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

Stephan Tanda, CEO for the company; and Mary Skafidas, who does a wonderful job on Investor Relations. Here for Aptar. They unfortunately ran the gauntlet and ultimately could not be here live, but we are grateful that they're here virtually and that all the great work that our conference planning people have done to enable the meetings and the presentation for Aptar to go on as planned, it's just in a slightly different format. So welcome, Mary. Welcome, Stephan. How is the weather?

Excuse me...

Snowing in New York. It starts snowing again. So we're very, very jealous of those who are able to make it to Florida and are what I think is some cooler weather, but still better than New York.

Good deal. So maybe just to Stephan, if you can hear me okay, warm up. What couple 3 things would you want to remind investors on regarding Aptar and why it is the wonderful company that it is. And then we'll get into the meat of the questions.

Yes. Good to be with all of you. Thanks for making it happen like this, George. Fundamentally, we have a best-in-class leading proprietary drug delivery system business. And basically, if it goes through the nodes, it goes through Aptar. And that used to be true just for the [ sniffled ] analogies, but increasingly, it's true for almost anything that you need to get into the bloodstream to affect human health, which can be a lot. I think that's number one. Number two, our consumer-facing businesses have been significantly improved. The Closure business is in and out of its long-term target range. The Beauty business has resumed growth. And many aspects of the consumer business benefits the Pharma business, for example, our leadership in sustainability that we've developed in the consumer business and now increasingly relevant for our consumer healthcare business. I think that's number two. And number three, just a reminder, we're very global. We are -- our supply chain is set up in region for region. While we don't appreciate all the global tensions around trade and so on, we are well positioned to manage and deliver to customers and patients in every region because of our multi-region supply chain setup.

Understood. Thanks, Stephan. And some good meat to get into a discussion in a minute off of those points. And just I'm not sure if you can see from where you're sitting, but it's actually a very full room here, so a lot of interest in Avatar today. As always, the company is guiding me, we'll get to the first of the questions to $1.13 to $1.21 in the first quarter. To the extent that you can comment midway through the quarter, how are trends progressing and/or what were some of the key assumptions and/or some of the macro sort of guardrails, from what you can see, no guarantees in life relative to what you said a few weeks ago, how are things looking from those data sets for the first quarter?

Yes. Obviously, we're not updating our guidance here. But fundamentally, we are comfortable with the range that we gave when we announced Q4. And the exchange rate was at $1.18. It's still pretty much there. So we expect a good quarter across the board, obviously, with the exception of emergency medicine, primarily naloxone. So I think overall, nothing has really changed.

Okay. And what were the key reasons to the extent that you could talk that you expect it to be in your overall range for margin for the year, which I think is 21% to 23% for the company? And would that -- and remind me if you already talked about it, would that necessarily -- would that not necessarily mean that Pharma has got to be in its range of 32% to 36%. How would you have us on that ponder on that?

Yes. I think we expect Pharma to do quite well with the exception of emergency medicines. Now most of that impact will be in the first half. I think the good news is that with quarter 4, we could kind of confirm the $65 million impact that we had given you 3 months earlier. So I think we're kind of quarter along in honing in on that number and triangulating order intake, what we hear from customers, what little we see from customers' inventory. So that we boxed in that impact and most of that will be in the first half. But apart from that, we see Consumer Healthcare being back to growth. We see, of course, injectable growing very briskly, including GLP-1, but not only also other areas. So -- and active materials doing well. So overall, we expect the Pharma business to do well. I will not commit to the range for the full year. But clearly, we expect improvement in the bottom line margins for the Consumer business and the Pharma to be doing very well for the company to be within its long-term range for the year, which we still feel quite comfortable with.

Thank you, Stephan. I want to switch gears just for a minute to Beauty and Closures, where the performance in the quarter was a little off from what we were expecting, a little off from what you were expecting. Certainly, one-off factors were at work. But I think speaking for some -- as someone who's covered the company for a long time, we'd love to see maybe a bit more steady progress on the margin -- towards the margin goals in Beauty. You've been getting better. Closures has been doing very nicely. How soon to the extent that you can comment, will you be back making more progress towards those goals in the first quarter? And then what in particular, went so well for you in the closures reorganization that really reinvigorated the growth and the margin. That was -- we said it before, that was more than we expected, better than expected and [indiscernible] you on that.

Let's start with that part. While we practice the same fundamental industrial processes across the company. Closures is very specific. It has by far the highest material content of any of our products. It's heavy-duty injection molding and a little bit of assembly. And the logic of that business is different than a nasal spray, and airless system and aerosol that we practice in Beauty and Pharma. So the industrial logic and the assets are fungible. You can make one closure one day, another closure the extra day, you just swap out the tool. So it is more of an operations-intensive business where you really need to watch capital intensity and you need to watch your cost base and you need to be close with customers both in the stock business and in the tailored business. Hindsight is always easy 2020. It used to be the business structured that way. But in 2010, Aptar decided to go to the end-use segments and took some of the closures activities into different segments. And we just went back to saying, this is -- with this particular business, the better way to run it. And all the things that I said, the team has done. I'm very proud of what the team has done, drive capital efficiency, drive cost down, be on the front foot with customers. And of course, the market helps. I mean, let's be clear. Food and Beverage, which is a big part of this business is very resilient, whether the consumer is doing great, whether the consumer is not doing great, whether they buy private label or brands, whether they buy smaller formats or bigger formats. If they eat out less, it's even better for us. So a weaker consumer doesn't hurt that business, maybe helps a little bit. So all of these factors have come together to get that business back to where it needs to be. Not perfect. We had some operational hiccups at one of our larger U.S. sites in the quarter that kind of made a tip out of the margin range, but we feel very good about the business. Now coming back to Beauty. Beauty is more complex. It needed substantial renovation that you are very well aware of. We're kind of 80% done with that. But as you get done, you have additional ideas. And that's one thing. Two, we were quite heartened with the bounce back of demand that we saw in quarter 4. Now it wasn't 10%, 25% of that was tooling and some easier comparisons. But nevertheless, we see that the market come back, customers come back. But unfortunately, we did lose it with some significant operational hiccups. One, we lost an important supplier where we had to qualify last minute somebody else at higher prices and poor quality. And we had some onetime compliance costs at [indiscernible] facility in France. So the quarter 4 margin is not representative for what that business can do by any stretch, and we expect that business to progress along the trajectory we had before, and we will do more productivity actions in that business.

Thank you, Stephan. A little bit later on, we have a great presentation at lunch from a trade economist and attorney who worked for the administration. We're eager to hear what she's going to be talking about in terms of different regional hot buttons and things like that. And one of the things, obviously, and you touched on in your comments at the open that there can be pressure points depending on the region, but Aptar has long sort of navigated these well. You as a company and probably more than most companies that we track have done a very good job of expanding in China and growing your presence there. Help us understand why you're comfortable with that strategy, particularly as regards Pharma? And then more broadly, and more specifically at the non-pharma businesses, are you seeing more competition from non sort of classic Aptar regions, making it a little bit tougher in Closures, a little bit tougher in Beauty? Or is that really not an issue for the company on a going-forward basis?

We could talk for hours on this one. I think the first one I would say is -- we've been in China since the mid-'90s. So that's now 30 years, and we during COVID, renewed our asset base to now be state-of-the-art, complemented with some acquisitions and joint ventures. So in this new geopolitical environment, I'm actually very happy with the competitive footprint we have there, primarily to serve the growing domestic market, but also especially for Beauty to help with accelerating development time lines, speeding up processes in Europe. So take the pilot mold or getting product to market, used to take 18 months was the standard with the Chinese infrastructure, we can do it in 6 months, even if we produce it still in Europe, but the front end of that work prototyping and the prototype molding and so on is just faster. I've been on record geopolitics so side, just as a business person, the capitalistic nature and the just sheer will to succeed in the country is unparalleled, and that includes our own teams. So getting things done is just very quick. Then when you talk about the domestic market, look, it's 1.4 billion people with increasing spending power. Thankfully, we address consumer and patient needs that are not sensitive to geopolitical issues or national security issues. So everyone wants us to succeed, our shareholders, the local government, consumers, patients. So there is no misalignment of incentives -- and we feel very comfortable. And the last point I would make, we have very strong local talent. You cannot run a multi-region business, especially in today's world without the strong local talent. We have at the senior level at the Executive Committee, Xiangwei Gong, who is very skillful and led the region, including China. So all of these factors make us quite comfortable. Pharma is not so different than the other businesses. And in fact, when you -- those to pharma -- who follow the pharma industry, a tremendous part of the upstream development work happens in China, clinical trials happen in China. A lot of the biotech innovations happen in China and are now licensed to Western companies. So it's like in some other industries, maybe a little bit late in pharma has gone from "low" production to now being an innovation powerhouse that is important to feed into the global system. So it's -- yes, you need to run it in a different way than we ran it before geopolitics change, but we are well positioned to do it that way. And the profitability of our China business is on par, actually slightly better than our global company.

And just a quickie. There was a side bar to that question. Just more broadly, are you seeing more competition from producers in China, producers elsewhere in Asia in traditional closure markets and traditional beauty markets that's affecting margin, the growth outlook or no, not really. It's -- competition has been pretty status quo. And then I want to pivot to the Pharma business and get in a little bit more deeply there with our questions.

Yes. So it's actually interesting. One, the Closures business is very much in country or in region for region because what I mentioned earlier, the material content being so high, it's not something that you ship across oceans. So what you produce in China stays in China, maybe surrounding countries and so on. In Beauty, there's more of that. And certainly, there's been a push of Chinese producers, especially into Latin America and into the U.S. and Europe. Given the geopolitics, that actually has been slowed down a little bit or has demanded more of the Chinese producers to kind of have boots on the ground, so to speak, in Europe and in the U.S. and in Mexico. And I sometimes say running a true multinational is not that easy, whether you're a U.S. multinational or you're trying to be a Chinese multinational. So having boots on the ground in Europe, making that work, making that work, there's a lot of fits and starts. So actually, I don't see increased competition, maybe even a little bit less. Latin America is still more of a trading business for them. So we see more competition there. The other thing I would say, for the Pharma business, certainly, the less regulated markets, you see more Chinese presence there. And last not least, into Russia. We used to have a big Pharma business in Russia. Now it's a little smaller Pharma business and part of that is really share lost to Chinese producers where we couldn't get export license. And of course, the Chinese were happy to step in.

Thanks, Stephan. I want to switch a little bit more to Pharma now. So your investor decks show a multiyear increase in both the number and the weighted value of your pipeline opportunities, which is great. Could you bridge the pipeline by stage, preclinical pivotal validation launch and how that might translate? I know you don't give more than a quarter guide, let alone a year, let alone a multiyear, but how that pipeline might sort of evolve over the next 4 years across those categories? And then within the pipeline, we've noticed that the value trajectory has come back down and converge more to be in line with the unit in the pipeline opportunity in that chart. What's been driving that? So those 2 questions, please.

Yes. I mean we disclose what we're comfortable disclosing for competitive reasons. And I think you have seen us over the last few years to peel back the onion more and more on that pipeline. And the way we give the statistics on the pipeline is, as you would expect, risk-adjusted, obviously, things that are early in the pipeline carry much higher risk than as things progress towards the launch. Indeed, we had a big spike of activities during COVID vaccine opportunities and now the pipeline ratio has more normalized. I think the big news on the pipeline that's really important to keep in mind, and we first discussed it at the Capital Markets Day in September. Maybe it was a little bit drown out with the Narcan story, but we gave you more visibility at JPMorgan and it's in the investor presentation for this event is the richness of indications in the pipeline. I mean you're talking -- you had asked me, George, 2 years ago, will you have these kind of things in the pipeline now, I don't think so. In fact, you may have asked me. But now we have peptides, GLP-1s in the pipeline with people working on neurodegenerative diseases, Alzheimer's, Parkinson's, dementia, with people working on mental health and with people working on cardiovascular indications. And in fact, we just had 2 important launches in recent time against edema and tachycardia. So it's kind of an alternative to injection where to bring molecules quickly into your bloodstream in a defined manner. The industry has kind of woken up that it is a great way to repurpose all the molecules, whether it was naloxone or esketamine, but now it goes really across the board and the pipeline is just bulging. And that's really what we're super excited about because it's in the sweet spot of our profit engine proprietary drug delivery devices through the nose. In the inhalation space, also, we have a big transition going on to low global warming potential propellants. Last time that happened, that was very accretive for our business. And again, that is a big piece of our pipeline. So the richness and breadth and depth of that pipeline is really super exciting, and it's not about the sniffles anymore. It's about treating heart disease. It's about treating dementia. It's about maybe taking your GLP-1 through the nose.

Thank you, Stephan. Thank you, Mary. I want to make sure there aren't any questions in the audience. Any questions for Stephan or Mary? Okay. So then we'll keep forging ahead from our side here. Stephan, kind of a micro question to the extent that you can comment. I know you're not going to break out the revenue, but is there a way to talk at all about unit dose and how large it's been in your CAGR over time? If your CAGR in Pharma has been 7%, unit dose has been a point of that, 8 points of that, obviously, it's not going to be that. But any way to size how important it's been to your growth rate in Pharma?

Yes. We obviously don't disclose growth or sales by product line. Clearly, the proprietary drug delivery systems is the key driver. When you think about the Unidose and the Bidose and related formats, they are really controlling the dosing of a drug. And if you talk about life-saving drugs that you need to dispense with 99.999% reliability, basically, that Unidose device is an auto-injector that goes through the nose. It has a vial inside. It has a plunger inside. It has very precise dosing, same for the Bidose. So those things will carry more value than a plunger in a prefilled syringe. So that's why -- that's really what's driving. But the same is true for an inhaler. I mean you want to get your asthma dose very, very quick. The reason our inhalation franchise is so strong is, again, it's treating chronic disease. And if this thing doesn't work, patients get in trouble. So precise dosing of medications is what PDDS is all about and Unidose is a part of that, and it's an important part of it.

If I could add before you look at -- Stephan mentioned that we had made available as the pipeline forward-looking for Pharma for prescription and not just prescription division, prescription, including injectables. And the top 3, when you look at them are pulmonary, so not Unidose, biologics, right, which is primarily injectables. And then you have systemic nasal drug delivery, which is a number of delivery systems, including Unidose, Bidose and others, as Stephan mentioned. So it's important, but it's not the only thing that's driving the growth or the only format that's driving the growth.

Thank you, Mary. Thank you, Stephan. Very, very clear on that. Can you talk a little bit about the tailwinds you expect to get from Annex 1, maybe perhaps related to biologics and also for GLP? And then second question, we've seen the growth in injectables. It's a very good business, but it is a little bit lower margin than the overall for pharma. Over time, how does that impact your longer term, that mix effect as that grows more quickly perhaps than your proprietary drug delivery systems impact your long-term margin target of 32% to 36% in pharma?

Yes. Well, let's start -- we are in the injectable business because injected medicines are really a major part of how drugs get delivered, especially modern biologic drugs that have been manufactured through biotech, meaning they are large molecules, they are sensitive molecules. You can't just punch them in a pill, maybe too big for nasal delivery. And the injected format is the format of choice for modern biologic drugs, whether they be biologics, biosimilars. And we wanted to be part of that, and we have the technology and the right to play. And by the time COVID came around, our technical capabilities have been developed so that they are on par with the market leader. The market we didn't have, thankfully, the big COVID whiplash because we didn't have a large position in COVID vaccine. But the market continues to grow. You mentioned Annex 1. Annex 1 is basically a leaning in or a tailwind that convinces customers in case of doubt, go for the higher-value solution, go for the sterilized solution, go for a solution that is premium coated. And that means for us higher-margin products, and that means for the industry more a shift towards higher-margin products. GLP-1, obviously, is a very nice tailwind. I expect that to continue. I do not believe that oral will take away. oral will just expand the market, especially in countries with not gill distribution. So overall, we're dealing with a growing market biotech is still at the beginning of its S curve. I mean, if you think of how we understand traditional small molecule chemistry or physics compared that to biotech, I mean, we're still many, many, many decades away from reaching the peak of the innovation cycle and many diseases to cure. So I would never bet against biotech drugs, and we want it and we now have a position in that. Now on your margin point, clearly, we've invested $200 million in brand new state-of-the-art facilities, and they are now being filled. As they're being filled, we gain efficiencies, margin will improve as we shift the mix to more higher-margin products, margins will improve. So this negative mix effect that you've seen very pronounced in quarter 4 will be less over time. Will it ever go away? Well, probably not and why? Again, I come back to -- in life-saving medicines, we control the dose to save the life. That's a slightly different value add than the plunger in that auto-injector or that needle shield. Not saying that it's not important, but it doesn't demand the same kind of pricing as life-saving medications. So -- but certainly, we see margin expansion in injectables itself through both operational efficiencies, economies of scale and mix enrichment.

Stephan, you've been very candid over the recent years that GLP is nice. It's a nice to have. It's not the entirety for sure of your Pharma business. And that certainly investors like to come to Aptar because you have that full suite of products. With that being said, and you already commented on touched on it, why do you think oral winds up being something that expands the category as opposed to -- and also continues the growth in injectables as opposed to expand the category and maybe flattening out injectables? What -- kind of what takeaways have you had that you're laying with us here today?

Yes. So I see a number of reasons. Number one, what drives a big portion of the GLP-1 growth these days is weight loss. And there is nothing today that's better than Zepbound, tirzepatide. So if people are interested in weight loss, they're going to go for the one that delivers the biggest bang for the buck. I have not seen any data that all formats outperform tirzepatide injected. And Wegovy is close behind that semaglutide, number one. Number two, there are many markets that do not have chilled distribution into the pharmacy or even chilling capability at home. And those tend to be markets with massive overweight populations. I think India, I think China, parts of Mexico. So that's where the oral dose will be the biggest fit because it's the first option people have because they don't have the injectable option. Clearly, there will be people who don't want to inject themselves who just have a phobia also in the developed markets in the U.S., and they will go to their oral format. I do not believe, again, until oral formats become more efficacious that they will rule the day. Glass is an economic argument. Most of the oral formats come from the same producers who have built tens of billions of infrastructure to deliver you more auto-injectors. Their economic strategies and pricing strategies will be such to take advantage of the installed capacity and not obsolete it. I think it's just economic sense. And there is plenty of commercial strategies available to them. You just saw Novo cutting price 50% there is not a big strong relation between cost and price. So they have a lot of flexibility in managing the market so that they don't obsolete their investment base. Now I'm not talking about 20 years from now, but the kind of time frames we are interested in, we believe this business continue to grow. And anecdotally, consumers still have a hard time getting their injector when it's prescribed and often have to wait a week. So it's not an oversupply by any stretch.

Stephan, maybe you touched on it here a little bit. How much runway does Aptar have across its injectable capacity before additions have to be made and where might the bottlenecks be, whether it's mixing or coating, if you can share or remind us.

So think of investments in injectables really in several categories. One is do you have the building and those are massive buildings with the ability, all the utilities that you need to run clean rooms and automation. We just made a massive investment in a brand-new building in Normandy, France. Those come around every 10, 15 years, certainly nothing on the horizon but just finish. Then inside the buildings, you need the mixer, which basically creates the first step, the polymer, then the molding and then the finishing, whether that's coating, washing, sterilizing and so on. Those are much smaller investment increments. Maybe the mix is a little bit larger than the others. And you can just creep capacity inside the existing buildings with doing that. So again, we think we are done for quite a while with the large investment and now just can creep capacity in the ordinary course as this business is growing.

Thank you, Stephan. Any questions from the audience as we're wrapping up here with Aptar, Stephan and Mary. Stephan, just a point of confirmation on emergency medicines, you remain comfortable that the destock will run its course based on the time line that you said most of it in the first half, based on the intelligence that you've got in the market. Just want to confirm that.

Yes. And that's more your territory, but what we kind of took away that the market felt somewhat relieved that we gave the same number 3 months later than we gave 3 months earlier. So it kind of tells you that we feel comfortable that we've boxed this in. Based on what we hear from customers, certainly don't see any reason to change that, $65 million, most of which in the first half.

You could be a securities analyst, Stephan. So it's your next game.

I'll stand in my lane.

Any last questions on Beauty, on Closures, on Pharma before we wrap with AptarGroup. Well, if not, we'll wrap it here. Stephan and Mary, thank you so much for your fortitude and being here even though you couldn't be. We appreciate everything that you do to support our research and the community's work on AptarGroup. So thanks very much. Everybody, join me in thanking Stephan and Mary for a great presentation.

Thank you, George.

Bye, guys. Good luck the rest of the day.