Aptargroup Inc (ATR) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AptarGroup's 2003 third-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.

Good morning, everyone. Before we begin, I would like to point out that the discussion to follow includes some forward-looking comments and the actual results were 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 call is relevant of the date of this live call, although the company will post a replay of the 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 update material changes to forward-looking information contained therein. Our speakers for today are Mr. Carl Siebel, President and Chief Executive Officer for AptarGroup; and Mr. Stephen Hagge, Executive Vice President and Chief Financial Officer. I would now like to the conference over to Carl Siebel.

Ladies and gentlemen, good morning. This is Carl Siebel speaking. I will briefly discuss the quarter and the outlook before turning it over to Steve, who will provide more detailed information about our results. In yesterday's release, we reported record third-quarter earnings. We also pointed out that dry powder inhalation is becoming a much more significant form of non-invasive drug delivery and announced that to accelerate our efforts in this area; we acquired technology relating to the inhalation of dry powders. This strategic investment positions us well to take advantage of opportunities in the future as the pharmaceutical market moves to more powder forms of medications. Steve will discuss the charge we recorded in the quarter in his comments.

Overall, sales increased due to higher unit volume, custom tuning sales and the impact of the weaker dollar on the transaction of foreign sales. About one half of the increase in custom tuning sales relates to a pharmaceutical project. The related product is in process of going to the regulatory approval process and we cannot predict when normal production will began.

Foreign currency translation effects and custom tooling sales aside, food and beverage market sales continue to be strong. Sales to the pharmaceutical and personal care market and up modestly. Fragrance/cosmetic sales were flat, and households sales decreased from the prior year.

The higher cost of imports to the U.S. continues to offset the favorable impact of the weaker dollar on the translation of foreign denominated results and adversely affected operating income as a percent of sales. The operating margin was also impacted by the charge for the acquired research and development costs, custom tuning sales and price competition. However, operating income in dollars increased over the prior year, higher operating income and lower interest costs helped drive earnings to a record third-quarter level.

Our (indiscernible) and our visibility of sales continues to very short as a result forecasting is very difficult. By looking ahead to the fourth-quarter we expect sales for the food and beverage market to continue to be strong, however experiencing a reduction in the incoming auto rate from our fragrant cosmetic customers and from a major pharmaceutical customer who has advised us with a plan to reduce their inventories further. Both of these are expected a have an adverse impact in the fourth quarter.

We anticipated diluted earnings per share for the first quarter of 2003 to be in the range of 45 to 50 cents. Now at this time, Steve will give you the financial results.

Thanks, Carl and good morning, everyone. I will review the financial information and Carl and I will be happy to answer any of your questions. Looking at the quarter, as comments we acquired technology related to the delivery of medications in that dry powder forms. The U.S. accounting rules required us to expense the research and development costs associated with the acquisition, and as such were recorded a pretax charge of $1,250,000. The impact of the R&D charge on net income was approximately $840,000. Adding this back to the reported net income would give a normalized adjusted operating EPS of 54 cents per share, per diluted share.

Focusing on sales, reported sales increased 17 percent, whereas excluding the impact of foreign currency translation sales by approximately 9 percent for the prior year. The increase in sales includes approximately 12 million more tooling sales recorded in the third quarter of this year than in the prior year.

Looking at sales to each of the markets for the quarter, excluding the custom tooling sales and exchanges in exchange rates, our food market grew almost 40 percent. Sales to the pharmaceutical market were up in the upper single digit area. Sales to the personal care market were up mid single digits. Sales to the fragrance/cosmetic market in the quarter were flat, while sales to our households market was down mid single digits. And our other packaging sales or other nonpackaging sales were down about $1 million.

Cost of sales as a percent of sales during the quarter was higher than what we reported in the prior year. This percentage with adversely affected by the higher cost of imports into the U.S. The increase in tooling sales which bears a margin of less than our normal product sales and price competition.

The charge for the acquired research and development costs related to the acquisition of the dry powder technology represented about four tenths of one percent of sales for the quarter. The higher cost sales percentage and the negative effect of the R&D charge on the operating margin were offset slightly by improvements in SG&A and depreciation and amortization percentages and resulted in the operating margin for the quarter being less than the prior year. However, as Coral indicated, our operating income in dollars increased over the prior year.

Below the operating income line, lower net interest expense helped improve our bottom-line and allowed us to report record third-quarter earnings of 51 cents per share for the quarter. From a geographic standpoint, sales to customers by European operations represented approximately 60 percent of net sales in the quarter versus 56 percent last year; and sales to customers by U.S. operations accounted for 31 percent of our sales, compared to 35 percent of sales last year. The increase in the European percentage is largely due to the strong euro compared to the prior year.

Excluding changes in exchange rates, dispensing segments sales increased about 10 percent and the SeaquistPerfect sales increased about 4 percent. Cash flow from operations continued to be strong for the quarter and was approximately 55 million versus almost 48 million in the prior year. From a balance sheet perspective, our return on average equity was approximately 12 percent and our debt to net CAP was approximately 10 percent. During the quarter our capital expenditures were almost $20 million.

Reporting on a year-to-date basis, our reported sales increased approximately 21 percent, whereas excluding the impact of foreign currency translation, sales grew by approximately 10 percent from the prior year. The increase in sales for the nine months includes approximately $20 million more in tooling than reported in the prior year.

Our earnings-per-share year-to-date are reported at $1.62 per share, or $1.64 per share without the required research and development charge, and this is compared to a reported $1.32 per share last year or $1.42 on a comparable basis for a total increase of 15 percent.

Cash flow from operations for the first nine months was approximately $111 million, which is about the same level as we had last year. Our capital expenditures year-to-date were approximately 56 million compared to about 63 million in the prior year.

Looking forward, total cash outlays for capital expenditures in 2003 are expected to be in the area of 80 to $85 million with depreciation and amortization expected to be in the same range. I would like to point out that both of these amounts may change depending on what happens between the various exchange rates. Also our effective tax rate is still expected to be between the range of 33 and 34 percent for the full year. At this point, Carl and I would be glad to take any of your questions.

(OPERATOR INSTRUCTIONS) George Staples of Bank of America Securities.

A couple of questions. First can you give us a little more color on the project behind the tooling investment, Carl? If you'd mention in the past I've perhaps missed it but would appreciate any commentary now.

It is a project with one specific customer in the pharmaceutical area, as we mentioned, naturally confidentiality prohibits us for giving you a lot of detail, but we have been tooling up for the capacity as required by the customer, and we expect that we will start supplying based on what the customer has told us up to this point in the second half of 2004.

Okay. Would it be safe to assume that if it cost about $20 million of investments so far that perhaps the annualized revenue might be $20 million from such a project or is that too aggressive?

You mean George, that the annual sales would be in the same area as the tooling investment?

Yes.

I don't think that this -- maybe not in the beginning, because they will also ramp up. We have first through regulator or authorization, the normal process and country by country, and as they go along and get those approvals, they will be able to increase their sales so this will be a major project. This would be an evolution over maybe one or two years to get to the full expected sales, but then at that point $20 million will be a certainly a reasonable expectation.

George, I want to follow up on that, because I want to make sure we clarify. The tooling sales for this particular pharmaceutical project are approximately $6 million. The total tooling sales that we've had increased from last year through the first nine months is about 20 million, but that relates to all of our markets. So there's only 6 million related to this particular project.

Okay, I understand. Stephen, did you have another comment there?

I just wanted to make sure we clarify. It wasn't a 20 million expenditure for one customer.

A couple other questions. Can you comment in terms of the new technology that you have acquired, what kind of growth you have seen in dry powder's in that market and to some degree might this application or trend capitalize the way you have been set up for pharma already or would you see this purely additive?

To the first part of your question, George, we, as good as our modern intelligence is, we believe that growth rates have been double-digit in this area, dry powder inhalers are in the market already since about ten years. They started very small, and have taken a good portion of the market. In effect what we would expect at this point, but again it is very difficult to forecast, that maybe it could reduce the growth rate on the NDIs (ph). However, we do not expect that would eat away from the existing level, but again that is very difficult to forecast over the long run.

Last question and then I will turn it over to the other guys. In terms of the impact that you are seeing for the fourth quarter, obviously your comps are little tough anyway versus last year, but is the bigger effect the fragrance slowdown or is it the pharmaceutical customers destocking and have long do you expect that destocking to last?

As you said, George, effectively the 50 cents last year fourth quarter was a very strong quarter in view of the fact that always the fourth quarter with the Christmas period is normally somewhat weaker quarter than other quarters in the year. So the comparisons are somewhat tough. They really are two reasons. There is on one side the expectation of a certain slowdown in the fragrance business for the fourth quarter and there is the announced reduction of inventory by one of our major pharmaceutical customers, so it is the two affects together. As for as it lasts, it could that this destocking of the customer in the pharmaceutical business could go into the first quarter, but again that is for us extremely difficult. We had also budgeted part of the reduction for this year at this customer and however, it has come out that he has decided visibly to go even down further.

He had for internal reasons I suppose, initiated some additional securities stock in 2002, and as I said we expected that he might go back on this in the 2003. And he is doing this now to somewhat major extent than we had expected.

Carl, is pharma worse than fragrance or are they the same, or is fragrance worse than pharma?

First of all, the forecast for the perfume businesses extremely difficult. We're talking about a forecast here, not about the facts yet, and we have a very -- we continue as we have seen and as I said in past calls, we continue to have a very short visibility in the fragrance and cosmetic business, and it is very difficult now to say what's the relation between the two. Both have an impact on our fourth quarter forecast; and however, we have seen, we have had a very strong first six months with double-digit growth in the fragrance business, as you know, and we have had a lot of new product launches. Customers now are waiting to see the Christmas season results and for those reasons with this kind of uncertainty, it is very difficult for us to say how it will look in the fourth quarter. But overall, even with a modest fourth quarter we still see the whole year in the fragrance/cosmetic business for us as a good year.

Very good, Carl. Thank you.

Don Jon Panjabi of Lehman Brothers.

Given the strong growth you have seen in food and beverages, are there any new product conversions that we can expect to hit the market over the next couple of quarters?

Well, we have in the food and beverage market, we have seen continued very strong demand, as you see from the figures which we have announced for the third quarter. And there has been a very strong drive to inverted packaging. You could call it the category change. With the announcement with the start of Heinz, who went to inverted packaging using our Simply Squeeze Dispensing Systems and then it even I don't know whether you noticed that they even put it on the cover of the annual report, this package. An then in the president's letter there is some comments on how helpful for Heinz is the utilization of packaging innovation for their overall success. And so with that, and by publicity about this, there has been a lot of interest and new product launches of all kinds in the food business and there are more to come for the next quarters.

So can we expect 40 percent growth next year, then?

I would like to say yes to that. But we certainly will continue to see very strong growth, specifically also because we can talk food and beverage. Give me a minute to talk about beverage. On the beverage side, we have developed specific closures with our Simply Squeeze system and without our Simply Squeeze system for bottled water. And now you may have noticed that the consumer product safety commission has ordered a recall of I think it was 1.2 million bottles on the U.S. market recently because of the potential risk of the push pull closure which is the standard in sports closure on those kind of products, because of swallowing by babies potential risk.

And this has prompted a lot of customers to look very seriously at our closures and our designs, which we also had already with a very major customer. We already have a major order for the years to come and we see a lot of potential in the water business where we already have been successful worldwide over the last two years. On the water side and also on the condiments side and the food side, there is a lot of potential in this area.

And one last question. Given your stellar balance sheet, net debt to cap down to 10 percent, can you give us some visibility into the acquisition pipeline? And can we expect a little bit more leverage going forward?

We have continually looked at potential acquisitions and we are presently also some areas we are looking at, but as I think there always underlined that we are not looking for acquisitions, just for growth. We are looking for acquisitions which make strategic sense for us, either new technologies or new products, or the geographic presence, and we will continue to do so if right opportunities come along, we will certainly grab it. And again, there is nothing specific evidently which I could announce today.

Thank you very much.

Timothy Burns of Cranial Capital.

You know with all these smart analysts on the call by the time you get on there are no good questions to ask anymore. Maybe we can talk about the Cubs or the Yankees or something.

Congratulations to the Yankee friends.

What a game. Dry powder like you say has been around for ten years but you obviously have studied this market. What do you buy when you buy this R&D? Have you been looking at this particular technology? Or do you keep a portfolio of technologies just in case, like we have seen in other areas?

We have developed and worked on developments of dry powder inhalers for the last ten years. And we have developed some products. This opportunity came along as being judged by us and some of our customers, as a very superior technology which was patented. We got the opportunity to buy it and that is what we have done. We believe that this may at the most advanced product and technology available today on the market and this gives us a head start into the certainly very interesting growth potential in this area.

Where does the technology emanate from? Is it European?

Yes, it is European.

So how long will it take you to integrate this technology, given that it is pharma application, is it probably a few years in the pipeline?

Absolutely right. In this area nothing is very short-term, what we expect to do is finished the development, adapt the development in certain respects, then try to sell with codevelopment agreements to major pharma accompanies for certain molecules giving specificity to certain molecules against license fees and milestone payments as the codevelopment with the customer goes along and then naturally at the very end to start to sell, produce, sell the device.

Do you have to invest in any new facilities or do you just integrate it into your own?

We would expect to integrated into our own existing facilities.

Okay. And I had a final question and that is we're hearing from a broad range of packaging suppliers and their customers and the first customer, that other parts of the world, China in particular, continue to eat our lunch in terms of either labor costs, energy costs, fixed currency, you name it. And the business that -- the portfolio of businesses you have I would think would be impacted yet we don't hear about that with Aptar and I am wondering what is the trick, and do you see the need to do anything more in China?

First of all, we have an operation in China since six or seven years and we are producing in China. We are also producing in India and we're producing in Indonesia, so we have the low-cost base there. To go back to your very concrete question, do you see Chinese competition outside China, the answer is yes. We have seen at the very low-end of our customer base.

In the fragrance and personal care areas, we have seen some offers of very low pricing and our answer to that is number one, we believe that if it is needed that we will make a very clear strategy how to go about that; and if we need to counter such an offer we are able to do that. We have the same in effect. We are able to offer products which have the same cost as our Chinese competitors, so we are cost competitive in certain areas of AptarGroup with the Chinese offers and however we go back to our overall strategy to offer to the customers innovation and diversification, differentiation to our customers. Best customer service, being as close as possible, and that is the main strategy, but we will also not let, as you say, have the Chinese eat our cake.

Good. Is there a hybrid approach that wins too, where subcomponents of your assemblies are made in China just because they our commodity and pure cost driven or --?

Yes, in certain instances we have done that. Also we have because of the fact that we are present ourselves in seven years in the area; we have all the information available on potential sub-suppliers. We are using the kind of sub suppliers for our manufacturing in Aptar China, but we are also, have been importing certain products and molds from China into the United States and into Europe, so where there is the technical possibilities we take also advantages of that. But again, especially on the middle and high-end of our market, our customers value very highly and need a very, very strong service, so you have to be very close to the customers.

So if our customers go to China and produce in China, then we are there with our full manufacturing capabilities for most of our products. In the other part of the world, we have to be equally close and then the service is in most cases, especially at the high and the middle end in the end of pharmaceutical industry, our service is more important than the price.

And Steve, could I ask you a quick question?

Sure.

I'm trying to figure it out, but reported sales are up in the quarter 17 percent. Sales ex FX are up 9 percent. I don't know how to account for the custom tooling. I know it means a lot of future business. I also know it is not a recurring factor. So is it safe to say ex-custom tooling and ex FX sales are up 4 or 5 percent, something like that?

That would be correct. We will continue to having custom tooling but it certainly is going to be -- it is going to be different from quarter-to-quarter.

But the third quarter was specifically higher.

It sounds that way. We are obviously rounding the corner on some very, very good comps and I guess the question is -- do you think we're going to run into a slow patch here, just tough comps to compete with for a full year, or is there enough stuff in the pipeline to kind of continue to elevate above year ago figures?

I think if you look at the comps certainly the fourth quarter is a difficult comparison. It was a very strong fourth quarter for us last year, but if you take a look at the year is a whole, we are still up 15 percent for the year and even if we get to the low-end of the range, we would be up 9 to 10 percent, or 8 to 10 percent for the full year. We have not completed our budgets for next year but certainly at this point we're still looking for positive growth momentum going to 2004 on a full year basis. So we are still cautiously optimistic as the look forward.

Have you given up on households or is it just not a good market?

No, no. The household situation was a very special situation at our SeaquistPerfectDispensing unit in the United States, where we have decided to walk away from a major customer because the margins just did not warrant to continue to supply this customer. We felt we did not get the returns we wanted. We wanted to improve our profits to sell that capacity someplace else and on top of that, we evaluated we evaluated the future potential of that specific customer concerning his interest in innovative new products and because of the market this customer was in, we did not see a chance let's say in two or three years he would be buying from us innovative products with higher margins. So that is why we really dropped the customer and that is the main reason for the reduced sales in the households segment you're seeing there.

And there is nothing better than seeing a packaging vendor walk away from a tough customer. I think that is a reason to celebrate. Well, it's good discipline.

Gregg Holter with LJR Great Lakes Review.

Last time we talked about the price competition, that it wasn't intensifying. Are you still seeing that or has there been any change their?

No. Price competition has always been a fact of life in our business and the only way is to balances this with better products, improving margins through innovation, and replace products before they become commodity. So we will always see at one end of the spectrum we will see some price erosion and competition and on the other hand we hope we will in total improve our profits and our margins by adding innovation. Yes, by also geographic presence, by improving our service, by reducing our costs, and so on. But overall pricing competition will continue to be a challenge and we will continue I hope, we will continue to be successful with our strategy.

You're doing a great job on building cash. It was up 28 million sequentially. It is any of that due to FX?

Certainly there is some FX issues. It is about 11 million on a year-to-date basis is up due to the FX side, but still even despite the 11 million, we continue to be a cash generator as we have been really throughout the last several years.

And it seems to be very atypical for Aptar. Two more quarters you may have no net debt. Is that something that you desire or will there be an increase in the share repurchase program or what do you plan to do with the building cash?

I think as you look at it, one of the things that we have talked about in the past is that as we have added capacity over time that at some point those things will be starting to generate more cash, which is what we're seeing over the last two years. In terms of the present position, I don't know that we certainly wouldn't come back and tell you we need to have that much cash on the balance sheet. What we continue to look at, as Carl mentioned earlier, continue to look of strategic acquisitions. We continue to revisit the capitalization and so those are areas we will continue to look at in terms of both dividend structure and share repurchase over the next three couple of (multiple speakers)

The last time we spoke it was about 50 percent at variable rates with a 4 percent blended rate. Is that still about the same?

Is about 50, 56 to variable. We may be a touch below the four at this point, but it is pretty close to that.

Okay and can you comment on the dispensing segment on a constant currency basis? I don't know that you did, or maybe you did and I may have missed it.

We are up I think we are up about 10 percent on a constant currency basis in the dispensing and we are up about 4 percent on the SeaquistPerfect segment on the sale side.

Okay, and have resins had any detrimental impact?

No, not major. What we saw in the first quarter was an increase in polypropylene prices. It was about even in the middle of the year. We expect maybe a slight increase going into the end of the year, but no major impact on our results either way.

Okay, and insurance costs had been a slight problem. Any relief there?

I think in the insurance area we're basically still seeing smaller increases than we saw in the past. Probably our biggest issue today is in U.S. on the medical side, which is effectively seeing claims experience being somewhat higher than we had originally projected and that is costing us probably in the quarter around 300,000 and on a year-to-date basis, a little over 800,000, more than we had anticipated. So hopefully those things will get somewhat better as we get into 2004.

And my last question, and you guys are very helpful as usual, on the selling, R&D and administrative line, up about $5 million year-over-year. How much of that is due to currency?

Almost everything on that is up due to the currency side.

Great, thank you for the detail.

Nicole Smith of TCBN. We will move onto the next question. We have an additional question from George Staples of Bank of America Securities.

I'll make it quick. In terms of households, you mentioned earlier when you were talking to Tim, that you walked away from some business. What kind of volume expectation do you have for households going into 2004?

Once the effect of eliminating the volume out of the comparisons from this one account at SeaquistPerfectDispensing, we would see growth both of the closure business and in the valve and pump business from there, but not comparable to the growth which we expect in the other areas. We have some new product developments both in the closure area and also at SPD for the households sector, but it is not a sector where we expect major growth in the near future.

So relatively flat, maybe up a little bit into the anniversary?

I think also, George, the other thing is that it is somewhat the inverted packaging we see as a potential for this market but it is probably a year away yet. There's areas that we see with good growth side, but they are probably not short-term.

Okay. Now same vein of question, you are up against some relatively tough comps both in fragrance and personal care, through the first half of this coming year. Personal care slowed a little bit in the last quarter again. Might we see relatively flat performance out of both of these businesses through the first half up a little bit?

I hesitate to answer the question, George, because we have not yet finalized our budgets. We do not yet have a very clear vision of the 2004 evolution. From an overall tendency, I would expect stores to see growth also in tough comparisons. But I would prefer to answer the question, then, when we've seen our budgets.

Steve, last question. And maybe same answer, margins were down a on a percentage basis this quarter. You did a good job of going through the factors that were driving that and one of them was currency. Do you expect that percentage margins will crossover and be positive year-on-year by, say, the second half of next year? Would that be a safe assumption, realizing you haven't done your budgets yet, etc?

It is difficult to come back and frankly one of the concerns or not concerns but one of the issues that is out there is going to be the dollar/euro, projections one where that goes. Because that, as we have indicated that certainly cost currencies had a negative impact this year. We are right now in the process of evaluating sales prices, moving those up and continuing to reallocate production more so we have more locally produced goods as opposed to import. But it is really difficult right now to go through an estimate of where the margins will end up for next year.

Thank you very much and good luck in the next few months.

(OPERATOR INSTRUCTIONS) At this time I show no further questions. I will turn the call back to Mr. Siebel for any closing remarks.

Thank you very much. I would like to thank everybody for your participation on our call today. So thank you and goodbye.

Thank you. That concludes today's conference call and please have a wonderful day.