Aptargroup Inc (ATR) 2005 Q1 法說會逐字稿

Welcome to AptarGroup's first quarter of 2005 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 call is relevant 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 for today are: Mr. Carl Siebel, President and Chief Executive Officer of 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. Ladies and gentlemen, good morning. This is Carl Siebel. I will briefly discuss the quarter and outlook before turning it over to Steve Hagge, who will provide more detailed information about our results. In yesterday's release, we reported record first quarter sales and income. Overall, our sales growth was primarily driven by increased volumes and price increases. These increases include both the usual revenues from our closures business as well as general increases in our pump and aerosol valve products.

Excluding the change in custom-tooling sales, and foreign currency translation effects sales increased to all of our markets. Demand for the dispensing systems was particularly strong from the food, personal care and household markets. Focusing on the change of demand for each of the markets, food sales grew due to continued conversion from glass containers to plastic, which allows the packages to be squeezed, as well as the increased use of inverted packages. Personal care sales benefited from the increased use of accessories. Household sales increased due to air freshener-related products, as well as increasing interest in packaging differentiation. Fragrance sales increased due to new product launches. Pharmaceutical sales, excluding tooling, were up only slightly, due to lower sales of devices to generic pharmaceutical companies.

We continued to face several factors that adversely affected our profits. These include: the higher cost of imports to the United States, increased costs of materials, and continued price competition. We completed previous -- the previously-announced acquisition of a company in Switzerland, that has proprietary aerosol valve technology, generally referred to as bag-on-valve. This very unique design serves as a fast-growing niche of the aerosol valve market and we're very pleased to have added them to our aerosol product line. Since the acquisition was completed late in the quarter, its impact on our first quarter results, was not significant.

Looking forward, we presently expect the positive momentum we saw in product sales during the first quarter to increase into the second quarter. Excluding any impact of favorable contingencies in the text area, included in the press release that Steve will discuss in a moment, we anticipate the diluted earnings per share for the second quarter of $2.05, will be in the range of $0.68 to $0.73 per share, versus the $0.61 per share recorded in the second quarter of 2004. I now would like to turn it over to Steve for his comments.

Thanks, Carl and good morning, everyone. I will review our financial highlights and Carl and I will be happy to answer any of your questions. Looking at the quarter, reported sales increased approximately 9%, whereas excluding the impact of foreign currency translation, sales grew approximately 6% over the prior year. As Carl mentioned, our custom tooling sales decreased approximately 8 million from the prior year, and most of that change in tooling related to the pharmaceutical market. Looking at total sales to each of the markets for the quarter, but excluding changes in foreign currency exchange rates, our personal care market grew 13%, fragrance/cosmetic market was up 4%, our pharmaceutical market was down 7%. Household sales for us grew 10%, and food grew 21%. I'd like to point out that the decrease in the pharmaceutical sales reflects the lower tooling custom -- the lower custom tooling sales to this market that I mentioned previously.

Excluding tooling, sales to the pharma market on a constant currency basis were up about 2%. Expenses below the operating income line increased about $1.4 million. This increase was evenly split between net interest expense, and the FX impacts, included in the miscellaneous expense line. Our net interest expense is higher due to increased borrowings, as a result of our share repurchases, higher interest rates, and our most recent acquisition. Bottom line: We recorded earnings per share of $0.60, compared to $0.57 per share a year ago, or an increase of 5%.

From a geographic standpoint, sales to our customers by European operations represented approximately 61% of net sales in the quarter, versus 63% last year, and sales to customers by our U.S. operations accounted for 30% of our quarterly sales in the quarter, versus 29% last year. Excluding changes in exchange rates, the dispensing systems segment sales increased about 4% and our sequence perfect segment sales increased about 15%. Our cash flow from operations for the quarter was approximately 32 million, compared to 35 million a year ago, and our capital expenditures in the quarter were approximately 25 million, compared to 19 million a year ago.

We spent approximately $12 million to repurchase 242,000 shares during the quarter, at an average cost of just under $51 a share. We have outstanding authorization, as of the end of the quarter, to repurchase an additional 2.1 million shares. Our return on average equity was approximately 11%, and our net debt to net capital is approximately 8%.

As we look forward, total cash outlays for capital expenditures in 2005 are expected to be similar to our depreciation and amortization for the year. We estimate the amounts to be around $100 million, depending on exchange rates, and, again, this may change depending on what happens to exchange rates throughout the year. In the past, we filed for tax refunds related to research and development expenditures in the United States, which were incurred from 2000 through 2002. As indicated in our press release, we're in the process of finalizing this matter with the IRS, and we expect the tax benefit to be in the area of approximately $1.2 million.

We also mentioned in the press release that the Italian government has offered businesses some incentives relating to taxation of government grants, which for us, if we elect to accept, would result in reduction of deferred taxes that had previously been provided relating to these grants. We estimate that the effect of this would be a reduction in income taxes in the area of $2.1 million.

Overall, the effective tax rate for 2005 is expected to be in the area of 32%, excluding the prior year research and development credits, and the Italian tax incentives I just mentioned. It is possible that the tax-related matters, which combined are equivalent to approximately $0.09 per share, may be resolved in the second quarter. And, again, I would like to point out that these tax-related matters are not included in the $0.68 to $0.73 range of earnings we disclosed for the second quarter of 2005. And at this time, Carl and I would be glad to answer any of your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press the one key on your touch-tone telephone. If your question has been answered, and you wish to remove yourself from the question queue, please press the pound key. Again, if you would like to ask a question at this time, please press the one key now. One moment. Our first question comes from Ghansham Panjabi with Lehman Brothers. Your question, please.

Good morning.

Good morning.

Can you give us more color on your current raw materials situation. You know is there any incremental change on a sequential basis or some sort of clarity there?

Well, I think if you look at it, Ghansham, we're still seeing some small increases in the United States in the overall resin cost.

Mm-hmm.

We continue to basically pass that through, particularly in our closure business.

And what's the acceptance rate of those pass throughs?

It -- we've been historically been able to do it. Up to this point, we are still being able to pass through. The timing again, is anywhere from a four to six week lag. In Europe, we're also seeing increases, and, again, we're passing through. The lag time are -- for us in Europe in our closure business, is closer to two months versus what we have in the states. It's a little bit longer pass through period. But we still, up to this point, have been successful passing the resins through.

And can you just, you know, talk a little bit more about the price competition you mentioned several times? Is it any different from the past? Or is it -- you know, is it the same? Is it just as competitive in the aerosol business, or is it spreading elsewhere?

Well, competition is essentially the same as in the past. We have always seen price competition. What has been added, if I may say so, over the last two or three years, is we are seeing some Asian competition coming in there. On the -- naturally, on the other side, we have been successful on the aerosol side to not only pass through our raw material cost increases, but also to get some general price increases. So competition on one side; however, they are also differing from geographic market to geographic market. We have been able to continue to maintain our margins essentially.

Okay. Great. Thanks.

You're welcome.

Thank you. Our next question comes from the Amanda Tepper with JP Morgan. Your question, please.

Good morning.

Good morning.

On the commodity side, just to follow up. I'm trying to -- can you break out for us, or give us a rough sense of how much of the top line in margin came from commodities? So , in other words, what would the core adjust price in volume growth have been X commodity pass throughs with the overall?

Well, Amanda, I think if you look at it from ours, we're estimating the net impact on sales was -- from price increases -- was in the area of 1%.

And that was virtually all pass through.?

A lot of it was pass through. As Carl mentioned, there were some general price increases coming back through that also. And again, that's a difficult calculation for us, because of our mix of our products and, frankly, the new products that get entered into, you know, from year-to-year. So it's not an easy calculation to come up to, but our best estimate is approximately a 1% net gain for us.

Okay. And looking at this new bag-on-valve Swiss company that you bought, which came so late in the quarter it didn't really impact Q1. How much of that should we look for delivering revenues and earnings in Q2 and the rest of the year?

We -- in the last conference call we indicated that the revenues for the company are approximately $15 million on an annual basis. We think that we will be at or above those levels as we go through 2005. As you mentioned, we've only included the acquisition really for the month of March in our results so it didn't have a material impact on either sales or earnings in the first quarter. But we do expect it to be accretive throughout the remainder of the year, and again we really haven't broken out fully what we anticipate what those amounts are going to be through the second through the fourth quarter but we don't expect them to be overly significant.

Okay so your Q2 -- your Q2 guidance just assumes basically more or less that same type of run rate?

Correct. It is included in the Q2 guidance.

Okay. Great. Thank you.

Thank you. Our next question comes from John Sullivan with Bank of America. Your question, please.

Hi, good morning. It's actually Tony Chan with George Staphos' group. Just have a quick question on volume trajectory and what you are seeing as the quarter ended. Can you just give us a sense as to what was going on with volumes in North America and Europe and whether you saw an acceleration or a deceleration as the quarter came to a close?

We had an -- we saw an increase in the personal care and in the food market in volumes in the United States. We saw some increase in volumes in Europe in the fragrance market. And we saw an acceleration of orders and activity also for the pharmaceutical market looking forward into the next nine months. So the impression which we have presently is that the personal care market and the food market, driven -- in the case of the food market, very much also by our innovations, is increasing, and we believe that going forward with new product introductions, et cetera, we should see results and that's the reason why we are reasonably optimistic for the second quarter. We believe that we will see improvement on a quarter-to-quarter basis.

Okay. And, you know, can you give us some sense as to how long your order books are at this point?

The visibility in the fragrance/cosmetic market continues to be very, very, low. In effect, if we compare three or five years ago what our order backlog was at the beginning of the month and which percentage of the business we were seeing at the end of the month was coming out of orders received during the month, that percentage has considerably increased. Our capabilities in terms of just-in-time customer service, have increased considerably, specifically in the personal and perfume and cosmetic markets. And that naturally has the consequence that we support the tendency of our customers to want just-in-time delivery.

So our visibility, as I said, it continues to be very short there. It is longer, naturally, in the pharmaceutical business. It has always been short in the personal care area.

Okay. And final question, you had mentioned in your comments earlier, that the food and beverage businesses has benefited from -- from conversions, from glass to plastic--

Yes.

--things of that nature. Do you see that trend continuing this year? I know you probably can't discuss specific projects but do you see any big ones out there on the horizon?

Yes. We have seen a continued movement to inverted squeezable packages. And you could say that especially in the U.S., but also in Europe, these kind of inverted packagings are sweeping the squeezable condiment segment. And one example is French's Mustard who has come out recently with an inverted package, using our Simpli-Squeeze system, and we believe because of the liquid, which is on the ketchup, on top of the ketchup bottle and inside and to a higher extent on the mustard packages is driving this -- will support this kind of movement to go to inverted packaging and our Simpli-Squeeze system is ideally designed to meet the requirements of the consumer in the inverted package.

So we see this movement continuing and maybe even accelerating the more products are hitting the shelves. We believe also that there's a good potential that the present -- that the new package of French's Mustard which is inverted will more and more replace the normal up side package. So these kind of movements -- same thing we are seeing in the honey market -- these kind of movements will certainly help us, and will certainly -- we believe we'll accelerate.

When you look at the market for inverted packaging, for the end markets that you do participate in, you know, what would you say is the share of inverted packaging versus, you know, normal upright packaging? Do you have a sense for that?

We do not really -- to be honest, we do not really have a sense of that. I would have to make a very, very rough guess, maybe something between 10% and 20%.

And I think the other thing, Carl, is certainly, that the inversion trend is really just starting. I mean, you still go through the grocery stores and you will see, really significant amount of products still in an upright position. So we -- I think we, because of the Simpli-Squeeze system are on a significant amount of the inverted packages today, but it's still that whole conversion process is really in its infancy.

To support what you are saying, Steve, if you go through the market, if you look at the shelves, and you see one Heinz inverted package and next to it you see maybe four or five others which are still standing up side, still in the traditional way.

Right. Ok. Thanks. I will turn it over.

Thank you. Our next question comes from Chris Manuel from KeyBanc Capital. Your question, please.

Good morning, gentlemen.

Good morning.

Good morning.

Two questions for you. The first has to do with margins. When I look at the margins in the dispensing system unit, those were -- I mean in the quarter were some of the lowest that I can remember in history, you know while conversely in the Seaquist unit, those were some of the best that I recall through your history. Can you give a little color there as to what's moving margins in both of those units in opposite directions?

Well, in the SeaquistPerfect Dispensing area, number one, we were happy as we mentioned before that we were able to get some general price increases there but that's -- the smaller reason, the bigger reason is our capability of bringing very innovative new products to the market, with considerably higher margins. To give you a few examples, there is the trend to introduce men and young men's products. For example, Gillette has introduced a young man's line under the brand name Tech, which you may see competes with the X product of Unilever, and they are using our new locking system actuator. Those products, Tech and also the product Old Spices, and then we have been introducing recently from SPD, a product which is a -- is a so-called inverted foamer for lotions. And that's a brand new new way of bringing out a lotion.

And we have other new product introductions which may be less spectacular, but anyway we have been able to -- to take advantage of the desire, more stronger desire of our customers in the market is for differentiation. So one side, it's innovation and on the other side, it's continued improvements in productivities and cost reductions and there's also some price increase. If you look at the dispensing systems sector, it is mainly a market and product mix issue. As we mentioned, our sales on the pharmaceuticals side have grown considerably less than in our other areas, and our pharmaceutical business traditionally has the highest margin. So there is -- there is no other major reason for the margin compression in the dispensing system segments.

The one other sector Carl, too, just to tag on the dispensing sector is foreign currency. Because we continue still to be the transaction part of foreign currency. We are still a net importer to the States. And as the dollar continues to weaken, versus the Euro that's had a slight negative impact also on the margin percentage.

Yeah. Okay. What was the impact of FX to EBIT? Or to operating income?

On operating income, it was slightly positive. But it was relatively small during the quarter. So you can see at the top, it was -- we had sales coming back at about 9% with X currency up six, but on the bottom line, it was really -- the transactions were pretty much offset the positive impact of the translation.

Okay. The second question I wanted to ask concerned the pharmaceutical area. You spoke of, Carl, I believe, a pick up in pharmaceutical business in the back half of the year. Is any of that related to the generic drugs that are coming, you know, off patent that you had supplied or filled the pipeline with already? Are any of those additional orders coming in there or are these new orders all together?

Well, if you look at the -- at the total year 2005, one of the reasons for the reduction in our sales in the first quarter, the pharmaceutical side is, in effect, the generics because the pipeline for most of these generics has happened in 2004, which has helped us in 2004 and specifically also the fourth quarter. And that's now tailing off -- between -- because the generic products have not been released yet by the FDA, and so they are waiting for the release.

And as far as the increase in sales which we expect, we see some newer product introductions potentially in the last quarter, but we also think that the stocking at some customers has finished and we have orders going forward from some major accounts which they -- which confirm our belief that we will have an improvement in the second quarter -- in the second half. Now what's also important is that we have a very good number of new projects and we believe that beginning in 2006, we will see new chemical entities and new product introductions by our customers, which should improve our growth potential in the years 2006 and going forward.

Okay. Thank you very much, gentlemen.

Thank you. Again, ladies and gentlemen, if you would like to ask a question at this time, please press the one key on your touch-tone phone. Our next question comes from Greg Halter from LJR. Your question, please.

Good morning, guys.

Good morning, Greg.

Good morning.

I guess good afternoon over in Europe. Relative to the resin situation that occurred a couple of quarters ago, any update regarding that?

I think we're in the same position on the quality claim. We pretty much have the full expense we had in 2004. If there's any recovery it's going to come back from the supplier on that, the resin supplier. We're still in the process of working through that. So to date, there has been no negative, but also no positive reflected in the quarter.

Okay. And can you give us an update on your outlook for both the share repurchase? I know you said you have about 2.1 million shares left to buy, but how aggressive you would be, as well as on the acquisition front?

Well, I think, you know -- I guess specifically on the acquisition side, we are not going to comment on that there. We continue, as we have in the past, we continue to look at opportunities that are in the market. On the share repurchase, we indicated at the end of last year, and also in our year-end conference call, that we will continue to be aggressive on the share repurchase and I think that is -- that's still our position as we go into the second quarter.

Okay. And looking at your debt, in terms of the composition, is it still about 40% variable rate?

We're about now 50/50 with the most recent. So we are closer to a 50/50 between variable and -- variable and fixed.

Okay. And do you have the average rate you paid in the quarter or the blended rate?

It's around -- between -- around 4.5 would be my best estimate, 4.5 to 5. Okay.

Thank you.

Thank you. Our next question comes from Amanda Tepper with JP Morgan. Your question, please.

Hi. This is a follow-up. When looking at the dispensing systems margins and you said probably the biggest reason for the margin decline was a mix shift. Since it sounds like the outlook is for personal care, and especially food and beverage, to continue to grow faster than most of the rest of it, should we expect to continue to see margins trending down over time in this division a little bit?

No. We believe rather that we will see it improving, rather than going down. Because we -- we have a very, very good new product. [inaudible] We believe that we are on the stage of industrializing in the consumer cosmetic area, especially in the sampling area, several new products which will be ready for sale -- for production and sales in the second half of 2005. There are other projects which are in the pipeline. Our new project activity also with customers in the perfume and the cosmetic area is good. So we believe that with the reinforcement of the sales of the pharmaceutical side going forward into 2005, the mix issue, which was in the first quarter, depressing our margins, will turn the other way. So I believe that we will not see further margin decreases in that segment.

Okay. And could you give me a sense of what is the range of margins across those five categories? You know from segments to household and in between?

No. The only thing that we have actually given in the past, Amanda, is that we have indicated that pharma is our highest margin--

Mmm. Hmmm.

--and frankly, our standard aerosol valve, that would be primarily personal care and household, would be toward the lower part of that range. But the rest of them really spread across the corporate average, both up and down. So we have not given specifics.

Okay. Great. Thank you.

Thank you. Again, ladies and gentlemen, if you would like to ask a question at this time, please press the one key on your touch-tone phone. Our next question is a follow-up from Chris Manuel of KeyBanc Capital. Your question, please.

Good morning, gentlemen. I just wanted to follow up on the tax issue. You mentioned the credits in Italy. What would be the thought process to decide -- excuse me -- whether you would want to go forward with that or not? Does it require capital expenditure or something of that nature?

What happens, Chris is that in the past we provided for these government grants that we received in southern Italy. We provided for book purposes, a full tax on those in the event we would ever distribute the earnings from our Italian sub. What we need to do is make the decision -- the new tax law gives us the ability to pay a one-time 10% tax rate, compared to a full corporate rate of over 35%. So we would have a cash outflow currently of around 600,000 if we decide to take advantage of this, but we would be able to release the deferred taxes which would give us a net P&L benefit of 2.1. So, we are in the process of just evaluating, does it make sense and what would be our timing to try and repatriate any of the money coming out of Italy.

Okay. And then the last question I wanted to ask you was I know you didn't want to comment on the acquisition pipeline. But you are still actively, or should I say looking?

That's correct. We have been active, and certainly we will continue to be active in the marketplace.

Okay. Thank you.

Thank you. I'm showing no further questions at this time. Mr. Siebel, you may proceed with any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.