Earnings Call Transcript - ATR Q1 2024

Operator, Operator

Thank you for joining us. Welcome to Aptar's First Quarter Conference Call for 2024. Introducing the call is Ms. Marry Skafidas, Senior Vice President of Investor Relations and Communications. Please proceed.

Marry Skafidas, Senior Vice President, Investor Relations and Communications

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, President and CEO

Thank you, Marry, 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 Aptar 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 to 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 double-digit 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 continues to grow nicely. 2024 continues to be a build-out year for injectables as the final phases of the capacity expansions announced in 2020 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 to 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 post-COVID. 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 normalize, 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 two 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 costs 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 to increase operational leverage while meeting market demand. Now moving to Slide 4, highlighting recent corporate awards and recognitions. We firmly believe that operating in a sustainable manner and developing more sustainable product solutions 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 #29 out of 100 companies for 2024. CDP, formerly known as the Carbon Disclosure Project, also named us 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, we were identified as one of the 2024 best employers in France where we are now #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 technologies and product launches as shown on Slide 5. Starting with several launches in our Pharma segment, our Airless+ system is the drug delivery solution used to treat rosacea, recently approved by the National Medical Products Administration in China. Our proprietary ophthalmic squeeze dispenser is used for AbbVie's Refresh brand of an over-the-counter lubricant eye drop treatment in the U.S. Next, our PureHale technology is used to dispense Frida Baby's ultra-fine, natural sterile saline mist in children's cough and cold. Finally, in Turkey, our nasal spray pump is used to deliver a new allergic rhinitis treatment. Turning to Beauty, Coty’s new Marc Jacobs Daisy Wild fragrance features our fragrance pump, custom overcap, and green-colored dip-tube. Aptar’s recyclable Airless dispensing system is the delivery solution for Avene’s dermo-cosmetic rosacea lotion. Our reloadable airless technology is featured on a skin care launch by Chinese beauty brand, Zhiben. Our fully recyclable lotion pump is featured on a new men’s skin care line in the U.S. Moving to Closures. Our sports cap is the dispensing solution for PepsiCo's new Gatorade Water. Our mono-material, tamper-evident closure is featured on the line of Voss water, both found here in the U.S. Our fully recyclable tube top is used for Unilever's St. Ives brand skin scrub. Finally, our tamper-evident, snap-top closure that features a customizable, in-molded scoop is featured on Nutrapharm’s protein supplement in Latin America. Now I would like to turn the call over to Bob.

Robert Kuhn, Executive Vice President and CFO

Thank you, Stephan, and good morning, everyone. Starting on Slide 6, I would like to summarize the quarter. Our reported sales increased 6%. 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, improved injectable sales, as well as 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%, driven by expanding margins in all three segments. Improved operational performance and a lower tax rate led to a higher earnings per share result versus the range provided 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 sales 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%, driven by strong sales of allergic rhinitis, asthma, central nervous system therapeutics, and emergency medicines. Core sales for consumer health care increased 2%, due to higher demand for nasal saline and nasal decongestant 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 improved in the quarter, increasing 2% with returning demand for our products used on probiotics and oral solid dose applications. Pharma's adjusted EBITDA margin was 32%, a more than 1 point improvement from 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 sun care 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 margin 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 tethered caps in compliance with European regulations. Core sales for personal care closures increased 2% after an extended period of decline. Regionally, rebounding demand in North America and Latin America had a positive impact on the quarter. In our 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.

Stephan Tanda, President and CEO

Thanks, Bob. In closing, following a very strong start in quarter 1, we see our momentum continuing in quarter 2 and the balance of the year. Demand for our proprietary drug delivery systems will continue in the second quarter, as well as 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 quarter 2 as the North American market continues to recover from this destocking. 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.

Operator, Operator

The first question comes from George Staphos with Bank of America.

George Staphos, Analyst

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 and doing are two 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 sea, so to speak, and that's something else you're going to have to worry about longer term.

Stephan Tanda, President and CEO

Thanks, George. We could hear you clearly. In the pharmaceutical sector, our proprietary drug dispensing solutions are performing very well, and we anticipate this trend will continue throughout the year. Additionally, in biologics, we are recovering from last year's challenges and are experiencing consistent growth. The impact of COVID on our injectables has been minimal, allowing us to capitalize on this growth. Year-over-year comparisons each quarter may appear daunting, but overall, we expect strong performance in injectables, with active material solutions also returning to growth. This positive momentum is widespread, primarily driven by our proprietary drug dispensing solutions, which is beneficial for our business. Regarding the beverage sector, many are currently transitioning to tethered caps, which involves some inventory adjustments and modifications to machines. However, we are not worried about the beverage business. We seem to have moved past the peak concerns regarding plastic in Europe, although some catalysts may differ. Ultimately, the focus on carbon footprint and life cycle analysis remains significant; we've seen companies like Unilever extending their targets to 2030. Overall, a sense of practicality is returning.

Operator, Operator

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

Ghansham Panjabi, Analyst

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 mean aversion 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, President and CEO

I would say pretty much in line with expectations. Remember that when injectables grow 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 costs, it's of course pharma. We keep reinvesting in innovation and new business development. So margins are in line with what we expected.

Ghansham Panjabi, Analyst

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, President and CEO

Yes. Sentiment 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, Operator

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

Daniel Rizzo, Analyst

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 with 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, President and CEO

Yes, I believe we have completed the construction of large new buildings. If you join us on our trip later this year, you will observe our impressive state-of-the-art facility. While we are finished with major construction, we can still create additional capacity within the existing building. We definitely have sufficient capacity, and as this new capacity proves effective, any future increases needed over the next five years will likely consist of smaller adjustments as we boost capacity and implement further automation. We might consider adding another wing in Congress, but that would not compare to the extensive work we undertook in Granville.

Daniel Rizzo, Analyst

When you do the expansions within the facility, is it easier in terms of getting approval or making sure it makes inspections that you...

Stephan Tanda, President and CEO

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 Granville 2 facility. 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 Granville 1, but the Granville 2 is really massive.

Operator, Operator

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

Matthew Larew, Analyst

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?

Stephan Tanda, President and CEO

Yes, we could discuss that at length. Fundamentally, we have fixed basic SKUs such as plungers, stoppers, and needle shields, which can be coated or uncoated. There are additional variations based on the level of quality assurance and data provided. The pandemic has significantly demonstrated that our capabilities match those of the market leader, allowing us to engage in every new biologics project. Typically, companies choose a single source for major products. During the COVID vaccine rollout, many sought a second source for supply security, but that concern has now diminished. Overall, our product pipeline for biologics remains strong and continues to grow. The decision to choose our services over others depends on various factors, including technical capabilities, geographic presence, and business models. We collaborate with some companies rather than compete with them, and customers often prefer working with partners who are not in direct competition. Thus, the ability to supply regionally is essential.

Matthew Larew, Analyst

Okay. As a follow-up, just wanted to check on emergency medicine and if you've seen any sort of change in demand for the Narcan product would be one. And then obviously, there's maybe an opportunity on the nasal delivery of epinephrine, which could start to develop in the back half of the year. So just curious for your assessment of what that opportunity might look like.

Stephan Tanda, President and CEO

Sure. Let's talk Narcan first. We've spoken before about the importance of the over-the-counter approval. Now it turns out it's not so important for people walking into a CVS or Walgreens or Rite Aid and picking up Narcan; that business is not so meaningful. But what it has allowed is for states to make bulk purchases of Narcan and then to distribute that in the states to harm reduction agencies, schools, police stations, and so on, and disburse the settlement money each state has received and will be receiving for the next 10 to 20 years. So it has greatly facilitated much broader distribution into schools, community centers, and first responders. And who knows, maybe one day, we all have a set of Narcan at our homes. So that's really helping the Narcan distribution. On epinephrine, we're all very excited about it, but I would caution that, in the end, product launches are day 1, and no single product changes the game for us. But of course, in totality, they start to build. A lot will depend on what is the reimbursement philosophy of the health insurers and the payers. But certainly, we think this product makes a ton of sense, and if patients are really excited about it, eventually it should receive good reception.

Operator, Operator

The next question comes from the line of George Staphos with Bank of America.

George Staphos, Analyst

Bob, just looking at net cash from operations, it was down a touch from first quarter '23. There probably was just some timing effects here, but could you remind us what was going on in terms of CFO being a little bit lower this first quarter versus last quarter? And then if you could talk more broadly about your goals for SG&A as a percentage of sales this year, if you care to update us. Obviously, you have progress in the first quarter. What should we expect for this year?

Robert Kuhn, Executive Vice President and CFO

Thanks, George. The slight decrease in the cash flow from operations, I think it was primarily due to more working capital, in particular, in some of the inventory areas and also in receivables. Remember, the first quarter was a little bit strange because you had the holiday weekend right at the quarter end, so our receivable balance was a bit higher than what we'd normally expect, but then all those were collected once we got into April. So I wouldn't look too much into that. And then when we look at the SG&A as a percentage of sales, we haven't really changed our target. We expect to be at a run rate of 15.1% by the fourth quarter. That's not for the full year, of course; that's kind of run rate going out, and we haven't really modified where we stand on that.

Operator, Operator

The next question comes from the line of Gabe Hajde with Wells Fargo.

Gabe Hajde, Analyst

Two quick questions. Could you clarify whether you are incurring $0.01 to $0.02 in commercialization start-up costs in pharma related to the injectables ramp? Is that correct? Also, should we expect that to change or disappear next year?

Stephan Tanda, President and CEO

Yes, I think you got it right.

Robert Kuhn, Executive Vice President and CFO

$0.01 to $0.02 is kind of where we're looking at for this year. And yes, in theory, then you'll have that go away, and then we'll have to see where we are from a fixed cost absorption in a new plant as business comes in for next year.

Gabe Hajde, Analyst

Okay. There's been significant progress on the CapEx side, but looking at the broader picture for the next few years, can you remind us about the maintenance CapEx? I have a note in our model indicating it should be between $125 and $150 million. You mentioned increasing some pharma capacity in three key regions. As part of your targeted spending this year, can you clarify how much of that is a carryover for injectables versus new investments in pharma?

Robert Kuhn, Executive Vice President and CFO

Okay. I don't know if I have in front of me what the runout is on the injectables rollout, but on your maintenance number, $125 million to $150 million. I think as we talked before, it's sometimes difficult for us to really categorize maintenance of investment and, call it, productivity improvement or cost savings. Very rarely will we invest like-for-like, meaning that if we're replacing an old mold or replacing an old assembly line, we're typically doing it with a more efficient, higher output type of thing. So we would say that between true maintenance of business and some of those in-betweeners that cover also productivity and cost savings, 45% to 50% of total CapEx would be in the ballpark. So I think you're $125 to $150 million is in the right range.

Gabe Hajde, Analyst

Okay. And some of the discrete projects that you have going on this year, I heard you say not on injectables, but the capacity expansions, is it just safe to say that maybe everything that you're spending above that $150 million this year is mostly pharma related?

Robert Kuhn, Executive Vice President and CFO

Yes. I mean, we've talked a little bit but we do have some capacity increases in some other isolated areas. But yes, I think that's a fair bet that a lot of the excess above the big rollouts are predominantly in the pharma area.

Stephan Tanda, President and CEO

If you look at the growth in proprietary drug dispensing systems, it's so strong, and obviously, think about a product like Narcan; you don't want to run out of capacity. So you need to expand ahead of the curve, and we're having a keen look at that and do not hesitate to expand capacity.

Operator, Operator

Thank you. There are currently no additional questions registered. So I would now like to pass the conference back to Stephan Tanda for any closing comments.

Stephan Tanda, President and CEO

Great. Well, thanks for the questions. As you see, we are fully executing on the ambitious plans that we shared with you last September at the Investor Day with a strong focus both on the top line and on delivering structural and ongoing productivity gains. This is all to ensure our bottom line grows faster than our top line. You have seen that play out throughout 2023, and we're now off to a very strong start in 2024, and we see that momentum continuing into quarter 2 and the balance of the year. Our order books and project pipelines remain strong. Our customers are engaging very positively with our innovations and the overall value that we can bring to their brands and drug products, including our overall sustainability contributions. A significant number of the productivity and cost reduction efforts are well underway in all regions. We mentioned a few on the call, and they will keep adding to the bottom line throughout 2024 and 2025. In addition, our teams are energized to find additional productivity opportunities. This is becoming a point of pride in the company and taking root into our culture. We are increasing the competitiveness of our regional footprint with all the actions in Europe, Asia, and North America. And now you've also heard about Argentina as we expand capacity in Mexico. As Bob said, our strong balance sheet allows us to continue to invest in growth, productivity, and we also find both sized acquisitions and partnerships, and have a solid track record of delivering value for shareholders. So when you consider all the puts and takes for the coming period, proprietary drug delivery systems will continue to grow even after a year of double-digit growth. We expect them to remain inside our overall pharma target growth and our growth target. Injectables have a strong pipeline and have additional capacities coming online and validated through the year that will be able to serve this demand. Digital health, we haven't talked about, but it is continuing to improve with project wins. Fragrance will continue to grow after a year of double-digit growth, albeit at a lower rate. The destocking in North America for Beauty and Closures is coming to an end. Our Latin America team is executing very well against a generally very positive economic background, but of course, with the exception of Argentina, which we are addressing. We haven't talked about Asia, but China is progressively recovering, and India is pulling very strongly. And as we talk, SG&A expenses and overall manufacturing fixed costs as a percentage of sales are coming down. So all of this makes us very energized for '24, and we're looking forward to discuss more with you on the road.

Operator, Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.