AptarGroup, Inc. (NYSE:ATR) Q1 2024 Earnings Call Transcript

AptarGroup, Inc. (NYSE:ATR) Q1 2024 Earnings Call Transcript April 26, 2024

AptarGroup, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Aptar’s 2024 First Quarter Conference Call. [Operator Instructions] Introducing today’s conference call is Ms. Mary Skafidas, Senior Vice President, Investor Relations and Communities. Please go ahead.

Mary Skafidas: Thank you. Hello, everyone and thanks for being with us today. Joining me on today’s call are Stephan Tanda, President and CEO; and Bob Kuhn, Executive Vice President and CFO. Our press release and accompanying slide deck have been posted on our website under the Investor Relations page. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measure and the reconciliations are set forth in the press release. Please refer to the press release disseminated yesterday for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. As always, we will also post a replay of this call on our website. And now, I would like to turn the conference call over to Stephan.

Stephan Tanda: Thank you, Mary and good morning, everyone. We appreciate you joining us on the call today. I will begin my remarks by highlighting our first quarter results. Later in the call, Bob Kuhn, our CFO, will provide additional details on key drivers for the quarter. Starting on Slide 3. For the first quarter, I’m pleased to report that after achieved core sales growth of 5% and delivered adjusted EPS of $1.26, a more than 30% increase over the prior year quarter. Strong demand for our Pharma segment’s proprietary drug delivery systems and improved performance for the injectables unit as well as the recovery in North American consumer end markets contributed positively to our quarterly results. Our Pharma segment continued to see robust sales of our proprietary drug delivery systems with high single-digit core sales growth in the quarter following more than 30% core growth in the first quarter of 2023.

Demand was broad-based with growth in every region and across several end market categories from emergency medicines through allergy treatments and central nervous system therapeutics. As a reminder, our proprietary portfolio of drug delivery systems is expected to grow within our 7% to 11% long-term core sales range target also this year after strong [indiscernible] core sales growth in 2023. The injectables unit saw a marked improvement over the prior year quarter as the ERP system implementation headwind from the first quarter of 2023 did not repeat and demand for elastomeric components for the biologics market continue to grow nicely. 2024 continues to be a build-out year for injectables as the final phases of the capacity expansions announced in 2020 [ph] for France and the U.S. come online and are expected to be validated for commercialization in early 2025.

In our Beauty segment, first quarter core sales growth was basically flat year-over-year with a challenging comparison of a strong first quarter 2023 that was driven by exceptional sales in Europe for fragrance dispensing. As a reminder, last year, market growth was driven by a boom in fragrance launches [indiscernible]. As previously mentioned, we expect continued growth for Fragrance dispensing solutions for the year but at a more measured pace. Even as sales in Europe normalized, adjusted EBITDA margins for the region were well within the Beauty segment’s long-term EBITDA margin range. Turning now to North America. While some end markets remain soft. Overall, the region is showing clear signs that the widespread destocking is coming to an end.

We continue to expect that recovery will not be linear and will be different end market by end market across our Beauty and Closure segments. Our focus on footprint rationalization and reducing fixed costs remains a top priority in 2024. Over the last several quarters, we have improved margins. As a reminder, since 2022, we initiated formal cost reduction programs in several European countries, including 2 social plans in France. We are reducing the Beauty segment’s European workforce by about 5% and as previously mentioned, the closing of a facility in France that serves closures is expected to be finalized by midyear. This is in addition to the facility that was closed last year in North America. Additionally, quarter-over-quarter, we have reduced selling, general and administrative of an SG&A as a percentage of sales by 50 basis points.

Looking ahead in the second half of the year, we plan to close our manufacturing operations in Argentina for beauty and for closures but maintain our pharma manufacturing operations in the country. We will continue to review and streamline our footprint during 3 operational leverage while meeting market demand. Now moving to Slide 4, highlighting recent corporate awards and recognitions. We firmly believe operating in a sustainable manner in developing more sustainable product solution is an important competitive advantage for Aptar. As a reflection of our progress during the quarter, we were named one of Barron’s most sustainable U.S. companies for the sixth consecutive year, ranked number 29 out of 100 companies for 2024. CDP, formerly known as the Carbon Disclosure Project, also means that as a supplier engagement leader for the fourth consecutive year due to our contributions to emission reductions throughout the value chain, a recognition that is highly valued by many of our customers.

Lastly, Capital magazine identified Aptar is one of the 2024 best employers in France where we are now number 14 in the health care and pharmaceuticals category. Before I turn the call over to Bob to share further details on quarter 1, I want to speak about innovation and highlight recent technology product launches as shown on Slide 5. Starting with several launches in our Pharma segment, our Airless plus system is the drug delivery solution used to treat [indiscernible] recently approved by the National Medical Products Administration in China. Our proprietary ophthalmic sweet dispenser is used for [indiscernible] brand of an over-the-counter lubricant eye drop treatment in the U.S. Next, our PureHale technology is used to dispense treat our Babies ultrafine natural sterile sailing mist in children’s cough and cold.

Finally, in Turkey, our nasal spray pump is used to deliver a new allergic renals treatment. Turning to beauty, Cody’s new Marc Jacobs, daisy rouge [ph] fragrance featured our fragrance pump customer up and green colored DP2. After recyclable Airless dispensing system is the delivery solution for dermocosmetic, Euroscan. Our reloadable ALS technology is featured on a skin care launch by Chinese beauty brand, Zubin and our fully recyclable ocean pump is featured on a new men [ph] skin care line in the U.S. Moving to closures. Our sports cap is the dispensing solution for PepsiCo’s new Gatorade Water. And our mono material temper everything closure is featured on the line of BOSS water, both found here in the U.S. Our fully recyclable [indiscernible] is used for Unilever’s St.Ives Brand skin scrub.

Finally, our Tempur evidence snap top closure that features a customizable in molded SCP is featured on Nutrapharm’s protein supplement in Latin America. Now, I would like to turn the call over to Bob.

Bob Kuhn: Thank you, Stephan and good morning, everyone. Starting on Slide 6, I would like to summarize the quarter. Our reported sales increased 6% [ph]; this included a currency translation benefit of approximately 1%. Therefore, core sales grew 5%, primarily due to strong growth in Pharma’s proprietary drug delivery systems and improved injectable sales as well as in recovering North American market. As shown on Slide 7, we reported first quarter adjusted earnings per share of $1.26 which is a 31% increase over the prior year’s adjusted EPS. During the quarter, we achieved adjusted EBITDA of $179 million which increased from the prior year’s first quarter by 16% and driven by expanding margins in all 3 segments. Improved operational performance and a lower tax rate led to a higher earnings per share result versus the rain [ph] in our outlook.

Turning to some of the details by segment for the quarter. Our Pharma segment’s core sales increased 13% due to volume growth, especially in our proprietary drug delivery systems and elastomeric components. Looking at in the pharma segment by market, we will start breaking out our proprietary drug delivery systems which performed extremely well in the quarter. Prescription core sales increased 10% and driven by strong sales of allergic rhinitis, asthma, central nervous system therapeutics and emergency medicines. Core sales for Consumer Health care increased 2% and due to higher demand for nasal saline and nasal congestion solutions which more than offset the decline in dermal. Injectable Core sales increased 54% over the prior year quarter which was adversely impacted by an ERP system implementation, affecting operations and shipping days which did not repeat.

We saw increases in several end markets, including elastomeric components for biologics and small molecules. Core sales for our active material science solutions proved in the quarter, increasing 2% with returning demand for our products used on probiotics and oral solid dose applications. Adjusted EBITDA margin was 32%, a more than 1 point improvement in the prior year’s quarter. Turning to our Beauty segment. Core sales decreased 1% in the quarter. As anticipated, sales of our fragrance dispensing solutions slowed after a period of rapid growth in 2023. Volume growth for beauty increased but was offset by resin pass-throughs. Core sales for the beauty market were flat in the quarter. Overall, difficult comparisons for prestige and mass fragrance dispensing solutions in the prior year quarter contributed to the muted results.

Regionally, sales in North America showed signs of recovery with strong facial skin care sales. Core sales for the personal care market decreased 4% due to widespread market softness, primarily due to the suncare applications. Home Care core sales increased 2%, driven by sales in North America and Europe. This segment’s adjusted EBITDA margin for the quarter was approximately 13%. The money improvement was due to improved operational performance, along with our continued focus on cost management. The closures segment’s core sales increased by 1% compared with the prior year’s quarter due to an improving North American market with increased personal care and home care sales. The positive impact from the improving North American market was offset by lower beverage sales in Europe as customers continue to transition to a new environmentally friendly closure.

When looking at sales by market for closures, food core sales increased 3%. This includes strong tooling sales in North America for food closure capacity expansions in the first quarter. Strong growth in our dry spices and food protection products contributed positively to the results, while North America and Europe led regionally. Beverage core sales decreased 4%, primarily due to market timing around customer conversions to tether [ph] caps in compliance with European regulations. Core sales for personal care closures increased regionally, rebounding demand in North America and Latin America had a positive impact fourth category which includes beauty, home care and health care, Core sales decreased 5% due mainly to a decrease in beauty closures.

The segment’s adjusted EBITDA margin was 15% for the quarter, a slight increase over the same period last year. In Q1 2024, cash flow from operations was approximately $92 million. Free cash flow was approximately $17 million for the quarter. In the first quarter of 2024, we had capital expenditures of approximately $76 million, the majority of which were in our Pharma segment for capacity expansions in North America, Europe and Asia. Reported depreciation and amortization expense increased 9% over the prior year quarter to approximately $64 million or 7% of sales. Moving to Slide 8 which summarizes our outlook for the second quarter, we anticipate our strong momentum to continue and expect second quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs and changes in the unrealized fair value of equity investments to be in the range of $1.30 to $1.38 per share.

The estimated tax rate range for the second quarter is 22% to 24%. We are expecting currencies to have a small positive impact compared to the prior year quarter. We currently estimate depreciation and amortization for 2024 to be between $260 million to $270 million. We expect our capital expenditures in 2024, net of any government grants to be between $280 million and $300 million, with the majority of capital allocated toward our Pharma segment. In closing, we continue to have a strong balance sheet with a leverage ratio of approximately 1.4 which allows us to continue to invest in the business, pursue strategic opportunities and continue to return value to shareholders in the form of dividends and repurchases. In addition to our cash dividend payments to shareholders which totaled approximately $27 million in the quarter, we repurchased about 86,000 shares for approximately $12 million.

At this time, Stephan will provide a few closing comments before we move to Q&A.

Stephan Tanda: Thanks, Bob. In closing, following a very strong start in quarter one. We see our momentum continuing in quarter two and the balance of the year. Demand for our proprietary drug delivery systems will continue in the second quarter as well demand for elastomeric components for biologics. As a reminder, we expect our proprietary drug delivery systems to grow within our long-term core sales target range of 7% to 11% for the full year. We see demand for our consumer dispensing, especially for our closure technology to build in order 2 as the North American market continues to recover from this token. Improving EBITDA margins through cost management and operational performance continues to be a strong focus. With that, I would like to open the call up for your questions.

See also 25 States with Highest Mortgage Delinquency Rates and 25 States That Are Struggling the Most with Credit Card Debt.

Q&A Session

Operator: [Operator Instructions] The first question comes from the line of George Staphos with Bank of America.

George Staphos: Stephan, you mentioned again that you expect pharma to grow in its normal core growth range of 7% to 11%. And that’s terrific given the comparisons, obviously, saying you’re doing 2 different things but taking that at base value, how should we expect the various end markets or product categories really to trend this year within that 7% to 11%. That’s my first question. Second question to you both. In terms of the timing issues that you mentioned in terms of beverage closures in Europe, should we be worried at all about what the implications are longer term for plastics and beverages in Europe? Yes, you’re benefiting from the tethered closure but is the tide going out to see, so to speak and that’s something else you’re going to have to worry about longer term.

Stephan Tanda: Thanks, George and we could hear you just fine. Look, within pharma, the proprietary drug dispensing solutions are growing really, really nicely and we don’t see that to change for the year. And then, of course, in biologics, we are rebounding from the situation with last year; plus we see continued good growth. For us, the COVID hangover was not significant in injectables, so we just benefit from the growth. Now the year-over-year comparisons for every quarter is going to be a bit scary, sorry, for the technical term. But overall, we see good growth in injectables as well, same for active material solutions returning to growth. So it’s really broad-based, led by the proprietary drug dispensing solutions and that obviously bodes well for the business.

Now in terms of beverage, look, right now, everybody is transitioning to the tablet caps. There is some inventory effect. There’s some technical effect of getting machines adjusted to the new caps. But overall, we don’t see any concern to the beverage business. I think we have passed plastic peak panic even in Europe now that might not be true for some capital. But overall, the reality of carbon footprint and total life cycle analysis in prevails, you saw Unilever also pushing out their goals to 2030. I think there’s just a general pragmatism that returns.

Operator: The next question comes from the line of Ghansham Panjabi with Baird.

Ghansham Panjabi: Obviously, very, very strong growth in pharma and I know the reasons for that in terms of the base effect from last year. Did the operating margins come in in line with what you thought they would? I’m just asking because last year, in the first quarter, obviously, margins were down on a year-over-year basis. And you have built up very nice operating leverage over that level but I just thought there would be a little bit more — just given the extent of growth? And maybe a parallel question. Is that mix related just because of injectables having that sort of outsized growth?

Stephan Tanda: I would say pretty much in line with expectations. Remember that when injectable grows much faster and 50% is much faster, that has a negative mix impact on overall pharma. And therefore, you don’t see bigger expansion than you might have liked. So overall, this is fully in line. The other point I would make, if there’s one business we keep reinvesting in including cost is, of course, pharma. We keep reinvesting in innovation and new business development. So margins are in line with what we expected.

Ghansham Panjabi: Okay, sure. And then for fragrance, just to expand on your sort of outlook for the rest of the year. I mean, obviously, comparisons are going to be difficult. We’ve talked about that in the past. Are you expecting growth to still remain positive for that segment? What’s the customer sentiment at this point specific to that market?

Stephan Tanda: Yes, remains positive. Of course, the comparison quarter 1, in particular, given the boom of launches last year is difficult but we would expect fragrance to continue to end the year somewhere in the 3% to 6% range. We see the regions continuing to perform well. And as a reminder, what we sell in Europe ends up all over the world, especially in this segment and also some good strength in Latin America. So overall, I think the 3% to 6% makes sense.

Operator: The next question comes from the line of Daniel Rizzo with Jefferies.

Daniel Rizzo: You mentioned that the capacity expansions in pharma are coming to an end. I was just wondering post that, what your capacity utilization would be in those segments? And I don’t know at what point you would think you would have to expand further, like what we can expect, I guess, over the next 5 years?

Stephan Tanda: Yes. I think we are done with big new buildings. And again, if you come on the trip with us later this year, you will see it. I mean it’s a phenomenal state-of-the-art new building. We’re done with that kind of — but within the building, we can further create capacity. So certainly, we have ample capacity as this new capacity is being validated and then the capacity increments if they need it down the road in the 5-year period, they will be more of a smaller increments as we increased cavity counts, as we further automate within the existing building. I mean, we may be another wing in Congress but that’s nothing like what we had to do [indiscernible].

Daniel Rizzo: When you do the expansions within the facility, is it easier or in terms of getting approval or making sure it makes inspections that you [indiscernible]?

Stephan Tanda: Of course, every new tool has to be validated. Every new machine has to be validated. But it is in the context of an ecosystem where the crew is fully up to speed and that can be happening in the ordinary course. It’s not a massive big investment like the new facility [ph]. I mean, we’ve made investments all along. We didn’t make a big deal out of it. As we upgraded per se, as we upgraded [indiscernible] is really massive.

Operator: The next question comes from the line of Matt Larew with William Blair.

Matt Larew: I wanted to circle back to injectables. And just get your updated thoughts on participation rate. And really now that we’ve emerged from the pandemic, your assessment of how customers in the space view referencing sole source or multisource arrangements and perhaps within multisource, if there’s a greater preference to spread volume. And to the extent your participation rate has improved, just how important your expanding global footprint has been to those discussions?