Aptargroup Inc (ATR) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup’s 2003 first quarter results 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 Mr. Ralph Poltermann, Vice President and Treasurer of AptarGroup.

Please go ahead, sir.

Good morning, everyone. Before we begin, I would like to point out that the discussion to follow includes some forward-looking comments and that actual results or outcomes could differ materially from those projected or contained in the forward-looking statements. To review important factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements, please refer to AptarGroup’s SEC filings. The information in this conference is relative on the date of this live call. Although the company will post a replay of this conference call on its web site as a service to those investors who are not able to listen today. The information contained in the replay will be dated and should be used for background information only. The company undertakes no obligation to update material changes and forward-looking information contained therein.

Our speakers today are Mr. Carl Siebel, President and Chief Executive Officer for AptarGroup, and Mr. Steve Hagge, Executive Vice President and Chief Financial Officer.

I would now like to turn the conference over to Mr. Siebel.

Thank you, Ralph.

Good morning, ladies and gentlemen. This is Carl Siebel speaking. I will briefly discuss the quarter and the outlook before turning it over to Steve Hagge, who will provide more detailed information about our [indiscernible].

In yesterday’s release we reported record first quarter earnings per share that were in line with our prior guidance. Compared to the same quarter of last year sales to all market increased, particularly strong with sales to the food and beverage, personal care, and fragrant cosmetic markets. Sales increased despite facing continued price competition. Overall sales increased due to strong organic growth and also from the impact of a weaker dollar on the translation of foreign sales. Higher startup costs than expected at our North American dispensing operation due to a large number of new product introductions from the food/beverage market negatively impacted our results. Better utilization of overhead from the increased sales, savings from our cost deduction program such as our strategic initiate, and lower interest cost helped drive diluted earnings per share for the quarter to a record level.

Now let’s take a look ahead. The situation in the Middle East, as well as the general economic environment could affect our customers and consumer actions. Also, the outcome of this [indiscernible] in international travel and its potential effect on sales of fragrant cosmetic products is impossible to predict. Aside from these, positive momentum in food and beverage and personal care markets is expected to continue, and early indications are that sales in the fragrant cosmetic market will increase over the second quarter of the prior year. Sales growth to the pharmaceutical market is expected to improve in the second half of 2003. Presently, we anticipate diluted earnings per share for the second quarter of 2003 to be in the range of $0.52 to $0.57 cents.

At this time, Steve will review the financial results.

Thanks, Carl, and good morning. I will review the financial information, and then Carl and I will be happy to answer any of your questions. For the quarter, as Carl mentioned, reported sales increased 21%, whereas excluding the impact of foreign currency translation our sales grew 9% from the prior year. We continue to have a significant amount of dollar-based sales with euro-based costs, particularly due to imports to the U.S. As a result, the positive impact you see from the translation of our foreign denominated profits was more than offset by the impact of exchange rate on these transactions. Looking at sales to each of the markets for the quarter, excluding changes in exchange rates. First of all, for our food market, we were up almost 40% on a quarter-to-quarter basis. Personal care and our fragrant cosmetic markets were up in the low teens as compared to last year, where our pharmaceutical and household markets were up low single digits. Our other nonpackaging area was down about a half-million dollars year to year.

Excluding the nonrecurring charges in the first quarter of last year, relating to the packing dispute settlement and our strategic initiative, our quarterly operating margin decreased to 11.4% versus the 12.1% we had last year, largely again due to the net impact of translation and transaction. Although the operating income line, net interest expense helped to improve our bottom line. Our diluted earnings per share for the quarter were $0.53 cents a share versus $0.36 cents a share reported last year, or $0.44 cents per share after excluding nonrecurring charges. The increase in European percentage is largely due to the strong euro compared to the prior year.

From a geographic sale perspective, sales by our European operations represented 61% of sales in the quarter versus 55% last year, and sales to customers by our U.S. operations accounted for 31% of sales in the quarter versus 37% a year ago.

Cash flow from our operations for the quarter were 22m compared to 30m a year ago, and from a balance sheet perspective, our return on average equity was approximately 12%, and our net debt to net cap is approximately 17% at quarter end. Our capital expenditures for the quarter were approximately $18.5m. During the quarter we purchased about 45,000 shares at an average cost of a little under $30 share. This brings our total shares repurchasing inception to approximately 1,380,000 and an average cost of around $26.5 dollars a share.

As we look forward, we expect our cash outlays for capital expenditures in 2003 to be in the area of 80m to 85m, with depreciation and amortization expected to be in that same range, and I would like to point out that both of these amounts may change depending on what happens in exchange rates.

Our effective tax rate for 2003 is still expected to be in the range of 33% to 44%.

At this time, Carl and I would be glad to answer any of your questions.

Thank you. If you would like to ask a question, please press star, one, on your touchtone phone, and you will be announced prior to asking your question. Once again, if you would like to ask a question, please press star, one, on your touchtone phone at this time.

Our first question comes from [Ganshah Bijadi] with Lehman Brothers.

You may go ahead.

Can you remind us how much sales were down during first quarter ’02 on a year-over-year basis core sales?

Core sales I think was – reported was down 6% and core sales were down 4% from last year.

So there has been a sequential improvement on a quarter-over-quarter basis then over the last couple of quarters?

Oh, absolutely. In fact, we’ve seen sequential improvement significant in the second half of ’02 going, you know, going into ’03.

Okay. Great. Also, what are you assuming for fragrance and cosmetics during the second quarter? You know, travel is down – it was down 17% in March, I think. The SARS virus is really causing turmoil in Asia, and I was wondering how is this factoring into your plan?

Well, again, there is a lot, as you point out, there is a lot of uncertainty out there. So it is difficult to make predictions. Up to now our business, the upper end of the fragrance business has not been affected, and short term the influx of orders continues to be good, but we have a very short-term visibility, so we are cautiously optimistic, but the impact of the SARS on one side and of the Gulf War on the other side due to the impact on the travel, and so it’s difficult to predict beyond right now something like one or two months.

But let me ask it another way. Our your customers still interested in introducing new products and so on and so forth?

Yes, we have more positive than negative information at this point. We have not seen an impact up to this point from our customer reaction, product introductions and so on in the market place. So everybody talks about being concerned, if you look at the press and so on, but in factual terms, we have not seen a negative impact up to now on our sales or new product activity at our customers.

Okay. One final question: What was the price mix during the first quarter?

Pardon me?

Price mix during the quarter. You mentioned competitive pricing and all that kind of stuff.

We’re actually down somewhat. Probably the largest part in our dispensing closures operation, but that’s been largely offset by mix issues as we go into the quarter. So it wasn’t a subsistent amount of money when you take a look at the whole business. Secondly, Ganshah, I wanted to point out in regards to your earlier question, keep in mind last year in the fragrant cosmetic market what we were seeing was a decreasing inventory by our customers, so also on a comparative basis they were decreasing inventory last year, so it was not pure consumption.

I can add to that by saying that as we have reported, throughout the year 2002, we had very strong activity of new product development and new product introductions. What we were missing was for the repeat business, the recurring business, and the good news is that in the first quarter and going into the second quarter, the recurring business now has come back, which proves to us also that this inventory reduction swing seems to have come to an end in the fourth quarter of 2002.

Okay. Great. Thank you very much. Good luck in the quarter.

Thank you.

Thank you. Our next question comes from Steve Wilson with [Rikate].

Good morning, gentlemen.

Good morning, Steve.

When I look at the pharmaceutical business on a local currency basis, it looks like it was down double digits or close to that. Could you just talk about how you’re dealing with that decline and then your outlook that it’s going to improve, improve to what – I guess I’m trying to understand whether it will get back to flat or actually up on a local currency basis?

Well first, Steve, let me go back. I don’t know where you’re with your numbers. We’re actually up in low single digits.

You said up low single digits, but I’m currency adjusting.

No, no.

No.

That’s without – excluding the currency effect. On cor sales we were up.

Okay. So all of your volume numbers were currency adjusted?

Absolutely.

Okay. Fine. That addresses A. Now, B what are we improving to?

Well we expect in the second half new product introductions by certain customers in the pharmaceutical business, and from that point we expect that the business will go back to 10% or double digits increase in sales in the second half, and we see continued improvement in the second quarter, but we see a better improvement in the second half.

Okay. And then second question is you talked about pricing pressure. Where is that showing up amongst the sectors, or where is it most prevalent?

It has been stronger than – (1) pricing for longer running items has been effect for our business for all our business always and we’ve always been able to mitigate this by having a very strong activity in new product development, new product for us, and new products from our customers. However, where we have seen lately is last year and this year more price competition was in the closure business rather than in our other businesses; however, at the same time now we also see a very, very strong success of our [indiscernible] system and some of our new product introductions there where we were are to improve our margins again. But if you ask the clear question in which area we see this more than in other areas, that’s in the closure business.

Okay. Thank you for clearing that up.

Yes.

Thank you. Our next question comes from Greg [Holtzer] of LJR Great Lakes Review.

Very good quarter.

Thank you, Greg.

I’m wondering if you could breakdown the two segments that you have in your release excluding currency as well on a percentage increase?

Well, to be honest with you, Greg, we don’t have those numbers on an ex-currency basis.

Okay. Secondly, you’ve in the past provided your European and U.S. operating income percentages.

We decided for two things: (1) The focus now going back on what we report on an annual basis. We actually don’t report that in our segment footnote and the other thing, Greg, what we’re seeing is more transactions between our divisions, for example, sales from one of our French operations to our U.S. operations and then to U.S. customers. So, unfortunately, those numbers are that geographic operating income is becoming more and more distorted, so we made the determination not to start reporting that because I don’t think it’s giving an accurate reflection of where we’re earning our money.

Okay. Fine. The food business you mentioned was up 40%. Is that really the [Simply Squeeze] that’s driving that and anything in particular there?

Well there’s certainly Simply Squeeze driving it also, but it’s not the only effect. What we are seeing is a move of the market to inverted packaging and that is helped strongly by the utilization of our Simply Squeeze system. So the two together have a very big improvement for convenience of the consumer, and that is now seen by many marketers, and that is why we have a surprisingly strong activity of new product introductions specifically in that area in the first quarter of 2003. So we have – Simply Squeeze certainly is a major factor in there, but it’s not the only factor. The inverted packaging trend, which seems to get more and more generalized, is driving our sales increases also. So, for example, there is Wishbone who have selected our product with Simply Squeeze, and there is a product peanut butter in a tube which will use one of our other closure systems without Simply Squeeze. So the two trends together multiply each other. You have seen that Heinz has introduced Ketchup in inverted packaging with our Simply Squeeze system. Del Monte has done it also. Hunts has done it and there are salad dressings, honey, there are all kinds of food products and we believe that this will continue to improve our sales and our margins in the months and years to come.

I have two Wishbone Ranch Dressing packages in the refrigerator right now. The kids love it. I’m wondering if you can speak any further on the pipeline on the new products in any or all of your different segments?

We see continued success, for example, in the fragrance business with our new sampling system called Click and Dream which we introduced a year about ago and we see a lot of increase in sales also for our so called very small, low-profile pump systems in the fragrance business. We have some other areas, some other new product introduction in the fragrant business.

In the pharmaceutical business, we see a lot of projects which are where the pharmaceutical industry tries to replace syringes by either lung inhaling systems or by nasal systems. We have quite a few projects in that area.

We have also in the beverage business our Simply Squeeze system is equally penetrating. There is a company called [indiscernible] which is using and has introduced a bottled water with Simply Squeeze. Same thing happened in Germany with a company called [indiscernible]. We have introductions on bottled water in Asia and South America, specifically in Mexico, also. So our Simply Squeeze system is making in roads in the food and in the beverage area.

We have in the area of suntan lotions, customers are now using our newly developed upside down pump system to replace noninverted packages by packages which can be used in all positions and that market which partially was still using to a large extent more dispensing closure systems is now moving into pumps which gives us higher margins and it may replace, in some cases, our own dispensing closure, but if that happens, then we have a product which we are selling which has a considerably higher margin.

So really we see a continued activity of new product introductions in all our markets.

Great. That sounds terrific. Steve, your cash is up about $53m year-over-year from the end of March ’02, how much of that approximately is due to currency?

It’s hard to estimate because we continue to generate. I’m guessing if you look at a year-to-year basis, euro is up 20%. The majority of that cash is in Europe, so probably $10 to $15m is currency base.

Okay. Great. Thank you.

(Caller instructions)

At this time, I’m showing no further questions and I will turn the call back to Mr. Siebel.

Thank you very much. I would like to thank everybody for participating in our call today. Thank you, ladies and gentlemen, and good bye.

Thank you. That concludes today’s conference call. You may disconnect at this time.