AptarGroup, Inc. (ATR) Earnings Call Transcript & Summary

Hi, everyone, this is Debbie Jones, Deutsche Bank's paper and packaging analyst. You are dialed in to a virtual call and fireside chat with Bob Kuhn, Aptar's CFO. We also have Dan Ackerman, Aptar's VP and Controller; and Matt DellaMaria, Head of Investor Relations. Bob has been CFO since 2008 and has been with the company over 25 years. He is going to start with a high-level overview of Aptar, and then we're going to move in to Q&A. Bob, you generally participate in our conference every year. So thank you, especially during this virtual format that we're doing. And with that, I will pass it over to you.

Great. Thanks, Debbie. I'm just going to take 5, 10 minutes max here covering kind of the first 6 to 8 pages of the slide deck that hopefully all of you have received. Just to give you a brief overview of -- for those of you who are not familiar with AptarGroup. So we are the leader in consumer dispensing and drug delivery systems. We've been around for more than 75 years. We've been public since 1993. We operate in very attractive markets, and we'll touch on those briefly. And I would say the story for AptarGroup, it's a very diversified long-term growth story. So we're diversified not only from a market perspective, but from a customer perspective, from a technology perspective, product perspective, and we operate in 4 different regions. Taking a look at our 3 reporting segments. So our largest segment in terms of annual revenues is our Beauty + Home segment. That serves 3 main markets: the beauty, the personal care and the home care market and represents about $1.4 billion of our 2019 turnover. Our next largest and growing at a slightly faster rate is our Pharma segment, which had $1.1 billion in 2019. And our last segment, our third segment and smallest, but also very fast-growing, is Food + Beverage, which had about $400 million in annual sales in 2019. So when you think of our Beauty + Home and the markets that we serve, you think of lotions, sanitizers, fine mist spray pumps, things of that fashion, color cosmetic solutions. When you think of Pharma, think of really 4 main divisions, a prescription division where you see a lot of products that serve nasal allergy and asthma primarily and now to a growing extent, central nervous system therapies. Consumer health care, think of nasal decongestants and cough and cold remedies and eye care treatments. Our injectable division, think of elastomeric components, plungers, needle shields and rubber stoppers for vials. And then our fourth division here is active packaging, which deals with material science in terms of stability, moisture control and is used on things such as desiccant vials used in diabetes test strips and the like. Moving over to Food + Beverage. Obviously, those are 2 very easy markets to understand. Think of food closures, condiments, of the like, primarily closures based, all with value added. On the beverage side, we don't do any flat caps, we do all dispensing sport caps, higher value-added products. And with the acquisition in active packaging, we've also gotten in a little bit more to food service with multi-absorbent trays for a variety of products, such as sliced vegetables for the food service industry and seafood applications. As I mentioned before, Aptar is a compounding growth story over the past 10 years. We've grown at about 4% compounded annual growth rate. Our adjusted EPS has grown at 8%. And our dividend over this time period has grown 9%. So we've increased the amount of dividends paid to shareholders for 27 consecutive years. When you think a little bit here, moving into more of the current environment and the pandemic, Aptar is part of the essential critical infrastructure. And as such, we were allowed to keep the majority of our facilities open throughout the pandemic, primarily because of our pharmaceutical business, our consumer products business, which are essential for some of the hand sanitizers and soap products and basic chemicals and things like that. So we were fortunate that we had that designation very early on, and we're able to maintain pretty -- the majority of our factories open with the exception of a few small ones. Some of the products I've touched on just a little bit already, but some that are critical during this time frame, obviously, people's pharmaceutical medications, those are critical, the diabetes test strips and the flash glucose monitoring systems were essential for diabetes patients during this. We saw a whole host of our products being used on various hand sanitizers, household cleaners use some of our aerosol valve products. And then obviously, some of the infant nutrition products that we're on as well as some of the food condiment categories as well. There's a slide in there on Page 10 that we've attempted to kind of outline what our near-term sensitivities are related to COVID-19. And I'll try to briefly touch on this. The most impacted of all our markets, and it should not be a real surprise is our beauty market. So beauty represents about 24% of our overall turnover, the beauty market does. And clearly, that's the most discretionary spend that's out there. And this follows suit with other crises that we've seen in the past, 2008, 2009 financial crisis or H1N1 in the past. Beauty is usually the first pullback category as it's a discretionary spend. And then moving all the way up in terms of least impacted, as you might expect, is the Pharma business, that's about 38% of our overall turnover. And that has grown considerably to a bigger piece of the pie since our last crisis in 2008, 2009. Now all throughout, you've got the other categories. Beverage for us, which is only about 5% of our overall turnover, has been impacted because, as I mentioned, we don't play in the general nondispensing beverage products. We play more in the sports cap on-the-go functional-type beverages that are typically consumed in gymnasiums or picked up at the airport, resealable on-the-go type of beverages. So as you might expect that demand for those closures was negatively impacted. On the personal care side, while we did see an exceptionally high demand for sanitizers and soaps and also to a certain extent, moisturizers, we did see some negative impacts from COVID coming from Sun Care and hair care sales. Both are 2 categories for which we have a dominant market share. So net-net, even personal care for us was a negative. And then obviously, Food and home care were least impacted from the crisis. We do believe that Q2 is going to be our low point in 2020, and we are expecting a gradual second half recovery. Let's see. So what have we done in the interim? We've been through this before, as Debbie mentioned, we've lived through many crises in the past. We have a fair amount of temporary labor in Europe, primarily where it's difficult to furlough people on a regular basis. So we reduced temporary labor immediately down to virtually 0 levels. We pulled in some work, noncritical work that we use subcontractors for. Typically, that's injection-molding type work. So we can pull that in to keep our facilities running as efficiently as possible. We've modified our production schedule. It's gone to less shifts, closed for the weekends, things like that, asked employees to take vacation time. We've eliminated all travel. And we've taken a hard look at nonessential spending. And passed through price adjustments when applicable. As you might imagine, just to keep the factories open, required a significant amount of sanitizing of the facility and deep cleaning of the facility, all of which we've attempted to pass through to our customers. Lastly, I'll touch on what we communicated as our consolidated financial targets. So from a core sales growth perspective, we're -- our long-term targets are in the 4% to 7% range. Over the past 3 years, we were at 5%, so within that range. Obviously, more recent times here in pandemic, we did see a core sales decline of 2% in the first quarter. We don't think that, that's a permanent range going forward, but we do see the recovery happening in the second half. Our profitability percentage of sales, EBITDA percentage of sales, our target is 20% to 22%. Again, we were within that range for the past 3 years of 20%, and we're right at the bottom end of that range in spite of the core sales decrease in Q1 at 20% as well. Our ROIC is 13% to 15% target. We were -- we have been at 13% the past 3 years. We declined a little bit to 11%. That's primarily due to some recent large acquisitions that we did late in 2018 and early in 2019. Our payout -- dividend payout ratio is targeted 30% to 40%, and we're right in the middle of that for the 3-year average and recently. And finally, our leverage ratio, we're comfortable between 1 and 3x levered, and we're about 2x levered at the end of Q1 of this year. Lastly, here, I want to touch on some of our strategic priorities. So we've already talked about the organic growth. We've set kind of 5-year targets. Those are the 4% to 7% that I mentioned and the EBITDA range that I talked about. So prior to 2017, we started to see a little bit of a deceleration. So we've made some changes around our commercial excellence structure, which I'll talk about in a minute, to help increase that core sales growth rate. Big focus on talent and leadership. You can see that in the Board, in the refresh of the Board, we've brought on a brand-new CHRO. We've added significant leadership in Asia. We've added a strategy -- dedicated strategy in M&A team. A lot of different focus areas around talent and leadership. So significant changes really in the past couple of years. I talked about those excellence pillars. So we've stood up commercial excellence pillar and operational excellence pillar and an innovation excellence pillar and those span across all 3 of the segments. 2018, we launched the transformation initiative, primarily focused at our Beauty + Home segment, to a lesser extent, also in our Corporate G&A to help not only take cost out of the structure, but also jump-start some of the commercial side of that business. And we're in year 3 of that as we speak. And then lastly, acquisitions and partnerships. I think in the last 3 years, you've seen an uptick in activity coming from us. We did our largest acquisition of CSP Technologies, about $0.5 billion in 2018. And we announced we closed on an acquisition on April 1 in the U.S. We did a small joint venture in China. We've done various other acquisitions in the pharma space in 2019. We've done some other investments around sustainability, investing in PureCycle and Loop and have done some other strategic initiatives with some other technological companies around the globe. So very active on that side. But Debbie, I'll stop there and not do a deep dive in the detailed segments and maybe open it up for Q&A.

Okay, Bob. I think that there are some opportunities that Aptar has with helping with this pandemic, and I want to get to those. But I thought if we could just start by focusing on the Beauty + Home business to help people really understand the impact there. If you could perhaps just kind of, from a regional perspective, talk about what you've seen there and kind of the different impacts across that business?

Sure. So Beauty + Home for us is -- majority for us manufactured in Western Europe, and that's typically where you see the prestige beauty brands made in France, made in Europe. So that obviously started to decelerate before we saw that in the U.S. as Europe was kind of a couple of weeks ahead of us in terms of the pandemic crisis. You've seen some of our customers have to shut down some of their facilities, in the short term. We're now starting to see some of them reopen. It's not -- beauty is not such a large category for us in North America. It's actually larger in Latin America and in Asia. And as you know, Latin America right now is in the midst of its pandemic as they head into the fall and winter season, that, combined with some volatile local markets. China, obviously, was impacted early on, and we were following it very closely early on in the first quarter, but seems to have rebounded nicely. But if I had to sum it up, I would say, overall, Europe was the most impacted for us, and that's certainly above 55% of the overall Beauty + Home sales are in Europe.

Okay. So if we kind of take a step back and look towards the future for this Beauty + Home business, you've been in the midst of a transformation plan here and if we could just focus on where you're trying to go. What type of margin profile should this business have when you get everything done that you need to do?

Certainly, when we look at what's within our control and comparable margin rates. I mean we're still targeting kind of in that 15% to 17% range. Now it seems like a long way from where we are today, but you also have to take into account that this is a very heavy asset-intensive business. And when you've got a pretty sharp pullback in your largest region, that's going to weigh pretty negatively on your profit performance. But I mean, certainly, when I step back and look at the transformation and all the great cost savings initiatives that we've implemented, the investments we've made in the factories, the consolidation that we've done in certain regions of factories into more state-of-the-art factories, it doesn't show right now because of the decline in volumes. But that, combined with some of the leadership changes that we've made in that segment, I'm very optimistic that when business does come around. And I think we've seen that in the past, the beauty market is very resilient and will bounce back once life gets back to a more normal pace. I think we're going to be very well suited in terms of being able to capture that margin expansion once volumes come back.

Okay. And then just one last question on this, and we can move on, but the -- what are your customers -- your Beauty + Home customers asking of you right now in this pandemic, whether it relates to the number of SKUs, the type of products that you're delivering to them, the speed? How has that changed your course here?

Sure. So I think what we've seen, just in general, is the pace of change in that beauty market has accelerated. And we've seen it a lot in the color cosmetic category. That has just completely exploded. And I think a lot of that is being driven by the pace of change in Asia, particularly in China. So what we're seeing over there is we've been used to for a long time, a new fragrance launch or a new cosmetic launch from the time we started talking to the customer until the time it actually comes to market, can be as long as a year sometimes. And I think now what you're seeing is there's not the patience for that anymore. And you're seeing in China from the time that somebody launches an idea or a concept or wants to co-create with you, they want to be in market actually selling in stores in 3 months or less. So it's completely put a different emphasis and you hear a lot in the industry called fast beauty, right? And I think our acquisition of Fusion Packaging is going to give us one step in that direction. So Fusion Packaging is a very nimble asset-light, think of them as a design house, that works primarily with independent brands. So smaller, upstart, independent brands that thrive on kind of small volume, quick-to-market, a lot of marketing campaigns, and then they're off to the next fashion type of product. And so we're learning a lot from them on how we need to accelerate our speed to market, our prototyping, our industrialization. It's making us rethink a little bit our approach in that fast beauty. And you've seen that through some of our investments. Recently, in China, we invested in a company called BTY, and they are very nimble. Multiple factories in Asia to serve the Asian market for color cosmetics. And so I think that's what I see is the biggest change happening right now in the beauty spaces, everybody wants to get to market, whether it's via e-commerce or other platforms very, very quickly and move on to them to the next launch.

That's interesting. I imagine you're seeing a similar trend right now in Pharma, where people want to push things out a little bit faster, given everything that's going on. You mentioned, I think, on your last earnings call, that you have over 150 potential projects related to the pandemic. I've seen things such as your N-95 disinfectant mask that you're looking for FDA approval. Could you just talk about some of the more interesting ones that you think you can share with us today or just general ideas around it that you think Aptar can pursue?

Sure. So included in those 150 projects, I would probably break it down. 2/3 of those are probably around the injectable applications. And most of the logic is coming to the fact that it's probably going to come in an injectable format. But we do see about 1/3 of those projects around the nasal space. So you do have some players looking at it from a nasal perspective. And I think a lot is going to depend on what the ultimate rules are going to be around the inoculation and the vaccination of the global population, right? Is it going to be people standing in line with a multi-dose vial with health care provider using a disposable syringe for each patient, right? That's going to impact the volumes if the vial holds 40 doses or not. A lot is going to depend on the volume of the medication, the potency that's needed is going to affect kind of the demand for some of those. So we're working with all the major players. And it's just my opinion, but I think we're going to see probably multiple people coming up with a vaccine and probably from a regional perspective. So I think you could see -- I don't necessarily believe this is going to be a winner take all. I could be wrong. But I do think that there'll probably be multiple players arriving. There's so much co-collaboration amongst all the pharma companies, and I've heard some of the pharma CEOs say, behind closed doors, we're all cooperating because we all share the same mission. So I do think you're going to have multiple companies coming up with the legitimate vaccine. And so hopefully, some of those projects that we're working on are using some of Aptar's elastomer components. On the ActivShield, so I'm super proud of CSP Technologies. They contacted me very early in the pandemic and said, "God, we got to -- we think we have a way that we can impact this mask shortage." And they're actually taking the InvisiShield technology used for food safety and killing all kinds of pathogens in food packaging and saying, "Well, can't we do the same thing for decontaminating a mask?" So from idea in the head until kind of EUA filing was 90 days -- 3 weeks, sorry, rather 3 weeks, which is crazy fast. But unfortunately, the FDA has been inundated with all kinds of requests. And so the process actually took longer going through the FDA than it took us to kind of do our own independent testing and documentation. Since that time, we did find a lab in the U.S. that actually has the live coronavirus. And even though we've tested according to FDA protocols for all the surrogate viruses, and we really want to be extra cautious and extra safe here, particularly with some of the backlash on some of the systems that are out there right now. We're confident in the reusability of our masks. We've tested those up to 10 to 12 times. But what we want to be ultimately sure about is, are we getting the same pathogen reduction on the actual virus versus the surrogate viruses that are today in FDA protocol? So we've had good feedback from the FDA, kind of, saying they're very happy that -- they were ready to issue a clearance letter to us for a certain application, but they're very happy that we wanted to take it to the next step and actually test it on the live virus.

You mentioned FDA approval in that process. And one thing we've been wondering is how maybe a potential slowdown there with the focus on COVID will impact other launches in your business. I just wanted to see if you could discuss that possibility and how your customers are dealing with that?

So yes, I mean, there's not one consistent answer that I can give you, Debbie, for that. I can generalize for you in that early on, let's say, April time frame for the U.S. and maybe March, April for Europe. Certainly, whatever products we were on, those were the products that we are going to ride through the storm. Not many customers were willing to launch a new product into this uncertain market. So a lot of projects that were still needed to be completed and had an expected Q2 launch were kind of pulled back and put on hold. I think what we're seeing now is we're starting to see customers now reengaging as they start to see life opening up, certainly, in the U.S. in many states and now also in parts of Europe as well. So we're starting to reengage with customers on projects, which, to us, is good news. The pharma side was very similar. I think those that were very close to moving through the FDA, continued on. Others that were in very early stages, they may have been put on pause. But for our pharma space, it's such a stable business and particularly the Rx business. I mean, we don't necessarily -- we aren't necessarily dependent on multiple FDA approvals of new drugs in any particular year. Last year, 2019, was more of a record year for us in terms of kind of called big blockbusters that were launched, but it wouldn't be uncommon for us to go a period of time about having new products launched or approved by the FDA.

If we do focus on kind of your growth possibilities, you have your long-term plan by segment for core sales growth. And we often get asked just kind of how you're going to hit some of these targets. And I'm curious if you could just walk us through what supports them, in your view? What kind of process do you go through to set these targets for Beauty + Home and Pharma specifically?

Sure. So for us, it's really a bottoms up approach, right? So even the markets that we talk about externally to the outside, we break it down into further, we call them, kind of application fields. So while we talk personal care, we break that down further into a dozen different application fields because we feel that the characteristics in those application fields are very different. What I mean by an application field, it can be body lotions as an application field. It can be sun screen as an application field. It can be hair care. So each one of those have very different characteristics. So we look at each one of those application fields. And it not just for personal care. It's in beauty. It's in food, it's in beverage. It's in Pharma. Although Pharma, we look more at therapies. And then we take a cut and we look at it across geographic regions, and we try to collaborate with external data sources. So when you think of the beauty market, fragrance has somewhat flatlined to decline in the U.S. market. So we take that into account. Skincare in China is growing double digits. Skincare in North America is growing high single digits. So we really look at it from a bottoms up approach. We aggregate it together, we look at it. And then we try to project out, is this a trend? And if it's a trend, how long is it going to continue? And that's how we establish those targets. So I would say they're rooted really in bottoms-up market studies -- detailed market studies and our presence and our capabilities to serve those markets.

Okay. And I just wanted to mention for anyone on the line who would like to ask a question, you can e-mail one in. We have about 5 minutes left. So a couple more questions for you, Bob. We don't have any questions in the queue yet, but I will mention them if we do. But a couple more from me. You mentioned kind of a team that you guys have put together focused on M&A. I'm not really sure if that's something more than just formalizing what you had previously. But could you talk about what their strategy is? And what this team you hope can bring to the table here?

So they're very involved in our business strategy. They help us when we're trying to look at a particular market, for example. So when -- we're not a big player in color cosmetics. So the M&A team and M&A strategy team will work to take a look at that color cosmetic market, and they'll break it down. And they'll look at it, again, as we talked about in establishing growth rates, gathering external data and seeing who are the players in that space. What are the customers looking for? What are the different categories within? I mean it's foundation, it's lip gloss, it's lipstick. It's mascara. What are the margin profiles for each one? So they do a lot of the heavy lifting behind the scenes and also potentially identifying targets and doing preliminary research on them. So I would say that's really -- it's given us a little bit more -- I don't want to say that we were more reactive to M&A in the past, but I would say we're more proactive now in doing a lot more scouting and looking outside of our typical markets. I mean, a big source for us has been our business and discussions with our customers, right? But we had a big kind of white space out there in Asia. We really didn't have a significant business in Asia to generate a lot of these leads. So here's where an area that the M&A and strategy group can play a really strong part. They can do some of the on the ground leg work for us. They can do market studies and identify potential opportunities for us that may not have hit our radar in the past.

Okay. I want to follow up just with -- end here with a couple of questions on sustainability. The first is that you're seeing the consumer and consumer companies, as a result, you're really focused on the -- or much more focused on the circular economy. I'm wondering what type of conversations around that topic you're having with your customers? And if that's having an impact on your business in the way that you package your products?

It absolutely is having a huge impact. Now I would say that it's taken a bit of a backseat in the pandemic, but it's still there, and it's not going away anytime soon. So a lot of customers -- our customers are making big bold statements about how they want to get to either 100% reusability, recyclability in the future. They're throwing out goals and objectives for 5 years, and then they're coming back to us and saying, "How can you help us?" Right? "How can you help us achieve that goal?" So you've seen that we've gotten very high environmental and sustainability scores across the board. On the ESG side, we're very close to publishing our sustainability report in 2020. And certainly, the past ones are out on the website, I encourage you to take a look at it. But we really take a holistic view of it. And it's not just circular economy, there's no one single bullet, right? I mean, you have to look at everything from carbon emissions to renewable energy. And so we're really coming at it from multiple angles, and we're sitting in -- we're part of the Ellen MacArthur Foundation. We've made investments in Loop and some other things, PureCycle for food-grade PCR. So like I said, I don't think that there's a [ seemingful ] answer to the sustainability question, but it's really important that we stay very close to the narrative and to the technology because technology will come up with a solution, and we need to be part of it. So we need to start thinking about how that impacts our dispensing products launching an all plastic recyclable pump, for example, launching more robust dispensers that can be used in refillable applications. It doesn't sound like a lot, but our products are all engineered for single use. And when I say single use, single package use, right? But now if you tell me that, that container is going to be washed and reused 100 times, that dispenser has not been engineered for 100 container uses. So you're talking about different materials, different robustness, all those things. So it's -- we've got a great group that's exploring it from the material science perspective. And like I said, being close to all these initiatives. And I think people really are looking to us for ideas. And certainly, it's getting us a seat at the table because people want to hear what we've learned and share some thoughts on that. So I think this is -- while it's taken a pause now to the pandemic, it's going to -- it's not going away. People are still genuinely concerned with this. And this, if anything, we'll probably be increasing in the near future again.

We did have one question in the Q&A, and we want to -- the person wanted to ask you about the rationale for keeping the Pharma business and the beauty business together. I wasn't sure we were going to have enough time to answer that question, but please go ahead.

Sure. I'll be brief here. So the margin profiles are very different. But the technologies and the synergies are vast, right? I mean, if you think about our Pharma products really came from our beauty and our personal care products. They've been adapted over time in our manufacturing clean room facilities. But essentially, this is using the same technologies, and one of the strengths of Aptar has been leveraging technology from market to market to market. It just so happens that some of those markets have lower margin profiles. But if I can fill a factory manufacturing wise, and it is a very asset-intensive business, if I can sell a bag on valve to the consumer health care and nasal saline and at the same time, sell it on a sunscreen product in personal care, that makes a whole lot of sense to me. We can leverage the asset base. Technology, sometimes, we think something that starts in one segment, ends up in another segment and being more successful in that other segment. And again, we don't have a whole lot of time to go through it, but there's a whole host of overlapping technologies that are used across all 3 segments.

Okay. Thank you for that. And again, apologies about my line. Thank you all for participating today. I really appreciate you joining us again this year and hope to see you back next year.

Thanks, Debbie.

Great. Thanks, Debbie. Thanks everyone.