Aptargroup Inc (ATR) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2012 first-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Introducing today's call is Mr. Matt DellaMaria, Vice President, Investor Relations. Please go ahead, sir.

Participating on the call today are Steve Hagge, President and Chief Executive Officer, and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Steve will begin our call with an overview of our first-quarter performance. Bob will then discuss our financial results in greater detail, after which we'll open it up for questions. Information that will be discussed on today's call includes some forward-looking comments.

Actual results or outcomes could differ from those projected or contained in the forward-looking statements. Please refer to AptarGroup's SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements. We will post the replay of this conference call on our website. AptarGroup undertakes no obligation to update the forward-looking information contained therein. I would now like to turn the conference over to Steve.

The first quarter ended up very close to what we had expected and we're off to a good beginning to 2012. Strong demand for our innovative dispensing solutions helped us achieve record first-quarter sales. It's encouraging that each of our segments grew their top lines over the prior year. Operating income increased slightly to a record first-quarter level in spite of the increased level of custom tooling sales compared to a year ago. Additional start-up costs associated with our newer facilities and unfavorable effects from the changes in currency exchange rates.

Our Beauty + Home segment, which constitutes about half of our revenue base, achieved core sales growth of 3%. Sales of our products to each of the markets served by this segment increased over the prior year. Operating margins were consistent with the prior year as product mix helped offset slightly higher custom tooling sales.

Our Pharma segment had a terrific quarter with core sales growth of 8%. Demand for our nasal delivery systems from the prescription drug market was particularly strong, and we continue to grow our consumer healthcare business even though at a slower pace than last year's exceptionally strong growth rate. Profitability remained toward the higher end of our historical range, mainly due to the product mix and production efficiencies which offset some of the start-up costs associated with our new Indian facility and the impact of higher custom tooling sales.

Our Food + Beverage segment completed the quarter with core sales of 11%, with 2% coming from increased custom tooling sales. Once again, we saw a very strong demand for innovative dispensing closures from the beverage market and steady growing demand from the food market. I'd like to mention a significant step in a penetration of the juice beverage category. In the quarter, Tropicana launched their new, redesigned 2.6-liter orange juice package with our custom closure. We're optimistic that further penetration of the juice and other beverage categories will contribute to the growth of our Food + Beverage segment. Profitability for this segment was negatively impacted by the start-up costs associated with our new facility in North Carolina. Increased R&D and prototyping costs coming from new project activity, as well as higher custom tooling costs.

Looking at our new facilities worldwide, we continue to bring our new capacity online and I'm pleased to say that our progress on our new facilities in both Lincolnton, North Carolina, and Mumbai, India, has gone very well. In Lincolnton, we began shipping to customers in the first quarter and we expect to begin shipping products from our Pharma facility in India in the second quarter. As we look ahead to the second quarter, there continues to be some macro concerns, particularly about the financial situation in Europe and a potential slowing growth rates in the emerging regions.

We also expect a challenging input cost environment and that currency exchange rates will have a larger negative impact on our results in the second quarter. However, I am encouraged by the level of project activity across all of our segments and we continue to penetrate new and existing categories with our market focus strategy. We're well-positioned with the recent capacity enhancements to grow with our customers in all the regions we serve. Now, I'll turn it over to Bob, who will review our quarterly financial results in more detail.

I'd like to first comment on our consolidated results for the quarter and then I'll go into details by business segment. As announced in our press release, we reported record first-quarter sales. Core sales growth was 6%. Currencies had a negative impact of approximately 3%, and therefore, the reported sales growth, including currency effects, was 3%. From a geographic standpoint, our European operations represented approximately 55% of sales this year, versus 58% of sales in the prior year, while our US operations accounted for 29% of sales, versus 28% last year.

Reported diluted earnings per share for the quarter equaled the previous year's first-quarter record level of $0.64 per share. Free cash flow, which we define as cash flow from operations less capital expenditures, was a use of approximately $29 million for the quarter, which was the same amount as in the prior year. Our cash flow from operations for the quarter was approximately $14 million, compared to a use of capital of approximately $4 million in the prior year. Capital expenditures were approximately $42 million in the quarter, compared to $25 million in the first quarter of last year. On a gross basis, debt-to-capital is about 23%, while on a net basis it is roughly 5%.

Turning to our business segments, our Beauty + Home segment reported sales that were in line with the prior year. This included a negative effect of 3% coming from changes in currency rates. Therefore, on a constant currency basis, segment sales were actually up 3%. Looking at our markets on a constant currency basis, sales to the fragrance cosmetic market increased 5%, sales to the personal care market increased 2%, and sales to the household market increased 8%. Our Pharma segment reported sales growth of 6%. Changes in currency exchange rates had a negative impact of about 2%, putting core sales growth at 8%. Looking at our markets on a constant currency basis, sales to the prescription market increased 11% and sales to the consumer healthcare market increased 3%. Our Food + Beverage segment reported sales growth of 10%. Currencies had a negative impact of about 1%, therefore, core sales were up 11% over the prior year. On a constant currency basis, sales to the food market increased 8% and sales to the beverage market were again very strong, and were up 19% compared to the prior year.

Regarding our share repurchase activity, during the quarter we spent approximately $10.1 million to buy back approximately 190,000 shares of our stock. The Board of Directors also declared a quarterly dividend of $0.22 per share, payable on May 17 to shareholders of record at the close of business today.

Looking forward, presently we expect depreciation and amortization for 2012 to be in the area of $150 million, with capital expenditures expected to be in the area of $160 million. I'd like to point out that these amounts could vary depending upon changes in exchange rates. We expect the tax rate for the full year to settle in the area of 33% to 34%. I'd like to also point out that we're expecting stronger currency headwinds in the second quarter. The average exchange rate for the euro to the US dollar in the second quarter of 2011 was 1.44, whereas the spot rate at the end of the first quarter of 2012 was 1.33, and this is what was used for our forecasted second-quarter range. We currently estimate that diluted earnings per share for the second quarter of 2012 will be in the range of $0.70 to $0.75 per share, compared to the all-time high quarterly earnings per share of $0.74, reported in the second quarter of 2011. At this time, Steve and I would be glad to answer any of your questions.

(Operator Instructions) Ghansham Panjabi, Robert W. Baird.

It's Matt Wooten, sitting in for Ghansham. I was hoping that you could talk us through the volume trajectory for each of the segments throughout the quarter?

The volume -- your talking about during the month? It was pretty consistent with historical patterns. March, for us, is typically the biggest month in the quarter, but if I were to look January, February, March, compared to last year, it was very consistent within the past so no unusual inter-period trends.

You talked about increasing labor costs in the emerging markets. Is that a trend that's consistent throughout the three businesses or is it something that we should look at in one rather than the other?

If you look at it, what we're saying is we're seeing inflation, whether it's in Asia or in Latin America. Increase from kind of where it's been over the last couple years, so it reflects increases in wages as well as certain raw materials. What we're saying is we're continuing to try to pass those through, but there is some timing differences in trying to get all of those costs passed through in terms of price.

Okay.

Chris Manuel, Wells Fargo Securities.

This is Gabe Hajde, actually, in for Chris. Can you guys fill us in again on phasing of the start-up costs and maybe when you expect that they will go away, or timing of those costs abating?

Sure. The two facilities that Steve mentioned, the Lincolnton, North Carolina, facility and the Mumbai facility, together were roughly about $1 million in the quarter. A bigger piece of that is going to be the Lincolnton facility, just because of the size of that facility. We would expect that to be going down gradually as we ramp up production there and as we get more throughput to those facilities. Same can be said for the Mumbai facility. On top of that, you also have about $400,000 to $500,000 of additional depreciation that's on board now that the facilities are in production.

Okay, so maybe by the end of the year that will be going away?

Well, certainly on a comparative basis. We were ramping up expenses last year, for particularly for the Lincolnton facility, so on a comparative basis it's going to be less of a drag on the earnings side.

Okay, and then you guys mentioned in the press release some variance in growth by geography. Can you maybe provide a little bit of color there, presumably some weakness in Europe, but --

Sure. I can give you just overall on an Aptar basis, what the regional splits look like. On a core -- I'm talking core sales growth here -- so on a core sales growth of 6%, the US was up about 7%. Europe was up 1%, Latin America was up 18%, and Asia was up 30%.

All right, thank you gentlemen. Good luck in the quarter.

Mike Hamilton, RBC.

Could you give us a walk through your assessment of raw material cost pressures as you go in to the second quarter?

Yes, I think if you look at it, what we saw kind of a -- last year, again, we have to come back and compare this to where things were a year ago. We saw resins going up about -- in the US -- about 12% on average, polypropylene in the first quarter of 2012, compared to the fourth quarter. Now, there was also increases last year. We actually are expecting that to level out a bit in the US as we go in to the second quarter, but again, we had some inventory carryover so we're still expecting a drag on our income going in to the second quarter. Europe, in terms of resin, looks to be not up as much but it's still on a bit of upward trajectory and again flattening in the second. Aluminum costs and some of the raw materials are up, but in less degrees than they were in terms of the resin side.

Thanks. On the manufacturing side, any constraints or any production inefficiencies at this stage?

When we look across the business, I don't think there's anything that steps out. We had some slowness -- our biggest slowness that we saw in the first quarter was coming out of the Beauty + Home area and Personal Care, so we saw some slowness of pockets in that area, but in general, with the capacity, we have we're pretty well-situated right now to be able to deal with the demand.

Jon Andersen, William Blair.

I guess I wanted to ask a little bit more about the strength in the Food + Beverage segment, and particularly on the beverage side. You called out the juice opportunity with Tropicana, and can you give us a little bit more color on kind of what that is, where you are in terms of the rollout of that with Tropicana? Is this -- should we view this as the first step in an opportunity more broadly in the juice category?

I think, first of all, in terms of the quarter itself, I think we started shipping -- it was relatively small amounts to Tropicana in the quarter, so they're going to continue -- they just launched this, I think, in the early part of March on a nationwide basis, so we do see that continuing to ramp up through the remainder of year. Again, if you see the package, it's really an impressive looking carafe-type package that's on the market. We're encouraged by that and, frankly, we're also seeing other marketers today come back and take a look at their juice packages as they may want to compete with what Tropicana does. In addition to those, we saw good strength coming out of Kraft with their MiO energy drink, and we continue to see good growth for us in Asia for our water and sports drink closures that we're selling over there that had a particularly strong growth in the quarter.

Perfect, thanks. In the Pharma business, the strength that you saw with the nasal delivery systems -- on RX side -- was there anything kind of unusual in the quarter with respect to that? I'm thinking about warm winter weather and maybe a stronger start to the allergy season, or is that just kind of sustainable growth going forward?

I think what you pointed out is we've got a couple things that are impacting us. We were very strong in products we were selling for allergies, and I think everything we're seen in the US in particular, it is going to be a challenging allergy season for people who have the allergies, so there is a lot of product being manufactured for that. In addition, sales to generics, for us, continue to do very well in the marketplace, so I think you had both of those and again, if you look at the sales at 8%, it's kind of in that 5% to 10% range, which we would expect in the Pharma market.

Perfect. I just have one more, I understand the FX impact on the top line and it sounds like that headwind at the margin increases in the second quarter. How should we think about that impact on the bottom line? I know that's a more complicated question but I'm trying to get a better gauge of that.

Sure, it's a great question. You're right, it's very complicated. What we see is that not all of that translation impact, if you will, falls all to the bottom line on a net basis. We have offsetting transaction impacts, although some of those are lessening as we balance our production locally and move more production. What we would say is that whatever the top line currency headwind is, it's something less than that. We -- roughly half is probably what you could use on the bottom line, but I'd caution you that, you're right, it's a very complicated issue and we got more than just the euro which is coming into play there. You've got the real and the Swiss franc, which are also playing in there. It is something that we do look at but it is definitely an amount less than what the top line is.

Thanks, guys, and good luck on the second quarter.

Albert Kabili, Credit Suisse.

It's actually Ernie Ortiz, filling in for Al. I just had a question -- in previous releases you cited cautious customers -- I just wanted to get an idea of the order patterns that you're seeing and some of the inventory management trends that you're seeing with customers at the moment.

I think if we came back, we saw some inventory contraction from our customers, Ernie, as we went back in. What we've seen is a little bit more cautious with our customers, particularly in local markets in Europe, which was what we saw in the first quarter with Personal Care. Our fragrance customers seemed to be doing reasonably well, off a very strong 2011, so again, you're not going to see-year on-year growth that we saw last year, but we had a very strong 2011 on that side. Our Pharmaceutical customers continue to do pretty well, really across all of the regions.

In terms of capital allocation, you guys are still fairly under-levered. What are you seeing in the M&A market and potential for a dividend increase?

Again, we'll continue to evaluate the dividend increase and we'll be getting -- the Board continues to look at that, frankly, on a meeting-by-meeting basis. When you look at M&A activities, I'd say the market is reasonable right now. There's a fair number of opportunities that are out there and we continue to evaluate anything that would make strategic sense for Aptar.

Great, good luck in the quarter.

Brian Rafn, Sparta Capital.

Give me a sense -- it's a big, broad question, but either by product group, by region, what are you guys running -- labor shifts and what are you paying in overtime? How much maybe third party contract labor you might be using? I'm just looking for if there are any bottlenecks.

I think at this time, Brian, what we do is -- we do use certain subcontractors in our manufacturing side, and we'll fluctuate that based on where capacity goes -- we'll bring some of that in when we have open capacity, so I don't know that there's been a substantive change from that. We try to run as much of our facilities as full-out as we can.

Okay, but nothing beyond -- what might be normal overtime for you across the world?

Again, it's really dependent on product to product to product, so it's -- and it's almost very different from market to market. So would I tell you that there's nothing in 2012 that's fundamentally different than what we've had before. We've continued to add capacity in some of these areas, so, again, we're not leveraging any more than we've done in the past.

Okay. I missed the opening comments getting stuck in queue. The Tropicana, is that a Simply Squeezed? Is that a single delivery size or is that this big gallon jugs?

It's the 2.6-liter, and if you look at it -- if you think of the -- you can see through the bottle, it's like a carafe-type, so it's got a fairly large dispensing closure. It is not Simply Squeezed, it's got some technology in terms of a pull-ring inside that's used on that. So for Tropicana it's a very big deal. They're spending a lot on the rollout for that, so we're excited about, not only for them, but other opportunities in that market segment.

Just one final -- do you see anything different from the standpoint of repackaging? The inflation, certainly, where you guys have to go from a 16-ounce shampoo bottle to a 12-ounce, do you see much repackaging?

Yes, I think you're seeing a trend. Again, you're getting a bifurcation and you can even see it in the food market where I think Heinz, as an example, has talked about they want to get a package that they can sell for $1 in some of the dollar stores, versus what they're selling today in the regular supermarkets. They're using different packaging to differentiate the price points on that, so we are seeing market moves to that, not only in the Personal Care market but also even in the Food/Beverage market.

Adam Josephson, KeyBanc Capital Market.

In light of Europe's ongoing weakness, has your confidence in your long-term core sales growth target diminished in any way?

No. In fact, I guess we were encouraged, as Bob mentioned, in our core growth in Europe in the first quarter after a record 2011 was up 1%, and that's based on kind of dismal news that you saw coming out of the whole European continent. I think it's also important, Adam, to take a look at our business. When you think of our business, the stuff -- a lot of the things we sell in Europe actually ends up in other parts of the world, so on the Fragrance/Cosmetic side, while we sell the product in Europe, it's really a world market and the same really goes for our pharmaceutical side., Overall, I think when you -- I was just in Europe this week, as a matter of fact. You can find some caution, but I'd say there's reasonable pockets in terms of where we're selling our product.

Thanks for that. In Brazil's economy, has obviously slowed as well in recent quarters, to what extent has that slowdown affected your business there?

Up to this point it's had minimal impact. Again, what Bob said, we were up almost 18% on a year-on-year basis. I think one of the strengths of Aptar is the diversification of our products. We're not in one market or just one segment of that market, and so what we're seeing is growth in Latin America across Food + Beverage, Pharma, Beauty + Home. So it's not just one side. The only cautionary side we've got is in some of these markets inflation is now picking up and we've got the challenges of making sure we get those costs passed through.

Thanks for that, Steve. One more. I think I missed a question on start-up costs -- lapping start-up costs -- but as you lap the facility start-up cost in Food + Beverage, at what point would you expect fairly meaningful margin expansion provides core sales growth remains robust?

I would expect you'd start to see the margin pick up more in the second half on the Food + Beverage side. As you said, we start gaining some scale in the new facility and the Trop business ramps up to full production, so I would expect you'd start to see some meaningful change starting the second half.

Brian Rafn, Sparta Capital.

This question may be for Steve. You've talked in the past, Steve, about how Europe has maintained a fashion, a little more ergonomic design, a little more engineering design, for the consumer whether that be shape or size or color. Given the recession, given the fact the US has reflated a little faster, does the US ever catch up or does Europe always continue to maintain that packaging lead?

I think you have got two things going on. One, I think when you look at Europe you have got actually -- a lot of the products that we make that are just sold regionally are targeted for regional markets so you do get very different packages based on whether it's Germany, France, et cetera. With the US, I think what we're seeing is our customers are looking in the US for packages that distinguish themselves on the shelf. They need to be cost-effective, but they also need to provide that consumer convenience, so I don't think that trend as a whole has changed, but there's probably even more emphasis today on trying to be able to come back and get cost-effective packages on the market.

Okay. In the Cosmetic/Fragrance side, given the robust markets last year, do you see any diminishment in the unit volume launches or any national versus regional?

Not much. What I would go back -- if you look at what our customers are saying, the Loreals, the LVMHs, they had a reasonable start to the year and we would expect that to continue, so we don't see anything different in terms of their launch patterns.

Okay. When do you guys start to get a sense as to, specifically in the Cosmetic/Fragrance area, what Christmas 2012 looks like?

It's going to be more towards the middle end of the second quarter, so we start to see orders. We're -- today I think it's important to go -- we talk about a lot of knew of projects. We're already working on projects that are targeted to be launched as we get into later into the second, into the third and fourth quarter for the Christmas season, but that's very dependant on when the customer finally wants to launch those.

Okay. Finally, Steve, anything on the application, the rollout, of some of these new technologies like the dosage meters or bond aluminum plastic, that type of thing, any --?

We're continuing to have, I think, excellent results. We have got several projects we're working on with the BAP, which is the bonded aluminum project. We talked about one of the projects with the bag-on-valve, which is a technology that now we see in cortisone treatments, which gives some flexibility there so I would tell you the introduction that we have with Simply Squeezed across all of the lines continues to be excellent.

You also had something, Steve. You had these little blister packs that you were talking about, a very micro-pump with one or two sprays that was going to break into the magazine area relative to samples, is that follow that trajectory or where is that?

That continues to do excellent. We're, in fact, sold out of that product line right now. It's a relatively small piece of business. The other positive to that, we're today are in liquid form. We've got a product that will be coming to market here in the next couple months on the lotion form, so those products continue to do well.

(Operator Instructions) Jason Rodgers, Great Lakes Review.

Did pricing or acquisitions have any impact on the top line for the quarter?

No, minimal Jason. It was, the resin was, as Steve mentioned, was not a factor on the top line in acquisitions. Was slightly less than 1%.

And could you repeat what Latin America was up for the quarter?

Sure, Latin America on a global -- on an overall Aptar basis was up 18%.

Adam Josephson, KeyBanc Capital Markets.

Just a question on China. What rate of margin expansion do you expect there? Over what period of time and based on what?

Again, I think you have to break that down, Adam, to our different segments. Today we've got margins that are pretty comparable on the Pharma side to what we're selling elsewhere in the world. The Food + Beverage and Beauty + Home side continue to move up in terms of margin, but they were coming from a relatively low base so as the throughput, and as Bob mentioned, we had 21% if you exclude the acquisition growth in China, that really helps the overall margin picture in that marketplace.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to turn the program back to Mr. Hagge for any further remarks.

Thanks, Jonathan. This concludes our call today and I'd like to thank everyone for joining us. Good-bye.

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