sale accrual system to concurrently go live. The new implementation date is at the beginning of quarter 4, and as the operation of our new warehouse is closely to ERP conversion, the warehouse will now begin a soft start towards the end of fiscal quarter 3, becoming fully functional in quarter 4.

Getting both of these critical projects online will allow us to fully realize the synergy value from the transaction of $4 million on an annualized run rate, which will begin in the fourth quarter of fiscal 2017. And somewhat related to the integration work, we recently moved the Rising colleagues into a new and larger office in Saddle Brook, New Jersey.

We're currently experiencing some short-term supply challenges that are largely the result of API constraints, and we're working diligently to ensure uninterrupted supply to our customers, and we anticipate full recovery by the end of the fiscal year.

During the quarter, we also had discussions and completed some negotiations with Claris One and Econdisc, and now have better clarity on the impact of harmonization from these customers going forward.

Rising launched 3 products in the quarter, and we expect to maintain our 15- to 20-product-launch schedule for the year as previously communicated. We now at marketing approximately 140 products that represent approximately 420 individual SKUs. We currently have 115 projects in our pipeline, which compares to 133 projects we reported on our fourth quarter call. The difference is a combination of several factors: With a beginning project total of 133, we added 3 projects, launched 3 products, terminated 1 project, and due to adverse market conditions and poor developmental delays, made these products less commonly -- excuse me, commercially attractive. We made the commercial decision to park 17 products we had previously intended for launch, and should market conditions become more favorable, we will put them back into the product queue for launching.

During the quarter, we also filed 5 ANDAs, bringing the total number of ANDAs on file with the FDA to 39.

And last, we significantly enhanced our Rising senior management team over the last 3 months with addition of functional leaders in business development, commercial operations, sales and finance that represent a combined total of 60 years of generic experience. We now have a team in place with the operational and strategic expertise to take Rising to the next level.

I've been working closely with these leaders, taking a fresh look at our forecasting methodology and instituting some changes. And while unforeseen developments can and do occur in the generic industry, I want us to improve the quality of our forecasts. We're now working more effectively as a team, bringing together perspectives from our sales, operations and business development areas to thoroughly scrub the numbers and sharpen our analytics.

Our assessment of the current generic market conditions indicate the annual price erosion is now a bit higher, in the low-double-digit percent range, and new competitive entrants and other market pressures are weighing in our outlook for fiscal 2018. In addition, Rising net sales on a few products are being pushed beyond original launch dates due to the API constraints and product launch delays I mentioned earlier.

The outcome of this bottom-up exercise is that we are resetting our fiscal 2018 guidance. We now expect net sales growth of 15% to 20% and reported diluted GAAP earnings per share to be in a range between $0.23 and $0.33, and diluted non-GAAP earnings per share to be between $1.05 and $1.15. And our results for the second half of fiscal 2017 are expected to be moderately higher than the first half of the year. And regarding R&D, we have adjusted our outlook to reflect first quarter numbers and now anticipate spending approximately $10 million in fiscal 2018 for our finished dose generic pipeline. That was -- that's versus the previous range of $10 million to $13 million. And just as a reminder, our R&D expenditures are milestone-based.

So, Doug, if I could, I'd like to turn the call over to you.

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Douglas Roth, Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary [5]

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Thank you, Bill, and good morning, everyone. Net sales for the first quarter were $185.3 million, an increase of just under 45% from the $128 million reported in the first quarter of fiscal 2017, reflecting in large part the addition of Citron products. Gross profit was $40 million, an increase of 29.7%, compared to $30.8 million in the first quarter of fiscal 2017. Gross margin for the first quarter was 21.6%, compared to 24.1% in the prior year.

On a reporting segment basis, Human Health segment sales were $106 million, an increase of $58.1 million, or 121%, from the first quarter of fiscal 2017. Of the $58 million -- of the $58.1-million variance, sales from Citron and Lucid products, which were acquired in December 2016, contributed $55.1 million. In addition, our legacy Rising business realized its first year-over-year sale gain since the final quarter of fiscal 2016, and nutritional sales were up modestly during the quarter. Our gross margin -- or, pardon me, our gross profit increased 73.5% to $24.6 million, reflecting, again, the addition of Citron and Lucid sales, partially offset by lower gross profit from certain other legacy Rising products. Human Health gross margin was 23.2%, compared to 29.7% last year, and is consistent with the gross margin run rates for the prior 2 quarters, which were subsequent to the product acquisition. The decline in gross margin was primarily due to the lower gross profitability of the Citron and Lucid products and the lower gross profit on legacy Rising products, reflecting an unfavorable product mix and price erosion on certain products.

Our Pharmaceutical Ingredients segment sales were $36.6 million, a decrease of just under 10% versus the first quarter of 2017, due in large part to reduced orders of a customer-launched API. Gross profit in the first quarter decreased 16% to $5.8 million from $7 million in the first quarter of 2017, primarily due to lower domestic sales of API, as well as API product mix. Our gross margin was 16%, compared to 17.1% last year.

The Performance Chemicals segment sales increased 8% to $42.7 million from $39.5 million in the first quarter of 2017, largely due to higher specialty chemical sales of agricultural and pigment intermediates. Gross profit was down 1.9% to $9.5 million, reflecting a less favorable mix of specialty chemical products. Our gross margin was 22.3%, compared to 24.5% last year.

Our SG&A expenses increased from $21 million to $31.1 million. The absolute increase of $10.1 million in the quarter included a $5.4 million attributable to the amortization of intangible assets associated with the recent Citron product purchase, and $4 million of a one-time cost associated with the departure of the company's former CEO, and $1 million of transition and administrative services cost associated with services related to the Citron and Lucid products. Also in the first quarter SG&A was a $900,000 environmental charge related to the remediation of our closed Arsynco facility in New Jersey.

Research and development expenses were $1.6 million, compared to $1.1 million in the comparable period last year, as milestone achievements and project initiations remained uneven on a quarter-to-quarter basis.

With SG&A and R&D growth modestly outpacing our gross profit growth, operating income dropped to $7.2 million, compared to $8.8 million last year. Our net income was $500,000, or $0.01 per share, compared to net income of $4.4 million, or $0.15 per share, on a GAAP basis. On a non-GAAP basis, net income was $10.7 million, or $0.30 per share, for the first quarter, compared to $8.3 million, or $0.28, last year. Our EBITDA for the first quarter of 2018 was $15.8 million, an increase of $3.6 million, or just under 30%, versus $12.1 million in the prior year quarter.

Just wanted to point out that our effective tax rate being reported in the first quarter looks like 79%. The tax provision includes a charge of $1.1 million, related to the accounting change under ASU new accounting pronouncements. If you were to exclude this charge, we expect our effective tax rate to be consistent with our prior -- with our previous run rates.

Turning to the balance sheet. As of September 30, 2017, cash and cash equivalents and short-term investments totaled $75 million. Our working capital was $240 million, and our shareholder equity was $409 million, or $13.38 per share. Our total bank and convertible debt was $331.6 million, including approximately $206 million under our senior credit facility. Our senior secured net debt leverage ratio was 3.71x.

As Bill mentioned earlier, our trade receivable decreased by $20.3 million to $240.6 million at quarter end, versus $260.9 million for our fiscal year-end June 30, 2017. As a result, our consolidated DSOs came down to $0.74 -- pardon me, 74 days at June 30, down from the 99 days as of June 30, 2017. Collections from the Rising customers were particularly strong in July and August as we continued to benefit from WAC price reductions on select products that we have discussed over the past 2 quarter.

Rising CSOs at 9/30/17 were 79 days, versus 114 days at 6/30/17. Rising's net trade AR at 9/30 was approximately 57% of the company's total trade -- net trade receivables. However, while we're pleased to have Rising DSOs at a sub-80-day level, we know a few things went our way this quarter, and this run rate is likely not -- a sub-80 is likely not sustainable in the coming few quarters.

Finally, this morning we filed an 8-K, in which we disclosed that we identified and recorded an adjustment related to the misapplication of cash in the year ended June 30, 2015. The correction resulted in a $4-million decrease to trade receivables and sales as of June 30, 2015, and a reduction of net income of $2.6 million for fiscal 2016. We have determined this adjustment is not material to our fiscal 2015 financial statements. We will expect to file an amended -- an amendment, the 10-K/A amendment, to our annual report on Form 10-K/A for the fiscal year ended June 30, 2016, to reflect this -- pardon me, for the year ended June 2017, to reflect this matter. We believe that we have remediated the underlying causes of this material weakness, as we more -- as we will more fully describe it in our upcoming Form 10-Q for the quarter ended September 30, 2017. The company will continue to monitor and test the remediation to ensure its effectiveness on a go-forward basis.

Now I'd like to turn the call over back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question comes from Dewey Steadman with Canaccord.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [2]

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Good morning, and congratulations, Bill, on the new role, and welcome to the generics jungle. I guess on . . .

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William C. Kennally, Aceto Corporation - President, CEO & Director [3]

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Thanks, Dewey.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [4]

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You're welcome. My first question is just on the generics cycle. Bill, obviously, you've been around for quite a while, as well as Walt, and you've seen several cycles in the industry. And is this cycle shaking out to be more severe or prolonged than previous cycles because of the customer consolidation and other external factors?

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William C. Kennally, Aceto Corporation - President, CEO & Director [5]

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Thanks for the question, Dewey. Nice talking with you. I think you might be onto a point here. It -- 2 keys. First of all, it is a cycle. I think for those us who have been around for a little while and can remember back when the Indian companies first came into the marketplace, there was a really significant downturn to the pricing environment, and that lasted similar to what we're seeing now. I think one of the differences now versus then is there were more customers and less consolidation, and there were less generic competitors that were being approved from the FDA. So on a scale, if I were to say that this particular turn has, I think, been especially painful but not inconsistent with what we're seeing in the market, and we will see a recovery.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [6]

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Great. On Flucytosine, I guess Hikma has announced that they're going to launch a competing product. What are your thoughts on the markets there and the potential impact to gross margin and revenue from a competitive launch, and was this factored into the reduction in guidance?

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Walter J. Kaczmarek, Aceto Corporation - COO [7]

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Yes. Hi, Dewey, I'll take that one. And yes, you're absolutely right. Hikma did get an approval on the product. We've seen some activity in the marketplace, and it absolutely has been factored into our thinking for the remainder of fiscal '18, and that's one of the contributing factors to refreshing our model.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [8]

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Next one: Obviously you're not going -- I don't want you to give details for competitive reasons, but are there any launches in 2018 that are particularly lumpy or important? We don't need to know what they are, but are there any out there?

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Douglas Roth, Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary [9]

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When you mean lumpy, what do you mean, Dewey?

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [10]

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Sort of any launches that are particularly more important than others, that are upcoming out of those 15 to 20?

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William C. Kennally, Aceto Corporation - President, CEO & Director [11]

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I think, first of all, all the products are going to be important for us to ensure that we launch on a timely basis. But I don't think that any are triples or home-runs, so to speak.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [12]

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Okay. And then a once -- ERP question: Many pharma companies stop shipping ahead of an ERP implementation or conversion. Is there any modeling concerns -- not concerns, but any modeling aspects that we should make in terms of 3Q versus 4Q in our models related to that ERP conversion?

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William C. Kennally, Aceto Corporation - President, CEO & Director [13]

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So, thanks for that, Dewey. And historically, as you're probably aware, there is an inventory build on the part of the customers towards the end of the period just prior to going live with the implementation. Historically, I think it depends on the customer, but you might see a couple of extra weeks of inventory in the channel, which might -- that would be reflected in the third quarter of this year. I'd be surprised if it was more than that. But that would be something you could expect to see.

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Dewey Steadman, Canaccord Genuity Limited, Research Division - Senior Specialty Pharma Analyst [14]

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Okay. And my final question is sort of broadly, in your first weeks in the role, Bill, what do you think is working for Aceto, and what's not working, relative to your prior experience?

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William C. Kennally, Aceto Corporation - President, CEO & Director [15]

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Well, I will say that the last 30 days have been really interesting and exciting. The -- if you take it from a -- like, a SWOT analysis, if you would, I think from a strengths standpoint, clearly we have great people in the organization, and I think that China example I gave is just one example of the work that's being done in order to really show some favorable results for the company. The asset-light model is giving us a lot of flexibility with our partners around the world. One of the things that I'd like to see us get to, which I'm not sure we're there yet, is in that model, we go to our partners and ask, what can you do -- sorry. We go to the partners, and the partners say, here's what we can do for you. I'd like to go to the partners and say, here's what I need you to do for me. So I wouldn't necessarily say that's a weakness, but I would say that we're evolving to that as well. So, in my -- I think I mentioned in my prepared comments that my goal is to work the company from the inside out, and that's essentially what I've been doing over the last 30 days. Meeting with leaders, meeting with people below the leaders, to understand what our challenges are and -- with a goal of addressing those as best I can. From here, the plan will be to go and visit with customers and partners to kind of go full-circle on the company's overall business so that we can implement the strategies necessary to be competitive.

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Operator [16]

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

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Good morning, gentleman. Congratulations, Bill, on the new role.

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William C. Kennally, Aceto Corporation - President, CEO & Director [18]

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Thank you, Matt. Nice to talk with you.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19]

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Yes. A couple questions: First, regarding the API issues that you've faced in the quarter, I'm curious; have those been resolved? If not, how long do you think it'll take to get those resolved? And I guess, longer-term, or as you look out over the next few quarters and years, what's driving -- what's been driving those issues on the API side? Is it displacements? Is it more FDA scrutiny of some of these international facilities? Any color on the APIs, that'd be helpful.

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William C. Kennally, Aceto Corporation - President, CEO & Director [20]

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So I might ask Walt to add, but I think the point of the API shortfall now is, we anticipate that that's going to be corrected by the end of the fiscal year. So we have had some technical issues related to that, and maybe Walt can address the specifics on that.

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Walter J. Kaczmarek, Aceto Corporation - COO [21]

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Right. Hi, Matt. So, a couple of different products in particular are being impacted. One is more of an API constraint, where we're not able to get as much of the API as we need to completely fulfill what market share that we have and our market share goals. And the other issue is a technical issue. So it's a combination of those two factors, and as Bill mentioned, we fully anticipate to have both of those issues fully corrected by the end of the fiscal year.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [22]

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Okay, and thank you. Bill, as you've come on board, and I realize it's -- you're moving as quickly as possible, but I'm wondering if there's any low-hanging fruit as you look through the organization that you could implement new changes, get an immediate return on those changes, and then maybe as you look out a little bit longer, are there any bigger or larger changes that you could see? For example, one of the things that's come up over the past couple of years has been the Performance Chemicals division. Any color there would be helpful. Thank you.

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William C. Kennally, Aceto Corporation - President, CEO & Director [23]

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Sure, Matt. Thanks for the question. As I kind of look around the organization, there are some short-term opportunities, and I think one of the things that we'll take a look at closely, especially in light of the revision in the forecast, is what business opportunities present themselves that we're not looking at? Especially considering the consolidation of our customer base. So there's some work going on behind the scenes that's looking at exactly that. For example, looking at our market shares, do we have the right market share out there, what is it that we can do to generate additional business there. So I think that's one area that we're going to focus on. In the longer-term, what I hope to be able to do is, and I think I mentioned in my prepared comments that we have a whiteboard of opportunity with our asset-light business model, and as you move up the value chain on the generic side, as depicted in that slide that's in the backup, right now, if we look at where we are with our product portfolio, we have some product opportunities in some of the higher boxes. But one of the challenges I think that we have, even though we have great partners, is that we're not in control of our business. So it would be really nice if we could be in more control of our business, and that might mean taking a look at having in-house R&D, maybe even in-house manufacturing down the road. So in the short term, obviously, with this tough environment, looking for opportunities not only in the Rising business but across the other 2 businesses as well, can we maintain the momentum that we've seen with Performance Chemicals this quarter? And try to create some value with the other businesses as well.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [24]

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Great, thank you. One last one from me and then I'll hop back in the queue. Were there any WAC changes or cuts done in the most recent quarter, in Q1, or was that just an impact from the last 2 quarters? Thank you.

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Douglas Roth, Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary [25]

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Yes, Matt, I'll field that question. There -- we look at the WAC prices and we look at each molecule virtually every month and every quarter. There -- the low-hanging fruit and the more impactful WAC changes have occurred a few months ago, and we reaped the benefits this quarter. During this quarter, there were a few, but they were not -- they were just opportunistic and not -- likely not moving any dials.

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William C. Kennally, Aceto Corporation - President, CEO & Director [26]

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Yes, and if I could add to that, Matt, as Doug said, this is going to be a part of the routine ongoing cadence that Rising performs. And as we see continued AFP declines, we're going to have to closely manage our WAC to a net spread. So in order to even keep a straight line across on that DSO, we're going to have to continue to modify those WACs and continue to manage it. So it will be an ongoing cadence and an ongoing process.

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Operator [27]

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The next question comes from Steve Schwartz with First Analysis.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [28]

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Good morning, everybody, and welcome, Bill.

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William C. Kennally, Aceto Corporation - President, CEO & Director [29]

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Hi, Steve.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [30]

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First thing: R&D spending. It looks like you reduced your guidance for the year. You were looking to spend up to $13 million as of the last report. It looks like it's now down at the bottom end of the range at $10 million. Bill, you talked about a couple of different things that might be behind that, but if you could make a clear connect for us on what's happening there?

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William C. Kennally, Aceto Corporation - President, CEO & Director [31]

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Yes, sure, Steve. Thank you for the question. Look, I think, as you know, our R&D is milestone-based, and we have a budget, and we've just lowered the -- we've put it at the lower end of the guidance based on what the spend is in the first quarter. So if we need to flex up due to some additional opportunities, then we'll take a look at that.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [32]

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Okay. But like, in terms of the products that you parked and those different puts and takes that have occurred within the pipeline, is the lower number related to nearer-term commercial opportunities or longer -- commercial opportunities that were farther out by years? Can you give us a sense there?

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Walter J. Kaczmarek, Aceto Corporation - COO [33]

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Yes, hi, Steve. These are products that are undergoing development, so to speak, so they're not near-term opportunities. They're in the process of -- the technical process of being filed for an ANDA. So they're still a ways off, anywhere from 18 to 24 months depending on their particular project, so that's the scenario.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [34]

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Okay, okay. On the ERP transition, this is company-wide, so it's across all regions and all 3 business groups or segments? Is that correct?

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Walter J. Kaczmarek, Aceto Corporation - COO [35]

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No, that's not correct. This is strictly for the Rising business. The other 2 business segments have a separate ERP system.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [36]

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Okay, okay. And then, just with respect to Pharmaceutical Ingredients, Europe has been particularly strong driver of results for you over the past several quarters. Was that the case again in the first quarter? And can you just remind us what's happening in France and Germany? And I think actually Singapore, too, has popped up as a driver. What's going on there that has generally been more favorable?

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Walter J. Kaczmarek, Aceto Corporation - COO [37]

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So one of the drivers is the FX, so we'll have to say that, that we're getting a positive lift out of that. And as far as Singapore is concerned, we do have a finished goods portfolio there that is just now starting to take hold and starting to drive some revenue, so we're very happy to see that starting to bear fruit. We're going to continue to put a lot of time, effort and resources into that particular part of the world and continue to grow that business. We've also got strategic initiatives on finished doses in other parts of Europe that we're hoping are going to start to bear fruit as well. So we're paying a little bit more attention to Europe, and it's performing very well, so we're happy to see that.

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Operator [38]

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The next question comes from Greg Eisen with Singular Research.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [39]

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Thanks. Good morning, and Bill, welcome to Aceto management.

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William C. Kennally, Aceto Corporation - President, CEO & Director [40]

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Thank you, Greg.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [41]

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I think in the prepared remarks you talked about wanting to work on improving the gross margin in the Human Health segment, and I was wondering, what would be the levers that you see the company has at its disposal to improve margin going forward?

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William C. Kennally, Aceto Corporation - President, CEO & Director [42]

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Well, thanks, Greg, I appreciate the question. I think it's really 2 parts. One is, are there some short-term opportunities that we can look at that haven't been explored in the traditional model? And I would say that there is some activity going on in that area, to try to think out of the box in terms of how we can deliver business at a higher gross profit. But I think in the longer term, the way we probably need to look at it is, relative to the comments I made about the partners that we work closely with and enjoy that working relationship. Our asset-light model is a primary driver for the lower gross profit as compared to some of our competitors, so what is it that we can do to increase our gross profit when it comes to having more control over our business? And that really relates to looking at bringing on the capabilities inside the company, perhaps on the R&D front and/or perhaps even on the manufacturing front. So these things will help us to -- if we can do those, and execute against those, it will help us improve our situation.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [43]

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Thanks for stating that so clearly. One more question on my part: Since you've arrived to the job of CEO, what's been the biggest surprise you've had that you've seen inside the company? What surprised you most?

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William C. Kennally, Aceto Corporation - President, CEO & Director [44]

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You probably have me a little tongue-tied on that one, Greg. I can tell you that I haven't been candidly surprised by a lot. I mean, I've had a lot of leadership experience historically. I think people in general are trying to do the best job that they can. I haven't seen any hinting of problems in that area. I think my experience as a leader has kind of prepared me for really just about everything that I've experienced in the first 30 days.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [45]

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Great, well, thanks for answering that question.

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William C. Kennally, Aceto Corporation - President, CEO & Director [46]

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Yes, sure. You got me a little tongue-tied on that, Greg.

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Greg Alan Eisen, Singular Research, LLC - Research Analyst [47]

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Okay, it's okay. Thanks.

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Operator [48]

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

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Kevin McKenna, [49]

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Good morning, thank you, everyone. Mr. Kennally, I would say that my question is really more of a request. What I'm trying to do is to get . . .

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William C. Kennally, Aceto Corporation - President, CEO & Director [50]

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Hey, Kevin.

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Kevin McKenna, [51]

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Good morning. I'm just trying to get you over to my side of the table. You're looking at a company right now with about a $300-million, plus or minus, market cap. Some people would say that's actually the value or near the value of just the chemical division by itself. And so if you want to institute this ownership culture at Aceto, I would say maybe we should look at the EDGAR search results on the Form 4s that have been filed by management. I am all for you guys getting paid with the options that are granted for the work that you do, but a stock that has gone from near $30 to under $10 in about 18 months, that is not a reward that I think should be granted. What I would like to see is, I'd like to see management eat their own cooking. I'd like to see people buying stock in Aceto at these levels, not selling or option-exercising and selling.

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William C. Kennally, Aceto Corporation - President, CEO & Director [52]

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Well, Kevin, look, I appreciate the comment, and I want to thank you for your suggestion.

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Kevin McKenna, [53]

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Well, that's what I got.

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William C. Kennally, Aceto Corporation - President, CEO & Director [54]

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Thank you very much.

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Operator [55]

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The next question comes from Lester Patrizi, a private investor.

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Unidentified Analyst, [56]

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

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Douglas Roth, Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary [57]

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No, Lester, let me answer the first question first. The EBITDA for the quarter was $15.8 million versus last year, $12.1 million. And that -- and in terms of the outstanding shares, we do -- we have included the 5 million shares that were issued to the seller. Well, they weren't technically issued yet, but we -- for accounting purposes, we do need to include them in our -- in the basic and the diluted share count. That's been consistent from the transaction.

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Unidentified Analyst, [58]

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Okay. So going forward, we shouldn't see too much of a change?

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Douglas Roth, Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary [59]

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No.

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Unidentified Analyst, [60]

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I mean, and the full dilution is in here now?

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Douglas Roth, Aceto Corporation - Senior VP, CFO, Chief Administrative Officer, Treasurer & Assistant Secretary [61]

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Correct, the 35 million and change, yes, that should hold true in the future.

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Unidentified Analyst, [62]

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And if I may make just a comment, welcome aboard, William. I wrote down a few words from your narrative, and thank you for your narrative. Words like aggressive and ambitious and driven, success-oriented, and my most important takeaway from your talk was that you are a risk-taker, something I think, with all the M&A that's taken place in the company, but something that I think we haven't heard in the past narrative from leadership. And I'm refreshed to hear you articulate what you want to do with the company going forward, and it's a segue to a criticism I would have. And you don't know me well. I've been an investor in Aceto for 60 years and -- 60 quarters, rather, a large investor, I would add, and something lacking, I think, that I put in your suggestion box, and I know it's early days, but what would be really appreciated would be a very crisp strategic plan articulated to us, a strategic goal with strategic imperatives. And what often we're hearing in conference calls is strategic vision 2020 or 2025, where you expect to take us. You've laid some of the spade work in your narrative, but what can we expect in 3 years, in 5 years? Are we a $1-billion organization? Are we a $3-billion organization? You touched on the margin improvement that you're going to go for: I liked what I heard there as well. I'm also a former veteran executive in the specialty chemical and pharmaceutical industry, so I have some experience and understand how a certain amount of patience is going to be required. These aren't changes you're going to make overnight. But you've touched again on this concept of manufacturing, investing in manufacturing, and it was mentioned at the Morgan Stanley conference and prior conference calls. I certainly appreciate you're not going to invest in heavy capex pots and pans and what chemistry to produce APIs. That's a strength of ours. It's been demonstrated to me, at least, for 15 years as an investor. So that leaves the forward-integration strategy. Is there merit to explore, either through acquisition or homegrown or both, acquiring the finished dosage formulation expertise, the drug discovery -- or drug delivery technology that would help us to capture this, what, 50% we're giving away in our model to our partners who are providing the finished dosage form, and perhaps even further to the packaging and product dress? So if you could, in the future, I would appreciate it, and I think the -- all the participants on this call would appreciate a more crisp articulation. Bookends, where do you expect to take us? But in the meantime, welcome aboard, our new captain.

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William C. Kennally, Aceto Corporation - President, CEO & Director [63]

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Well, Lester, thank you very much for your comments. It's much appreciated. And by the way, I'm Bill, not William. My wife calls me William when she's angry at me from time to time, so I don't want you to be angry at me. So I think you made some great comments, and look, one of the things I do plan to implement soon is taking a look at our strategic plan and then not necessarily ripping it up, but adding to it, to the -- in line with what your expectations might possibly be. Because if you don't have a plan, you're not going to get where you want to go. So I think many of the comments that you made are part of my whiteboard opportunity that's out there, and what you're asking for is exactly what we need to do, and that is put pen to paper, discuss the strategies that we plan to bring to the company in the intermediate and long term, and then implement. So I take your comments under advisement and I appreciate them very much.

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Unidentified Analyst, [64]

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So this could be the beginning of a beautiful relationship, someone once said.

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William C. Kennally, Aceto Corporation - President, CEO & Director [65]

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Well, I certainly hope so. And thank you very much for your support of the company.

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Unidentified Analyst, [66]

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Good luck to you, Bill.

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William C. Kennally, Aceto Corporation - President, CEO & Director [67]

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Thank you.

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Operator [68]

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This concludes our question-and-answer session. I would like to turn the conference back over to Bill Kennally for any closing remarks.

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William C. Kennally, Aceto Corporation - President, CEO & Director [69]

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Thanks, Anita. I appreciate it. Nice job today by you. And for everyone on the call, I wanted to thank you for joining us today. It was certainly a pleasure participating in my first quarterly conference call, and I hope I was able to provide you with some clarity regarding what I can bring to the company and how I intend to manage our operations going forward. I look forward to meeting all of you in 2018 and speaking with you again in February on our second quarter fiscal 2018 conference call. And I hope everyone has a great day and a good weekend coming up. See you later.

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Operator [70]

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This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.