Aptargroup Inc (ATR) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2012 third-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Introducing today's conference call is Mr. Matt DellaMaria, Vice President Investor Relations. Please go ahead, sir.

(Inaudible) call with an overview of our quarterly performance. Bob will then discuss our financial results in greater detail, after which we will 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 a 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.

Thanks, Matt, and good morning, everyone.

First off, I'd like to say our thoughts go out to the families who were affected by the terrible storm this week. I'm sure many of you on the call today were impacted in some way, and I want to thank you for making the effort to participate in today's conference call. Thankfully, none of our people were harmed during the storm, and none of our facilities were significantly damaged. We have five facilities in the region. All were affected by loss of power for a couple of days; and as of today, four are back online and one is still waiting for power to be restored. Right now, it's too early to say what impact this will have on our Business.

Yesterday, we reported results for the third quarter. The consistent focus by our people on our customer and markets, combined with the diversity of our Business once again allowed us to achieve a growth in a challenging environment. As anticipated, currency exchange rates continue to have a significant negative effect on our sales and earnings, and we saw softness in selected markets. The softness is coming from certain customers remaining cautious, given the current level of economic uncertainty, and in some markets, due to inventory-management efforts.

In spite of the challenges, we continue to execute our strategy and we remain committed to investing in our research and development efforts. I remain encouraged by the good level of project dialogue we are having with our customers across each of our segments.

Now, looking at our segments' performance for the quarter, our beauty and home segment was negatively affected by the softness in the European beauty market, but this was offset by growth in the personal care market. The beauty market is where we saw the most caution on the part of our customers in the quarter. However, project activity remains at a good level for our beauty and home products, and we participated in several new launches by our customers this quarter, which include Procter & Gamble's new James Bond 007 fragrance, which was introduced with our spray pump.

Several new fragrances were equipped with our unique retro bulb atomizer, including Bvlgari's Jasmin Noir, Shiseido's Carica, and O Boticario's Lily Divine fragrance. In the personal care area, Guess brand introduced two men's body deodorants in Europe, using our spray systems and locking actuators. And in the home care market, the Glade brand's fall collection of air fresheners are equipped with our twist-to-lock actuators.

Now, looking at our Pharma segment, demand for our nasal delivery devices from the prescription drug market increased over the prior year, but this growth was not enough to offset the decline in sales to the consumer health care market, which is principally -- which was down principally due to softer demand from Eastern Europe and the fact that last year at this time, our Consumer Health Care business was growing at around 30%.

We are particularly pleased that our innovative dose indicator, known as Landmark, has been launched on two products in September, one of these being an asthma medication in Europe and the other, an allergy medicine in the US. This is an exciting entry into the market with our patient-friendly dose-counting technology.

In the quarter, there were several interesting consumer health care launches, which include various nasal moisturizing products, using our nasal spray pumps in Europe, and two ophthalmic product introductions, one in Switzerland and one in Argentina. We also include the results of Aptar Stelmi for the first time. Bob will go over the impact of their results in the quarter in his comments.

We are extremely pleased with the progress of Aptar Stelmi integration and the efforts of the combined team to make sure the Business continues to grow uninterrupted. Customer feedback has been very positive, and the demand for Aptar Stelmi's product has been strong throughout 2012. As we mentioned in the press release, volumes are up 9% in the third quarter, compared to the prior year. We continue to be excited about the opportunities to grow this Business.

Now, turning to our food and beverage segment. Our food and beverage segment had a very good quarter. We are very pleased with the tremendous growth in the beverage market, and this is on top of exceptional growth in the prior year. The beverage market is one that we had very little presence in only a couple years ago; and now with our market focused strategy, we're penetrating new categories and have been growing even beyond our targeted growth rates for the past two years. We continue to benefit from the success of major launches like Kraft's MiO water flavoring, Tropicana's new 89-ounce carafe-style package, and with several isotonic beverage products around the globe, including one of the leading sports drinks in China.

In the quarter, growth in the beverage market was offset by some continued softness in the food market. Our recent softness in the food market is primarily due to volume softness in the food industry, and the loss of some business in the salad dressing market. I am happy to report that our Lincolnton facility continues to ramp up production, and we're encouraged by the new project activity for that facility. Regarding the few new products launched this quarter, in the food market, one of our pouch closures was chosen for a package for agave syrup in France, for Kraft's Kenco instant coffee package was rolled out with our custom closure in Europe, and in Latin America beverage market our SimpliSqueeze sports closure was chosen by Coke for their Dasani bottled water.

In our press release, we also announced a plan to optimize certain capacity in Europe. Due to increased production efficiencies and to better position the Company for future growth in Europe, we will transfer and consolidate production capacity involving 12 facilities. Two of the related facilities are expected to close, and this would impact approximately 170 employees. The locations involved in the operation optimization plan are facilities that are serving the beauty, personal care, food, beverage and consumer health care markets.

These actions are part of a long-term strategy intended to prepare us for future growth. We are benefiting from our continual investment in efficient production equipment and our ability to adapt to the changing needs of the markets we serve. In this instance, we looked at product lines, supply chains, and production capacity. We identified ways to streamline certain production technologies, reduce complexity for our people and our customers, and optimize our production footprint. This allows a more efficient deployment of capital to support our growth in Europe in the future.

As we look ahead to the fourth quarter, we expect further challenges in the fourth quarter, including continued currency exchange rate headwinds; ongoing softness in certain markets driven by economic uncertainties; and decreased demand for our prescription nasal spray pumps, mainly due to the generic allergy market having high levels of inventory at this time. It appears that the inventory-management issue affecting our prescription nasal spray pumps is isolated to the fourth quarter.

Nevertheless, we remain optimistic that our market-focused approach will yield new applications for innovative dispensing device technologies, and we look forward to new opportunities for growth.

Now, I'll turn it over to Bob, who will review our quarterly financial results in more detail.

Thank you, Steve, and good morning, everyone.

As announced in our press release, on a constant currency basis and excluding the Aptar Stelmi acquisition, our core sales grew 2% in the third quarter. Aptar Stelmi added 4% to our sales growth. You may recall that our guidance for the third quarter had anticipated a $0.01 per share negative effect from Aptar Stelmi. However, after all the acquisition accounting adjustments were finalized, Aptar Stelmi's results actually had a negative impact of $0.02 per share in the quarter.

Earnings were also negatively affected by changes in currency exchange rates. We estimate that the net-negative impact from transaction and translation on earnings was approximately 7%. We reported earnings per share of $0.62, compared to $0.72 a year ago. If current exchange rates had been in place last year, we would have had reported $0.67 per share. Last year's earnings per share also included a positive impact of $0.02 coming from a lower effective tax rate.

Turning to free cash flow, which we define as cash flow from operations less capital expenditures, in the quarter, we had a positive free cash flow of approximately $76 million, compared to nearly $72 million a year ago. On a gross basis, debt to capital is about 22%, while on a net basis it is roughly 14%.

We were active in our share repurchase program once we exited the Aptar Stelmi transaction blackout period, and we spent approximately $30.8 million to repurchase 610,000 shares in the quarter. We had approximately 2.8 million shares authorized for repurchase at the end of the third quarter. The Board of Directors also declared a quarterly dividend of $0.22 per share, payable on November 28 to shareholders of record at the close of business on November 7.

Turning to our business segments, our beauty and home segments reported sales decreased 7% from the prior year. Changes in currency exchange rates had a negative effect of 8%. Therefore, on a core basis, segment sales were up 1%.

Looking at our markets on a constant-currency basis, sales to the beauty market decreased 2% from the prior year, while sales to the personal care markets increased 6%. Sales to the home care market decreased 14%, but most of that was related to lower tooling sales in the quarter. Our Pharma segments reported sales increased 7%, but if we back out the impact of the Aptar Stelmi acquisition, which accounted for 18% of that growth, and we add back the negative impact coming from changes in exchange rates, we can see that our core sales declined 2% in the quarter.

Looking at our markets on a constant-currency basis, sales to the prescription market, excluding the Aptar Stelmi acquisition, increased 4%, while sales to the consumer health care market decreased 13%. Our food and beverage segment reported sales growth of 12%, currencies also had a negative impact of about 4%. Therefore, core sales were up 16% over the prior year. On a constant-currency basis, sales to the beverage market were, again, very strong and were up 56% compared to the prior year, while sales to the food market decreased 4%.

Looking at our year-to-date results, on a year-to-date core sales, excluding changes in currency rates and acquisitions, core sales increased 3% over the prior year. Aptar Stelmi added 1% to our year-to-date reported sales, but had a negative impact of $0.08 per share, due to the transaction costs and the acquisition accounting adjustments required in the third quarter.

For the first nine months of the year, we reported earnings per share of $1.86, compared to $2.08 a year ago. If this year's exchange rates had been in place last year, we would have reported $1.95 per share. Prior-year earnings per share also includes a positive impact of $0.04 from last year's lower effective tax rate.

Just a few comments on our announced operations optimization plan. The charges related to the plan are expected to be approximately $18 million, of which $13 million will be cash costs and $5 million will be non-cash expenses. These amounts could change depending on changes in exchange rates. The charges will be recorded at the time they are recognized according to GAAP accounting rules. And annual savings are expected to be approximately $12 million, and we expect to start seeing some impact from savings late next year.

Looking forward, presently we expect depreciation and amortization for 2012 to be in the area of $140 million, with capital expenditures expected to be in the area of $180 million. I would like to point out that these amounts could vary depending on changes in exchange rates. We currently anticipate that our full-year tax rate will be between 33% and 34%.

I'd also like to point out that we expect currency headwinds to continue into the fourth quarter, though with potentially less of an impact than we've seen in the third quarter. The average exchange rate for the euro to the US dollar in the fourth quarter of 2011 was $1.35, whereas recent spot rates have been around $1.29, and this was used for our forecasted fourth-quarter range.

We currently estimate that diluted earnings for the fourth quarter of 2012 will be in the range of $0.53 to $0.58 per share, compared to $0.57 per share reported in the prior-year fourth quarter. Had today's currency exchange rates been in place one year ago, we estimate that the prior year's fourth-quarter earnings per share would have been approximately $0.54 per share. Our fourth-quarter earnings per share guidance does not include any potential impact from our announced European operations optimization plan.

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, today.

Could you guys comment on the inter-quarter trajectory of volumes? We're trying to figure out if the pace of sales was consistent month-to-month, and any indication if this is continued just one month into the fourth quarter?

No. We can't talk about the fourth quarter yet; but generally, our sales were pretty consistent throughout the third quarter. We didn't see any significant trend up or down. It was very consistent, month to month to month.

On the inventory-management issue, is it specific to one customer? Or, what gives you confidence that the impact will be limited to the fourth quarter?

A couple things on that, Matt. It's come across mostly to the generics here in the United States. So, it comes across a couple different customers, and it seems like all of them have got sufficient inventories going in. Now, one of the things that gives us confidence that it's a fourth-quarter issue is we're already seeing orders being placed by these customers for first-quarter delivery. So, it looks to be more of an inventory correction at year end, rather than a sustained reduction in terms of their sales.

Okay. Lastly, have you guys quantified what's included in your guidance for that inventory-management issue?

Again, we haven't -- there's not one specific number. It includes the overall estimates, that we've given you, do include that, though.

Okay, thank you.

Chris Manuel, Wells Fargo.

A couple different questions here. First, when you think about -- early thoughts about capital for '13, and I know you're probably in the middle of budget processes and things of that nature. One of the areas that you've seen a good bit of growth here still is the Stelmi piece, I think you said up 9% in the quarter. And, I believe that was becoming relatively capacity constrained. Would it be -- as you think about 2013 is it reasonable to anticipate capital stays the same? And, how quickly, potentially, could you get some capacity in -- could you give us some update on where you stand with utilization rates at Stelmi? And, how quickly you could be able to get some capacity in line to continue to grow faster?

It's a good question, Chris.

As we talked about on the last call, with the significant double-digit increase that we're seeing at Stelmi in terms of sales, there is some capacity contraction right now or challenges. We've actually come back and placed some capacity increase orders that we're going to be producing now, and hope to have in place as we get into early 2013. So overall, I don't think there's going to be, at this point, anything major that's there. It's more of the normal, ongoing -- let's call it, depreciation replacement cycle, but we're actually trying to deal with that now so we are in place to deal with that as we go through the last part of this year and into next year.

Okay. No thoughts, as you sit today, to an additional facility or anything there?

Again, we're going to continue to look at that and we're -- with it being relatively early -- we are still studying that. The new facility would probably be targeted, initially, at the US, but we're not ready to make a determination what the timing of that would be.

Okay, that's helpful. Two other quick ones. One is on the European -- the restructuring program, I think you talked about $13 million of savings in total. Is all of that essentially EBIT improvement, or is some of that cash improvement coming from working capital reductions or things of that nature that, as you consolidate facilities and inventory, things of that nature?

The savings we talked about at the current exchange rate are about $12 million once the whole plan is put in place, and that's going to take a period of time. But the majority of what we're looking there is EBIT improvement. There will be, in addition to that, some cash, some working capital improvements that we anticipate, but that's not in the number we've given you.

Okay, that's helpful. Then the last question I had is, as we look at -- and you talked about this a little in the earlier question, I think, for Matt. But, when we think about the impact from the Pharma piece, is it likely then to be that we would anticipate a negative organic-growth quarter out of Pharma here in 4Q, given this inventory issue? Or, is there any way possible that we could understand, maybe if this wasn't there, what you would have been able to do, or something -- to somehow we can get our arms around to quantify it?

It's a good question, but it's difficult for me to answer. Even if you look at the third quarter, one of the things we saw in the third quarter last year, we had about a 15% Pharma growth, which was outside of our normal growth rate. As we look to the fourth quarter, as you're talking about it, we've seen good generic growth and we anticipate that on a long-term basis, but it's really difficult to just isolate what it would have been. I do think it's reasonable that we can have either flat to slightly down in terms of organic growth in the Pharma segment as we get into the fourth, with some of the inventory issues that we're foreseeing now.

Offsetting that, though, and I think this is still a big positive, is that we still are seeing margins for this business on our legacy Pharma business still holding within that 25% to 30% area. In fact, we were at almost 28% in the quarter. And I think with Stelmi, we're looking at the margins being pretty much as we anticipated in the acquisition, and our EBITDA margins also trending in the same way.

Okay, that's helpful. Good luck, guys.

Al Kabili, Credit Suisse.

It's actually Ernie, here. First question, can you give us the trends that you've seen across the regions. Lat Am, Asia, and Europe, and the US?

Sure, for the third quarter?

Yes.

The third quarter, similar to the second quarter, was up slightly at 1%. Europe, overall, was down 3% compared to last year third quarter. And, as we talked about in the press release, Latin America and Asia were still strong. Latin America was up 14%, and Asia was up 26%. Again, those are core sales growth, and those do not include Stelmi activity.

Okay. And a quick follow-up, a competitor recently commented on some market share gains. How are you seeing your market share, and how would you characterize the level of competition in the market now?

Again, that's going to be very different across the segments, I think, if you take a look at it. From ours, overall we're confident. We're continuing to be at or gain market share in almost all of our markets. You can see that in the food beverage side as they continue to go through the transaction cycle.

In our beauty markets, there's been some acquisition activity in that space. And we, at this point, are confident that if anything, we've actually gained some market share through some of those transition issues.

So overall, I'd say we're positive in terms of where we're at from a competitive positioning.

Okay, that's helpful. Good luck in the quarter.

(Operator Instructions)

Brian Rafn, Morgan Dempsey.

Give me a sense of what you guys are running -- if you can break out -- I won't ask capacity utilization, but how many shifts would you guys be running, say, in US factories versus Europe? Is it shift, shift and a half, or maybe what are you running fulltime versus overtime in the two areas?

I think in general side, Brian, if you looked at it, we actually run 24 hours a day in most of our facilities. I'd say in the US, we tend to run seven days a week, while in Europe it may be six days in different times, depending on the country and the regulatory environment. But given our equipment, for the most part, we are running 24-hour-per-day basis, at least on a five-day-a-week base.

Okay. How would you guys -- say, frame out the cosmetics perfume, and what's your sense is Christmas holiday 2012 versus, say, of previous years?

Overall, I think our customers, again, we've said are pretty -- I'd say cautious. They're not pessimistic at all. And, I think we can split this business as we look going forward. One thing that's important, the diversity of our business has helped us. Our skin care business, these lotions, the anti-aging, those continue to do extremely well. And frankly, we saw strong growth even in the third quarter in that.

The fragrance business, we're seeing new introductions. And we would anticipate that the Christmas season would be probably up 1% to 2%, at least what our customers are thinking, compared to where they were one year ago on a worldwide basis, but not being down at all.

Okay. One follow-up, Steve. With some retardancy in the Asian economies, European having the banking across crisis, things being malaise, a lot of companies' consumer price are focusing on Latin and South America. If you look at your product groups, what would be, for Latin and South America, would it be cosmetics, perfume, cleaners, is it a food and beverage market? What would be big market demanders, in those areas, by product line?

The biggest one in Latin America for us, in terms of our business, is in the beauty business, both fragrance products as well as cosmetic. We tend to be the market leader there; and by the way, Brazil, for example, I think is the second-largest producer of fragrance or beauty products in the world. So that market, as Bob said, continues to do well for us and it's growing at about 14%.

One of the things we feel good about there is that while today we have a strong beauty presence, we are also now expanding in personal care. We're doing more in the food beverage market, and we're seeing more in the Pharma market. So we see growth potential for the other segments, but our strength today is in the beauty side in Latin America.

Thanks.

(Operator Instructions)

Greg Halter, Great Lakes Review.

Relative to the Stelmi costs on the P&L, were those primarily contained in cost of sales or not?

You've got the majority -- Greg, this is Bob. You've got the majority of that in cost of sales. You've got about $3.8 million that flushed through cost of sales, and that was on the write up of the inventory at the acquisition date. Then, the remainder is going to be in your depreciation and amortization of the write up, the fixed assets and the intangibles.

All right. On a core basis, excluding Stelmi, wondering how your receivables and inventory came out on a year-over-year basis? And I realize there's some currency issues in there, as well, or currency impacts.

Actually, it was pretty consistent with where we've been in terms of turns and in inventory and AR, so actually we've made some improvements in both of those areas from a cash-flow perspective. But generally, we haven't seen anything of concern, stretching out longer collection periods or anything like that. If anything, we're making a stronger focus there.

All right. One last one for you. I wanted to get your outlook on resin costs both, here in the US, and overseas.

In general, I think if you looked at it, our view is with resin we see it relatively flat. Maybe a small uptick in the States and a small downturn in Europe; but again, I think right now what we're seeing in the industry is it seems to be relatively flat on a worldwide basis.

Thank you.

Todd Wenning, Morningstar.

Did you see any trends from the Pharma companies from this quarter migrating from traditional delivery systems to aerosol or a valve delivery this quarter?

No. Again, I think in terms of one quarter, those trends are really difficult for any of our Pharma customers to go, so they tend to be in delivery systems really for multi, multi years, in fact, probably for the life of the product.

What we have seen, and I've mentioned this and sometimes I think we lose sight of it, one of the pluses is we've entered into a new market field this year for ophthalmics, and we're starting to see more and more introduction. That is a very large volume potential for Aptar, and we continue to see new customers entering new products with dispensing devices. So that, together with the Landmark accounting device that we've introduced, gives us some more reach into those marketplaces.

Great. Going to the fourth quarter, do you see any change from your traditional research and development spend as it relates to sales?

No. In fact, one of the things that we did, and I think this is important, as we would look back at that 2008, 2009 period, Aptar continued to invest in the R&D. And, I think that's bolstered very well as we got into '10 and '11 and here into '12. We continue to the same. So as we look forward, that commitment to the long-term is really that innovative part of our Business, is what makes us successful. We're going to continue to invest in that.

Great, thanks. And a quick one on the dividend, was there any discussion about raising the payout this quarter, since you have been at, I think, $0.22 per share for more than one year now?

The Board continues to look at that. We tend to look at our payout ratios in terms of where we're at. So, it's a discussion at the Board, and they'll continue to evaluate it on a meeting-by-meeting basis.

Okay, great. Thanks so much, guys.

Brian Rafn, Morgan Dempsey.

A question for you, Steve. The Wall Street Journal had an article back a couple weeks ago. It was not directly related, perhaps, to what you guys do. It talked about Kimberly-Clark International Paper exiting Europe in tissues and diapers and personal products -- not maybe the gels, the shampoos, the stuff you guys do. The overall comment was the European consumer -- it was really unprofitable to be there. How tough has it been, in the malaise that we've seen with the Europeans, from the different products that you would sell into that area?

First of all, I think we have to come back and take a look at our products. If you look at the products we sell in the personal care market and the food beverage, those tend to stay in Europe, so that would be a local type of product. That's always been a challenging market, but I think we bring enough value add to the products we sell to be able to make those profitably. When you look at our beauty products, particularly the prestige beauty products, even though we show those as European sales, because they're produced in France for example, those are really worldwide products. And the introduction of those around the world -- the packaging to those are actually critical to the success of the product.

So again, I wouldn't tell you that they're easy markets; but certainly, we've got no intention of exiting Europe. And, the European optimization plan that we put in place, I think helps facilitate future growth in Europe, as we make entrees into new application fields and new areas throughout the system.

Okay. You and I have chatted in the past, and you've talked about Europe being really the driver in packaging innovation -- sizes, colors, shapes, dispenser technologies. Given the retarded economies, the malaise in Europe, has that at all -- has that innovation leadership at all suffered?

I don't know if it's suffered. What I do see is some of the other regions starting to more and more catch-up. If you look at Latin America, for example, some of the things they're doing and some of the things in Asia -- instead of Europe being the clear leader, I think they still have a lot of innovation, but I see the other regions now stepping up a little bit more and also trying to do more innovation around that.

Okay. We've all been, certainly, tired of the election stuff. Is there any pivot you think, relative to either Obamacare going through or Obamacare being struck down, relative to the long-term development in the pharmaceutical drug area, in product launches, in new innovations, is the election, either way, going to have an effect on that area?

I don't think it has a short-term impact. I think if you look at Obamacare long-term, there's probably more -- there would be more people getting back into the system, which probably could have a net-positive impact on us. But it's really too hard to come back and give you a specific to that, Brian.

Okay. And one more, Steve. I'm not going to ask you about milk, but I will ask you -- we've talked in the past about you don't have a huge position in large pump dispensers, a little more of a commodity area. Have you done anything in that area at all, or looked at acquisitions?

We've looked at that. We've actually introduced a large 4cc pump that we are now producing Europe and we're selling to selected markets there. So, that's a market that we're looking at; but again, we are being selective in terms of where we go, not as much to the commodity marketplace.

Okay. Thanks, Steve.

(Operator Instructions)

Jon Andersen, William Blair.

It's actually Ryan Sundby in for John.

From an expense standpoint, selling, R&D, and administrative expense declined pretty meaningfully on a sequential basis, despite what I would assume, some expenses related to Stelmi. Could you touch on some of the initiatives you have in place to help control costs? And, how should we think about that line going forward? Thanks.

One of the important things I want to point out is, when you look at on a gross basis, currency is obviously impacting that number. If I were to stripped out Stelmi and currency, we would have been relatively flat on an SG&A perspective quarter to quarter.

We continue to look -- we don't have any one specific initiative that I would tell you about, but it is an area that we do continually try to focus on. We're trying to control hirings and nonessential type of travel, those types of things. It's similar to what we did in the '08, '09 period. We are paying close attention to it. But, you sometimes can get fooled on the face of the financials if you don't strip out the currency side of that.

Okay, got it. Thanks, guys.

Thank you. This does conclude question-and-answer session of today's program. I'd like to hand the program back to Mr. Steve Hagge.

Again, we want to thank everybody for participating and look forward to talking to you next quarter.

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