AptarGroup, Inc.

Attention everyone. Thank you for your patience. Please remain holding as the call will begin shortly. Once again, please remain holding. The call will begin shortly. Thank you. Bye. Ladies and gentlemen, thank you for standing by. Welcome to APTAR's 2024 first 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 Mrs. Mary Scafidis, Senior Vice President, Investor Relations and Communications. Please go ahead.

Thank you. Hello, everyone, and thanks for being with us today. Joining me on today's call are Stefan Tanda, President and CEO, and Bob Kuhn, Executive Vice President and CFO. 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 reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. As always, we will also post a replay of this call on our website. And now, I would like to turn the conference call over to Stephon.

Thank you, Mary, and good morning, everyone. We appreciate you joining us on the call today. I will begin my remarks by highlighting our first quarter results. Later in the call, Bob Kuhn, our CFO, will provide additional details on key drivers for the quarter. Starting on slide three, for the first quarter, I'm pleased to report that AFTAR achieved core sales growth of 5% and delivered adjusted EPS of $1.26, and more than 30% increase over the prior year quarter. Strong demand for our pharma segment's proprietary drug delivery systems and improved performance for the injectables unit as well as the recovery in North American consumer ed markets contributed positively to our quarterly results. Our pharma segment continued to see robust sales of our proprietary drug delivery systems with high single digit core sales growth in the quarter following more than 30% core growth in the first quarter of 2023. Demand was broad based with growth in every region and across several market categories from emergency medicines to allergy treatments and central nervous system therapeutics. As a reminder, our proprietary portfolio of drug delivery systems is expected to grow within our 7 to 11 long term core sales range target also this year after strong double digit core sales growth in 2023. The injectables unit saw a marked improvement over the prior year quarter as the ERP system implementation headwind from the first quarter of 2023 did not repeat, and demand for elastomeric components for the biologics market continued to grow nicely. 2024 continues to be a built-out year for injectables as the final phases of the capacity expansions announced in 2020 for France and the U.S. come online and are expected to be validated for commercialization in early 2025. In our beauty segment, first quarter core sales growth was basically flat year over year with a challenging comparison of a strong first quarter 2023 that was driven by exceptional sales in Europe for fragrance dispensing. As a reminder, last year, market growth was driven by a boom in fragrance launches post-COVID. As previously mentioned, we expect continued growth for fragrance dispensing solutions for the year, but at a more measured pace. Even as sales in Europe normalize, adjusted EBITDA margins for the region were well within the beauty segment's long-term EBITDA margin range. Turning now to North America, while some end markets remain soft, overall the region is showing clear signs that the widespread destocking is coming to an end. We continue to expect that recovery will not be linear and will be different end market by end market across our beauty enclosure segments. Our focus on footprint rationalization and reducing fixed costs remains a top priority in 2024. Over the last several quarters, we have improved margins. As a reminder, since 2022, we initiated formal cost reduction programs in several European countries, including two social plans in France. We are reducing the beauty segments European workforce by about 5%. And as previously mentioned, the closing of a facility in France that serves closures is expected to be finalized by mid-year. This is in addition to the facility that was closed last year in North America. Additionally, quarter over quarter, we have reduced selling general and administrative of an SG&A as a percentage of sales by 50 basis points. Looking ahead in the second half of the year, we plan to close our manufacturing operations in Argentina for beauty and foreclosures, but maintain our pharma manufacturing operations in the country. We will continue to review and streamline our footprint to increase operational leverage while meeting market demand. Now moving to slide four, highlighting recent corporate awards and recognitions. We firmly believe operating in a sustainable manner and developing more sustainable product solution is an important competitive advantage for Aptor. As a reflection of our progress during the quarter, we were named one of Barron's most sustainable U.S. companies for the sixth consecutive year, ranked number 29 out of 100 companies for 2024. CDP, formerly known as the Carbon Disclosure Project, also named us as a supplier engagement leader for the fourth consecutive year due to our contributions to emission reductions throughout the value chain, a recognition that is highly valued by many of our customers. Lastly, Capital Magazine identified APTA as one of the 2024 best employers in France, where we are now number 14 in the healthcare and pharmaceuticals category. Before I turn the call over to Bob to share further details on quarter one, I want to speak about innovation and highlight recent technologies and product launches as shown in slide five. Starting with several launches in our pharma segment, our airless plus system is the drug delivery solution used to treat rosacea, recently approved by the National Medical Products Administration in China. Our proprietary ophthalmic squeeze dispenser is used for Apwee's Refresh brand of an over-the-counter lubricant eye drop treatment in the U.S., Next, our Pure Hail technology is used to dispense Frida Baby's ultra-fine natural sterile saline mist in children's cough and cold. Finally, in Turkey, our nasal spray pump is used to deliver a new allergic rhinitis treatment. Turning to beauty, Cody's new Marc Jacobs Daisy Wild Fragrance features our fragrance pump, custom overcup, and green colored dip tubes. Aptar's recyclable airless dispensing system is the delivery solution for Avene's dermocosmetic rosacea lotion. Our reloadable airless technology is featured on a skincare launch by Chinese beauty brand Zubin, and our fully recyclable lotion pump is featured on a new men's skincare line in the U.S. Moving to closures, our sports cap is the dispensing solution for PepsiCo's new Gatorade water. And our monomaterial, temper-evident closure is featured on a line of boss water, both found here in the U.S. Our fully recycled tube top is used for Unilever's St. Ives brand skin scrub. Finally, our temper-evident snap top closure that features a customizable in-molded scoop is featured on NutraFarm's protein supplement in Latin America. Now I would like to turn the call over to Bob.

Thank you, Stefan, and good morning, everyone. Starting on slide six, I would like to summarize the quarter. Our reported sales increased 6%. This included a currency translation benefit of approximately 1%. Therefore, core sales grew 5%, primarily due to strong growth in pharma's proprietary drug delivery systems and improved injectable sales, as well as in recovering North American market. As shown on slide seven, we reported first quarter adjusted earnings per share of $1.26, which is a 31% increase over the prior year's adjusted EPS. During the quarter, we achieved adjusted EBITDA of $179 million, which increased from the prior year's first quarter by 16%, driven by expanding margins in all three segments. Improved operational performance and a lower tax rate led to a higher earnings per share result versus the range provided in our outlook. Turning to some of the details by segment for the quarter, our pharma segment's core sales increased 13% due to volume growth, especially in our proprietary drug delivery systems and elastomeric components. Looking at sales in the pharma segment by market, we will start breaking out our proprietary drug delivery systems, which performed extremely well in the quarter. Prescription core sales increased 10%, driven by strong sales of allergic rhinitis, asthma, central nervous system therapeutics, and emergency medicines. Core sales for consumer healthcare increased 2% due to higher demand for nasal saline and nasal decongestant solutions, which more than offset the decline in dermal. Injectable core sales increased 54% over the prior year quarter, which was adversely impacted by an ERP system implementation affecting operations and shipping days, which did not repeat. We saw increases in several end markets, including elastomeric components for biologics and small molecules. Core sales for our active material science solutions improved in a quarter, increasing 2% with returning demand for our products used on probiotics and oral solid dose applications. Pharma's adjusted EBITDA margin was 32%, a more than one point improvement from the prior year's quarter. Turning to our beauty segment, core sales decreased 1% in a quarter. As anticipated, sales of our fragrance dispensing solutions slowed, after a period of rapid growth in 2023. Volume growth for beauty increased, but was offset by resin pass-throughs. Core sales for the beauty market were flat in the quarter. Overall, difficult comparisons for prestige and mass fragrance dispensing solutions in the prior year quarter contributed to the muted results. Regionally, sales in North America showed signs of recovery with strong facial skin care sales. Core sales for the personal care market decreased 4% due to widespread market softness, primarily due to decline in sun care applications. Home care core sales increased 2%, driven by sales in North America and Europe. This segment's adjusted EBITDA margin for the quarter was approximately 13%. The margin improvement was due to improved operational performance, along with our continued focus on cost management. The closure segment's core sales increased by 1% compared with the prior year's quarter due to an improving North American market with increased personal care and home care sales. The positive impact from the improving North American market was offset by lower beverage sales in Europe as customers continued to transition to a new environmentally friendly closure. When looking at sales by market for closures, food core sales increased 3%. This includes strong tooling sales in North America for food closure capacity expansions in the first quarter. Strong growth in our dry spices and food protection products contributed positively to the results, while North America and Europe led regionally. Beverage core sales decreased 4%, primarily due to market timing around customer conversions to tethered caps in compliance with European regulations. Core sales for personal care closures increased 2% after an extended period of decline. Regionally, rebounding demand in North America and Latin America had a positive impact on the quarter. In our fourth category, which includes beauty, home care, and health care, core sales decreased 5%, due mainly to a decrease in beauty closures. The segments adjusted EBITDA margin was 15% for the quarter, a slight increase over the same period last year. In Q1 2024, cash flow from operations was approximately $92 million. Free cash flow was approximately $17 million for the quarter. In the first quarter of 2024, we had capital expenditures of approximately $76 million, the majority of which were in our pharma segment for capacity expansions in North America, Europe, and Asia. Reported depreciation and amortization expense increased 9% over the prior year quarter, to approximately $64 million, or 7% of sales. Moving to slide eight, which summarizes our outlook for the second quarter, we anticipate our strong momentum to continue and expect second 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 $1.30 to $1.38 per share. The estimated tax rate range for the second quarter is 22 to 24%. We are expecting currencies to have a small positive impact compared to the prior year quarter. We currently estimate depreciation and amortization for 2024 to be between $260 to $270 million. We expect our capital expenditures in 2024, net of any government grants, to be between $280 and $300 million, with the majority of capital allocated toward our pharma segment. In closing, we continue to have a strong balance sheet with a leverage ratio of approximately 1.4, 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 total approximately $27 million in a quarter, we repurchased about 86,000 shares for approximately $12 million. At this time, Stefan will provide a few closing comments before we move to Q&A.

Thanks, Bob. In closing, following a very strong start in quarter one, we see our momentum continuing in quarter two and the balance of the year. Demands for our proprietary drug delivery systems will continue in the second quarter, as will demand for elastomeric components for biologics. As a reminder, we expect our proprietary drug delivery systems to grow within our long-term core sales target range of 7% to 11% for the full year. We see demand for our consumer dispensing, especially for our closure technology, to build in quarter two as the North American market continues to recover from destockment. Improving EBITDA margins through cost management and operational performance continues to be a strong focus. With that, I would like to open the call up for your questions.

We will now begin the question and answer session. In the interest of time and fairness to all participants, please limit yourself to two questions and then come back into the queue if you have more questions as time allows. The first question comes from a line of George Stappos with Bank of America. George, please go ahead.

Thanks. Hi, everyone. Good morning. Hope you can hear me okay. Thanks for the details. Stephen, you mentioned again that you expect pharma to grow in its normal core growth range of 7-11%. And that's terrific, given the comparisons. Obviously, saying and doing are two different things, but taking that at face value, how should we expect the various end markets or product categories really to trend this year within that 7-11%? That's my first question. Second question, to you both. In terms of the timing issues that you mentioned in terms of beverage closures in Europe, should we be worried at all about what the implications are longer term for plastics and beverages in Europe? Yes, you're benefiting from the tethered closure, but is the tide going out to sea, so to speak, and that's something else you're going to have to worry about longer term. Thank you.

Thanks, George, and we could hear you just fine. Look, within pharma, the proprietary drug dispensing solutions are growing really, really nicely, and we don't see that to change for the year. And then, of course, in biologics, we are rebounding from the situation with last year, plus we see continued good growth. For us, the COVID hangover was not significant in injectables, so we just benefited from real growth. Now, the year-over-year comparisons for every quarter are going to be a bit screwy, sorry for the technical term. But overall, we see good growth in injectables as well. Same for active material solutions returning to growth. So it's really... broad-based, led by the proprietary drug dispensing solutions. And that obviously bodes well for the business. Now, in terms of beverage, look, right now everybody's transitioning to the tethered caps. There is some inventory effect. There is some technical effect of getting machines adjusted to the new caps. But overall, we don't see any concern to the beverage business. I think we are past plastic peak panic, even in Europe now. That may not be true for some capitals, but overall, the reality of carbon footprint and total lifecycle analysis, I think, prevails. You saw Unilever also pushing out their goals to 2030. I think there's just a general pragmatism that returns.

Thank you, Stéphane.

Thank you. The next question comes from the line of Gancham Punjabi with Baird. Your line is now open.

Hey, guys. Good morning. You know, obviously very, very strong growth in pharma, and I know the reasons for that in terms of the base effect from last year. Did the operating margins come in in line with what you thought they would? I'm just asking because last year, you know, in the first quarter, obviously margins were down on a year-over-year basis. You have built up very nice operating leverage over that level, but I just thought there would be a little bit more mean reversion just given the extent of growth. And maybe a parallel question is, is that mixed related just because of injectables having that sort of outsized growth?

Hi, Gancham. Yeah, I would say pretty much in line with expectations. Remember that when injectable grows much faster and 50% is much faster, that has a negative mix impact on overall pharma, and therefore you don't see a bigger expansion than you might have liked. So overall, this is fully in line. The other point I would make, if there's one business we keep reinvesting in, including cost, it's of course pharma. We keep reinvesting in innovation, in new business development. So margins are in line with what we expected.

Okay, sure. Thank you. And then for fragrance, you know, just expand on your sort of outlook for the rest of the year. I mean, obviously comparisons are going to be difficult. We've talked about that in the past. Are you expecting growth to still remain positive for that segment? What's the customer sentiment at this point specific to that market?

Yeah, sentiment remains positive. Of course, the comparison quarter one in particular, given the boom of launches last year is difficult but we would expect fragrance to continue to end the year somewhere in the 3-6% range we see the regions continuing to perform well and as a reminder what we sell in Europe ends up all over the world especially in this segment and also some good strength in Latin America so overall I think the 3-6% makes sense

Perfect. Thank you so much.

Thank you. The next question comes from the line of Daniel Rizzo with Jefferies. Daniel, please go ahead.

Good morning. Thank you for taking my question. You mentioned that the capacity expansions in pharma are coming to an end. I was just wondering, you know, post that, what your capacity utilization would be with those segments and, I don't know, at what point you would think you would have to expand further? like what we can expect over the next five years.

Yeah, I think we are done with big new buildings. And again, if you come on the trip with us later this year, you will see it. I mean, it's a phenomenal state of the art new building. We're done with that kind of, but within the building, we can further creep capacity. So certainly, We have ample capacity as this new capacity is being validated, and then the capacity increments, if they need it down the road in the five-year period, they will be more of smaller increments as we increase cavity counts, as we further automate within the existing building. I mean, we may add another wing in Congress, but that's nothing like what we had to do in Granville, right?

When you do the expansions within the facility, is it easier in terms of getting approval or making sure to make the past six inspections?

Yeah. Of course, every new tool has to be validated. Every new machine has to be validated, but it is in the context of an ecosystem where the crew is fully up to speed. and that can be happening in the ordinary course. It's not a massive, big investment like the new Grandville 2 facility. I mean, we've made investments all along. We didn't make a big deal out of it, you know, as we upgraded, let's say, as we upgraded Grandville 1, but the Grandville 2 is really massive.

And then, I'm sorry, oops, I think I only allowed two questions. I'll get back in queue.

Thank you. The next question comes from the line of Matt LaRue with William Blair. Your line is now open.

Hi, good morning. I wanted to circle back to injectables and just get your updated thoughts on participation rate. And really now that we've emerged from the pandemic, your assessment of how customers in the space view referencing sole source or multi-source arrangements and perhaps within multi-source, if there's a greater preference to spread volume and to the extent your participation rate has improved, just how important your expanding global footprint has been to those discussions?

Yeah, we could spend hours on that question. Look, fundamentally, just to back up, you have Six basic SQs, you have plungers, you have stoppers, you have needle shields, and they can be coded or uncoated. Now, there are many more depending on the level of quality assurance, the level of data that you provide. So, as we said, the pandemic has really helped us to demonstrate to the industry that our capabilities are equivalent to the market leader. That allows that we participate in every new project. In a new molecule, long-term biologic project, people don't start having dual sourcing. They pick the horse they're going to ride. If you have a massive big product, like we were with the COVID vaccines, people did want to have a second source just for security of supply. You don't want to run out of a COVID vaccine. That's all behind us. In general, I can say our product pipeline for biologics is very strong and keeps building. And whether people choose us or other providers has a lot of factors. Technical capability obviously is an important one that's almost a qualifier, but then it has to do with geographic footprint. Ability to provide the support for a particular biologic molecule or vaccine in a particular geography. And then what is not talked about that much, but also very important business model. We fundamentally have a business model to some other people. We are not getting into the auto injector business. We're not competing with our customers, and sometimes customers prefer to deal with somebody who's not competing with them. So those all play a factor, and absolutely, having the ability to supply in region for region is critical.

Okay, thank you. As a follow-up, I just wanted to check on emergency medicine and if you've seen any that sort of change in demand for the Narcan product would be one. And then, obviously, there's maybe an opportunity on the nasal delivery of epinephrine, which could start to develop in the back half of the year. So, just curious for your assessment on what that opportunity might look like.

Sure. Let's talk Narcan first. We've spoken before about the importance of the over-the-counter approval. It's not, it turns out it's not so important for, you know, people walking into a CVS or Walgreens or Rite Aid and picking up a Narcan. That business is not so meaningful. But what it has allowed is for states to make bulk purchases of Narcan and then to distribute that in the states to harm reduction agencies, to schools, police stations, and so on, and disperse the settlement money each state has received and will be receiving for the next 10 to 20 years. So it has greatly facilitated much broader distribution into schools, into community centers, into primary responders, You know, who knows, maybe one day we all have a set of Narcan in our homes. So that's really helping the Narcan distribution. On epinephrine, we're all very excited about it, but I would caution in the end, product launch is day one and, you know, no single product. changes the game for us. But of course, in totality, they start to build. A lot will depend on what is the reimbursement philosophy of the health insurers and the payers. But certainly, we think this product makes a ton of sense. And if patients are really excited about it, eventually, it should receive good reception.

Okay. Thank you.

Thank you. The next question comes from the line of George Zappos with Bank of America. Your line is now open.

Hi, thanks for taking my following question. Bob, just looking at net cash from operations, it was down a touch from first quarter 23. You know, there probably was just some timing effects here, but could you remind us what was going on in terms of CFO being a little bit lower this first quarter versus last quarter. And then if you could talk more broadly about your goals for SG&A as a percentage of sales this year, if you care to update us. Obviously, you had progress in the first quarter. What should we expect for this year? Thank you, and good luck in the quarter.

Thanks, George. The slight decrease in the cash flow from operations, I think it was primarily due to more working capital in particular in some of the inventory areas and also in receivables Remember the first quarter was a little bit strange because you had the holiday weekend right at the quarter end So our receivable balance was a bit higher than what we'd normally expect But then all those were collected once we got into April so I wouldn't wouldn't look too much into that and then I When we look at the SG&A as a percentage of sales, we haven't really changed our target. We expect to be at a run rate of 15.1% by the fourth quarter. That's not for the full year, of course. That's kind of run rate going out, and we haven't really modified where we stand on that.

Thanks very much. Good luck in the quarter. Thank you.

Thank you. The next question comes from the line of Gabe Haiti with Wells Fargo. Gabe, please go ahead.

Thank you, Stephane, Bob, Mary. Good morning. Just two quick ones. Remind me again, you guys are carrying one to two cents of commercialization, startup costs, and pharma associated with the injectables ramp. Is that true? Would we see that flip next year or go away, I guess, maybe how to think about that?

Yeah, I think we're one to two cents is kind of where we're looking at for this year. And yeah, in theory, then you'll have that go away. And then we'll have to see where we are from a fixed cost absorption and a new plant as business comes in for next year.

Okay. And then one we sent, there's been a lot of ground covered on the CapEx side, but maybe bigger picture looking out over the next few years. Can you remind us what maintenance CapEx kind of looks like? I have a note here in our model, 125 to 150. You mentioned adding some pharma capacity, I think in three key regions. So I guess as a kind of the the targeted spend this year, can you break out what's still the injectables investment carryover versus maybe what's new in pharma? And thank you.

Okay. I don't know if I have in front of me what the run out is on the injectables rollout, but on your maintenance number 125 to 150, I think as we talked, before, it's sometimes difficult for us to really categorize between a maintenance of investment and call it a productivity improvement or cost savings, right? Very rarely will we invest like for like, meaning that if we're replacing an old mold or replacing an old assembly line, we're typically doing it with a more efficient, higher output type of thing. So we would say that between true maintenance of business and some of those in-betweeners that cover also productivity cost savings, 45 to 50% of total CapEx would be in the ballpark. So I think your 125 to 150 is in the right range.

Okay. And some of the discrete projects that you have going on this year, I heard you say not on injectables, but the capacity expansions, is it just safe to say that maybe everything you're spending above that 150 this year is mostly pharma-related?

Yeah, I mean, we've talked a little bit. We do have some capacity increases in some other isolated areas, but yeah, I think that's a fair bet that a lot of the excess above the big rollouts are predominantly in the pharma area.

Just to build on that, if you look at the growth in proprietary drug dispensing systems, it's so strong. And obviously, think about the product like Narcan. You don't want to run out of capacity. So you need to expand ahead of the curve. And we're having a keen look in there. And do not hesitate to expand capacity.

Thank you. There are currently no additional questions registered. So I would now like to pass the conference back to Stephan Tanda for any closing comments.

Great. Well, thanks for the questions. As you see, we are fully executing on the ambitious plans that we shared with you last September at the investor day with a strong focus both on the top line and on delivering structural and ongoing productivity gains. This is all to ensure our bottom line grows faster than our top line. You have seen that play out throughout 2023, and we're now off to a very strong start into 2024, and we see that momentum continuing into quarter two in the balance of the year. Our order books and project pipelines remain strong. Our customers engaging very positively with our innovations and the overall value that we can bring to their brands. and drug products, including our overall sustainability contributions. A significant number of the productivity and cost reduction efforts are well underway in all regions. We mentioned a few on the call. And they will keep adding to the bottom line throughout 2024 and 2025. In addition, our teams are energized to find additional productivity opportunities This is becoming a point of pride in the company and taking root into our culture. We are increasing the competitiveness of our regional footprints with all the actions in Europe, Asia, and North America. And now you've also heard about Argentina, and we expand capacity in Mexico. As Bob said, our strength balance sheet allows us to continue to invest in growth, productivity, And we're also fans of both sides acquisitions and partnerships and have a solid track record of delivering value for shareholders. So when you consider all the puts and takes for the coming period, proprietary drug delivery systems will continue to grow even after a year of double digit growth. And we expect them to remain inside our overall farmer target growth growth target. Injectables has a strong pipeline and has additional capacities coming online. and validates through the year will be able to serve this demand. Digital health, we haven't talked about, but is continuing to improve with project wins. Fragrance will continue to grow after a year of double-digit growth, albeit at a lower rate. The stocking in North America for beauty enclosures is coming to an end. And our Latin America team is executing very well against Actually, generally, very positive economic background, but of course, with the exception of Argentina, which we are addressing. We haven't talked about Asia, but China is progressively recovering, and India is pulling very strongly. And as we talked, SG&A expenses and overall manufacturing fixed costs as a percentage of sales are coming down. So all of this makes us very energized for 2024, and we're looking forward to discuss more with you on the road.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.