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

Good afternoon. I am Dan Rizzo with Jefferies Equity Research. Up next, we have Aptar Group. And today with us today, we have CEO, Stephan Tanda; CFO, Vanessa Kanu; Gael Touya, who is Aptar Pharma President; and Mary Skafidas, who is SVP of Investor Relations. We're going to have a quick presentation about 15, 20 minutes. And afterwards, there will be time for questions. So with that, I'll turn it over to Stephan for the presentation.

Thank you, Dan, and good afternoon, everybody. I got the great energetic after lunch hour. So welcome to Aptar in 25 minutes. For those of you not familiar with the company, we've been around for about 80 years, public for 35 years. And today, pharma is really the driving force of our company with almost 70% of EBITDA. And the Pharma business is really all about proprietary drug delivery devices, predominantly drug delivery through the nose or inhalation, but also ophthalmic and dermal and we'll spend quite some time on it. We also have a beauty business and the closure business. So broadly serve demographically advantaged end users, all the things you would think about, aging population, health and wellness and the drug application we serve are predominantly chronic disease treatment like asthma, COPD, allergic rhinitis, medicines that people take every day. We report out in 3 reporting segments, if you want the verticals here, but we manage the company really by technology platforms that you see here. Fundamentally, the core industrial processes that we execute are the same across the company, precision injection molding followed by high-speed automated assembly, I think hundreds of parts per minute, followed by automated AI-assisted quality control. We practice that across the whole company. But as I said, we report out in the segments. Now -- we own the intellectual property of everything we produce. So we're not a service provider. We're not a service manufacturer, but we create and own the IP of the devices, obviously, with deep pharma regulatory expertise. We also produce life-saving drugs that -- in medicines that need to work to a 99.999% reliability standard. And that's really what makes us the partner of choice for many early-stage drug development activities. When you look at the performance of the Pharma business, top line growth in the 7% to 11% the last couple of years, 8%, 3 years on core sales on average, adjusted EBITDA growth 26%, pharma profitability is in the 32% to 36% EBITDA range. We focused a lot on productivity in recent years, driving EPS growth to almost 50%, strong cash generation and dividend. We've paid dividends for the increasing -- annually increasing dividends for the last 32 years. Now when it comes to capital deployment, we really obviously preferentially deploy capital towards our Pharma business because it's the highest returning, the most rapidly growing and addressing the largest addressable market, followed by beauty and closures. Over the last 7 years, you see here we returned $8 billion in dividends, $6 billion in share repurchases, about $1.1 billion acquisition and the balance in CapEx, again, preferentially towards the Pharma business. Here, you see our dividend track record, 32 years of annually increasing dividend. Certainly something we take very, very seriously. And we just last quarter announced another dividend increase of 7% payout ratio of 30% to 40%. We were currently at the lower end of that payout ratio despite the increase. Now we are in Europe, so we talk more about sustainability. We're very proud of our sustainability track record. We are the trailblazer in sustainability in our industry. Q1 both hard and soft recognitions here, EcoVadis Platinum, that means you're in the top 1% since 2021. CDP A List for a number of years, but also more soft things like named amongst the Top Companies For Women by Forbes, Most Sustainable Companies by Time Magazine, Barron's Top 100 Most Sustainable Companies, Newsweek and so on. And the same in France by Le Point or in China. So we take not only what we do very seriously, but how we do it and our people are highly committed to the company. We've become an academy company for our industry that makes our people highly sought after, but also means that we are able to recruit above our weight class, if you want, because not only what we do, but how we go about doing the business. Now let's deep dive into what you're most interested in, our Pharma business. I mentioned the proprietary drug delivery systems is the core engine of our profit growth. That business was built organically out of our Beauty business. So when you think about a high-end fragrance pump, if you reconfigure that, you get a nasal spray. If you think about an aerosol dispensing system, if you shrink that down, you get an inhaler. In fact, our first pharma products were made in Beauty factories 40 years ago until we started to make bespoke pharma capacity investments. And today, it is the profit engine. Now we bought additional businesses. First, injectable solutions in 2012 was a privately held French company called Stelmi. We modernized it, upgraded the technology that today -- where today, it is equal to West's technology and expanded capacity in the United States, in Europe and also added capacity in Asia. And then in 2018, we bought Active Material business that really allows us to protect drugs, protect sensing systems, for example, we're in diabetes test strips, but also in flash glucose monitors like Abbott's Libre and some of the consumer-related products. Again, it is the combination of having the intellectual property being in various indications that are chronic disease related, which means you need the drugs every day. And more and more, the nose has been discovered as a preferred drug delivery route. It used to be you just use the nose for treatment of the sniffles or the congestion or allergic rhinitis. And today, of course, it is used increasingly for total body treatment, getting drugs into the bloodstream. It started out with Narcan or using -- delivering naloxone to reverse opioid overdoses, then came SPRAVATO for antidepressant treatment. And today, our pipeline is full with things that address the cardiovascular system. For example, recently, [ AVMI ] to treat edema -- tachycardia is right next to it. We have things in the pipeline to treat neurodegenerative diseases and also deliver larger molecules and peptides through the nose. That all is enabled by our regulatory expertise. We work with pharma companies from early stage to get a combination medicine approved. And then once the approval is achieved to stay with them for the life of the drug. In the respiratory dermal eye care spaces, we have very high market shares. Of course, in injectables and orals, we have plenty of growth opportunities. And in injectables, I already mentioned, we are on things like the GLP-1 auto-injectors. In oral, particularly for sensitive drugs that need to be in a protected environment, the blister, think of it as a protected environment. And within that blister, we can influence the atmosphere, whether it's reduce oxygen content, reduce moisture, CO2 or emit products like chlorine dioxide to preserve a medication or a food product. When you look at our track record, we grew the Pharma business by 8% over the last decade and frankly, significantly also the previous decade and also EBITDA. In more recent years, we've accelerated our EBITDA growth just because we push more and more into the proprietary drug delivery side of things. We've started to disclose the pipeline value and number of opportunities, and they all head in the right direction. Of course, there was a bit of a bump during COVID time. But fundamentally, we're very excited about our pipeline and the pipeline adds to the base revenue base. And if you don't take anything else away from this presentation, it's the following. We work with the development partners, as I said, for a decade to create an approved combination medicine. What is an approved combination medicine, it's the API, it's the formulation and it's our dispensing device. That is what is approved. That is what is captured in the drug master file. Once the API goes off patent, it becomes a generic medication, it's still our dispensing device that is required for that combination medicine. And if the product goes over the counter, same thing. So we actually make the same, sometimes increasing margin as we go through the stages of a drug. That means we have a perpetual revenue stream, perpetually growing revenue stream for these drugs. And then the pipeline adds on top of it. I don't know any other Pharma business that works like that where you have that profitability level, and that's what's behind the magic of our Pharma business. As I mentioned, nose to brain has been discovered as not just local drug delivery vehicle, but really for all kinds of therapeutic areas. This is probably the most -- second most important slide to take away. It's all the areas where we have projects in the pipeline from neural disorder, neurodegeneration, mental health, metabolism up into including GLP-1 delivery through the nose, but also vaccines and cardiovascular. So maybe bring a little fun in the conversation, one of our investors says, we've known that the nose is a great drug delivery vehicle for decades. Finally, pharma industry is catching up to that. It is the route from the nose to the brain that works the quickest. So no need to go through the GI tract, overdose dramatically just to get a few molecules into the brain. The nose is a much quicker way to go there. A few words about our other businesses. The Beauty business is a world leader in the fragrance and skin care area, very much grew up in Europe, but now it's a global business. This is sales by region, but of course, what we sell in Europe ends up in the luxury fragrance products that you pick up in the duty-free store when you leave here, please, start at 200 pounds and up or premium skin care products. We've invested a lot in operational efficiency, increasing margins in the renovation of the Beauty business. And today, it is a much more competitive business. And as volume increase, profitability will increase further. Our Closures business, for those who don't know, we were the people that allowed Kraft Heinz to put the ketchup upside down because of a unique valve that keeps things clean. And after that came sour cream and now it's Procter & Gamble's dish soap category that has been changed. So changing categories to formats that use our products is really the driving force behind closures. This conversion of driving categories, whether it's from allergy bill to nasal spray, from injected naloxone to nasal naloxone or from sour cream to sour cream that sends upside down. This conversion is really what's driving growth in our markets. In addition to that, of course, we have regional growth and all the other levers to drive profitability. So with that, we have hit a Narcan pothole at the moment that has pulled our stock price down. But when we take Narcan aside, everything else in the Pharma business is working very well. Injectable business is hitting on all cylinders, also fueled by GLP-1. We are the innovation leader in the industry and have a very strong balance sheet that not only allows us to pay dividends, buy back more shares, especially at the moment, but also retain our strategic optionality. And with that, I submit myself to your questions, Dan.

Okay. So if anybody has a question in the audience, please raise your hand. But for now, what I just want to kind of start with, one of the big exciting growth drivers for you guys is the injectables business. You mentioned GLP-1. But if we were to look out 5 years from now, how would the injectables business say compared to maybe nasal delivery, I mean, do you see it being comparable? Or do you see nasal delivery still outpacing it for the next 5 years? Or how should we think about it?

Yes. Let me start out and then Gael, please jump in. Look, the relative size is still quite different. The nasal and proprietary drug delivery business in general is by far bigger as a business and more profitable. And with all the things that you saw in the pipeline, we continue to see that as being the locomotive that pills our pharma business. We're very proud of our injectable business. Right now, it's 17% of pharma, and -- with being technologically equivalent to West but driving a different business model, we see that business continue to grow very nicely. And of course, GLP-1 is turbocharging it, probably will become 20% of injectables down the road, maybe even more, but other parts of injectable pulling as well. But Gael, why don't you?

Yes. You know that segment, the injectable segment is the one growing way faster than the other segment. Most of the development are for an injectable form of delivery. So obviously, I mean, if we were to look at 50 years down the road, I mean, the growth rate will be nicer for -- this being said, I mean, there's a lot of drug repurposing program happening right now, and this is what we see in our pipeline. And there, we obviously extract slightly more value because we control the dose. I mean we deliver the full combination product offering, and you don't want to overdose, underdose. So that's where we are positioned.

And if we think about GLP-1 and Annex-1 compliance, I mean they are 2 separate issues, but when do you see the sales peaking? Is it like a 3-year trajectory upwards before it kind of flattens out for -- I mean, is each different? How should we think about it over the next 2 to 5 years or 10 years?

Yes. I wouldn't think about this in peak obesity is probably the ultimate chronic disease. It's like being drug addict and having drugs around you every day and part of which you have to take. So I don't see a peak to GLP-1 sales. Now there will be a different mix of auto-injectors, pen, oral formats, plus you can't go spend a week without a new indication being called out, whether it's dependence management, whether it's cardiovascular benefits and so on. So this is more about what is the trajectory of the growth rate.

And for the Annex-1 compliances, I mean, how should we think about that?

Yes. We've got a nice pipeline right now. I mean -- so customers are coming with Aptar and they need to be fully compliant with, and this is part of our investment. What we have done in the last year is not only to develop new technology capacity around the world, but also being in line with the Annex-1 to be fully compliant. So we see a nice pipeline. And I think that's going to be -- that's going to be an interesting, I would say, growth driver for Pharma injectable.

Yes. Again, there also, I wouldn't see it as a peak. Once you know or practicing a better way of doing things, meaning a safer way, more sterile way, there's no reason to go back. .

So we think about what you've done over the past few years is going to build out 4 different things and you kind of updated your R&D facilities, I believe, both in the U.S. and in Europe. I was wondering if there's a need for more CapEx spend in the coming years to meet the potential growth from your different products. Or if you think you have enough capacity to meet what's coming?

Yes. So our CapEx comes really in 2 forms. One is kind of to build large, sometimes I call them disrespectfully boxes, large new sites. So we just built a state-of-the-art large site in China where we hadn't really invested in new facilities since the mid-'90s. We've built a brand-new facility for injectables in Normandy and one for beauty in France in the [ Verneuil ] region. We don't see any of those large investments coming up in the coming years. And then comes the second part, which is really additional equipment, additional capacity in the buildings or adding another wing to a building like we've done in Congress over time to build out facilities. But those are much smaller investments. So our largest capital investment this year was $5 million or so. So logical increment for us is $2 million to $3 million. So there's plenty of space to create capacity. And we have 50 sites around the world. There's no need to build another site. We shut down sites, we make acquisitions, then we add some sites. But other than that, for the next few years, we see capital expenditure more to be steady state. And as Vanessa said at the Capital Markets Day is for the consumer-facing business, it's kind of mid-single digits of revenue plus in for pharma, it's kind of more high single digit, low double digit depending on the year. So CapEx should be pretty conservative in the coming years.

And then you jumped into -- but you augmented your Pharma business by one, I think you did M&A in injectables in 2012, then you got into active ingredients in 2018 or so. I was wondering if there's another subsegment that might be interesting, too, that you're not in? I mean -- or how you're addressing that.

Yes. When we look at acquisitions in pharma, it's really -- and frankly, for the company as a total, are there additional technologies that we can add to the portfolio that deepen the moat or open adjacencies. For example, we acquired SipNose a couple -- last year to improve the intellectual property portfolio around -- and add some additional nasal capabilities. Or an additional geography, for example, the injectable facility we bought in China that came with a coveted government license. Or just a good business that comes with good management that is an adjacency. I mean, we talk a lot about nasal inhalation, but we're also active in dermal drug delivery, in ophthalmic drug delivery or some additional services like the CRO facility we acquired in New Jersey. So it's really broadening the business, deepening the moat, something that can do better under Aptar leadership and ownership than it does outside, but always with a keen eye on management. The digital assets that we bought came with management that still works for us happily. The same for the Active Material business. We want to make sure that 1 plus 1 equals 3.

Got you. And then final question because we only have about a minute left here. So with what's happened with the stock price, but with what your priorities are, are share repurchases looking more attractive at this point versus maybe versus historically what you thought about it?

A little bit attractive, I would say, a little bit attractive. Yes, indeed. So we have leaned in a lot more on share repurchases this year. We had done about $190 million or so, 1.3 million shares by year-to-date to the end of Q3. And what we did say was that we would look to essentially exhaust the remaining authorization. We've got about $273 million left in our Board authorized pool for share buybacks. And certainly, we are executing against that given the current conditions.

Yes. I mean, usually, my cardial rule is never opine on the stock price, but I think the reaction to the Narcan pullback feels a little bit overdone.

I would agree.

So we buy back shares.

So we buy back shares.

All right, guys. Thank you very much, and thank you, everyone, for sitting here. We really appreciate it.

Thank you.

Thank you.