AptarGroup, Inc. (NYSE:ATR) Q4 2022 Earnings Call Transcript

AptarGroup, Inc. (NYSE:ATR) Q4 2022 Earnings Call Transcript February 17, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Aptar’s 2022 Fourth Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Introducing today’s conference call is Ms. Mary Skafidas, Senior Vice President of Investor Relations and Communications. Please go ahead.

Mary Skafidas: Thank you. Hello everyone and thanks for being with us today. Joining me on the call are Stephan Tanda, President and CEO; and Bob Kuhn, Executive Vice President and CFO. Our press release and accompanying slide deck have been posted to our website. If you are following along on our website, you can advance the slide by hovering over the presentation screen and clicking on the arrows on the right and left. As always we will also post a replay of this call on our website. Today’s call includes some forward-looking statements. Please refer to our SEC filings to review factors that could cause actual results to differ materially from what we are discussing today. I would now like to turn the conference call over to Stephan.

Stephan Tanda: Thank you Mary and good morning everyone. We appreciate you joining us on the call today. I’m going to begin my remarks by highlighting our results for the fourth quarter and the full year. Later on in the call Bob Kuhn, our CFO will provide additional details on the quarter and year-end results. I will also spend some time talking about the strategic realignment that we announced in early December and the benefits we expect to achieve. Starting on Slide 3 for the fourth quarter, I’m pleased to report that Aptar achieved core sales growth of 4% and delivered adjusted EPS of $0.92 per share. We guided our adjusted earnings per share for the fourth quarter to be in the range of $0.73 to $0.83. The results are driven by strong volume growth in our pharma segment, which continue to benefit from demand for nasal decongestants and saline rinses, as well as allergic rhinitis and emergency medications.

Solid volume growth from Beauty dispensing solutions, especially in prestige fragrance and skincare, also drove positive results in the quarter. We also ended the quarter with a more favorable exchange rate and a lower tax rate than we previously anticipated. As we identified during our third quarter call, our dispensing solutions for food, personal and home care areas that had benefited from the pandemic were experiencing a decline in sales as certain customers especially in North America, are working through the safety stock they had built up over the pandemic. We are seeing signs that sales for food dispensing solutions, which were impacted first, are starting to stabilize, while beverage personnel and homecare are still being affected, although we see a few green shoots.

We received a number of recognitions during the fourth quarter. We ranked number 15 or Newsweek’s America’s most responsible companies and number 70 on the World’s Top Female-Friendly Companies 2022 by Forbes. In China, sHero recognized us as one of the Best Companies for Female Executives awards. And in France, the country where we have the single largest footprint, Le Point, a leading French news magazine named us as one of the most responsible companies. More recently, we again achieved the platinum level rating in recognition of our sustainability efforts from EcoVadis. This place is after among the top 1% of the more than 90,000 companies that are rated by EcoVadis across all industries. For the year, Aptar achieved strong core sales growth of 9% with pharma delivering 13% core sales growth, while beauty and home’s core sales were up 7% and food and beverage grew 5% for the year.

Growth in core sales for the year was driven almost evenly between volume and pricing. I am very proud of our Aptar team members around the world who had worked tirelessly to create and deliver solutions that make the lives of people better every single day. We ended the year achieving the highest full year sales and adjusted EBITDA hopefully leaving the pandemic behind us. We do recognize there is more work needed to achieve our long-term profit margin ranges. Some of that work is well underway, including our investments in new state of the art sites in France and China that will enable us to capture growth. And on the cost side, we continue our work to reduce our fixed costs and drive profitable growth and margin improvement, while spending capital wisely.

In 2022, we started to leverage our fixed cost base and reduce our SG&A as a percentage of sales. We will continue to focus on increasing efficiencies in 2023 and beyond. Turning to slide 4 through 6. As of January, our three reporting segments are Aptar Pharma, Aptar Beauty and Aptar Closures. In December we announced the strategic realignment of our closures and non-pharma complex multi component dispensing solutions, which is expected to benefit us in four key areas. First, it strengthens our market position in both closures and beauty by aligning us more closely to the way our customers are structured and purchase our products. Secondly, it better positions us to enter new and use markets for our closure technologies. Thirdly, it enables bottom line improvements by capturing efficiencies and streamlining operations.

And fourth increases capital efficiencies by leveraging common assets. In addition, the realignment builds on the work done as part of the transformation and enhances our ability to achieve our long-term targets. A key learning from that work was the closures in our complex multi component products each require a different focus. Over the last 10 years, we have grown our food and beverage business, which is predominantly a closures business and have more than doubled its revenue. Our focus was on capturing and driving conversions from a simple closure like a flat cap to value added solutions like a hinge closure that may also use our elastomeric flow control valve like the Daisy Squeeze Sour Cream in the pouch. Since then, end markets have evolved considerably.

And today, the food and beverage closures market share much more in common with the personal and home care closures markets we serve. Aligning ourselves to directly serve all these end markets in one segment will enable us to enhance our operational and capital efficiencies. For Aptar beauty, the simplification and focus of the segment allows us to better leverage our complex spray and dispensing solutions for prestige and premium brands in the beauty and personal care markets. The realignment will help us to focus on what is most important to our beauty customers, reinforcing their brand equity and providing consumers with exceptional user experiences. Aptar Beauty will continue to supply homecare, food and beverage customers that use spray technologies, which is a small part of our business today.

As we implement this realignment, we are fortunate to be guided by proven leaders in our businesses. Hedi Tlili is leading Aptar Closures and Marc Prieur is leading Aptar Beauty each of whom has broad experience across Aptar including deep knowledge of their respective markets. We have shared on past calls about the operational and supply chain challenges we have experienced in North America. That has very much impacted our ability to deliver the benefits of our transformation work to the global bottom line. In Europe, where we did not have these challenges, there has been significant improvement in operations and profitability. Beauty and home in Europe delivered adjusted EBITDA of 14% for the full year, showing consistent improvement and overcoming strong inflationary pressures.

As part of our continued focus on cost, we announced internally the closing of a beauty and home plant in North America in December of 2022, as well as a reduction in regional staffing levels, which will be completed by the end of quarter 1, 2023. And earlier this week, we initiated the formal consultation process, which is quite detailed and extensive with the European works council, the respective national workers councils and union representatives regarding a potential reorganization of our European Beauty segment. The processes will take time and will be subject to both Pan European and national bargaining obligations and timelines in each affected country. We are in the early stages of this process and we will keep you updated. We will also accelerate the streamlining of shared business functions across the company by expanding in-house business service centers in the Czech Republic, Brazil and the United States.

We expect to record onetime costs in the second half of 2023 and into 2024 associated with these efforts. While we cannot pre-empt the labor consultations and bargaining processes, our objective is to improve our margins by executing on our growth plans as well as managing and leveraging our fixed cost base. On slide 7, I want to comment on the strength of our balance sheet and our capital allocation approach. Aptar has historically maintained a strong and relatively conservative balance sheet, which has served our customers and shareholders well during challenging economic times. In recent years, we have been focusing the majority of our capital allocation toward our higher margin faster growing pharma segment. Our $180 million injectables expansion program began in 2020 and is on-going.

The first phase of our premium product capacity expansion in Granville, France has been completed. A new, additional large state of the art factory also in Granville as well as expansions of our U.S. based manufacturing facility in Congress, New York will be operational in 2024. In 2023, we expect our capital expenditures to be in the range of $260 to $280 million as two of our large projects are nearing completion. In Suzhou, China, a new plant that will serve all three segments is scheduled to progressively come online, starting in the first half of 2023. Our state of the art sites for prestige custom Beauty in Oyonnax, France in the heart of the French manufacturing beauty industry, is scheduled to open in the second quarter of 2023. The new leaders in LEED certified site brings together operations from five older, inefficient manufacturing plants into one modern site and will serve as a growing part of the market for us.

Photo by Alexander Grey on Unsplash

Dividends and share repurchases are also part of our balanced capital allocation strategy. In 2022, we returned over $190 million to shareholders through dividends and the repurchase of over 860,000 shares for $92.1 million. We completed our 29th year of paying an increasing annual dividend. Before I turn the call over to Bob to share further details on Q4, I want to speak about innovation and highlight recent technologies and product launches as shown on slide eight. In Pharma, we recently announced the first metal free nasal spray pump, a development made possible by the sustainability expertise well formed in our consumer facing businesses. When used in combination with a high density polyethylene or polypropylene container, this pump can be conveniently recycled as one piece without needing to separate or dismantle any parts.

This pump strengthens the circular approach for nasal delivery devices and serves the growing needs for simple to recycle packaging. Also in pharma we launched our first ever active bottle featuring postconsumer recycled content, which is now part of Aptar CSP technologies Activ-Vial solutions. Incorporating PCR content in our active polymer solutions is yet another step towards material circularity. For Beauty and Home, we are providing refillable packaging, made with recycled plastic for Clarins’ JoliRouge lipstick and our award winning fully recyclable mono material pump is the dispensing system for Renpure’s new hair hairline and the Body Shop’s shower wash both in Europe. Several fragrance launches in Europe feature our prestige fragrance spray pumps including perfume brands by Dior, L’Oreal and Coty.

Turning to food and beverage. Kraft Heinz is featuring our custom closures on several ketchup flavors along with our pour spout closure for their Wild Style condiment line in the U.S. In addition, our closure and flow control valve technology is featured on Hyvee squeezable, cream cheese spread in the U.S. and Prima brand condiments in Spain. As seen on slide 9, this past year also marks the first full year of operation of our InVision lab, Aptar’s state-of-the art Innovation Center in France. The InVision lab showcases the latest in design, engineering and material science that Aptar has to offer enterprise wide. In 2022 we hosted IDH sessions, with about 150 primarily beauty customers. During these sessions, we were able to engage and collaborate with our customers at a high level between our landmark investments in Oyonnax and the InVision lab outside of Paris.

Our customer engagement has continuously increased and our beauty pipeline has been significantly strengthened and grown. Now I would like to turn the call over to Bob. Bob?

Bob Kuhn: Thank you, Stephan. And good morning everyone. Starting on slide 10. I would like to summarize the quarter. Our reported sales decreased 2%. This included currency translation headwinds of approximately 6%. Therefore, core sales grew 4% primarily due to strong volume growth in pharma, in beauty, as well as price increases in beauty and home. As shown on slide 11, we reported fourth quarter adjusted earnings per share of $0.92, which is a 5% increase over the prior year adjusted EPS when we neutralize the currency headwinds we are facing. The original EPS range we gave included a tax range of 28% to 30% and assumed the euro to U.S. dollar FX rate of 0.98. Had these assumptions materialized, our adjusted EPS would have been approximately $0.81 which is at the upper end of the range we gave in Q3.

We achieved adjusted EBITDA of $147 million, which decreased from the prior year’s fourth quarter, and includes foreign currency headwinds of approximately $4 million. About half of the decrease in adjusted EBITDA was due to these foreign currency headwinds. Our team has done a good job of obtaining price increases, especially as we face continued cost pressures. At the end of 2022, we have caught up on our cumulative inflation impact. However, margins continue to be compressed, because we have been passing through costs on a one for one basis. The two year cumulative impact on our margins is about 1.5 percentage points. Our reported tax rate for the fourth quarter was 19%, including the reversal of a portion of a tax charge related to legal entity reorganization.

Adjusting for this, our tax rate would have been 21%. The midrange of our guidance was 29%. Turning to some of the details by segment for the quarter, our pharma segments core sales increased 8%. Approximately 5% of the growth came from increased volumes, especially in the prescription and consumer healthcare divisions. Looking at sales in the pharma segment by division, prescription core sales increased 9% primarily due to strengthened demand for allergic rhinitis, and emergency medicine devices. Consumer Health Care core sales increased by 11% on strong demand for nasal decongestants and saline rinses as greater consumer mobility contributed to more common ailments including colds and influenza. Consumers also turned to some of the same treatments to alleviate symptoms of COVID-19.

Our elastomer solutions for the injectables market grew core sales 6%, primarily due to higher volumes for biologics and anti-thrombotic applications. Turning to our active material science solutions, core sales decreased 3%. Active materials faced a difficult comparison to the prior year quarter due to slow sales of active film used for at home COVID-19 test kits. Excluding those sales, active materials core sales grew 6%. As a reminder, these challenging comparisons will persist next quarter. Pharma’s adjusted EBITDA margin was 32%, which included start-up costs for the injectables division capacity expansion, and enterprise resource planning system implementation of approximately $4 million. Our beauty and home segments core sales increased 2% based primarily on price adjustments with volume growth and our prestige fragrance and skincare solutions.

Regionally both Europe and Latin America had solid growth for the quarter. This positive was offset by volume declines in other regions, especially in North America, primarily due to our customers working off current inventory levels. Sales were also negatively affected in China, due to its reopening and the resurgence of COVID-19 infections. Looking at the beauty and home segment by market, beauty core sales increased 13% primarily due to increased sales in prestige fragrance and skincare. Personal Care core sales decreased 7% primarily due to decreased sales in the haircare and body care categories, while suncare continued to increase. Homecare core sales decreased 13% due to lower sales in the surface disinfectant cleaner and laundry care categories.

This segment’s adjusted EBITDA margin for the quarter was 12%. The Food and Beverage segment’s core sales declined 4% compared to the prior year’s quarter as product pricing was affected by lower resin prices. The segment also faced difficult comparisons to strong fourth quarter 2021 sales. Volumes in the food and beverage markets decreased as our customers continue to work through their inventory levels. Demand in North America and Latin America was the most impacted, but we are seeing some of the signs of orders stabilizing primarily for our food dispensing solutions. Looking at the Food and Beverage segment by market, food core sales were flat as we were able to offset resin price decreases with higher tooling sales and volume increases in our foodservice products.

Beverage core sales decreased 16%, primarily due to the challenging market conditions in North America and Latin America. The segment’s adjusted EBITDA margin was 13%, which was affected by lower volumes and related lower factory production levels, primarily in North America and Latin America. Reflecting for a moment on 2022, Aptar finished the year with strong top line growth and adjusted EBITDA. We also took steps to reduce our fixed costs, a focus that will continue in 2023. Slides 12 and 13 cover our annual performance with core sales growth of 9% and adjusted earnings per share growth of 5%, including comparable exchange rates. In 2022, cash flow from operations was $479 million. Free cash flow was $196 million for the year, up from the $58 million in 2021 due to improvements in working capital management and lower restructuring costs.

For our 3 large capital projects, our injectables capacity expansion projects, our state-of-the-art beauty site in France and our new site in China that will service all 3 of our segments, we spent about $24 million in the quarter and approximately $108 million in the year. As Stephan mentioned, 2 of our 3 large capital projects will come online this year. Reported depreciation and amortization expense decreased less than 1% or $1 million to approximately $234 million in 2022. Depreciation and amortization as a percentage of net sales decreased to 7% in 2022 compared to 7.3% in the prior year. Moving now to Slide 14, which summarizes our outlook for the first quarter. As Stephan covered, we had a strong year and a solid finish even with the industry destocking in food, personal care and home care experienced in the North American market.

We anticipate our strong momentum to continue and expect first quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs and changes in the unrealized fair value of equity investments to be in the range of $0.85 to $0.93 per share. The estimated tax rate range for the first quarter is 25.5% to 27.5%. In the first quarter, we will have about an $0.08 impact in start-up costs from our injectables expansion program and the rollout of a new ERP system. The start-up costs should step down in Q2, but we anticipate about a $0.02 to $0.03 impact per share per quarter for the year. Additionally, we are expecting some currency headwinds compared to the prior year. For example, the euro rate for the prior year Q1 was $1.12, and our guidance for the coming first quarter is assuming a $1.08 euro rate.

We have said that roughly for every $0.01 move in the euro rate, that equates to roughly $0.02 per share for the full year. So for the coming quarter, we are looking at approximately a $0.02 currency drag on earnings compared to the prior year. We currently estimate depreciation and amortization for 2023 to be between $240 million to $250 million. As Stephan mentioned, we expect our capital expenditures in 2023, net of any government grants to be between $260 million and $280 million. In closing, we continue to have a strong balance sheet with a leverage ratio of 1.7, which allows us to continue to invest in the business, pursue strategic opportunities and continue to return value to shareholders in the form of dividends and repurchases. In addition to our cash dividend payments to shareholders, which totaled $25 million in the quarter, we repurchased approximately 191,000 shares for approximately $20 million.

Before I turn it over to Stephan, I want to remind you that in advance of our first quarter earnings call, we will issue recast financials for our new segments. At this time, Stephan will provide a few closing comments before we move to Q&A.

Stephan Tanda: Thanks Bob. In closing, as Bob mentioned, on Slide 14, looking ahead to the first quarter, we expect the momentum to continue in our pharma end markets, especially in prescription and consumer health care as well as in our beauty end markets such as fragrance and skin care. The year is off to a good start, and we are excited about the opportunities ahead of us. We anticipate that the food, personal care and home care market in North America will continue to be challenged due to destocking. While we are starting to see orders to come back in food, it’s too early to say when these markets will fully recover. We believe our segment realignment will strengthen the market position of our beauty and our closure segments, allowing us to better serve customers and deliver long-term value for shareholders.

The realignment reinforces our commitment to optimizing our portfolio and increasing capital efficiencies by leveraging common assets. As I mentioned earlier, we will continue to work to reduce our fixed costs and drive profitable growth and margin improvements while spending capital wisely. This will be a key focus for 2023 and beyond. Over the last few years, we have concentrated our investments on our higher growth and higher-margin businesses and have built robust pharma opportunities that have grown in both number and value over the last 5 years. We have also invested in digital health capabilities through our acquisition of Voluntis, which offers patient support algorithms and connected devices. However, the digital health market is still evolving and results may be lumpy.

We believe this investment will give us a distinct advantage in the future. Our products are used by millions of people every single day. Our customers recognize us as an innovation leader in the drug delivery, active material science and consumer product dispensing industries. Additionally, we continue to advance our mission of becoming a proactive leader in sustainability. Our businesses have a very clear competitive advantage in growing markets with unmatched solutions. I’m very proud of all that we have accomplished in the fourth quarter and full year of 2022. With that, I would like to open up the call for your questions.

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Q&A Session

Operator: Our first question comes from Ghansham Panjabi from Baird. Ghansham your line is now open.

Matthew Krueger: Hi, good morning. This is actually Matt Krueger sitting in for Ghansham. Thanks a lot for taking my questions. I guess I’d like to dig a little deeper into the inventory situation across the supply chain. So can you provide an update on how you are seeing inventory levels across the supply chain right now, including on a segment basis across your own portfolio but then also some added detail on what you’re hearing from the customer base. I think we’ve seen in the market a mix time line for when this destocking effort could be complete, whether it be kind of in the first quarter or maybe lingering into the later part of the first half of the year. Any thoughts on that topic would be helpful.

Stephan Tanda: Sure. Hi Matt. Maybe we start off with pharma. We have very robust order books for prescription and consumer health care see good growth in injectable and active materials with the exception of the at home COVID test comparison. Clearly, allergic rhinitis is growing well above trend. Now part of that is just catching up from the low points during COVID. We just reached about 2019 volume levels in allergic rhinitis. Anecdotally, we see that usage of nasal — allergic rhinitis product is picking up further as more products come out, more combination products come out, so we’re quite positive on allergic rhinitis. And on the consumer health care, clearly, nasal hygiene has become a very different place in personal hygiene regimes, and we just see a very good order book.

The one area where the, for sure, is some inventory build is in emergency medicine as we expect Naloxone Narcan to go over the calendar sometime as early as next month or into the second quarter, and customers are building inventory for that effect. When it comes to the consumer product side, as we mentioned, we see food starting to normalize. The big question mark is, of course, in personal care, home care, beverage — we were maybe a bit early in indicating that inventory correction with our quarter 3 announcement. And since then, I think a lot of people observed the same. What we’ve heard from customers is pretty much, hey, your service levels weren’t great during COVID, so we ordered from multiple suppliers. We built up our safety stock with because then you wouldn’t have sold as anything.

And now we got 90 days safety stock, and we really only need 30. So we’re going to work that down over the coming quarters. We are proactively working with customers to smoothen those lashes a little bit by producing at a certain level so that we don’t have to lay off a ton of people. But clearly, it will take you well into through quarter 1 and maybe into quarter 2 for some of these end users. I think that’s the best we can say. It is primarily lower situation for North America. I want to be clear about that. And as a reminder, North America is about 20% of our business and — 30% of our business, sorry. And Europe doesn’t have these issues because it dealt very differently with COVID. And of course, China has also different dynamics. But it is — the impact from us from the U.S. nevertheless, is significant.

Matthew Krueger: Great. That’s very helpful. And then — maybe just touching on the raw material situation. Can you talk about any sort of raw material benefit that you saw during the quarter in 4Q? What sort of potential impact or benefit there could be from lower raw material costs in the first quarter of 2023 and guidance? And then maybe some detail on what you’re thinking about for the full year as to how that develops. We’ve seen some fluctuations with oil and resin actually ticking up recently after heading lower for quite some time. So just how that would flow through the portfolio would be helpful.