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

Ladies and gentlemen, thank you for standing by. Welcome to Aptar's 2026 Second Quarter Results Conference Call. [Operator Instructions] Introducing today's conference call is Ms. Mary Skafidas, Senior Vice President, Investor Relations and Communications. Please go ahead.

Hello, everyone, and thanks for being with us today. Joining me on today's call are Stephan Tanda, our President and CEO; Vanessa Kanu, Executive Vice President and CFO; and Gael Touya, our CEO Designate; and President of Aptar Pharma. Our press release and accompanying slide deck have been posted on our website under the Investor Relations page. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measure and the reconciliations are set forth in the press release. Please refer to the press release disseminated yesterday for the reconciliations of non-GAAP measures to the most comparable GAAP sure discussed during this earnings call. As always, we will post a replay of this call on our website. I would now like to turn the conference call over to Stephan.

Thank you, Mary, and good morning, everyone. As many of you know, this is my final earnings call as CEO of Aptar before I will retire later this year. It has been a tremendous honor to lead this company and work alongside our talented teams around the world. I'm incredibly proud of what we have accomplished together and confident that Aptar is well positioned for continued success. With Gael Touya, assuming the role of President and CEO on September 1, I am assured in the future success of the company and exceed as a shareholder. Gael and I have worked closely together throughout this transition and for much of the last decade. I know Apta will greatly benefit from his deep experience, leadership and vision. Gael is joining us on the call today and will be sharing our outlook towards the end of the call. On a personal note, leading Aptar has been the greatest privilege of my career. What I will remember most is not any single accomplishment, but the people I've had the opportunity to work alongside and the relationships I have built with employees, customers, the investment community and partners around the world. I have always believed that great companies are built by great people, and Aptar is fortunate to have an exceptional team, a strong culture founded in performance and purpose and a consistent focus on execution, innovation, agility and value creation. While there is always more work to do, I believe Aptar is entering its next chapter from a position of strength. I am excited about the future under Gael's leadership and remain confident in the company's ability to deliver profitable growth and create long-term value for shareholders. And now back to the business at hand. Let me begin my earnings remarks by highlighting our second quarter results and later in the call, our CFO, Vanessa Kanu, will provide additional details on the key drivers for the quarter. I am pleased to report that all 3 of our segments delivered positive sales growth during the quarter and we delivered adjusted EPS results above our guidance range due in part to better-than-expected farmer performance. The Pharma segment continued to perform well driven by strong demand across our injectables, consumer health care and prescription businesses, highlighting the strength of our innovation-led portfolio and the dedication of our teams around the world. We saw continued momentum in injectables, supported by demand for elastomeric components used for biologics. Vaccines and GLP-1 therapies, which -- according to a recent survey showed that 11% of Americans are currently taking GLP-1 for weight loss, up from just 3% in 2024. Consumer Healthcare benefited from strong nasal decongestion and Eye Care Solutions sales. Prescription saw growth in central nervous system therapeutics and asthma COPD applications, which help offset the anticipated destocking related decline in emergency medicines. Beyond Pharma, Beauty benefited from double-digit core sales growth in prestige fragrance, while closures saw strong beverage demand, particularly in bottled water. Operational performance in both segments improved progressively from the first quarter. Shifting gears from performance highlights, I want to spend a few minutes discussing how we continue to strengthen the pipeline and long-term growth of pharma. Beyond our core delivery systems, we continue to expand the capabilities we bring to customers across formulation development, analytical services regulatory support and patient engagement. A few good examples include the patent applications we announced during the quarter related to inhaled and nasal GLP-1 therapies. While these programs remain in the early stages, the build on formulation expertise that we currently provide to customers and demonstrate our continued exploration of capabilities that could create future growth opportunities in the delivery of biologics and other high-value therapeutic areas. Turning to Active Materials Science. Our U.S. patent application for NSORP has been approved. NSORP is designed to address unacceptably high levels of nitrosamine impurities in pharmaceutical products. The FDA has issued guidance on nitrosamine it's predicted carcinogenic potency categorization and recommendations on when a manufacturer should recall a product. As a first of its kind packaging delivery solution, Aptar's [ NSORP ] sort technology is intended to give pharmaceutical companies a new tool to reduce risk, meet regulatory demands and deliver safer products. Additionally, we announced a collaborative system framework for injectable therapies, providing customers with earlier insight into assembled system performance for injectable therapies. These expanded capabilities help customers make more informed development decisions, better manage risk, accelerate development time lines and address the expectation of the United States Pharmacopeia Taken together, these investments continue to advance our strategy focusing all the way from drug formulation to the patient and deepen our role in the pharmaceutical development process. During the quarter, we also saw several milestones that reinforce the strength of our core pulmonary nasal and injectable delivery platforms. In respiratory health, products utilizing Apta technologies received FDA approvals across both rescue and maintenance therapies for asthma and COPD, further validating the performance and regulatory track record of our pressurized metered dose inhaler, or PMDI platform. is received approval from the U.K. Medicines and Healthcare Products Regulatory Agency for the world's first PMDI utilizing HFA 152A one of the next-generation propellants with low global warming potential. This achievement is particularly meaningful because in 2023, Aptar was selected by the U.S. Food and Drug Administration to conduct research on next-generation propellant pMDIs through our Nanopharm business, recognizing our deep expertise in inhaled drug delivery. It is encouraging to see the first approval with this new Propel and come to market, helping expand patient access to essential respiratory therapies while helping to reduce environmental impact. We continue to see growing interest in nasal delivery across a widening range of therapeutic areas. A recent example is Eli Lilly's announced acquisition of a tire Backley centered on an intranasal therapy for treatment-resistant depression that has received the FDA breakthrough therapy designation and the program has begun initiating Phase III trials. We believe this highlights and confirms a broader trend we have been discussing for some time now. nasal delivery is increasingly being explored not only in allergy, migraine and emergency medicine, but also in central nervous system disorders where rapid onset and direct access to the central nervous system may provide meaningful therapeutic advantages. One of the most significant developments during the quarter was the FDA's update to multiple product-specific guidance documents for generic inhaled therapies. These changes remove certain requirements, including certain clinical studies and bioequivalence testing, representing a significant shift in the FDA's expectations for generic PMDI development. We believe this is a positive development for Aptar as the streamlined requirements should help bring more generic inhaled products to market more efficiently, while also highlighting the value of the scientific expertise and data generated through our collaboration with the FDA. Moving to Beauty, we continue to focus on premiumization, differentiated consumer experiences and dispensing technologies that help our customers stand out in the increasingly competitive categories. We had the first commercial launch of our auto loading dosing TROP technology for Dermalogica as future code booster skin care product. This technology features an auto loading dropper cap which fills the applicator with the same dose after each use and addresses consumer needs around dosage control, convenience and clean usage. I also want to highlight that a new range of fragrances by French corner have launched in the Middle East market featuring our prestige fragrance pump. Lastly, enclosures, recent launches showcase our ability to improve convenience, functionality and the overall consumer experience through differentiated dispensing solutions. Heinz is featuring our tap top closure for clean, convenient directional dispensing on its new line of flavorful dipping sauces in North America. In China, our closure with SimpliSqueeze valve is being used for easy one-handed spill free hydration on the go. In terms of sustainability, there are several notable recent accolades to touch on. Aptar was named a CDP supplier engagement leader for the sixth consecutive year. This assessment highlights companies that are engaging their suppliers on climate change and supporting efforts to address emissions throughout the value chain. We have also been named one of the world's most sustainable companies by time for the third consecutive year, and we have been named among the magazine's top 100 America's best companies. This inaugural list highlights top U.S.-based companies during the nation's [ 250th ] anniversary. The Americas Best Companies 2026 ranking identified the top-performing companies based on employee satisfaction financial performance as well as sustainability performance and transparency. Aptar is ranked within the top 5 companies nationwide in the engineering, manufacturing and medical technology category and is ranked in the top 10 companies nationwide for sustainability and transparency. I also want to provide an update on litigation. Recently, the court issued a favorable ruling for Aptar in our litigation against ARS Pharmaceuticals related to Aptar's proprietary nasal drug delivery technology and confidential manufacturing know-how. The court granted our motion to amend the complaint to maintain our state law trade secret misappropriation claim and denied ARS motion to dismiss the remaining claims. We were also pleased that the core transfer, the later filed California action brought by ARS to New York under the first-to-file rule, ensuring the related matters will proceed in a single jurisdiction. The litigation remains ongoing, and the next phase will allow us to further develop the factual record. Overall, we view this decision as a positive step, allowing Aptar to continue pursuing the claims at the heart of the case and reinforcing the importance of protecting the intellectual property, technical expertise and manufacturing know-how that differentiate us in the marketplace. Now I would like to turn the call over to Vanessa to provide additional details.

Thank you, Stephane, and good morning, everyone. Let me begin by summarizing the highlights for the quarter. Our reported sales increased 6% to approximately $1 billion, a new quarterly record. And core sales, which adjust for currency effects and acquisitions, increased 1% compared to the prior year. We achieved adjusted EBITDA of $213 million, a decrease of 3% from the prior year. and adjusted EBITDA margin of 20.7% compared to 22.6% in the prior year, primarily due to less favorable product mix and ongoing operational challenges in beauty and closures that have progressively improved since the beginning of the year. Adjusted earnings per share were $1.42 compared to the prior year's adjusted earnings per share of $1.68 at comparable exchange rates. Before moving to segment performance, I'd like to briefly address the higher input costs experienced since the start of the recent conflicts in the Middle East. As anticipated, we experienced higher input costs during the quarter, which we largely offset through customer pass-throughs with some timing lag in beauty. As we look beyond Q2, we continue to monitor the situation closely and we'll also continue to take appropriate pricing actions to offset higher costs where necessary. And with that, let's turn to our Pharma segment results. Pharma core sales increased 1%, impacted by the anticipated decline in emergency medicine. As previously discussed, emergency medicine sales are expected to decrease by approximately $65 million in fiscal year 2026, approximately 2/3 of this decline has already been incurred in the first half of the year, with the majority of that having been in the second quarter as we had anticipated. And the remaining 1/3 is expected in the second half of the year and primarily in the third quarter. We continue to expect that the year-over-year headwind will abate by the fourth quarter. Excluding emergency medicine, core sales in our Pharma segment grew by 8% in the quarter, demonstrating resilience of the portfolio. Let me break that down by market. starting with our proprietary drug delivery systems. Prescription core sales decreased 7%. Excluding emergency medicine, prescription core sales increased 8%. The central nervous system and asthma COPD therapeutics were drivers of growth in the quarter. Consumer Healthcare core sales increased 15% due to strong demand for nasal decongestant eye care and dermal solutions, supported also by strong tooling sales. Injectables core sales increased 9%, with strong demand primarily for elastomeric components used for GLP-1 and biologics and vaccines. Services also contributed positively in the quarter, and we continue to see strong pipeline build for X1, GLP-1 and biologics projects. And for our active material science solutions, core sales decreased 2% in the quarter. Growth in probiotics and oral solid dose sales partially offset the decline in diabetes test strips which reflected customer inventory normalization following robust growth in the prior year. Pharma's adjusted EBITDA margin for the quarter was 33.6%, a 180 basis point decline from the prior year. The margin decline was anticipated and driven by short-term unfavorable product mix, primarily due to the decline in high-margin emergency medicine sales, while royalties and productivity initiatives continue to positively impact margins. Excluding emergency medicine, the adjusted EBITDA margin for the segment would have improved year-over-year. Moving to our Beauty segment. Core sales increased 1% and as demand for beauty dispensing systems and the pass-through of higher input costs more than compensated for lower tooling sales. Looking at the 2 largest end markets for beauty, Fragrance, facial skin care and color cosmetics core sales increased 2%, primarily due to strong sales growth for prestige fragrance pumps and color cosmetics. Our turnkey indie beauty business also continues to perform well, benefiting from the growth of Indi brands, which continue to capture consumer interest across the beauty market. Personal Care core sales were flat. Applications for hair care continued to show good demand but did not offset lower tooling sales from the prior year. Beauty's adjusted EBITDA margin for the quarter was 12.2%, and which, while improved sequentially from the prior quarter, represented a decline of 190 basis points year-over-year. This was primarily attributed to lower product volumes, unfavorable mix and the timing of resin pass-throughs. Moving to the closure segment. Core sales increased 4% compared to the prior year. Strong volume growth, particularly in beverages and the pass-through of higher input costs more than compensated for lower tooling sales. Looking at the 2 largest end markets for closures, Food core sales decreased 1%, primarily due to lower tooling sales, which was partially offset by continued demand for our sauces and condiments dispensing closures. This end market also faced a challenging comparison from the prior year period of double-digit growth. Beverage core sales increased 14%, primarily driven by increased sales of bottled water and functional sports drinks. The segment's adjusted EBITDA margin was 14.9%, a 200 basis point decline over the prior year. These results were temporarily impacted by the ramp-up of new production lines and by a previously reported maintenance initiative that continues to make sequential progress. Selling, research and development and administrative costs, or SG&A, increased in absolute dollars, largely due to currency effects. -- and the impact of acquisitions. Excluding currency effects and acquisitions, SG&A dollars were flat year-over-year. SG&A as a percentage of sales decreased from 15.6% in Q2 2021 and to 15.4% in Q2 2026, a 20 basis point reduction year-over-year. These amounts include approximately $4 million in legal expenses for nonordinary course litigation, which did not exist in the prior year period. As I noted earlier, adjusted earnings per share of $1.42 were down 15% year-over-year at comparable exchange rates. This was due to lower sales of emergency medicine products in pharma, operational issues in beauty and closures as well as higher depreciation and amortization expenses associated with our capital investments and acquisitions. Interest expense also increased from higher interest rates and a higher average debt balance. Our due -- the tax rate for the quarter was 23.7% compared to the prior year's 20%. In the prior year period -- the tax rate benefited from the realization of a deferred tax benefit as well as greater excess tax benefits from share-based compensation. Moving to our year-to-date performance. Reported sales increased 8% and core sales increased 1%. Strong growth in consumer health care and injectables offset the emergency medicine destocking, while beauty and closures also saw growth on a year-to-date basis. Adjusted EBITDA remained consistent at $401 million, while adjusted EBITDA margin decreased by 170 basis points to 20%. Adjusted earnings per share decreased 12% and to $2.61 compared to the prior year period, including comparable exchange rates. Free cash flow year-to-date increased by $8 million to $99 million, comprising cash from operations of $222 million, less capital expenditures net of government grants of $123 million. Over the last 6 months, the company has returned $212 million to shareholders through share repurchases and dividends. So far this year, we have repurchased 1.1 million shares for $150 million. Finally, we ended the quarter with a cash balance of $190 million net debt of $1.2 billion and a leverage ratio of 1.49x, reflecting a very strong balance sheet. Now on to our outlook for Q3. We -- we anticipate third quarter adjusted earnings per share to be in the range of $1.45 to $1.53. This assumes an effective tax rate range of 22.5% to 24.5%. And and a euro to U.S. dollar exchange rate of 1.14. For full year 2026, we continue to expect capital investments to be in the range of $260 million to $280 million, and depreciation and amortization expense to be between $310 million and $320 million. Before I hand the call over to Gail, I want to take a moment to address the fun. Stephane, it has been a pleasure to partner with you during an important chapter in Aptris history. I joined Aptar because of its unique strengths, a rich history, a strong foundation that you have helped to build its culture and values, and importantly, the robust opportunities that lie ahead. I've enjoyed working with you and appreciate your partnership. Stephane, thank you for your leadership, your contributions to Aptar and the solid foundation you leave for the future. We wish you and your family all the best in retirement and don't be a stranger. With that, I will turn it over to Gael to provide a few closing comments before we move to Q&A.

Thank you, Vanessa. As I prepare to assume the role of CEO on September 1, Alusa is a great confidence in Aptar's future. We expect growth across all 3 segments supported by strong broad-based demand in pharma across injectables and consumer health care and prescription applications, excluding emergency medicine as well as continued momentum in closures and improving trends in beauty. Before we open the call for questions, I'd like to take a moment to recognize Stephan on his final earnings call as CEO of Aptar. Over the past 9 years, Stefan has laid Aptar through a period of significant transformation, strengthening our position in pharma, expanding our global footprint, advancing our innovation capabilities, and reinforcing our leadership in sustainability. [indiscernible] Aptar, a stronger company with a robust pipeline of opportunities, leading market position and an exceptional team that is well positioned for the future. On behalf of our employees, customers, shareholders and Board of Directors, I want to thank Stephan for his leadership partnership and dedication to Aptar has been a privilege to work alongside him, and I'm grateful for the strong foundation he leaves behind. And now I'd like to open up the call for Q&A.

[Operator Instructions] The first question comes from the line of George Staphos with Bank of America.

Hi, everyone. Good morning. Thanks for the details. Gael, congratulations again to you. Stephane, It's been an absolute pleasure covering -- after and the time that you've been CEO. Not many CEOs can move as deftly from tachycardia to the latest and catch-up squeeze technology or have the buy side or sell side taking over Anders on the references to systemic nasal drug delivery references on the call, but you've done a great job, no matter the rating, you've helped to reinvigorate the growth you're on the front foot and remain so on sustainability and you built a -- and continue to build a great bench. So congratulations and enjoy retirement. Stefan. Best of luck to you. In terms of my questions, first of all, it looks like some have noted some weakness in the Brazilian market. Have you seen that at all relative to your beauty or personal care business? And then unless on Beauty & closures, I know there's been improvement, but beauty has, in particular, lagged an improvement for a number of periods. When should we -- and Gael, obviously, feel free to step in here, too. When do we see Beauty actually be a sustained grower both of volume and earnings.

George [indiscernible] very nice comments. Thank you for that. Much appreciated. On your questions, yes, we've experienced also weak sales in Brazil. This is [indiscernible] cycle, and there are really 2 main customers that trade shares. So we experienced quite some weakness in Brazil. On your larger questions, Yes. If I zoom out, certainly, there's always more to do. And certainly, the beauty bottom line performance, in particular, is something that's left to do for Gael. As you remember, it's a story of 2 halves or 2 or 3 hemispheres. On the 1 hand, we're very proud with the turnaround we've achieved in Europe, and I won't repeat all the things we did with shutting down plants, improving cost base and Europe is firmly in the target range. Asia has done very well and is well above that. But we have fallen short in the Americas for different reasons. We've fallen short in North America and still wrestling with operational issues. And now came this Brazil situation. So with respect to the future, time certain, I certainly made the mistake. I'd give a time certain so, but I'll leave it to you, [indiscernible].

Yes, the 1 comment I will make, Sean. Last time I worked in Jilinsometimes ago, more than 8 years with pharma. What I'm doing right now is really focusing on making sure we have a fresh Q1 perspective as we look ahead. So we've been reengaging more with the business, visiting factories our team around the world and more importantly, I mean to engage with customers. And what I can tell you is that we've got -- we've got all the ingredients. We've got deep customer relationship, and they are really looking at Aptar. It's not just being part of their supply chain, but being part of their success. So looking ahead, what I'm going to be looking at. And for sure, I mean, we're going to look at building on what works, adjust on cost correct needs to be corrected, protect met at our special and to really focusing on delivering on our commitment and preparing the company for future growth.

Okay. Look, I just want to step in quickly here, and I'll turn it over. time certain we've been patient, you're investor have inpatient. And look, the track record of APRA has been quite good over the years. So no complaints with that. But within beauty, does it come a time where you actually take action in the next year to do something more structural to fix the performance there .

Yes. Maybe I'll jump in first. Look, we, of course, have -- we are not taking the situation as it is, and we have clear ideas on how to also address short fall in the Americas, but it's too early to commit to that. .

I mean is open-minded approach and looking at best interest for our customers and our shareholders. And I will come back to you, Aman, due course.

The next line comes from -- the next question comes from the line of Paul Knight with KeyBanc Capital Markets. .

Congratulations out. The -- as I look at the quarter, the gross margin was not the driver of expansion in Q2. It was the off margin line. with a big drop in SG&A. Going forward, I think it's implying margin expansion. Is it more the gross in line that we should talk about modeling Vanessa on what's already been a good margin expansion period in Q2?

Paul from Bank -- let -- thanks for the question. We're actually quite happy when you think about the emergency medicine pullback was the largest in quarter compared to the prior year, and pharma was still within the long-term guidance range. So we certainly, as the emergency medicine situation normalizes, we expect the company margin to get back within its guidance range and not just the -- within its long-term target and not just the pharma business. We didn't quite fully understand the rest of your question. Maybe you can repeat and then Monese will address.

Should we expect gross margin expansion in the second half of the year? Or is it still below that line item?

Yes. As we had said earlier on previous calls, okay, thank you, Paul, that we understand the question. So a lot of what you're seeing on the gross margin line is the emergency medicine dynamics that we previously discussed. And that dynamic was strongest in the first half. So 2/3 of that year-over-year headwind was incurred already in the first half. which will have the greatest amount of pressure on the gross margin. And so as that starts to ease in the back half, I do absolutely expect gross margins to improve from where we've been in the first half. Also Q2 was the biggest quarter of that EM headwind as we had previously communicated. So that's the compression that we see .

Also, we see progressive improvement both in beauty and enclosures. -- codes are already progressive impot improvement but will continue as the maintenance issues abate -- and we also expect a progressive improvement in beauty. .

And then lastly, on pharma, really solid 8% quarter of growth. Is that momentum continuing here in rest of year? .

Yes, I can take that question. So we said that we are confident with our long-term targets. And 2026, it's in the story on the emergency medicine as we explained to you -- we've got a strong pipeline. Pipeline plant conversion is robust. The underlying market strong and customers really are looking at us to be the partner of tract support them from early stage to market launch. So confident to be in the long-term target.

The next question comes from the line of Ghansham with Baird.

Congrats on our end as well. I wish you the very best along with you, Gil. It's been a pleasure working with you Stephane. -- early. I guess during the first quarter, if I remember correctly, Rx was down by 10% and roughly half of that was emergency mitigation related was part of the improvement in 2Q then just related to the catch-up from the previous shortfall in Rx. I'm just trying to get a sense as to what the underlying growth is in Rx suggesting for obviously a lot of noise with the destocking and comparisons and so on. .

Yes. Again, Sam, when you look at the pharma business, I mean, we are present in different categories. The Asman market has been a great market for us, I mean, in the quarter. And you know that the market is going to transition to a new propellant and Aptar is well positioned in that transition. You know that we are supporting the FDA and defining the guidelines for proper and switch approval. If you look at the press release recently, Chiesi announced the very first [indiscernible] and COPD price using the new propane gas in U.K., we Aptar solution. So the underlying performance of prescriptions is also announcement COPD or performance.

And for my second question, first off, can you confirm if there's any benefit from any sort of tariff refunds and so on and so forth? And then, Gil, back to you, obviously, core sales in pharma have been below trend for 2 years now, different reasons for that last year versus this year, but it has been 2 years. And you've expressed confidence as a company as it relates to the secular growth there and so on and so forth. In 2027, is there any reason why we should not expect growth in pharma at this point to be within your 7 to 11 core sales growth sure.

You know that I'm not guiding -- we are not guiding for the year. So -- the long-term target of Aptar in the 711 ones coming from the underlying robustness of our pipeline. -- and the market positions we've got with our customers. So confidence is there. Yes, some years, we're going to be up some years, we're going to be down. If you look at the past performance for the last 8 years, I mean, I would say we have pretty much deliver on our long-term targets. So the team remains focused on what delivering on our commitments, continuing to sharpen to strengthen our capabilities in order to become or to stay the leading company in our respective market. So this is with confidence there.