Aptargroup Inc (ATR) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2005 second-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 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 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 website 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 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, (indiscernible). Good morning, ladies and gentlemen. This is Carl Siebel. I will briefly discuss the quarter and outlook before turning it over to Steve Hagge who will then provide more detailed information about our results. In yesterday's release we reported all-time high quarterly sales and income. (Technical difficulty) sales growth was primarily driven by increased sales and increased volumes. While the fragrance/cosmetic market sales were on par with last year, our four other markets; personal care, pharmaceutical, household and food and beverage did quite well this quarter demonstrating broad demand for all of our products.

As you know, we as well as other packaging companies, have seen increased raw material costs over the last year. However, we have been successful in passing through the majority of our raw material increases. This and the better utilization of overhead due to increased volumes contributed to our increased profits. In addition to our strong operating performance, earnings for the quarter were favorably impacted by lower income taxes and Steve will explain this further in a moment.

We announced that we plan to begin reducing and redeploying some of our workforce in our French fragrance/cosmetic operations over the next three years. This decision was taken as part of a longer-term plan to better utilize our resources and realign our operation for future growth. We anticipate recording charges relating to this totaling approximately $3 million during the second half of 2005. The cash outflow for this as well as estimated savings of 1.5 million based upon current exchange rates will occur next year. Based upon current exchange rates, we anticipate total charges over the three years to be in the range of $7 million to $9 million and upon completion, annual savings are estimated to be in the range of $3.5 to $4.5 million. Excluding any charges relating to this program, we anticipate that diluted earnings per share for the third quarter will be in the range of $0.70 to $0.75 per share versus the $0.68 per share which we recorded last year.

Lastly, the Board has increased the quarterly dividend to 20 from $0.15 per share. This represents a 33% increase in the dividend rate and reflects our strong financial position and our confidence in the long-term prospects of our company. I now would like to turn it over to Steve for his comments please.

Thanks, Carl. Good morning, everyone. I'll review our financial highlights and then Carl and I will be happy to answer any of your questions. First, looking at the second quarter, as Carl mentioned we had an excellent quarter. Reported sales increased approximately 14% excluding the impact of foreign currency translation. Sales grew to 11% from the prior year. Custom tooling sales were approximately 13 million, an increase of 4 million from 2004's level.

Looking at total sales to each of the markets for the quarter and these sales exclude changes in foreign currency exchange rates, our first sales for personal care market were up 19%, fragrance/cosmetic market was flat, pharmaceutical sales were up 15%, household up 7% and the food/beverage market was up 12%.

During the quarter, we reached an agreement with the IRS regarding tax refunds we filed for relating to research and development expenditures incurred from 2000 through 2002. As a result, our tax provision for the second quarter was reduced by $1.2 million. We also accepted the Italian government's offer of reduced taxes on government grants which resulted in a reduction of approximately $2 million in deferred taxes that were previously provided for related to these grants. This combined with the R&D credits I just mentioned contributed approximately $0.09 per share.

Bottom-line, we reported earnings per share of $0.81 compared to $0.61 per share a year ago for an increase of 33%. If we exclude the positive impact of the two tax items I just talked about, earnings per share would have been $0.72, up 18% from last year's level. From a geographic standpoint, sales to our customers by our European operations represented 60% of net sales in the quarter for both years and sales to customers by our U.S. operations accounted for 31% of quarterly sales in the quarter compared to 30% a year ago. Excluding changes in exchange rates, the dispensing systems segment sales increased by about 9% and our SeaquistPerfect segment sales increased about 20%.

Our cash flow from operations for the quarter was $42 million compared to 46 million a year ago and our capital expenditures in the quarter were approximately $24 million compared to 32 million in 2004. During the quarter, we spent around 31 million to repurchase approximately 631,000 shares at an average cost of just under $50 a share. The remaining authorization at the end of the quarter is approximately 1.5 million shares.

Finally, our return on equity was approximately 12% and our net debt to net cap is approximately 11% at quarter end. Looking at our first six-month sales pretty quickly, our reported sales increased 12% where sales excluding the impact of foreign currency translation grew at approximately 8% from the prior six months. Tooling sales for the six-months were 18 million, down 5 million from the prior year. On a year-to-date basis, we reported diluted earnings per share of $1.41 versus earnings per share of $1.18 per share for the first six months of the prior year or an increase of 19%. If you exclude the two tax items I talked about that occurred in the second quarter, our earnings per share would have been up 12% year-to-year.

Our cash flow from operations for the first six months was approximately $74 million compared to 82 million a year ago and our capital expenditures on a year-to-date basis are 49 million compared to 52 million a year ago. As we look forward for the remainder of the year, our 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 what happens to exchange rates. Our overall effective tax rate for 2005 is expected to be in the area of 32 to 32.5% excluding the research and development credits and the Italian tax incentive I previously discussed. Now at this time, Carl and I would be glad to answer any of your questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS). Amanda Tepper from JP Morgan.

Hi. This is Scott Levine for Amanda. Nice quarter. I had a question regarding margins. We are still looking at gross margins down year-over-year and I was wondering what type of scenario combination of either your price or resin costs would need to occur for us to see margins stabilize and go up?

I think what's on the gross profit margins, Scott, I think a couple of issues like you said. They are down slightly from a year ago, down about 0.5%. The biggest contributing factors to that is the pass-through of material. As Carl mentioned in his comments, we were able to pass-through the majority of the material increase we have received over the last 12 months but we have done that on a dollar-for-dollar basis as opposed to being able to pass that through with the margin.

Finally, because we are still a net importer to the United States and the dollar has still weakened on a year-to-year basis, we are still seeing some impact of our imports coming in at a higher cost. Frankly, as we see the dollar stabilize and if we get to a point where raw materials will be stabilizing, we would anticipate margins starting to improve through the second half of the year and into 2006.

Regarding the general pricing environment, any comment overall or with regard to particular markets?

There is no major change, Scott, on the general pricing environment. We continue to see pricing pressure like it has always been. We see Asian competitors like we have seen also in the last few years. On the other hand, we were positively surprised by our capability to increase our prices on the aerosol valves market. There, we were able not only to pass our raw material cost increases. We were also able to get some margin improvement there over the last two years. So that was a positive impact.

In general, right now, we have seen in the last two months some decrease in the raw material cost of plastic resins. That may be turning with a very high price for oil. However, as you know, we always have a lack in the transfer of the price increases to our customers when the price of the raw material goes down, we may recuperate some of that. But essentially, our markets have always been, will continue to be competitive. We have been able through our innovation, new product introductions, to mitigate that and we believe that we will be able to continue to do so.

One last question regarding the dividend increases, wondering if you could talk a little bit about uses of cash flow. Obviously the dividend is a key variable there. We saw the buyback activity during the quarter. If you could talk a little bit about acquisition activity, what you're seeing in the pipeline there and uses of free cash going forward.

I think, Scott, we have always said -- frankly, we can't comment on any specific acquisition activity. We are seeing opportunities as good for the marketplace. We go through rigorous evaluations internally of those potential acquisitions and certainly the acquisitions would be right now our primary target for free cash flow. That being said, I think it's important that the Board came back and said even with a very strong balance sheet and the ability to do these acquisitions, they felt that the increase in the dividend was a strong signal of our feeling of the long-term cash flow outlook for the company.

(OPERATOR INSTRUCTIONS). John Griffin from Wedge Capital Management.

I have two questions. First, with regards to revenue growth, ex FX, what kind of information can you give us regarding the breakdown in that between volume pricing, real pricing and then raw material pass-through?

I guess it's difficult to do, John, because you also have got mix issues that play into that. We have got a rough estimate and we would anticipate that -- frankly, you're getting about a 1% positive impact because of pricing overall in terms of the price increase. The rest tends to be mix-related issues. As Carl said, we continue to have several new products entering the market which have benefited the overall price structure. But 1% would be kind of on a 1 to 1.5 on the resin pass-throughs and the rest of it would be related to volume and mix.

That's helpful. The other question, I was wondering if you could just discuss for a minute or so what is going on in the fragrance/cosmetic side.

Certainly, John. If we look at our major markets, which is U.S. and Europe, we believe that they are growing 3 to 5%. Last year, we have been growing 6%. Remember that we are the market leader. So essentially it is very very difficult for us at this point to grow much faster than the market.

Specifically, if we look at the second half of 2004, in the third quarter, we have grown about 10%, in the fourth quarter we have grown about 14%. So this was far above our estimated market growth and we may have gained some marketshare at that point but there may have been also some filling of product introductions by our customers in the third and fourth quarter moving into the first half of 2005. We believe that there may have been a change in inventories at the levels of our customers and that that may have had an impact on our growth in the fragrance/cosmetic market in the first half of 2005.

Looking forward, it continues to be very difficult for us to give good estimates of the growth looking forward because the visibility is shorter than ever. We have improved our service level in this business over the last year so much that the customers are relying on us being able to fill their orders sometimes within the same month which was unheard of like three or four years ago. So we have been observing that. In 2005, 20% of the sales were not on order yet, the sale of one month were not on order yet at the first of the month.

The other side is the new product introduction activity of our customers that we have a lot of new product introductions in preparation. The customers have and we continue to gain the major part of these introductions. However, some of these product introductions have been moved up, have been moved towards the end of the year of 2005 and that may be the same movement which we have seen last year when we had, as I mentioned before, very strong growth in the third and in the fourth quarter. So we're looking also at very tough comparisons here.

Last point I would like to make is that we have never had as many new dispensing systems introductions by AptarGroup and specifically in this market as in 2005. We have three major new product lines coming to the end of the industrialization and starting to be supplied in the third and most likely then ramping up more in the fourth quarter. So we believe that there is some potential for the third and the fourth quarter but keep in mind also the tough comparisons please.

Thanks for taking my questions and keep up the good work.

Michael Pack (ph) from Bank of America Securities.

Just a couple of housekeeping questions. Can you remind us again what your operating cash flow and CapEx was in 2Q?

CapEx was around $120 million. In Q2? I'm sorry. I thought you were talking about --.

Yes, in the second quarter, please.

In the second quarter of this year, our cash flow from operations was 42 million. Capital expenditures was around 24 million. To give you a comparison to prior years, cash flow from operations was 46 million last year and CapEx was 32 million last year.

Can you also talk about the growth in your food and beverage end market? I believe you reported it was 12% growth. Is that correct?

Yes. I think the biggest thing though that if you -- last year, we had a relatively large amount of tooling sales that occurred in the second quarter of 2004. If you back that out, we would have sales of almost 22% on a year-to-year just product sales.

That's very strong growth there. I was wondering can you talk specifically on which categories you are seeing strength.

Yes, Michael. On the food side, we see considerable and continued interest and increase on products like, you may remember, the Kraft mayonnaise package, which is very much -- which is a big improvement in terms of convenience for the consumer. That is gaining acceptance. There are quite a few other marketers who are looking at this type of packaging. On another note, the honey market, we have been successful with many product introductions over the last years in Europe. Now we are just gaining attention in the United States market. We also have had success with jelly in our Simpli-Squeeze closure system. A gain there that is a potentially very big market and customers -- what was the name of --? Smuckers? Welch.

That's Welch?

Welch's, yes.

Welch's has introduced a first package with jelly using our Simpli-Squeeze system. Then looking at the beverage market, we have been able to obtain a major contract with an Eastern European marketer of mineral waters. That is for the Eastern European market. I think this is one of the largest marketers of these products in this market. We have a three-year contract guaranteeing us considerable quantities over the minimum quantities over the three years. So that is one example again in the beverage side. In China, a new customer will be on the market in the third quarter. Again, with application of our SimpliDrink closure for mineral water. So we see continued very strong interest both on the food side and also on the beverage side worldwide for our dispensing systems.

That's great. Just one last question. Can you just give us a sense in Europe and in the U.S. what your outlook is for resin?

The resin prices seem to have peaked in the first quarter of 2005. We have seen some downward movement in the second quarter and also going into the third quarter but we have first indications now that the trend may be turning and that we will see again increases with this very strong increase of the oil price and also with the change in the rate of exchange which will impact our costs in Europe because of the weakening of the euro against the U.S. dollar. The impact of those increases may be higher than it has been in the past where the drop of the dollar mitigated somewhat the impact on the raw material costs in Europe.

Ghansham Panjabi (ph) from Wachovia.

This is actually Salim (ph) calling for Ghansham. I had a quick question regards to the fragrance market. With the scaling back in this business, how does that affect your push into the tester market and is most of that penetration in the North American market or Europe in general?

Could you repeat that? I'm sorry. I didn't hear you, Salim.

This is actually Salim calling for Ghansham Panjabi. In regard to the fragrance market, I guess, with the scaling back of that business specifically, how does that affect your push into the tester market? What you guys were talking about last quarter?

You mean the sample market?

Yes, the sample market, yes.

In the sample market, we are in the third quarter introducing two new products, two new dispensing systems, which we believe show a major -- on one side, one of those products is not only a savings potential for our customers and a considerable margin improvement for ourselves but it is also technically an improvement for the marketer because we have designed the system such that the product of the customer, the fragrance itself, will not get in touch anymore with any metal or rubber component, touch of other components. So that product we are ramping up industrially and we will start shipping most likely in the second quarter and going forward also in the third quarter. Sorry, going forward into the fourth quarter.

We will also be introducing in the third quarter another very innovative sampling system which will be presented to the market most likely in September, October. We have finished industrialization of a new very small miniature sampling, not sampling, pump for the high-end perfumery market which gives great advantages to the designers.

As you know that in the perfumery industry, the high-end, the decorative impact of the packaging to the sale of the finished product is very important. So to allow more flexibility than ever to the designers by the design of the dispensing system is very important. Again, we are introducing several new products in the fourth quarter, third and fourth quarter, both for the sampling area and also for the normal pump area and we believe that this will give us again a boost for our sales going forward.

That was helpful. How much of a contribution I guess do you expect from that market that you guys just talked about?

That's difficult to estimate at this time when we are just in the stage of presenting. So it may not be material in the beginning but it will be material going forward for the next one or two years.

Then follow-up to the question on the fragrance market. Is this more so an effort to fine tune the cost structure or is it more of a broad-based program on a go forward basis into some of the other end markets I guess?

It think it's much more -- it's certainly, right now, it is fine-tuning the cost structure and frankly redeploying a lot of the assets to better suit utilize the markets that we see growing not only in Europe but in the United States, South America and Asia. Carl, maybe you can touch a little bit more on that.

We have, not as you will, appreciate we have ongoing programs to improve our productivity. Beyond that, and maybe much more important is the necessity to balance our exposure to movement of currencies by producing our products in the currency zone in which we are selling. So we are redeploying our assets not only within France, also within Europe and beyond Europe by moving equipment and moving production from Europe into partly the USA but also into Asia and also into Eastern Europe. At the same time, by these redeployments, we are able to better utilize our existing overheads and by -- so to improve our cost structure at the same time and to improve our productivity.

That was helpful. My final question was are you seeing underlying growth in the pharma business or is this more so easy comps I guess.

We certainly see continued growth in the pharmaceutical market. As you know, it goes somewhat -- the increase in sales go somewhat instep with major product introduction of the customers which do not necessarily happen every year. We have been investing over the last ten years considerable amounts in research and development in new products. I give you one idea, our investment in the so-called dry powder inhaler system where we invested in research and development over the last two or three years and where we expect to introduce a new dry powder inhaler within a timeframe of five to ten years. We have been introducing and we have been developing new products over the last 10-20 years on a continuous basis. At the same time, we are working on many projects with the pharmaceutical customers. It is very difficult to estimate when these customers will bring these products to the market.

I think there's one other thing too. I think if you look at the products that we are on in terms of growth, we are still seeing incidences of asthma and allergies which today are two of the larger areas that we treat through our products. Those tend to also have strong international growth. So the need for our products are also growing to that. We see strong internal growth just even on our existing product lines.

Thank you, guys. Congratulations on another strong quarter.

Mike Hamilton from RBC Bank.

Steve, if you could start off with just a clarification. When you talk your tax rate outlook 32, 32.5% for the back half of the year, is that including anticipated impact off of the Italian decision?

The Italian decision was a one off decision.

No carryforward?

No, there's no carryforward. The $0.09 is -- the impact that we saw, the Italian, was only occurring in the second. You won't see any impact in the third or the fourth.

Thanks. Could you give a little outlook in terms of the 13 million in tooling, where the bulk of that is?

A lot of that has been spread out in the quarter. We saw a fair amount coming through in the pharmaceutical area. I think the two biggest areas that we see tooling coming back have been tooling in personal care so far this year. The other side that we still see some other tooling coming back for the back half will be in the food markets. Those are the three markets that generally we end up having the majority of the tooling go to.

Do you see anything in potential for pharma and new launches back half of the year or are we really likely out into '06?

That is again very difficult to forecast. We have one or two major pharma companies which may start launching. There is one asthma product by one major pharmaceutical company which has gained approval in some European markets. They have applied also for the U.S. market, which as you know, is the biggest market. Some of that may start hitting in the third and fourth quarter. In total, it will necessarily not be yet material. So that is just one example that we believe that 2006 and 2007, that's very difficult to forecast, some more important new product introductions by customers we have been working on for the last five or ten years.

Could you also give some comment -- obviously there has been some fairly broad-based consumer weakness in Europe and yet, in your markets, you seem to be still getting pretty good momentum there.

You are right. I think this has been mainly fostered by our position and by our introduction of new products and by our general strength in innovation. So we are seeing with most of the major marketers as, I would say, the most innovative company in the business. We have been able this way to maybe mitigate some of the overall general slower consumption growth specifically in Germany and France.

Congratulations and thanks for the help.

Chris Manuel from Keybanc Capital Markets.

A few questions for you. First EP Spray. Can you tell us what it contributed in the quarter?

EP Spray was positive. It had a little over $4 million impact in revenue and a little over $1 million on a pretax basis in terms of profit. So it's pretty much on track with what we anticipated when we acquired the company at the end of the first quarter.

Is that still principally in Europe or have you begun to bring that to North America yet?

That's a very good question. I was just going to -- before you asked the question, to add to Steve's comment that a major marketer in the U.S. is seriously considering to introduce the EP Spray technology and we are in industrial preparations to bring that product line and manufacturing to the U.S.

So that is something that will take place third-fourth quarter then?

Yes.

Very good. Then on the Seaquist side of the business. It looks like margins there have been real good the last couple of quarters. Is that principally due to the inclusion of EP Spray or are there some other factors there that are helping as well and is this sustainable?

EP Spray is helping. By the way, will continue to help. In general, we have been introducing other new products by Seaquist and other new products with considerable better margins than we have had, specifically in the aerosol business. What is helping there has been also the price increases I mentioned earlier today in the valve business. But more than that, again, our innovation, which has been very well accepted, one of the more successful product introductions is the Schering-Plough product for suntan lotion called Coppertone, which features our locking device, a dispensing system which doesn't need a hood anymore. It also features the EP Spray technology so you do not need pumping. It works in every direction and in every position, which is especially helpful for the consumer for a suntan lotion. It is environmentally friendly because of the propellants which are used. We see -- that product, in general, our new locking device has gained wide acceptance, (indiscernible) and other personal care products like deodorants and is one of the examples of how new product introduction, our innovation, is helping our margins.

If I can ask a question back to pharmaceutical a moment. It looks like you're going to have a couple of difficult comps the next two quarters where you were up 12% third quarter of last year, up 27% fourth quarter of last year. Any updates on potential new -- some of these diabetes drugs, there was a favorable study there or anything also that would lead us to believe that the growth in pharma can continue or is that an area that you think might potentially be flat in the back half of the year due to the difficult comps?

We agree with the difficult comparisons for the third and the fourth quarter. You mentioned the diabetes products. We have one project with one customer, one marketer, who is introducing or is in the brink of introducing a metered dose system applying internally through the mouth. They are first trying to introduce in Europe and they may be close to getting approval in one or two European countries soon. Then they also will try to go worldwide I suppose.

There is -- there is in the second half of this year will be the introduction of an asthma spray using our dispensing system by one of the largest pharmaceutical companies in the world. They have gained approval in one or two European countries very recently. They will be apply -- they have been applying for approval in the United States and other countries. That should have an impact for us next year, some smaller impact this year.

In general, we have seen very good growth in the business and our orders going forward for the third and the fourth quarter. We believe that we will have reasonable expectations for the third and fourth quarter and certainly we believe that the pharmaceutical markets for the years to come will support strong growth supported by our own innovation and supported by the underlying potential for these products.

One last addition along that point. Any update on -- I know in the back half of last year, you shipped a lot of product in anticipation of some generics, particularly in I believe Flonase. Any update there as to how those products may be doing? Can we start to see shipments pick up again for that?

There are two aspects of this. You mentioned the name Flonase. Flonase came off patent in May 2004. In anticipation of FDA approval for generic products, some generic companies have geared up using our dispensing systems to be ready for any pending approval by the FDA. As of this day, we believe the FDA has not approved any generic products. In anticipation of generic introduction, Glaxo, who is the producer of Flonase, has potentially we believe reduced their inventory and their forecast in terms of their use of pumps and that has come back to normal levels. On one side, the generic sales have declined. On the other side, our sales to the Flonase inventor, being Glaxo, will most likely increase again in the second half.

(OPERATOR INSTRUCTIONS). Greg Halter from Great Lakes Review.

I got on the call late due to some difficulty but had a couple of questions. You had a situation with a resin supplier earlier. I guess it was last year. I was just wondering if you are seeing any resolution on that or whether or not you have commented on that already.

No. We did not comment on that yet. There is no resolution. There is ongoing negotiations with a supplier in order to get some compensation for the costs which we had to support last year.

The only thing in that Greg is whatever the results of the negotiation would be, the only upside potential for the company, we have taken the full exposure for any kind of expenses.

And on your data, are you still about 50-50 variable to fixed?

Yes, we are 50-50 with the average rate being just under 5%.

Did you comment on what you expect for capital spending for the full year?

We came back and we're looking -- through the first half, we're basically around a little under $50 million, which is about the same level of depreciation. We're still expecting CapEx to depreciation to be about the same and again, given where currency ends up, we're looking right now that to be in the area of 100 million.

For both?

For both.

Maybe you commented on this but I may have missed it. On the two segments, did you comment on your sales ex currency?

Sales ex currency was -- for the dispensing segment sales, we were up 9% and the SeaquistPerfect segment sales were up 20%.

I heard you make a comment regarding excluding tooling, you are up 22%. What particular area was that or was that --?

That was in the food beverage market. I indicated when I started my comments that food was up 12% year-to-year. But in that, in the second quarter of 2004, we had a large sale of tooling. So if you just kind of made it product sales to product sales, we would have been up 22% year-to-year in the food beverage market.

(OPERATOR INSTRUCTIONS). There are no further questions in the queue at this time. I'd like to turn the program back to you.

Thank you. Ladies and gentlemen, I'd like to thank everybody for participating in our call today. Thank you and goodbye.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.