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

Joining us today is Gael Touya, who is as of September 1, President and CEO, congratulations, once again. And Mary Skafidas, IR, so this session or these sessions are intended to be interactive. To the extent there are questions in the room, please do not hesitate to ask. And with that, I would like to just Gael, maybe give you a moment to a quick introduction and your 9 days on the job, -- but you've obviously been at Aptar for a long time. Nobody expects a strategic overhaul this afternoon. But as you've kind of prepared yourself for the new role, -- what are some -- maybe 2 or 3 things as you look across the organization that are sort of core to what Aptar is and nonnegotiable in terms of we're not going to change -- we know we're not going to change this. If you will.

So thanks, Gabe. And I'm first pretty excited to be with you. So thanks for the invite. Now in days into the job and still a lot so good. But as you rightly said, I mean, more than 30 years with the company in a different part of the organizations, all the 3 segments and different working and living in different regions. But I will share with you 3 elements. I mean the first one being the customer and Trade City, I mean, I want us to continue to be perceived as the preferred partner for our customers and to develop this kind of very tight relationships. So for me, that's not negotiable. I'm not here to be a supplier they have to be a partner of choice with WOM as a customer because we bring the right value proposition, experiences and capabilities you're going to co-invest with. That's number one. Number 2 is innovation. In that space, I mean for me, innovation is the -- one of the only sustainable competitive advantage of any company. So for me, innovation is what will give you that ability to be perceived as a preferred partner. And number 3 are in performance mindset execution. I'm coming with an earlier decade in pharma, when you play in the pharma space, you know that your quality of supply, your your safety of supply is not negotiable. And this is the same for the other segments. I mean L'Oreal is winning for a new product because they've got a new product to be introduced on the market and they sign already with all the I don't know, say for of the world that they're going to get product on time for their product launch. I mean, you better have as a partner to be on time with good quality products. So that will be the 3 elements on me cross segment are going to be looking at where we need to really strengthen our leading position. But at the same time, where we need to look at cost correcting and to improve performance and how we can unlock value across the organization.

Got it. On the Q2 call, you talked about visiting some factories. And again, I maybe some preliminary groundwork for setting the stage to step into the new role. You obviously ran pharma, I think, since 2017. So maybe not as close with beauty and closures necessarily. Again, not asking you to grade anyone. But as you're going through that process, -- and I guess, in fairness, Beauty has had a couple of stumbles here in the past couple of years, some of which were outside of web, Aptar's control. But just think that you're looking at within those 2 segments that you were like maybe couldn't see from pharma that you're paying attention to?

Yes. So I've been -- I started my listening tour, and I will continue -- and that listening to is putting me in front of the business, I mean, at any level of the organizations, but also with customers and partners. And what I will say for the 2 segments, Amin, there's a very strong technical capabilities. You've got people extremely committed and engaged for their business and had very interesting conversation around talent management, for example, our people are asking us to be way more agile and to accident some process decision approach. But when I look at the 2 businesses, there are 2 different realities. I mean, on one hand, beauty, is outside our long-term target and outside their potential. This being said, have seen regions that are well within the long-term target and I call say, Asia is well within the long-term target but also Europe, knowing that Europe is our largest market from a beauty perspective. Americas is a problem. I mean, LatAm for me is temporary. They're going to -- they show rapidly be back on track where they should be -- the #1 problem for us is really a North America beauty. I'm not satisfying at all with the performance over there, and we need to be way better from an execution standpoint. So -- and everything will come down to -- you set the expectation, you've got a culture of execution with discipline and clear accountability and a sense of ownership through the organization. So that's what I've seen. Closure they've been within the long-term target. They've been off. They have been within. We need to be reliable from an execution standpoint, and we have been facing 2 problems -- for production ramp-up and the other one was for a maintenance issue in one of our manufactories, performance is a little bit lower than the long-term target, but the top line is there, the business category, the pipeline and the mindset and for me, I'm confident that they're going to be back within their long-term targets.

Okay. Maybe we'll come back to Beauty in a second. But I think you closed the second quarter call talking about 3 priorities: profitable growth. You've talked already a decent amount about execution. So I think that's pretty clear. and then allocate capital. And I guess what's becoming more evident to me over time is companies that consistently are profitable, they're capital aggregators and then it ultimately rolls up to you to decide where that goes, reward shareholders, share buyback, et cetera, to make acquisitions. If you had to kind of pick one today, that's maybe been a little bit of a binding constraint looking backwards on, I'll say, the Aptar value creation which one do you think was kind of a little bit of a thorn?

Execution. I mean, we don't control the weather conditions, but we control the way we navigate those different weather conditions. So Beauty and closures, I mean, two of them got good fundamentals from a market standpoint. Market is growing. So we've got long-term relationship with customers. They want more for Aptar, with more listening to. We've got good technology. We need execution. We need to make sure that through accountability, we need to make sure we lead with accountability. So we set the expectation. We control transparently the performance and we deliver this upon our commitments. We need to move with agility. We need to simplify the way we work internally. We need to reduce complexity. We need to accelerate decision-making process. And we need to win through accountability. I mean -- and we need to transform to turn what I will say, our great market position into market leadership, we have but into sustainable profitability for the organization. So execution very far.

It's obviously a health care conference, turning to Pharma. Hopefully, this is one of the last quarters that we're talking about this emergency medicine destock issue. Lab update, it was on track. We knew it was going to be about a $65 million to $70 million top line hit abating -- starting to abate in Q3, mostly gone by Q4. Some of the data that I look at actually suggests the molecule has started to inflect positively from a Scripps standpoint, and I appreciate that's not the only channel in which this kind of drug gets distributed. So -- any updates for us there funding-wise or just we've got line of sight feel good about.

You've got good public health program. You've got good funding program that are critical to tackle the ovidoperadose situation. We are on track with the 65 million total impact in H1 and the remaining for the second part of the year. You know that we have to rely a lot on our customers because you don't have any public information. I mean, I can't go to Nielsen and to buy Nielsen to get the sell out of the product. I mean it doesn't work that way. because the #1 market is public market interest. So -- and when you listen to those different players, they are telling us low mid-single digits. So we have to track on that one early 2027, we're going to better know where the best line has been reset up to build from. But fundings, public market interest discussing with our customers, they are all trying to make sure that you've got, let's say, opioid overdose using our technology everywhere on the market. And yes, that's a $65 million top line hit. And margin-wise, also, we are losing that contribution. Maybe I could share that we factor in early on this kind of navigating impact. If you exclude the margin from this emergency medicine, pharma margin up. And here also, you don't have any -- I don't have magic recipe there than being disciplined on the execution and making sure that we prioritize we execute, we deliver on time to make the overall machine, I mean, more performant. So I was very pleased to see that excluding emergent citizen, prescription is at 8%. I mean, in Q2, injectable is at 9% following 2 quarters where they were in the 20% because the market is growing and the market is asking for solutions. CHG has 15%. So excluding emergency medicine, yes, the seven element algorithm and that framework still solid for us. It's a long-term commitment.

I was going to go to the 7% to 11%. So what kind of -- what excites me and we're overweight on the stock, and it's one of our favorite ideas as we sit right now, particularly given we want to lean into defensive names in the moment. Your model is a little bit unique relative to maybe some other folks that are here at the conference or even packaging in general. You've talked about roughly 90% of your revenue is recurring and growing. And then you get the remainder contribution from the pipeline of new molecules, new product introductions, things like that. Can you talk about sort of the magic of -- I mean, you say we don't have a secret sauce, but there is a little bit of a unique strategy that you have or...

So when I come on that business, back in '17, I mean, we were what, USD 750 million, good technology, but we will have predominantly a product-driven organization. You need a product to dispense your solution for a specific route of delivery is a pulmonary of TAC and so on and so forth. Here, our product and fantastic technology. I mean, fantastic technology. So we have been keeping evolving and developing and strengthening our technology. Don't get me wrong, but the point was to gain flexibility in the value chain. And to say, well, if 70% of all the R&D work is done by molecule early-stage biotech company, I mean, maybe we could partner with the scars in the early stage of their development. And then to follow the molecule from formulation from a difficult support also whenever they're going to face the FDA or any regulatory bodies. And that was the decisions taken by the Yes, we're going to be on top of delivery devices, a combination product player that will be able to provide formulation, support for any drug to be repurposed through the nose of the loans or from an analytical standpoint and the regulatory goals, they are raising the bar always. So we've got that expertise -- we strengthen a lot our regulatory capabilities in order to support our customers to navigate such complexity. So when you are in the early stage, they don't specify your product -- they're going to generate data to demonstrate compliance, efficacy, safety to the FDA, and they're going to stay the course with you. And we were even a year ago or a little bit more than a year ago, we went even to acquire the company doing clinical testing Phase I and Phase II. So the ability to work direct substance and to fill the substance with our product for our customers to do clinical testing and guess one, they stay with us. So the magic recipe is to follow the molecule to be the partner of choice and to look at different ways to extract value with them. Why not? Instead of waiting edge product on the market, we can have fee-for-service, more we can discuss differently saying, well, guys, maybe we would like to have a kind of biotech value extraction model, why not for your different milestone. Going to put resources to superior program. phase one, you're successful. I want to cash in Phase 2 year successful. I want cash-in. Change of control. I want cash-in, because I've been supporting you early-stage biotech company to be acquired by a big guy. So that some of the magic gradients, if I miss it, not so magic, but that is making our value proposition so robust. And it's 1 side. The other side of this magic recipe is we are a customer and a patient-centric organization. Everything we are doing within patients -- we've got user experience capabilities, how to unbound patients, how to remote monitor a patient in a world where the health care market is moving a lot from clinics to virtual settings are at home, how to support them. We bring this element of differentiation, and we extract value from.

I'm an analyst, so I have to ask the question. You talked about maybe 6 or 7 years ago, the change in mindset to maybe going -- I'm going to say co-invest. But with some of those customers on the molecule presumably a scientist on staff that are saying this one has a higher probability of efficacy than this one or something like that. Do you guys track I suspect you do -- the number of projects that may be starting point indexed to some level, and now you're 200, you're up 2x on opportunities sort of in the pipeline, irons in the fire, if you will. Conversion rate, things like anything that -- and a little off script, but I'm just curious if there's something since you're running pharma.

How much we can I mean, to support the algorithm. And so that's something we are working on because when you listen to pharma company, they're going to open this here. This is the number of office on I've got a number of Phase II. This is the readout for Phase III that I'm expecting and so on and so forth. So that's something we are working with Mary to improve the way we could disclose our pipeline because, yes, -- we are very strict on our pipeline build and pipeline conversion, and we follow all the steps and so on. And at the same time, because in many route of delivery, as we've got a leading position I don't want to give indication to my competitor. That's where I do some or gone. They are sniffing around. There's maybe something interesting. What I will say though is that everything that goes through the nose that goes through the lungs. We are behind any kind of development, and we are trying to support our customers at best. And this building of drug capabilities behind and have been helping us to move from, I would say, kind of big congestions. -- you sit through the nose to treat issue. Nose is running, your nose is black, -- you've got some energies. And now we've got more and more through the nose blood system for different kind of products you know Tachycardia, Emmis I mean, edema for water retention problems, opioid overdose, severe hypoglycemia and so on. And we are also working a lot around the note 2 brand. We all have a blood brin buyer that are this broadband buyer is protecting basically our brand. You take our Lit goes to your GI track on our fraction will go to brain for different kind of treatment through the nose, you can directly go to very specific part of the brand -- that's where we're looking to develop the science and the analytical capabilities to provide the support to of the early stage biotech to wear and develop their solution.

So you mentioned a couple of drugs I had it on the list. [indiscernible] a couple of these products. I know it's difficult to say in terms of uptake and how physicians are going to adopt different drugs and treatments and things like that. But just as you look across the addressable markets, maybe internally, are there 1 or 2 drugs that you're more excited about today than maybe you were 6 months ago? Is question #1. And then anything in the pipeline on the generic conversion opportunity because I think that's unique again to Aptar as drugs go from patent-protected generic and maybe over the control sort of the multiplier effect, if you could talk about that a little bit?