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

Good morning, everybody, and welcome to Day 4 of the JPMorgan Healthcare Conference. My name is Bhavana Balakrishnan, and I'm an associate in the Healthcare Investment Banking team. Thank you for joining us for the presentation of the AptarGroup. With us we have today is Stephan Tanda, who's the Chief Executive Officer; Bob Kuhn, who is the Chief Financial Officer; and Gael Touya, AptarGroup President. We'll have time at the end for questions. For now, over to you, Stephan.

All right. Thank you, Bhavana. Thanks for having us back this year, and welcome, everybody, in the room and online. I'd love to give you an update on our pharma business. You may not have heard of Aptar before, but you have a dozen of our products at home. I guarantee you. Anything from your nasal spray to your spray on suntan, to your upside down catch-up. But our largest business these days is pharma. And we serve the world's preeminent pharma company and global brands that you see up here. You see -- our origin is in Europe, that's why our sales, they are still 50%. Now many of our clients, of course, export their end products. So the end products are more like 1/3, 1/3, 1/3 between the Americas, Europe and Asia. It's, of course, beauty and pharma going a lot to Asia. Now we recently raised our targets on the back of very strong performance and especially a growing pipeline of our pharma business. So you see a target growth rate of 7% to 11% for our pharma business. We've actually been inside that range for the last decade and the business is accelerating double digits in recent quarters. And of course, that will flow through to the bottom line and to return on investment. On the right here, you see kind of the outlook over the next 5 years, which is basically solid growth, mid-single digits with a much faster growth rate on earnings quite simply. We've done a lot of work around reducing cost, increasing operating efficiencies across the company in all the businesses, and of course, the faster growth that pharma contributes as well. Now within that, we see our injectable business double with over the next 5 years. We've put massive investment into the injectable business, and it benefits from all the things, biotech that you're aware of, including serving the GLP-1 drugs. Now look at it another way, this is not an accident. We have intentionally shifted our capital allocation towards a faster-growing, higher-returning pharma business. So it has been grown initially organically in the company out of the technology base we had. And then in the last decade, we added 2 additional businesses in injectables and active materials, and I will unwrap that for you all. But today, clearly, pharma is by far the biggest value driver of the company. Now when you look at our intentional capital allocation, of course, we invest in our business, in R&D and capital. We do a lot of bolt-on M&A, small and midsize. And of course, we make sure that we return funds to shareholders. More than 50% of our -- if you want, discretionary capital, CapEx, M&A, of course, goes to the pharma business, and that is a growing ratio. Now, COVID has been a net negative for the company, actually for all the businesses, including pharma. And hindsight is very clear. If you stay indoors, if you wear masks, guess what, you're not going to have as many allergies, which is important for our business. You're not going to get the cold or the sniffles. So especially 2021 was a tough year for us with a lot of destocking and that lasted in '22, but '23, we've been back very, very strongly. And most importantly, throughout that period, we have been -- we have continued to invest in the company and the business. You see here a list of capital investments we've made, everything in white is for the pharma business. Additional capacity in injectable, additional capacity for the other businesses, geographic expansion and most of these facilities have come up onstream in recent time or are coming onstream and being validated through the end of next year. At the same time, we've improved our operating systems, the way we run the plants much higher efficiencies, better discipline, more sophisticated systems, a lot of AI in the operations. So both the capacity and the way to run them has improved. That's why we feel so comfortable. I'm not a big baseball guy, but I think the bases are loaded for Aptar. Now this is also showing the return of funds to shareholders. We're very proud of 30 years annually increasing dividend payments to shareholders. And of course, we keep an eye on the share count and regularly rebuy stock as well. Just last year we raised our dividend 8%. So for the whole company, this is kind of the value creation framework. So the top line growth based on growing attractive end users around the world, as you saw, it's a very global company, with very differentiated strong positioning in key end users. We are a technology leader. We own the intellectual property of our devices -- I will come back to that. We are an innovation leader. Clients come to us for what's next, how they can innovate the brand, how can they product life cycle, their drug products. And importantly, we're a sustainability leader in the industry. It's not something that came yesterday, that's been around for more than a decade. It's part of the core value of the company, and it's not to do good for the planet. It's really the future-proofed business to be an attractive employer and we're also doing good for the planet. And don't get me wrong, more than 95% of our energy comes from renewable resources and so on. Now we -- as I already mentioned, continuously intentionally evolve the portfolio. Pharma is the big growth driver for the company and we allocate capital accordingly. More recently, we have become much more serious about cost and efficiency. Given our European routes in many different European companies -- countries we historically have not streamlined, especially back office, support functions and learn from the different sites, and we drive that a lot harder including attacking our cost position in France, we're the largest employer in Normandy with over 6,000 people. So really determined cost effort and that is really paying off. And last not least, a strong balance sheet, significantly less than 2x leverage, which gives us the optionality of acquisitions, which we do regularly. And with that, we see the bottom line growing much faster than the top line, which is a significant shift from the COVID years, let me put it this way. So let's deep dive into our pharma businesses. As I mentioned already, strong intellectual property. You see here 4,500 patents. More than 80% of our revenue streams are protected either by patents or proprietary know-how or and/or strong regulatory files. So the revenues are extremely high longevity. Like many other pharma business, it's a pipeline business. Anything we do today in terms of new projects, you won't see in the P&L until 5 to 10 years later, but the pipeline is growing in value and quality, and that's why we feel confident about raising our targets. Now of course, we are regulated by the FDA according to different standards, 14 G&P facilities and the number of launches has been -- has grown very nicely over recent years. So where are we playing in this whole drug delivery space? Our core strength is really in respiratory. If it goes through the nose, after we'll deliver it. That's 9 out of 10 times, and let me put it this way. Of course, inhalation, respiratory health, then thermal delivery, eye care, we have very strong position. And then in the large oral and injectable drug delivery space, we have very small niches, but that we own, that we get back to, of course, injectables for all injected drugs and oral, I can come back to that. So looking at our business in another way, we have these proprietary drug delivery systems, mainly for respiratory. And then in the last decade, we had at first an injectable business, that was initially a family-owned business in Europe that we have modernized, expanded, put in the footprint in the U.S., has acquired a footprint in Asia and upgraded the technical capability that we at par was the market leader. And that business is primed for to double. And then the active material solutions business, which sounds very critical, but it's actually quite simple. Sync of an enclosed space and that enclosed space we can condition the environment. And in that space could be a test strip for diabetes, could be a single-dose drug like high-value HIV drug or a probiotic supplement. We can condition that space either absorbing things out of the environment or actually emitting compounds into the environment to sterilize or reduce bacterial load. So a very sophisticated business. You see some of the applications. Now in addition, over recent years, we have developed service businesses acquired, put together, and the digital health business that really allows us to embrace customers from the beginning of the drug development journey all the way through launch and patient onboarding, patient retention and so on. So this is a key slide to understand what we do. So first, we own the IP of our delivery devices. Let me say this again. We own the intellectual property of our delivery devices. We are not a CMO. There's nothing wrong with CMO business. I've been on the board of CMO business, but that's not what we do. We have a different business model. We design and own the IP of our devices. And then we have deep, deep regulatory expertise in these delivery methods that means that customers come to us very early and say, "Hey, how could we take this existing molecule or this new molecule and deliver it through the nose, inhalation, dermal and so on. In addition to that, already mentioned the injectable business. Great technical capability at par with the industry leader in prime for growth, the active film business and then the services. Overall, a great franchise that allows us to drive growth and profitability. And it's not just about the future. When you look over the past 10 years, that's been our track record, and we certainly see the business accelerating both from the top line and on the bottom line. Why? Because the pipeline is growing based on the capabilities that we offer for drug companies large and small. Here, we're offering you one new disclosure that in the first 9 months of last year, we set a record in terms of opportunities, one, and the value of opportunities added to the pipeline. The pipeline just keeps growing and growing. You see on the bottom, there are some nice launches in recent times. Of course, sadly in the U.S., opioid overdose is a big issue. We make the device for Narcan and the generic versions, depressions, J&J Spravato. Incidentally, both of these were started with small companies, helping them to get to the approval stage and then larger companies bought them and emerged in J&J in this case. Also new emergency treatments for seizures, for allergy, for hypoglycemia, all delivered through the nose. So what are some of the underlying growth drivers in our -- across our franchise? Number one, the discovery of the nasal delivery to cross the blood brain barrier. Of course, you've been around nasal sprays have been around for a long time for respiratory syndromes, but to deliver molecules to the brain efficiently and effectively and not having to go through the GI tract, that is a more recent phenomenon. And the pipeline based on the launches I talked about earlier on the success of those, the pipeline is filling with CNS drugs, central nervous system drugs delivered through the nose, number one. Number two, in our core franchise allergy, that some time ago, people thought, well, that's a mature category. That is really changing. You see one the allergy season expand and expand and many year-round sufferers. For whatever reasons, people are allergic to more and more compounds, and we see geographic growth. Of course, Europe and North America have been strong regions for allergy, but now Asia is powering additional growth in this field, which attracts people to launch new products, to launch combination products and ultimately, that drives growth. Thirdly, continued switch to over-the-counter. So you may wonder, why is this good for you? Most innovative pharma is not so keen on going over the counter and the price points that go with it. That really doesn't apply to us. Once our dispensing device is in the drug master file, it stays there. If the molecule goes generic, still needs our device to dispense -- the molecule goes -- if the product goes over the counter, it's still our device, nobody will go and requalify a spray pump to save a few panels if you have to go back and redo Phase III trials, or pharmacokinetic trial. So in many ways, all this work we invest in the pipeline once the product is in the market, the product is there for life and the returns that come with that. So continued switch with -- though this is good for us, creates additional distribution, creates additional adoption. And then last not least, of course, what you've heard here all week is the biotech wave continues to drive, growth of injectable drugs, mainly large molecules. And we participate in that through our injectable business, including supplying components for the different GLP-1 players. So one more level, let me deep dive quickly into [ pharma regulations ] I already talked about our proprietary dispensing device. As you see here some of the indications and some of the products biggest part of our pharma business. Injectable business, basically, you're talking stoppers, plungers, and needle shields. And here, you see the capacity investments we've been making just in the last few years, and they come on stream ultimately around the world, upgrading our high-value products. So our capacity is going up by 30%. And of course, the value of the products goes up much further. So you have additional mix enrichment in the portfolio. Most of that investment program, you see EUR 180 million in CapEx, EUR 65 million in acquisition we made last year, most of that will have run its course by the end of next year, where most of the capacity is being validated. Now active material, you see also some examples, Abbott Libre, a high-end HIV drug. Again, it's about conditioning the environment in an enclosed space. It's a very sophisticated business. We had some COVID tailwinds because we were one on the [ COVID test ], but underlying this business is growing very nicely and contributing greatly to the pharma business. Now a few words about the service businesses. So why do we have them? It's quite simple. You know more and more of innovation comes from small drug companies. We sometimes refer to them as 2 people in the molecule. They have an idea. They have a great idea and say, okay, we don't know how to get this formulated through the FDA and so on. And for years, we have been providing services in the nasal and inhalation space. But now we've also added services for injectable drugs, help with formulation, help with approval, and then help with patient onboarding with trainers, help with patient retention. So these services are really ensuring that we are from day 1 with the drug companies, they look to our expertise, making the drug druggable, ensuring the delivery and then onboarding patients, retaining patients. And that, of course, is a nice revenue stream. It's not comparable to our product revenue stream, but it ensures that during the pipeline work, we also have a good business. It also ensures that our devices are in the drug master file and then with that product for life. This is just a recent example of a project, relatively fast, 6 years. And you see here on the bottom, we really used everything from device and formulation development, analytical testing, patient insights, human factor study, regulatory support, life cycle management and then patient onboarding with trainers, with digital health solutions. That brings me to our digital health solutions business. Increasingly, of course, drug companies want a companion, a digital companion to the drug, either for compliance or for patient retention. We all know that from clinical trials, but now it's in the chronic disease management. And a couple of years ago, we bought the leader in this area of Voluntis and combine it with what we had in-house and it's really developing into a wonderful platform. We announced a nice deal with [ Celgene ], European drug company. You see here some of the others. More and more drug companies say, we need this digital capability, but is that really our business or do we look to outside providers and increasingly, they come to Aptar to help with that digital companion, again, for compliance for patient retention, for patient onboarding. And sometimes, the app is the medical device. Actually, our algorithms, our FDA and EMA approved as medical devices. It's not your no-offense taxi hailing app. Those are robust algorithms with all the rigor and protections that the FDA and the EMA requirement. So a very nice add-on. A few words about sustainability. Many, many awards you see here and certifications. Let me point out EcoVadis platinum. That means we're in the top 1% of freighted companies. That does not come easily. If you have weakened [indiscernible] to our sustainability report, very detailed in its eighth edition, all the things we do. I mentioned renewable resources, but it's, of course, landfill free, it's about taking care of the supply chain. CDPA and CDP supplier engagement leader. But also in terms of workforce, we rated by Forbes as, I think, #15 World's Top Female-Friendly Companies. Can you imagine that? We also rated consistently amongst the top 100 most responsible companies in the U.S. and also in France, where we're a big employer and in China. So why do we do this? Again, I mentioned future proof in the company, making sure we have the right to operate from society, but also being a very attractive employer for the next generation, being a talent magnet and retaining our talent. So we see sustainability as a competitive advantage. We drive circular solutions, mono-material products, products that can be recycled using recycled materials, of course, that was spearheaded by our consumer-facing businesses, but now it's coming into pharma, first into consumer health and increasingly also into injectable and prescription. Every young employee, also older employees want to work for a purpose-driven company, and it's very important for our culture for the DNA of who we are. So let me sum up with our value creation framework one more time. Solid top line growth driven by the attractive engine, which is very global around the world. Faster bottom line growth based on the efficiency measures we have taken and the operating leverage across the company. We are a technology leader. We own our IP. We evolve our portfolio towards the faster-growing, higher-returning pharma business. And with that drive higher returns, and our balance sheet is where solid, low leverage that gives us strategic optionality.