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

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Good afternoon, everyone. Thanks for joining us here. Gabe Hajde, Wells Fargo containers and packaging analyst. You're dialing to a virtual call and fireside chat with Bob Kuhn, Aptar's CFO; and Matt DellaMaria, Head of Investor Relations. Mr. Kuhn has served as the CFO since 2008. He's been with the company for over 25 years. So we'll start with a high level, very high-level view of Aptar and then go on right into Q&A. Gentlemen, thank you again for your participation in this year's event, particularly in a virtual format. And with that, I can pass it over to you, Bob.

Great. Thanks, Gabe. So I'm just going to give a very brief overview because I want to make sure we allow enough time for Q&A. But for those of you who are not familiar with us, I think this slide tries to capture the essence of who we are. So we are a leader in consumer dispensing and drug delivery technologies. We've been around for about 75 years. You can see in the lower left, we serve very attractive end markets. Markets from beauty, personal care, pharmaceutical markets like prescription, injectables, consumer health care. We have an active material solutions division also, which serves both our food safety and our Pharma segment as well. We really supply every major brand internationally, multinationally and regionally. These are just a small select few of them. In the middle there on the bottom, you see a little bit of our geographic sales, and these are sales from those regions. And you'll -- maybe something that jumps out is that you see a rather large 50% overweight in Europe. This is really more tied to where we're shipping our products to the customers who are filling the products, not necessarily indicating where the end consumption is consumed of the product. If you think of beauty products made in France, made in Paris, in particular, for fragrances, those are filled in Europe. So those are sold from our European sites to customers and then our customers will export the finished goods around the world. The same can be said for a lot of our pharmaceutical products, which are filled by the major pharma customers in Europe and then consumed around the world like the U.S. and places like that. Very heavy into R&D. So innovation has been at the cornerstone of our business really from the get-go. We spend about 3% of our revenue on R&D. So launching new and innovative products and helping brands differentiate the products on the shelves, bringing convenience, cleanliness to consumers is what we're all about. We have a very resilient product portfolio. You can see some examples here of some products. But really, we're all about providing the right technology for the right application. And if you think how -- in your own home, how products are used, you'll use a different type of technology depending on the product, whether that's a shampoo or conditioner or maybe a hairspray or a sun care product or a pharmaceutical product. So I guess with that, I'll turn it over to Gabe, and we can start the Q&A session.

Thanks, Bob. Particularly for highlighting the R&D aspect because that's where I wanted to start. And maybe in more particular pharma. You guys have really expanded that platform, both organically, kind of leveraging your existing and/or own developed technologies and through acquisition. Again, kind of including new or complementary technologies. So can you talk about kind of the uniqueness of Aptar from a manufacturing standpoint and how your R&D capabilities stand out maybe versus your competitors?

Sure. So if you look at the majority of our prescription and consumer health care products, those are all produced and manufactured in clean room environments. We've been in dedicated clean room environments really even going back to the late 80s when it wasn't even a requirement by our customers or the FDA or the regulatory bodies. So we really kind of set the bar and set the tone for the manufacturing process, and that includes full traceability of all components. Should there ever be, heaven forbid, a product recall on anything, so traceability, visual inspection, quality standards, all those things are really paramount to our manufacturing process. And then R&D, I can't really speak for our competition, but we have a very strong bench of PhD level engineers, scientists, medical professionals, people who understand the industry, understanding spray characteristics. As you mentioned, we've acquired some businesses over time like analytical labs, which help us to understand, and in many cases, even inform and train the regulatory bodies on the importance of spray pattern characteristics, right? And so all those have helped us in the development of next-generation products and what it takes for molecules to be more efficient and efficacious with the routes of delivery that the customers are looking for.

Perfect. Now this actually leads right into kind of developing these dispensing systems for molecules or drugs that are often not your own. Again, from the outside world, it appears very seamless. But internally, the process is more co-development, I would suspect. So again, can you kind of talk about maybe the moat that this gives you and the advantage for your company in the segment? Particularly in light of, again, some of these services that you guys are starting to develop or have developed in terms of kind of stage gating your customers through the approval process, maybe that aren't as familiar as you might be.

Sure. So maybe I'm going to start with we developed what I would consider platform technologies like inhalation devices, metered-dose inhaler valves, liquid nasal spray type products, powder-based nasal spray products. And then we begin to work with the customers really at the very early stages of their drug development. And at that point, they already have a real good idea of how that drug is going to be delivered, right? So we don't necessarily go in and influence a pharma company to say, "Hey, you should take that molecule and put it in a nasal spray format." Really, it's more that a -- drug companies are very well aware of our platform technologies and what they can do. But typically, at the developmental drug stage, they will already have decided the route of delivery. So let's just say, nasal sprays, for example. Now we take that platform technology of a nasal pump, but it is very specific to that drug, right? So how effective that drug is, is going to depend on the spray pattern, where it's absorbed through the lining of the nose and things like that. If it's a metered-dose inhaler valve, how it performs is really critical based on factors like how deep in the lungs do they want the medication to go. Is it the lower abdomen? Is it the upper abdomen? Those types of things. So we then -- each drug product really is, as you said, a co-development, right? And so when companies are going through that, they're not testing with multiple pharma co-suppliers, right? I mean that would be very costly and really inefficient for them. So the key is getting in early and working with the customer and developing it. And that's why the process is a very long sales process, right? I mean we've talked about it before that it can range sometimes as soon as 5 years to as long as 15 years in some cases. Between the time when we start working with the customer until it actually comes on the market. Now some of the investments we've made more, I would say, upstream like some of the analytical labs. And in particular, some of the services also are getting earlier in that drug development process, using different proprietary technologies to predict how clinical trials will come out before they even attempt them, right? So if you can get even earlier upstream in that process, give them some indication of what's the likelihood of that molecule being successful in that format, you just continue down that chain of development and you locked in at an earlier phase. So that's some of the way we work with the customers.

Okay. Well, I think from my perspective, that's unique to Aptar, so. The CSP Technologies acquisition, I think it's the largest that you guys have done in terms of purchase price at least. I think that the acquisition has done well since that time, and there's at least one test case you guys have talked about in terms of utilizing this the active technology for at-home test kits for COVID. But just maybe framing up the longer-term potential for that business, maybe other applications that you envision either stuff you can talk about, obviously, that you're working on. And then really, I guess, potential to maybe double that business similar to what you do with Stelmi and I don't know, 5- to 8-year period?

Yes. So certainly, we're very, very happy with the acquisition. And the performance has really surpassed even where we had thought we would be at this point, similar to the Stelmi injectables acquisition that you referred to. I personally believe that we're just scratching the surface of using that technology, and we're finding new ways to deploy that technology, right? And so for those of you not familiar, it's a 3-phase polymer, which essentially can -- I'll give you the simplest example, can be used as a moisture absorption property within a container. So we've all opened the bottle of aspirin or something like that, and you find that little sachet or that little desiccant puck, which is in there. Think about it in a more rigid sophisticated manner for products like diabetes test strips, where actual moisture absorption is really critical to the accuracy of the test strips, right? So think about it as a much more rigid and strict technology than a sachet or a puck. That has been -- and again, it's not just moisture. It can absorb oxygen. It can actually emit products as well. And you may remember that we actually did file for EUA Authorization to decontaminate masks. And we were again using our 3-phase polymer to emit a chlorine dioxide that would be contaminate masks. So again, we're learning more and more about this every day. We've developed now film applications for using these properties, these 3-phase properties, and that opens a whole new set of doors. Last year, we launched in Q1 an Activ-Blister formulation for Gilead's Descovy HIV product on the market. So for oral solid dose, for which we don't play today, it's a great alternative if you have a product that needs to pass stability trials with the FDA. So that's been exciting. We've moved into the COVID diagnostic realm. We've talked about on the last call, working on 2 projects in-home COVID test kits. In one case, protecting the test strips, much like we do diabetes vials and an another one actually using our film directly on the test strips for stability. So again, we're super excited about that. That, in particular, the diagnostic space is not new to us, but it is a very fast-growing one and it's a crowded space. But we do think that there's room for us to play in that category. But I could go on and on about things that we're exploring. But certainly, anything with antimicrobial properties today is front and center, whether it's food protection, whether it's cosmeceuticals. So we're seeing a lot of requests, really on a global basis, to see if that technology can be cost efficient for -- to solve various consumer problems. So if you go back to kind of the first slide we talked about, we're all about solving problems that customers have with their products. This just gives us a great weapon to deploy in certain areas. So we think we're only in the early stages of developing those technologies, and I'm sure we're going to hit on a few here in the coming years.

Okay. Last one, with maybe not only pharma overall, but you delivered kind of 21% growth in injectables for 2020. And again, obviously, the pandemic played a role in that, but also I think 2019 was somewhat of an easy comp. So I'm curious, just your thoughts more than medium to long-term growth prospects for that product line. You guys are investing, obviously, today, I think it's, what, $88 million in aggregate to expand capacity there. So just your thoughts there.

Matt, would you like to take that one?

Yes. I mean, I could start. You can certainly jump on. But you're right, Gabe, last year was a really strong year. This is our injectables country business, which is -- represents about 20% of our Pharma business segment. Here, we're making the rubber stoppers for vials, syringe plungers, syringe needle shields. And so with the onset of COVID, the global pandemic last year, and I'll back up a little bit, we're a smaller player in this market space. So we're probably the #3 player. West Pharmaceutical is the large dominant player in this space, and they have been so for many years. And then you have a company out of Europe, Detweiler, who is maybe a little bit bigger than we are, but we're a smaller part, maybe 10% of the market is ours. But what we benefited last year was from an incremental growth because of the pandemic, and we grew in the low 20, so let's say, mid- to low 20s in terms of organic growth in 2020. A couple of percentage points were price, and then about 1/3 of the remaining volume growth was what we call COVID related. And in 2020, that was actually parsed out incremental vaccines -- flu vaccines. So everybody who didn't get a flu vaccine actually got a line and get a flu vaccine because of the pandemic. And then unfortunately, because of the degree of hospitalizations, there was an awful lot of injected medicines happening, and we were getting that -- some of that business. So about 1/3 of that strong growth last year was COVID related. Now, roll the clock forward a little bit, and we saw at the end of last year and certainly in Q1 somewhat similar pattern that we were up 14% core growth, about 2 percentage points of that being priced, about 1/3 of the remaining growth being COVID related, but this time, the needle is tilted towards the vaccine distribution in terms of where we're seeing incremental COVID growth. And what do I mean by that? Well, we're supplying rubber stoppers for a variety of vaccines themselves, but also the diluent. So if you're familiar with, for example, Pfizer's vaccine, you need a vial vaccine, but you need a vial diluent where the professional is going to draw that out and mix that with the vaccine concentrate before distributing the vaccines. So we see that kind of steady state right now. I mean it's hard for us to predict the future. But with -- if you listen to what the CEOs of all the vaccine makers are talking about it, we're all going to need booster shots. And we don't know where the variants are going to take us. And we're going to need annual COVID vaccines for at least a while. So we don't see that necessarily going away anytime soon. Now it could migrate into pill form or we've seen an article in Wall Street Journal, a spray form. We'd love that in a nasal spray form. That's a little bit longer shot, nasal spray to get to market. And pill will probably take a little bit of time just because these are complex drugs, and RNA is a complex technology, and the easiest way to get that in the body right now is through injection. So that could happen, but we're well present. As Bob said, in the pill area, we have some really interesting active film that could prolong the life and stability of oral meds. And we certainly are the larger player in nasal delivery. So if that ever happened, we would certainly be well positioned for that.

Right. I guess maybe even your base business outside of COVID, some of the injectable drugs, and it seems like biologics is kind of the next phase. I mean that's probably beyond my paygrade in terms of what I'm an expert on, but just thinking about drug treatments overall that weaving them into your long-term forecast within kind of 6% to 10%. Is it at the high end, maybe just because, again, where some of the research is being done for drug treatment?

I wouldn't necessarily -- it's hard for us to say, Gabe, if that's going to be at the high end or not. We like 6% to 10%. I would tell you, it gives us a lot of confidence that this part of the business should be growing in that 6% to 10% in the near term -- near medium-term, and really a little bit ahead of that because of COVID. But you're right in that what we are hearing is that the mRNA knowledge that we all gained or the pharmacos gain because of COVID. mRNA, remember, wasn't created during COVID. It was around prior to COVID, but everything has been accelerated now with the learnings. And so what does that mean? It means that in the near future, we're going to have better cancer meds that are mRNA-based. You're going to have better rheumatoid meds that are mRNA-based. And I think another confidence point that 6% to 10% is the right growth for this even after COVID settles down is that Becton Dickinson, one of the largest, if not the largest syringe maker, has announced a while ago that they're putting in $1.2 billion in incremental capital over the next 4 years, specifically for their injectables business because of what's coming down the road, I mean, the first capacity that's coming online from Becton's big investments aren't coming online until 2023. So that tells us that probably the smarter syringe maker in the world understands what's coming on the other side of this, and that's a lot of good drugs, most likely an injectable form.

Got it. The other component of the question, too, in terms of longer-term targets. I mean, I think you guys had always maybe be a little bit nervous that Stelmi was going to bring down that profitability. But in fact, you guys I think have pretty much performed at the high end or maybe even above some quarters in terms of profitability. So can you say kind of what surprised you to the upside? And maybe if you see a risk of that coming down at all? Bob, I mean, I know it's difficult to predict quarter-to-quarter, but just sustainability of the margin profile in Pharma.

So as a reminder, I mean, our range for profitability is 32% to 36%. And you're right, we've been at the upper end of that range for a while. The injectables business and the active material science solutions division do have typically lower margin profiles than our prescription and our consumer health care division. I would say we're working on both of those improving those margins in each of those 2 divisions. So with some of the newer applications, for example, in the CSP active material side, some of those newer film applications come with some slightly better margins. On the injectable side that Matt said, the coated offerings are much higher value-added play. So we're optimistic that we can help improve the margins on both of those. But I would say we've always looked at this as a long-term business, right? And we're always investing in new technologies in R&D. We've talked a lot about recently investing in digital therapeutics, digital health, right? And a lot of those investments are start-ups. So we're going to have to invest in those over the next several years to develop some of those digital therapeutics, which we think is really going to be that next step. And certainly, COVID has proved that out with virtual doctors visits and the like. So now if you can start connecting the medication via a platform that's communicated directly to the doctor, that's kind of the next leg. So the mix will play a role in the overall margins. And again, us continuing to develop new technologies for the long term, but we're still very comfortable with the 32% to 36% range. But I would say that's how we look at it is continuing to invest in the business, continuing to try to improve margins in our existing business and, of course, mix is always going to play some role in a particular quarter.

All right. Thanks. In Beauty + Home, switching gears, obviously, COVID had a pretty big set back in 2020, let's make no mistake. But underlying kind of macro trends that are -- that's kind of driving long-term demand and maybe kind of marry this up with some short-term kind of recovery that you're seeing in some of the China, if you will, or Southeast Asian countries, you still feel good about that 4% to 7% long-term growth rate. Does it maybe come down a little bit towards the lower end because of at home work? Just curious kind of how you're thinking about that. And then in terms of profitability, 2-part question kind of asked on the call, but just your confidence level in delivering that $80 million of restructuring savings and then restoring that mid-teens margin profile?

So some of the trends in the Beauty + Home space is certainly around e-commerce, right? So if you think of specifically the beauty industry or the fragrance market or even skincare, prestige skin care products, those are well suited for e-commerce because those already have tertiary packaging with them, right? You don't buy a fragrance in a store without a box around it, right? So I do think that it's not necessarily hurt by e-commerce. What you miss a lot with the travel side of things is some of those unique distribution channels like duty free, which tends to be a little bit more of an impulse buy as you're walking through the airport. The beauty customers have a captive audience in the airports, right, for international travel that people are -- have to pass by the duty free to get to their gates. They may have extra currency in their pocket. They see big broad-based displays of new product launches that they may not have in their own country. So that's one unique factor in the beauty industry that is suppressed right now because of the lack of international travel. And then as far as the margin profile and the growth profile, I do believe that the 4% to 7% sales growth is the appropriate target for that industry. And when you see the exponential growth that's coming from Asia, right, pre-pandemic and now kind of post-pandemic, it's very quickly becoming the region -- they'll very soon become the largest consumer society of beauty products, right? Color cosmetics, pre-pandemic, we were seeing 20% to 25% growth annually for the last several years. Now again, that's not a category that we have a significant presence in, but we're building that. And we think that, that's going to come back. Skin care globally is doing well, right? People want to take care of their skin. A lot of cosmeceutical-type-based products that are out there. So again, we see that as a very important growing category. So I think 4% to 7% makes...

3% to 6%, sorry, just...

Yes, 4% to 7% for the company, and 3% to 6% for...

Yes, exactly, just depending on which. 4% to 7% is Aptar's growth rate, just to be clear. 3% to 6% is the Beauty + Home.

Yes. Thanks for clarifying that, Matt. And then in terms of the profitability, we are seeing the positives of the transformation within the personal care facilities, right? So we can see the margins improving which are the result of more efficient manufacturing processes, cost takeouts that we've had and volume pull throughs, to be honest with you. So a lot of our factors are technology based. And so we do have dedicated beauty factories that are just underutilized at this moment. So that's really been the biggest drag recently in the last 18 months on profitability. But again, I see what we've done structurally to the business, I see what we've done in the factories. And I think we just need that beauty market to come back and get above the breakeven point in certain categories.

Looks like we're coming close to time. Just real quick on capital allocation. You recently bumped the dividend. Where would you kind of highlight your key priorities for capital? I mean, again, you've owned CapEx even this year as well. Really still internally focused or...

Yes. So our highest return investment, to be honest with you, is investing in ourselves, right? It's industrializing that innovation kind of going full circle here when we talked about R&D and the significant amount we spent on R&D. So industrializing new technologies, we believe is really the highest return that we have, investing inorganically in bridging capability gaps from a technology perspective is also very important to us. And I think you've seen us be a little bit more acquisitive over the years. You talked about the dividend, so paying an increased dividend over the last 28 years is critical. And then lastly, I would say that the buffer for us is around share repurchases. So we've not repurchased a lot of shares in the past couple of years. And that's partly because of what we're looking at in those first 2 categories about industrializing new technologies or potentially acquiring companies that bridge those gaps.

Great. Thank you guys for the time.

Great. Thanks, Gabe. Thanks, everyone.

Thanks, Gabe. Thanks, everyone.