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

Good afternoon, everyone. Thank you for joining us today. On behalf of the entire JPMorgan team, it is my pleasure to introduce Stephan Tanda, President and CEO of AptarGroup; Bob Kuhn, CFO AptarGroup; and Gael Touya, President of Aptar Pharma. Just as a friendly reminder, you may submit questions through the "ask a q" feature list under the presentation. Thank you again for your participation, and I'll now hand it off to Stephan. Thanks again.

Thank you, [ Amy ]. It's wonderful to be here with you. We have a slide deck that accompanies our remarks. And I would ask you to take notice of the forward-looking statements notice also on our website. I'm jumping to Slide 4. This is the first time we present at this conference, even though our company is more than 75 years old. It really started after World War II in the beauty space. But over more -- the last 30 years or so, we built a very powerful Pharma business inside of Aptar, and we will focus most of our remarks on that. But next to the Pharma business, we have a Beauty + Home business focusing on consumers, and the Food + Beverage business. But the bulk of our EBITDA these days comes from Pharma. You see on Slide 5, in this pandemic, of course, patients and consumers have been relying on our solutions, whether it's treating chronic diseases like allergic rhinitis or asthma or COPD, in addition to emergency treatments like Narcan as well as, of course, we are participating in the supply chain for vaccines and injectable drugs in general, and we'll get more into that. In the Beauty + Home space, of course, our beauty business has declined a bit. But as you can imagine, [indiscernible] cleaning and sanitizing has been booming. And as an anecdote, that Heinz ketchup you have at home, we were the people who are allowed Heinz to put the ketchup upside down in addition to the on-the-go beverages and other food products. Jumping to Slide 6 then. There, you see breakdown of our 3 segments. So Pharma is about 40% of revenue but 70% of EBITDA and increasing; Beauty + Home business, about 45% of revenue, 20% of EBITDA, depressed during this pandemic period but on the rebound; and then Food + Beverage is the junior partner. So you may ask what all of these businesses in common, we really leverage the core industrial technologies, the infrastructure, the material science across all 3 businesses. The kind of unit operations we're doing is precision injection molding, high-speed assembly of devices, many hundred parts per minutes and special metal processing. And at the end of the day, we do that in a way that is really in a sustainable, good for the world where we are one of the, if not the, sustainability leaders in our industry. And all of these end users have very reliable growth that's underpinned by all the macro trends that you're very much aware of growing, urbanizing population, aging population, increased focus on connectivity, connected devices and so on. Now switching on Slide 7, which is really the key slide where we introduce our Pharma business to you. And we are humble from a culture point of view, but we really believe we have a best-in-class health care business. And why is that? You see here the numbers, about $1.2 billion sales, 35% EBITDA margin. It's been there for quite some time. It is because we rely on our own IP. You see 750 patent families. Even beyond patents, a lot of trade secrets, know-how, and that has led to compounded growth over the last 10 years of 7.5%, and we operate in our 14 facilities. So what we really do, we make proprietary, if you want, niche drug delivery devices that are focused on the nasal route. That's really our core strengths, pulmonary, so inhalers, and we are building a nice ophthalmic business. We have guided the market for some time on consistent top line growth, 6% to 10%, and you see we've averaged it quite nicely in the middle of that range over the last 10 years. EBITDA margin, 32% to 36%. Also there, we've been quite in that range for some time. And we really drive growth by, one, being in reliable category around chronic disease management as well as emergency response. Those don't seem like the highest growth categories, but we drive additional growth by converting other delivery routes like oral solid dose or, in some cases, injection, like in the case of naloxone or on some central nervous system drugs to the nasal and inhalation route. So we get additional growth from this conversion, and that really drives our business. The key indications already mentioned, allergic rhinitis, congestion, asthma, COPD, diabetes and increasingly, central nervous system and pain. We've built this business and had developed over 3 decades of experience with regulators around the world, particular strength in Europe, the U.S., and increasingly in China. And we have also, based on an acquisition we did in 2012, developed a position in the injectable business, as we call it, which is really elastomeric components, whether it's stoppers for vials or plungers or needle shields for anything that is injected, whether that's large biotech molecules, whether it's small molecules or vaccines, and I'm sure some of your questions will be about vaccines. Lastly, also through acquisition, about 2 years ago, we bought a business that's focused on diabetes where, through material science, we are able to modify and condition the atmosphere in which diabetes test strips are capped or other sensors, and we'll be covering that business as well. So overall, already a nicely diversified business with best-in-class profitability, solid growth and a 3-decade track record, clearly now of a size that is very meaningful and critical for Aptar. And with that, I hand it over to the guy who's running it, Gael Touya.

Thank you very much, Stephan. Hello, everyone. I will move to Slide 9, and I will just cover some of the very few points here. So one, to tell you that we are working with all large customers, biotech, branded generics and even [ 2 main 1 ] molecules with many start-ups. Two, as Stephan mentioned, we are not at all a contract manufacturer. Everything we develop, we manufacture and we commercialize is built with our intellectual property, and we bring additional layers of protections to our customers. Three, we are supporting our customers basically from -- on top of our drug-delivery devices solutions from formulations to analytical and regulatory support, even to patient onboarding solutions. Last, we are having over 3 decades of strong, strong connections with different regulatory bodies in different regions with a long-term track record for either NDAs, for instance. So turning to next slide, Slide 10. I mean, we are a global leader in core application fields and delivery routes. For example, in nasal, with our pumps for allergy rhinitis, CNS or central nervous system or pen, nasal [indiscernible] cough and cold solutions or nasal saline solutions. In pulmonary, leveraging our inhalation pMDI product for asthma or COPD, and some accessories around dose counter BAI-type solutions. And last, in the ophthalmic space, where basically we are supporting the market basically with preservative-free multidose solutions. Turning to the next slide. On top of growing our business in our core application field, we are developing a nice pipeline of product and product conversions around repurposing drug, around conversion to nasal drug delivery format. And the best example that we can share with you is really telling you that our device is the one supporting the success of Narcan. Slide 12, you see additional examples of a successful story is converting basically to a new delivery format. Starting from the left to right, I will name a Janssen product for severe depression treatments, SPRAVATO, that has been launched in 2019 as a breakthrough therapies. In the center of the 3 examples, you've got Eli Lilly for glucagon, that's a by-dose powder, by-dose dispensing solution. And the yellow part is an active packaging, protecting basically our drug-delivery devices in order to get the integrity of the formulations being a powder-based formulation. On the right side, you've got 2 examples. UCB on their release for epileptic seizure treatments using also our Unidose technical platform. Moving to Slide 13. I mean, we are also growing since 2012 in the injectable space through elastomeric components such as, I would say, for preservative-free -- sorry, pre-filled syringes, PFS, plungers or needle shield protections and also for vial with stoppers. We are investing a lot in our capacity from a worldwide perspective, and I can say we are pretty active in the COVID-19 vaccine supply chain. West is obviously the big players in that market, just as we are the large player in the nasal pulmonary and ophthalmic drug-delivery devices support. Turning to next slide. We are expanding defensive moat, our moat with a broader pharma services platform. So once again, in our core right to play market application fields, from formulation support to analytical regulatory, drug delivery solutions, but also onboarding patient solutions with Noble on the right side, basically we are supporting our customers to, I would say, de-risk and accelerate their drug development program. Slide 15. In addition, we are building our digital capabilities in our niche market. So we supply add-on connected sensors to our devices, but also app and platform. We've made the key acquisitions and partnerships in the recent years. We acquired the assets of Cohero being a digital platform for the asthma and COPD market. We've got business position, equity position with Kali Care being a digital platform for clinics, for the eye care treatment. And we've got business positions in India with a company called Navia. And in China, with a company called Sonmol for the asthma and COPD market. And interesting also to notice that in the first half of 2020, we've [ gone ] commercial in India with a large generic company for supplying not only the inhalator, I mean, the drug delivery solutions, but also the add-on devices, the app and the platform in order to connect patients to HCPs for a better adherence through remote patient monitoring. Slide 16 will give you a quick look of our results for the first 9 months. So reported sales are up 11%; organic, up 8%, so right in the middle of our long-term target from 6% to 10% and delivering a strong margin, being in the 30% EBITDA level. Now I will turn over to Bob who will speak briefly about our active material solutions business, which we acquired back in 2018. Bob?

Thank you, Gael, and good afternoon, everyone. I'm going to start on Page 18, where we can briefly see on the left-hand side of the page that the active polymer technology really begins with combining a base polymer, in most cases, polypropylene with a channeling agent followed by adding an active ingredient. This 3-phase polymer technology allows us to create molded plastic components or products that exhibit active properties. In most cases, these active properties can either extend shelf life, control moisture, oxygen, odors or, in some cases, even emit chemicals as well. The largest example of this is the Activ-Vial, which is used to store diabetes test strips or even used for containing probiotic capsules and pills. In both cases, a desiccant sleeve molded directly inside of the vial can be formulated to precise standards, enabling the integrity of the moisture-free nature of the test strips in this example no matter how many times the vial is open or left open and reclosed. Turning to Page 19. You can now see how this 3-phase technology can also be used in an Activ-Film product like the Activ-Blister product shown here, which protects the integrity and the shelf life of Gilead's DESCOVY HIV capsules. This Activ-Film technology is enabling us to enter new spaces every day and even using it as a component of some high-value implantable devices. On the next page, or Page 20, you can see an example of how we have used this 3-phase technology to emit chlorine dioxide into a sealed plastic bag after having added moisture to the Activ-Film strip. We developed this concept early on during the pandemic last year as a means of disinfecting N95 masks for health care workers when they were in short supply. We filed for EUA approval and are awaiting confirmation, but this is an example of how we can use active material solutions to solve some of the problems we and our customers encounter today. Now turning to the Aptar consolidated financials for 2020. The pandemic has had different impacts on the various markets that we serve. And on this slide, you can see how reported and core sales have been affected by the pandemic, noting that the lowest quarter was in Q2 with a gradual recovery in Q3, and we've -- we're expecting to sequentially improve in Q4 as well. As we had predicted at the outset, the beauty market, which is our most discretionary market, has suffered the biggest headwind from the pandemic as the shelter-in-place and the reduced travel has reduced significantly people using and buying some of our prestige fragrance products in classical retail and international duty free shops. In addition, our on-the-go beverage also suffered as gyms and on-the-go lifestyles where our products are primarily consumed were also negatively impacted. As Stephan mentioned, offsetting that was a sharp increase in personal care products like hand sanitizers and liquid soap and moisturizers as well as the increase in some of the use of injectable components and a very strong surge this year in probiotics usage. The next 2 slides are included here just for reference to show you our 9-month year-to-date performance and some comments to help explain. Lastly, I'd like to turn to Slide 25 where you can see on the right-hand side of the page our long-term consolidated targets and how we've done through the first 9 months of this year, how we performed in 2019 and for the prior 3-year average. As a point of reference, our long-term core sales growth target on a consolidated basis is 4% to 7%. Our EBITDA sales percentage target is 20% to 22%, and our ROIC is 13% to 15%, while our dividend payout ratio is 30% to 40%. All targets have been achieved over the prior 3-year average. And finally, our leverage ratio was 1 to 3x. And as you can see, we are comfortably in the middle of that range, giving us a lot of flexibility for growth. And with that, I'd like to turn the presentation back to Stephan for some closing remarks. Stephan?

Very good. Thank you, Bob. So I'm jumping to Slide 26. This is a key takeaway. Clearly, we have built a business that is highly differentiated in large but still niche markets. We've built a leading position that is built on decades of experience based on the proprietary nature of our devices, and that's really driven the growth and profitability of this business. And we are now expanding that moat with wrapping services and the digital platform around those devices and deepening that moat. So you see, with that, we've been able to get consistent best-in-class growth in margins, being above the 35% level for the last 5 years. And we see a very strong future for this business with a strong pipeline makeup. If we zoom out to the total company on Page 27. Obviously, we serve a broad set of end users, all of which are reliably growing. In that broad set of end users, clearly, health care is a very leading franchises -- a very leading franchise. But also with that come some nice positions, leading positions in beauty and food dispensing solution industry. Very much technology, IP-driven and a strong balance sheet. With that strong balance sheet, we've been paying a rising dividend every year for our public life over the last 27 years. And of course, we keep investing in the growth of our business both organically and inorganically. And with that, we'd like to turn it over to your questions.

So it looks like we have a couple of questions coming in looking at the group chat. So can you comment on the -- your participation in the recent pandemic as it relates to your injectables business? What type of growth are you seeing? And do you think this will continue beyond, say, 2021?

So you want me to take that one, Stephan?

Go ahead. Okay.

Okay. So if you look at the performance of our injectable divisions, we are in the mid-20s. And I would say that COVID-related, either pure vaccines, but also emergency treatment anesthetic-type product, but also regarding the flu vaccines, I mean, COVID-19-related is 1/3 of our injectable division growth, I will say. And yes, we see this continuing for 2021. And I will just say that we are growing in line with our market share, and we are pretty, pretty active in the overall COVID-19 supply chain.

And there's another one that's a follow-on to that, which is, "Are you able to handle existing demand related to COVID-19 demand with your injectables business or are you needed to invest in additional capacity?"

No. We -- that's a business we have been investing for years, and we are keeping investing. So we've got a pretty clear investment for capacity ramp-up that came into motion that help us to sustain a mid-20s growth that we are posting so far, and we are keeping -- continuing investing and putting capacity in order to make sure that from a safety of supply perspective, our customers will have a reliable partner.

And you've mentioned on some recent calls that you are participating in current COVID vaccine activity. Could you comment on that? And is that currently happening? Or is that more for the future? And what does that really mean when you mention dual sourcing?

Well, one of the key lessons from the COVID-19 and key feedback from the customers have been really around the safety of supply and looking at alternative source of supply and alternative partners. And that's where we have been on their test with many customers, and we are supplying actively as we speak, I mean, through directly [ pharmacos ] but also CMOs in order to make sure that the overall supply chain is robust enough. And we are in full initiation of the mass vaccination campaign all over the world, and we are pretty much active there.

So maybe just to add, zooming out a little bit. Clearly, our business in the injectable space has been a distant -- a smaller business compared to West's, and customers were not looking often for large molecules or projects to our capability. But now this whole COVID-driven qualification of all possible and potential supply chain partners has really led to the -- all the players in this industry recognizing, hey, wow, Aptar's technical capabilities are equivalent to West's. And that really bodes well, not only for our supply position in COVID vaccines, which is very well placed, but also getting much more traction on future projects around biotech, biologic, biosimilar projects in addition to continued strength in not only COVID vaccine, but any other injected treatments and vaccines.

So I think that addressed. We had another one come in on multisourcing for injectables pertaining to vaccines. Is this likely? Or will only big pharma companies use only a primary supplier? So I think the answer that you've put forth is, yes, co-supplying is happening. It is happening with the big pharma companies right now, and it will happen in the future.

Correct.

And I don't see any other questions coming in, in the group chat. So with that, we could wrap it up.

Very good. Well, thanks for joining us today, and we look forward to have follow-up discussions.