(ATR) 2006 Q4 法說會逐字稿

Welcome to AptarGroup's 2006 fourth quarter and annual results conference call. (OPERATOR INSTRUCTIONS).

Introducing today's conference call is Mr. Ralph Poltermann, Vice President and Treasurer of AptarGroup.

Please go ahead sir.

Thank you, Christopher.

Before we begin, I would like to point out the discussion that follows 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 in forward-looking information contained therein.

Participating on this call today are Carl Siebel, President and Chief Executive Officer of AptarGroup, Peter Pfeiffer, Vice Chairman, and Steve Hagge, Executive Vice President and Chief Financial Officer.

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

Thank you, Ralph.

Good morning, ladies and gentlemen.

This is Carl Siebel.

I will briefly discuss the quarter and outlook before turning it over to Steve Hagge, who will provide more detailed information about our results.

I am pleased to report that we had a record fourth quarter.

We reported increased sales by every segment in the quarter.

In the Beauty & Home segment, increased amount from the fragrance cosmetic and (indiscernible) markets offset lower sales to the household market, particularly of aerosol (indiscernible).

Also, acquisitions contributed to the increase in this segment's sales.

Closure segment sales increased primarily due to strong demand from the personal care and household markets, as well as acquisitions.

Pharma segment sales increased primarily due to higher sales of metered dose valves and custom tooling.

As noted in our press release, changes in exchange rates had a positive impact on sales during the quarter.

We reported record fourth-quarter operating income, even after considering the negative impact of recording stock option expense of about $2 million in our financial statements in the fourth quarter of 2006.

We mentioned in the press release that we had some operational issues in our European Closures business.

This relates to problems at our Closures operation located in France, which had low productivity.

We are focusing on addressing this situation and expect sequential improvement coming into the first quarter of 2007.

When comparing our bottom-line results between the two years, you need to keep in mind that we had a negative impact from stock option expense on the face of our financial statements in 2006 of $0.04 per share for the fourth quarter and $0.24 per share for the year.

Excluding the stock option expense, earnings per share were up about 23% for the quarter and about 12% for the year.

2006 marked our 41st consecutive year of increased sales and a record level of earnings per share.

We are benefiting from the diversification of our business resulting from our broad product offering, the variety of the markets we serve, and our international geographic presence.

Also, we're seeing positive results from our disciplined acquisition strategy, and I'm excited about the high level of new product activity, both our own innovations, as well as new applications by our customers for our products.

And in light of the high level of projects being worked on in the pharma market, we will be adding to our Pharma facility in France in 2007.

Looking forward, we expect the positive momentum to continue into the first quarter of 2007.

Diluted earnings per share for the coming quarter are expected to be in the range of $0.68 to $0.73 per share, versus $0.55 per share in the first quarter of 2006.

This represents an increase in the range of 24% to 33%.

Now I would like to turn it over to Steve, who will provide more detailed information about our results.

Thanks, Carl, and good morning, everyone.

I'll review our financial highlights, and then Carl, Peter and I will be happy to answer your questions.

First, looking at the fourth quarter, as Carl mentioned, our reported sales increased approximately 25%, with changes in exchange rates accounting for about 7% of the increase and acquisitions accounting for approximately 4% of that 25% increase in sales.

Sales of custom tooling increased about 9 million in the quarter from the previous year to approximately $24 million, with the majority of this increase from higher sales to the pharma and personal care markets.

Excluding changes in exchange rates, the Beauty & Home segment sales increased 21%, mainly comprised of a 27% increase in sales to the fragrance cosmetic market and a 19% increase in sales to the personal care market, while sales to our household market declined about 5%.

Acquisitions affected the fragrance cosmetics sales of this segment and accounted for approximately 9% of the 27% increase in the fragrance cosmetics sales.

Again, excluding changes in exchange rate, our Closure segment sales increased 19%, mainly due to 26% increases in sales to both the personal care and household markets.

Our acquisitions in the closure market affected the personal care sales by approximately 7% of the 26% increase in personal care sales.

Excluding changes in exchange rate, our Pharma segment sales grew 12%, mainly due to increased sales of metered dose aerosol valves and higher custom tooling.

As Carl mentioned, we started expensing stock options in the first quarter of this year.

This change had a negative impact on pre-tax earnings of $2 million in the fourth quarter, which was mostly included in the SG&A line of our income statement.

This represents a negative impact of $0.04 per share on the bottom line.

During the fourth quarter of 2006 we had a positive impact on our tax rate, due primarily to a tax law change in Germany, which resulted in a positive impact of approximately $0.03 per diluted share.

Bottom line, we reported earnings per share of $0.77, compared to $0.66 per share a year ago, or a 17% increase.

From a geographic standpoint, sales to customers by our European operations represented approximately 62% of net sales this year, versus 61% of sales last year, while sales to customers by our U.S. operations accounted for 28% of our sales this year, versus 29% of sales last year.

Free cash flow we define as cash flow from operations less capital expenditures for the fourth quarter was approximately $18 million versus $11 million in the prior year.

Our cash flow from operations for the quarter was roughly $47 million in the current year compared to $41 million in the prior year.

And capital expenditures in the quarter were around $29 million in the quarter compared to $30 million in 2005.

We spent approximately $13 million to repurchase roughly 223,000 shares during the quarter at an average cost of a little over $59 per share.

The total number of shares repurchased in the year was 1,080,000 shares.

This represents our third consecutive year that we have repurchased over 1 million of our shares.

And at the end of the quarter, the remaining number of shares authorized for repurchase was around 2 million.

The mix of our debt at the end of the quarter is approximately 60% fixed and 40% variable, with an average interest rate around 5.7%.

On a gross basis, debt to capital is about 24%, while debt net of cash to net capital is approximately 12%.

Now looking at the full year 2006, reported sales increased approximately 16%, changes in currency exchange rates accounting for only 1% of this increase.

Acquisitions accounted for approximately 92 million of the increase, or about 7%.

Our tooling sales for the year increased approximately $21 million from the prior year, with the majority of this increase in sales to the food and beverage and pharmaceutical markets.

The preliminary breakdown of sales by product for the year is as follows.

Pump sales accounted for approximately 50% of our sales in 2006, compared to 55 a year ago;

Closures were 26%, compared to 25 a year ago; aerosol valves at [15], compared to 15% a year ago; and our other sales were 10% compared, to 5% year ago.

From a geographic standpoint, sales to customers by our European operations represented approximately 61% of net sales in 2006, compared to 60% a year ago, while sales to customers by our U.S. operations accounted for 29% of sales this year, versus 28% a year ago.

As I mentioned, for the quarter, we started expensing stock options for the first time in 2006.

This had a negative impact on pre-tax earnings of 13.3 million for the year, or, on a bottom-line basis, $0.24 a share. 2005 earnings per share include a positive impact of approximately $0.09 per share related to prior years' research and development tax credits in the U.S. and reduced taxes in Italy, as well as a negative impact of approximately $0.07 per share related to our French redeployment program, for a net positive impact for the year of about $0.02 per share.

Free cash flow for 2006 was approximately (technical difficulty) million, versus 90 million a year ago.

Our cash flow from operations for the year was about 195 million in the current year, compared to over 194 million in the prior year.

Capital expenditures for the year were around $111 million, compared to $104 million in 2005.

Looking forward, based on our current exchange rates, we expect our depreciation and amortization to be in the area of $120 million, while total cash outlays for capital expenditures are expected to be in the area of $135 million.

Our capital expenditures in 2007 are expected to exceed depreciation and amortization by about 18 million, which is due to the new pharmaceutical facility that Carl talked about in his comments.

I would like to briefly touch on the stock option expense for 2007.

In January of 2007, the Board of Directors awarded approximately the same number of shares -- option shares in 2007 compared to 2006.

Black-Scholes value for our 2007 grants are approximately $2.50 higher per share than in 2006, largely due to the higher stock price this year, which will affect our stock option expense.

Our pre-tax option expense for all of 2007 is expected to be in the area of 14.1 million, compared to 13.3 million a year ago.

The increase of around 800,000, however, is not evenly distributed during the year.

Rather, the expense by quarter is estimated as follows.

In the first quarter we expect an expense of 8.8 million, compared to 7.1 million, or an increase in the expense of (technical difficulty) million.

In the second quarter we expect about 2.1 million in expense, which is comparable to last year's level.

In the third quarter we expect 1.6 million of expense, compared to 2.1 million a year ago, or a decrease of $500,000.

And in the fourth quarter, again, 1.6 million in expense, compared to 2 million a year ago, or a decrease of 400,000, which gives us a net increase for the full year of 800,000.

Finally, the effective tax rate for 2007 is expected to be in the area of 31 to 32%.

At this time we would be glad to answer any of your questions.

(OPERATOR INSTRUCTIONS).

Ghansham Panjabi, Wachovia.

(indiscernible) sales from some of your major customers, such as Estee Lauder longer and Avon, are very strong.

I assume that much of the growth is coming from overseas, particularly the emerging markets.

Can you give us a sense as to how your fragrance asset base matches up against this growth surge, and how much of your CapEx is targeted overseas relative to the U.S., relative to your sales base proportion?

Most of the growth in the fragrance market is for us very well distributed between the regions.

We have a very good growth from our international customers, and we believe that it -- again, this is driven by not only growth in our traditional markets in Western European and the United States, but also specifically by the developing markets.

And just to give you one example (indiscernible) was talking about explosive growth in Russia.

So in effect, we presently have a very good -- an improved economic situation in general in Europe.

And on top of that, we have the developing markets.

So, we believe that presently there is a good overall growth situation for our customers in the fragrance and cosmetics business.

So you don't see yourselves being supply-constrained in any market?

No.

Right now we are running essentially in most of our operations at full capacity.

We have been up to now able to supply the demand.

Steve, real quick.

The drop in SG&A as a percentage of sales year-over-year?

We've been trying to (indiscernible) particularly if you back out the stock option expense, we continue to be able to leverage that.

So, that's an area as we grow we would expect to continue to be able to leverage through '07 to '08.

Ross Gilardi, Merrill Lynch.

I want to clarify your guidance for the first quarter.

So, you're saying $0.68 to $0.73, and it sounds like that includes about $0.17 from options expense.

Does that sound about right?

It includes about 8 million -- yes -- on a pre-tax basis, about 8.8 million of option expense.

Correct.

That's [up loss] from last year's level of options of about 7.1, or, on an after-tax basis, probably -- net increase is probably about $0.03 or $0.04 a share.

But ex options expense, if you take your guidance, it sounds like the number is really $0.85 to $0.90, versus something like $0.68 in March 2006.

Do I have that correct?

You're close on those. (multiple speakers)

Could you just talk about the near-term sustainability of the double-digit organic revenue growth that you're -- that you got in the fourth quarter?

We were, frankly, positively surprised by the sales growth in the fourth quarter, and, I'd like to underline, also by the incoming order activity and the order backlog we have going into the first quarter of 2007.

One of the major drivers of that sales growth is the fragrance and cosmetic lotion business, which (indiscernible) has shown visibly a much stronger growth than in preceding years.

The big question will always be the visibility.

Right now, as seen from our forecast for the first quarter, we are quite optimistic about the fourth -- first quarter.

And I would say also, based on present order backlog and our discussions with our customers, the second quarter seems to be -- seems to look quite well.

Also, we -- in talking with our customers, we have been told that the sell-off into the -- to the consumer has been good.

They do not indicate that there has been an increase in inventories in the product pipeline between the marketers and the retail chain.

So, all the indications at this point, as much as we have the visibility, are positive.

And we believe that this is driven by our new product launches, by our -- by some market share gains, for example, in the sampling business, and by very strong growth in the developing markets.

And as well, fortunately, the European economies, as you know, have improved also in general.

And indications from sales -- for example, fragrance sales statistics to the -- from the retail chain to the consumer in France and Germany indicate to be about 7%, which historically, again, is a very strong growth.

And the additional pharma capacity or capacity to serve the pharma market in France, is that for some specific new applications, or is that more for your core traditional metered dose products?

We are working on some new customer projects which will come on stream in 2008, 2009, so that we are (indiscernible) this [new building] in 2007.

Hopefully we will be finished [with it] in -- end of 2007, beginning of 2008.

Also, this is foreseen for some new products we are working on (indiscernible) market, like for example dose indicators for metered dose inhalers, [where it is for both capital projects] and new products to the market.

Chris Manuel, KeyBanc Capital Markets.

A couple questions for you.

First, I'd like to follow-on to the last line of questioning a little bit.

When we think about what looks to be 13-ish-or-so% organic growth here in the fourth quarter, it sounds like that's, given your guidance, at least going to be sustainable into the first quarter.

And from your comments, Carl, it sounds like it could be sustainable into the second.

Are these principally new products leading it -- I guess, given a good sense that it could go through for a whole year?

Or is this may be something that we're filling a pipeline with that would be more temporary?

Can you give us a sense of over the next 12 months how sustainable a double-digit organic growth rate could be?

As you know, the issue in this business, in the fragrance and cosmetic business historically has always been that there was a certain seasonality, and there were cycles of ups and downs.

So, it would be risky to venture into forecast into the second half at this point.

However, what I would like to point out also is that beyond what I mentioned already in terms of economic activity in Europe and developing markets potential, what we noted also is that repeat sales, sales of products on product launches of customers of preceding periods, have been quite strong.

So, it is not that we are seeing good new product introduction activity, but the we have seen equally strong sales of existing products of our customers.

So -- and we do not think that there is an unusual part of that business going into pipeline filling for new products.

It is very -- it has been a very balanced situation in this respect, and is also a balanced situation as we see it presently looking at our order backlog.

That helps.

Could you also maybe give us a little more color into the European Closures issue, maybe what -- approximately what it may have hurt you this quarter, how that may look into the first quarter and beyond?

The issue, as we mentioned, is more internal operational and productivity issues than external issues.

And we have been working on that.

We have special programs and activities going on.

It is, however, difficult now to -- we see improvement going into the first quarter, but now to give you exact figures would be difficult.

I think we've estimated that, in terms of the Closure side, it probably had a negative hit to us in the fourth of around $2 million.

So, sequentially we certainly see an improvement of that going into the first, and quarter-by-quarter improvement as we go through 2007.

So, you're not -- you're anticipating some incorporated into your guidance for the first quarter?

That's correct.

The last question I wanted to ask was -- as we look at the increased CapEx, I think you mentioned the delta being the new facility you're putting in for pharmaceutical.

Are there -- how should we think about -- how do you think about returns on capital?

Is there a hurdle rate or something that -- can you give us a little more color there?

We actually put up hurdle rates for all of our capital expenditures, with the exception of just plain replacement side that we need.

So, in terms of the pharmaceutical side, as you'll notice in the segment, it is our highest-returning asset.

And given the growth -- and particularly as Carl mentioned, a lot of the projects we see coming for our future growth are customer-based, so customers are also putting up additional capital.

So, our returns for the Pharma buildings would exceed our corporate average in terms of overall return on capital.

(OPERATOR INSTRUCTIONS).

Claudia Shank, J.P. Morgan.

In the press release you mentioned that the competitive environment remains challenging.

I was wondering if you could put some color on that, if it's from competitors on price, or is it sort of customers pushing back?

As we said, essentially we have always worked in a climate of competition.

We have good competition, we have had strong competition, and that's continuing.

So, there is nothing new compared to the past.

But we -- especially as we go into developing markets, we are in front of different competitors there.

But there is no specific event or no specific competitor to be mentioned, or situation to be mentioned, which gives us a major change from the past.

That's helpful.

Just as you sort of look out over the packaging phase right now, it seems like there are a lot of large divisions that are up for sale.

And as we -- so taking that into perspective, and even looking back at the (indiscernible) sale, do you think the sale of large companies or businesses in your markets is helpful, or does it disrupt the market, I guess?

I would say, Claudia, it is more neutral.

Up to now we have always had a mix of privately-held competitors and divisions of large companies.

Selling activities of one competitor being sold and changing hands from A to B is not necessarily strengthening in the short-term this competitor.

But long-term, I do not think that there is a major influence of disruption by a competitor being purchased or sold.

Todd Peters, American Century.

Two questions.

I missed what your capital spending was in 2006 for the full year.

It was about 111 million, and our depreciation was about 115.

And I'm looking at your inventory, your working capital inventory and accounts receivables.

They're up about 23% year-over-year.

I guess that's in line with your revenue growth.

But, there's been a little bit of variability in the account receivable area.

Can you tell me what's going on there?

I think, first of all, you've had a couple things impacting both receivables and inventory, one of which is the exchange rate from a year ago.

So the exchange rate has moved from 1.20 to 1.30, which has had an impact on the base amount.

Secondly, in our fourth quarter, as Carl mentioned, we had actually a stronger fourth quarter than what we were anticipating.

A lot of those sales came into December.

So our December sales were up over 20 million from a year ago, which represents a good part of that increase in the receivable.

So we continue to monitor pretty closely on a days basis, and we're pretty much at or slightly below where we were a year ago on a days outstanding, for both inventory and the receivable categories.

How do you calculate those numbers for the quarter?

Essentially what we're doing is taking a look at quarter sales divided by whatever the receivables are, and same thing with cost of sales for the inventory side.

Greg Halter, Great Lakes Review.

Congratulations on the excellent results.

The Closures business operating income was down about 16%.

I presume the majority of that is due to the issues that you had mentioned previously?

Again, the biggest issue for us was -- on the Closure side was the French operation here in Europe, with the productivity problems that Carl talked about.

Can you comment on resin costs at this point and what you see going forward?

I think it depends again -- the resin -- you have to look at it in terms of geographic size.

In the U.S. we saw resin dropping in the latter part of 2006, and basically stable to slightly up in 2007.

Europe has been seeing a small increase as we go into the year.

What we're looking as we go forward -- and again, this is very difficult to predict -- we predict actually looking at more stability in terms of resin pricing in '07, and not, hopefully, some of the volatility that we've seen in prior years.

That would, obviously, be helpful.

Just wanted to look at your guidance again for the $0.68 to $0.73, and just confirm that that does include the option expense of about $0.17 a share you've previously discussed.

It does include the option.

That's correct.

Thank you.

Looking on your own side of things relative to mergers and acquisitions, what you see as the outlook there for any other potential deals.

We continue to look at the framework of our strategy for potential acquisitions.

And that is ongoing activity and monitoring.

We are looking presently, like always, on certain potential acquisitions.

But we continue in our strategy to be conservative, in the sense that we [are] not looking for [buying growth], but we are looking for enhancement of our product line, of our technologies, geographic presence, and whether in general they fit into our -- specifically our product categories.

Any comment on the integration of the transactions that you completed in the third quarter?

All -- as you have noted, we have done several smaller transactions over the last 18 months.

And in general, all of these, we are very pleased with the way the integration has worked.

And also, the last ones which we did in 2006, the gain integration is going quite to our satisfaction.

Steve, do you have the number that was spent on acquisitions in all of 2006?

About $30 million, $40 million is the number. $36 million, I think, is what we show.

Carl, you usually run through some of the new items, new products that you have.

Just wonder if there is anything knew you could share, and if the Clic and Dream -- or I don't know what you call it now -- has been expanded beyond the applications we have seen in the past.

Certainly.

We'll talk about our new product development introductions in our three divisions -- Beauty & Home, Pharma and Closures.

Maybe start with Beauty & Home.

Since you were mentioning the sampling -- number one, the sampling business, as such where we have been a rather small player in the past, is growing very fast, and we're very successful there.

And specifically, the flat new sample for fragrance called Imagine has attracted a lot of interest.

We have now an order for a product which should be used for promotion at celebrity concerts.

And also L'Oreal has chosen Imagine, our flat sample, for a promotion at airports for their flagship Armani fragrance.

And we expect -- and we are expecting additional promotional activities for -- at L'Oreal for Armani using our flat sample.

So, this is maybe the most important success which we have had in the B&H area.

And if I may continue and talk about the Closures side, we have introduced a new patented closure for the beverage market, which has an improved performance for the consumer, for the [filler] and for the marketer, and it has been very well received by the markets.

We are also introducing a new push-to-open closure system, which is a patented design, again, and we already have a contract with a major marketer which will come to the market in 2007, with many other projects for this closure.

Maybe, Peter, you can comment on the Pharma side.

As already mentioned, one of the new products which will be produced in the new facility is the dose indicator for (indiscernible), which we have shown to several customers with quite a good response.

But as you know, in the pharmaceutical area, new product introductions take time.

So, it's not foreseen before 2008.

Another new product which has shown to the market with very good response is our DPI, dry powder inhaler.

We have had contact with several customers, shown it, and we are in discussion with these (indiscernible) agreement.

These are basically the two major products.

We are offering also a new pump to the market, which is a user independent pump (indiscernible) very good response from the customers, but not so -- so far, no concrete deal on this side.

Great.

Thank you.

It looks like your stock is indicated to open at 67 to 70 this morning.

Congratulations on that.

Tim Burns, Cranial Capital.

I had about six questions that I wanted to ask that were just asked by the previous caller, but that's another story.

I guess I have a question that was brought up earlier about M&A.

There's certainly a flood of, let's say, rigid plastics coming to the market.

But your strategy has been really to avoid bottles or lower-commodity products.

I guess what you're saying is there's still way too much growth in your core technology and core competency.

Is that correct?

I think so, Tim.

I think if you take a look at it, I think we've always had a very strong discipline on buying things that can add value to the Company, that meet the strategic needs for the Company, and not buying growth.

And frankly, as we've even demonstrated through the fourth quarter and, I think, through most of '06, we continue to have double-digit, or close to double-digit organic growth.

So we see lots of opportunities.

M&A still looks to be -- there's a lot of -- as you say, there's a lot of opportunities that we'll continue to look at.

One of the challenges that has been in this market is what the pricing for some of these properties are, which, again, we have to continue to evaluate.

There's a number of unique companies -- you're one of them -- who are very concerned about their culture, and acquiring assets that might pollute their culture.

Indeed, you guys manage a stable of, what, five or six independent companies?

I don't know how you do it.

Is that an issue as well?

Culture is a very important subject if you are running a worldwide business like ours. and especially if you're running a business on a b-to-b basis, as we are doing.

So, we have put a lot of emphasis from the beginning of the creation of AptarGroup on our values, on our culture and our strategy.

And we have continuous efforts, especially when it goes for acquisitions, to try to (1) evaluate the culture of the companies we are looking at, and (2) after potential acquisitions, then also to be able to extend our culture into these companies.

But as you can imagine, we prefer, evidently, to buy businesses which also fit into our culture, and specifically of the senior management of these businesses which we acquire which fits into our culture and our strategy.

I guess the last question I had -- I'll keep it to three -- is, in terms of the Pharma business, there's a lot of ominous stories about big pharma and their ability to continue to charge a lot for drugs, and movement to generics.

Historically you guys have said that changing the delivery system is good for them, good for you and good for the end user.

Do you still feel that way?

I think it is still one of the growth possibilities for AptarGroup, because the change of delivery systems is one way of extending the protection for a drug.

And this has been used in the past pretty often, and it has shown pretty good success to our customers.

And since we are, in most cases, also an important part of this business, it also improves our growth (indiscernible).

So (indiscernible) are still a very important part of drug delivery, and we are helping our customers improving their business.

Keep pumping the profits and dispensing the good news.

(OPERATOR INSTRUCTIONS).

George Staphos, Banc of America Securities.

This is Michael Pak for George Staphos here at Banc of America.

Just a couple of housekeeping questions.

One, what was the guidance on the D&A for '07?

And the other is, can you help us understand the acquisition impact for '07, if there's any remaining, on the top-line, that is?

The D&A guideline was about 120 million.

And the acquisitions side -- we're looking at probably, in terms of revenue, probably would be only around 13 million, because a lot of the major transactions that we had done are crossing the year timeframe.

So it's only going to be about 13 million, based on the deals that we completed through the end of '06.

How should I look at that in terms of the segments?

Is it mostly in Beauty & Home?

You've got one -- you've got a small one in the Closures side which we did in February of '06, and then you've got -- or actually -- and then you have another one in Closures that was done down in South America, and then the other is Beauty & Home.

So I'm guessing out of the total it's about half -- a little over half for Closures and slightly under half for Beauty & Home.

There are no further questions in queue at this time.

Thank you very much, ladies and gentlemen.

I would like to thank everyone for participating in our -- today's call.

Thank you and good bye.

Ladies and gentlemen, this does conclude the conference for today.

We do thank you for your participation.

You may log off at this time.

Have a good day.