AptarGroup - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to Aptar's twenty twenty Second Quarter Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Introducing today's conference call is Mr. Matt Delamaria, Senior Vice President, Investor Relations and Communications.

Please go ahead, sir.

Speaker 1

Thank you and welcome everyone. Participating on our call today are Stephane Tanda, President and Chief Executive Officer and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. You can find a copy of our press release as well as results on our website. If you are following along on the website, you can advance the slides by hovering clicking on the arrows on the right and left. There is replay of this conference call on our website.

Website. Today's call includes some forward looking statements. Please refer to our SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward looking statements. Aptar undertakes no obligation to update the forward looking information contained therein. I would now like to turn the conference call over to Stephane.

Speaker 2

Thanks, Matt, and good morning, everyone. Thank you for joining us. Let me start by expressing my hope that you and your families are continuing to do well and staying safe during this difficult time. I would also like to take a moment to thank our global workforce for the tremendous dedication and commitment they have shown through. I am extremely proud of how the entire organization has risen to the challenge, so that we could maintain our production of critical drug delivery and dispensing systems for patients and consumers around the world.

I would like to share a few updates related to COVID-nineteen starting on Slide three. We are proud to live up to our purpose and responsibility to society. And as previously shared, we are an essential supplier to several critical industries, including pharmaceuticals and consumer products. Our teams are further motivated by our customers for honoring our commitments to them. To that end, we are constantly adapting our approach and we recently issued new remote and flexible work guidelines to ensure the minimum number of essential on-site employees during We're also thinking of what's coming next to address the future of work, including the future of customer engagement in the new normal of the post COVID-nineteen era.

Turning now to Slide four. Our global solutions, which are critical to our drug delivery, dispensing, sealing and active packaging solutions, sanitizers, cleaners, food and beverage products. Turning to Slide five, I would like to offer a few comments on the quarter. Our pharma business delivered another strong performance. Core sales grew in our injectables, consumer healthcare and active packaging businesses, offsetting declines in prescription, which faced a challenging comparison to the very strong quarter two of last year.

The pharma team continues to engage with customers and evaluate potential opportunities related to COVID-nineteen. The situation is very fluid, and it is difficult to say which drugs will eventually be approved and when. At the same time, it is very reasonable to expect that we will benefit in line with our market share from the rise in injectable business to be expected by the coming wave of COVID-nineteen vaccines. We expect to also benefit from increased demand for traditional vaccines and therapies that may have been delayed because of the initial crisis. Our Pharma segment is expected to remain a reliably growing business during this pandemic, as we are well diversified across different healthcare end users that are not COVID-nineteen related.

U. S. FDA approvals feature an effective material science technology is featured on an implantable rechargeable device used to treat urinary and bowel dysfunction by Axonics Modulation Technologies. Our technology helps to protect key elements inside the device. The second recent U.

S. FDA approval is for a new drug application, Chimari, which features our multi dose nasal pump for the first and only nasally administered treatment and recurrent diabetic gastroparesis. This is another good example of a unique nasal treatment option that unlike oral medications bypasses the disease gastrointestinal tract, allowing the drug to enter the bloodstream directly. Turning to recent eye care product introduction, our ophthalmoscopy suite dispensers featured on allergy and dry eye products from in Latin America. Now turning to Beauty plus Home, the beauty market continues to be quite challenging even though our shipments increased in June relative to the first two months of the quarter related to the reopenings of several countries, including The U.

S. Demand for hand sanitizers and cleansers remained strong. Because of this, we grew sales to the personal care market over the prior year. I would also like to highlight that our spray pump is featured on a line of Suave hand sanitizer sprays by Unilever. We also donated 50,000 of these pumps to support Unilever.

Our pumps enclosures are also featured on numerous hand sanitizer products around the world, and we are investing in new tools, molding equipment, and this time. Our closure and simply squeeze valve was chosen by Dial for innovative body wash and easy squeeze stand up pouch. Our technology provides controlled drip free dispensing even when the flip top is open. This product is available for purchase on Amazon. Continued flexibility is important to our customers, and we are maintaining a state of readiness for the upturn.

We have operating overhead costs that we must absorb while we are reducing some labor, travel and other costs. Turning now to Food and Beverage, sales were negatively impacted by a decline in On the Go beverage closure sales due to the COVID-nineteen crisis, as well as the passing on of lower resin costs to customers and lower custom tooling sales. Turning to product launches, the flexible space continues to have good momentum. Our closure with SimpliSqueeze valve is providing clean and controlled dispensing for major peanut butter brand, which has just launched an innovative standard pouch. Our dispensing solution also includes an easy our closure and simplex free valve for inverted packaging are also found on the launch of a new line of signature sauces and condiments by Chick fil A in The U.

S. Beverage market, our sports closure is now on a new sports drink by Chow Yun Ren in China. Before I turn the call over to highlights as shown on Slide six, our view is a great start and we benefit from their tremendous agility to adapt rapidly to the changing beauty demands as well as their sophisticated consumer insights and marketing approach. Subsequent to the end of the quarter, we issued our 2019 sustainability report, which highlights our sustainability aspirations, safety programs, societal impact of our products, and community outreach initiatives. We are very proud of our accomplishments, and I encourage you to review that report that is available on our website.

We are also pleased to welcome Kimberly Cheney to Aptar as the Executive Vice President and Global General Counsel. Her breadth of experience across multiple industries as the lead attorney for Global 100 and Fortune 500 companies for global mergers and acquisitions, strategy innovation, intellectual property and compliance will strengthen our leadership to achieve our strategic priorities. With that, I will now turn it over to Bob, who is going to provide an update

Speaker 3

Thank you, Stephane, and good morning, everyone. Concerning our second quarter results and the impact of the COVID nineteen pandemic, starting with slide seven. For the second quarter twenty twenty, reported sales declined 6% and were negatively impacted by changes in currency exchange rates and lower resin costs to customers and impacts. Coming from recent acquisitions helped to offset the headwinds coming from the changes in currency rates. Core sales also declined 6%.

Taking a look at our segment performances, our pharma segment achieved core sales growth of 6% and an adjusted EBITDA margin of 35% compared to a very strong second quarter a year ago. Looking at sales growth by market on a core basis, core sales to the prescription market decreased 6% due to lower tooling sales and a difficult comparison to the prior year. Core sales to the consumer healthcare market increased 10%. Strong demand for our products used on nasal decongestant and cough and cold treatments were the reasons for the growth. Core sales to the injectables market increased 26% due to increased demand across a variety of applications.

Finally, core sales to the active packaging market increased 21% due to strong growth in our probiotics, diabetes, and active film products. Turning to our Beauty plus Home segment, core sales decreased 13% due to the negative impact of COVID nineteen. The significant negative effects of COVID nineteen on the beauty market were partially offset by an increase in sales to the personal care market. Home's adjusted EBITDA margin was 8% in the quarter and was negatively impacted by the sales decline in the quarter. Looking at sales growth by market on a core basis, core sales to the beauty market decreased 33% due to a significant reduction in orders from customers providing both prestige and masstige beauty products, mainly in the travel retail and standard retail settings.

Many beauty stores closed throughout the quarter in response to government shelter in place regulations. Core sales to the personal care market increased 11%, as increased sales of our products used on personal cleansing products, mainly for hand sanitation products, more than offset continued softness in our deodorant, hair care, and sun care applications as consumers adhered to shelter in place orders. Core sales to the home care market decreased 5% as higher demand for our household cleaner products was not enough for care and automotive products. Turning to our Food and Beverage segment, core sales decreased 15% in the quarter due to the passing on of lower resin costs to our customers, lower tooling sales, and lower beverage closure sales related to the COVID-nineteen crisis. The Food and Beverage segment achieved an adjusted EBITDA margin of 18%.

Looking at each market, while sales of our closures to the food market increased 3%, lower tooling led ultimately to a core sales decrease of 3% as we recognize several large tooling projects during the second quarter of the prior year. Core sales to the beverage market decreased 37%, 7% of which is due to lower tooling sales. Demand for our closures for single serve bottled water and on the go functional drink products was significantly affected by COVID nineteen impacts. Turning to Slide eight, second quarter adjusted earnings per share totaled 80¢. Prior year comparable earnings per share totaled a dollar and 14¢.

Slides nine and ten cover our year to date performance and show the full and adjusted earnings per share, which were which was down 21% from

Speaker 2

the prior year.

Speaker 3

Slide 11 shows sensitivity analysis that we showed in the first quarter, and it is still relevant as we move forward. Slide 12 outlines our outlook for the third quarter. The recent spike in COVID-nineteen cases in many regions of the world creates economic uncertainty in some of our markets. Our outlook is heavily dependent on the pace and breadth of resumption of air travel, the reopening of retail confidence, and we expect to see a gradual improvement in the second half of the year. Now I will share a few more details around our cash flow and CapEx, and then turn the call over to Stephane for closing remarks.

In the quarter, reported cash flow from operations was strong and totaled approximately a $143,000,000. Capital expenditures were approximately $61,000,000. And as shown on slide 13, our free cash flow was $81,000,000 compared to 70,000,000 in the prior year. We continue to have a strong balance sheet and on a gross basis, debt to capital was approximately 44%, while

Speaker 2

on a

Speaker 3

net basis, it was approximately 39%. In addition, we continue to evaluate and challenge our capital expenditure and are forecasting a range of $230,000,000 to $250,000,000 At this time, Stephane will provide a few comments before we move to Q and A.

Speaker 2

Thank you, Bob. To close, I would like to cover a few key takeaways as can be seen on Slide 14. While there is uncertainty due to the effects of COVID-nineteen, we continue to invest in our company for the long term. Our cash generation remains strong and our product innovations serve the greater good of society. The initial reopenings resulted in improved demand for some of our products, including beauty products, towards the end of the second quarter.

We will continue to monitor the evolving status of the pandemic as well as the trajectory of reopenings by country and by state. As we manage our company for the long term, we will continue to focus on providing tangible value to patients, consumers, and our customers, made up of many of the world's leading brands. And now I would like to open up the call for questions.

Speaker 0

To withdraw your question, press the pound key. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow on question. You can come back into the queue if you have more questions as time allows. Your first question comes from Ghansham Panjabi with Baird. Your line is open.

Speaker 4

Good morning, everybody.

Speaker 2

Hey, Gunjan. Good morning.

Speaker 4

Gotcha. Yeah. So, Stefan, maybe you could just expand on your comments related to the COVID nineteen vaccine and, you know, obviously, the supply chain has to position for any sort of vaccine. There's a, you know, obviously, a lot of people on the planet, and there's only so much supply. So how how are your customers kinda managing the buildup of inventory ahead of that?

And then just more broadly touch on COVID-nineteen activity as it relates to that segment.

Speaker 2

Sure. Thanks, Ghansham. Look, as you're all aware, there are many hundreds of projects going on, and we are following all of them closely. Of course, you see the the big ones in the headlines, Moderna, Pfizer, Seneca, Sanofi just this morning, but also in China, Sinovac, Kansino, many, many more. About a third of our COVID related projects are vaccine related and two thirds are treatment related.

And then we have additional projects in nasal inhalation, in the nasal inhalation space, as well as respiratory space. So activity is tremendous. There is also displacement of traditional business, like say the traditional flu vaccine assets are being rededicated to COVID. And then you have the question of SKUs, coated, non coated, prefilled syringe or vial. So there are many moving parts.

We are in discussions with many of our clients on that. We're not going to comment on any individual project. But as I mentioned in my remarks, the safe assumption here is that we will benefit from the uplift in business related to COVID in line with our market share in the injectable space. And clearly, the Macular space and like everybody else, we are following it very closely.

Speaker 4

Okay. And then in terms of the Beauty plus Home segment, I think you mentioned I think Bob mentioned that Beauty was down 33% core sales in the quarter. Can you just sort of break that out by month? And then related to that, just touch on the decremental margins in 2Q for that segment because it looks pretty significant. I assume some of that is just an industry drawdown, but just help us bridge the two quarters year over year.

Speaker 2

Maybe let me take the first part and then Bob cover the second part. Clearly, April was the low point, some improvement in May and then June was a very good month as the effect of reopening around the world, especially Europe and The U. S. Made its impact. We also see continued good momentum into July.

So what you really see is the effect here of two not great months and one solid months. And I'll let Bob address the margin side.

Speaker 3

Sure. So, I mean, I think it's important to keep in mind that of the three segments, you know, Beauty and Home has the widest and most diverse product offering. So as a result, more facilities than the other segments. And when you have particular, parts of that market, in this case, the the beauty market as you as you referenced, gunshot, down 33%, you've got, you know, big portions of dedicated factories which which are running, you know, clearly below a breakeven facility. Some facilities which are running.

Stephan mentioned, you have a couple months, and we've mentioned several times before. We entirely offline. We do have certain of those factories, those that really

Speaker 4

Thanks so much.

Speaker 0

Your next question comes from George Cephas with Bank of America Securities. Your line is open.

Speaker 5

Hi, everyone. Good morning. Thanks for all the details. Stephane, I was wondering if you could maybe dig a little bit deeper into your COVID project activity. I think on the last call, you had mentioned there were something around 50 or so serious projects.

That's my phrasing. You might phrase it a little bit differently. And in more recent discussions, you had mentioned, you know, you're working on around 75. Is there a way that you can update us on where those projects stand currently? Are you at the 75 or a higher level?

And relatedly, from what you're seeing from customers, do you think the dosage per packs will be low single digits or high single digits per pack? Just trying to get a size four market with COVID-nineteen it ultimately occurs.

Speaker 2

Sure. I'll try to add a bit more color to what I mentioned in response to Gantran's question. Look, of course, the numbers are trending up. I think we said before there were hundreds of COVID related projects in the industry. Now this is probably above 1,000.

The ones that are relevant for us are certainly now also well above a couple 100 and the seventy five percent. 75 number certainly has gone a bit higher, let me not get into that more, but it certainly is higher than seventy five, approaching triple digits. And now in terms of your question around doses by geography, in The U. S, it's likely that you get multi dose vials, whether it's below five or close to 10, but it will be multi dose vials. In other geographies, Asia, believe there will be a significant part of that also in prefilled syringes.

And in Europe, it's a mix of both. So the other effect, of course, that I tried to hint that a lot of the traditional flu vaccine capacity is being repurposed in the industry towards COVID. And, you know, a lot of that traditional flu vaccine capacity is prefilled syringe. And there is realignment of the supply chain for the traditional flu vaccine, which also provides opportunity. So again, it's an active space, and we will participate well in line with our market share.

Speaker 5

Thanks, Stephane. So my related follow on and the other question, I'll turn it over. So if the supply chain on traditional flu vaccines is being somewhat displaced by the increase in COVID infrastructure that you mentioned, Ghansham was talking to, that would suggest there's essentially a larger flu season for you. We'd expect it anyway just because of what's been happening, but also given that you're producing dispensers. So would it be sensible to expect a stronger flu season for Avtar?

The other question, I know you're not going to comment to margin by segment for any quarter, let alone third quarter. But would it be fair to say, Bob, given where we are right now, no guarantees in life, obviously, that we should be seeing some sequential improvement in margin across the businesses off of the lows from 2Q, particularly around Beauty plus Home and Food plus Beverage where I'm going? Thank you.

Speaker 2

Yes, look, this is terrible to say, but I don't know how to say it better. Always on season that tends to be all decongestant and so on. And you may add here more flu vaccination and probably there is a punishance that we suspect. So, yes, unfortunately, if you're in the pharma business, if things are not going well in the flu season, that's good for the pharma business. I'll let Bob address the margin question.

Speaker 3

Sure. So, thanks for the follow on, George, because I did wanna mention that, you know, the opposite of that decremental comment that I made is that, you know, when it does come back, the volume to, I would say, above that line, I I I think what we've done is is we've done a tremendous amount of cost savings throughout the transformation, and and I think we're we're better positioned today for when the market does come back. And certainly, we're starting to see that in China, that beauty, in fact, is resilient and and, you know, once the economy start getting back to normal, we do see that beauty business bounce back. And as a reference point, you know, if we look back to kinda o nine when we were down, you know, significantly in the first three quarters, and then for the year, finished down 9% on on on the top line. The following year, we bounced back with an 18% core growth rate and and and a 100% improvement on EBITDA.

So once you get above that, you know, that kind of breakeven point, then you start to see the opposite effect on the incremental margin. So I think what we're seeing here, George, is as we've highlighted before, and continue to believe in is it it's step back in the second half, it's gonna be more of a gradual improvement. So a a dramatic improvement in the Beauty plus Home margin, it's all really, you know, how quickly we can get back above kind of that breakeven point in some of those beauty factors. Once we're beyond that, then that's when I think we'll start to see some significant margin improvement.

Speaker 2

Maybe the other thing I would follow this COVID related activity also creates some additional costs, some additional investment. So we're also passing on some of that with price increases in the injectable space. And I think we did a few percentage in quarter two already.

Speaker 5

Thank you guys.

Speaker 0

Your next question comes from Neil Kumar with Morgan Stanley. Your line is open.

Speaker 6

Hi. Thanks for taking my question. You talked about related to COVID, our injectable applications. If you're ultimately chosen as a supplier, do you have available capacity to meet such demand? I know you increased your injectables capacity in France last year, but I was wondering if you have any plans to for further capacity additions just given the growth potential there.

Speaker 2

I just assume that we will increase our capacity in line with with ours. Our capacity situation is is really you need to look into the details. Obviously, beginning is the whole, then the product formulation, sampling and so on, injection, and then finishing, washing, coating. And then you overlaid on that different product types, stoppers, needle shields, plungers, and geographies. So, and then we have of course discussions with each customer and supply and their supply chain including the CMOs.

And we reserve certain capacities or commit certain capacities. In many cases, this will be a dual source situation. Nobody wants to rely on a single supplier when supply chain performance will be critical. And, yeah, I think that's probably what I can say about that, but clearly we will accelerate some of the investments in in the line with our position in the industry.

Speaker 6

Great. That's helpful color. And you had a poor growth decline in the prescription business for the pharma quarter. I know you had some tough comps year over year. But were there any areas that you called out that were particularly weaker?

And then you also had some pretty strong growth in asset packaging. I think we had previously expected growth moderate a bit for the quarter. Is it being what drove the upside between your expectations there?

Speaker 3

If want, I can I can take that? Sure. The description side, we saw a little bit of softness on the allergic rhinitis, which we had kind of indicated before that you know, we kind of peaked with the, over the counter business and the volume growth there. Saw also a little bit of softness on the CNS side, as well. There, that's partially due to difficult comps, because we did have, a couple big launches last year, in in the space.

So those were those were really kind of what we were referring to and what actually materialized on the on the on the prescription side. As it relates to to active packaging, so I I I we were a little bit cautious with the strong diabetes vial sales that we've experienced in the

Speaker 2

first quarter,

Speaker 3

and had had some doubt whether that was going to continue or whether that was gonna kinda level off. And in fact, we did see it continue, at at very strong level in The other thing that we're seeing really exceptional growth in is is the plenty of articles out there that industry is doing quite well right now as as as people are are trying to lead a a healthier lifestyle. And then we are starting also to see some good traction on our active film projects as well. So, you know, we'll we'll see how the diabetes volume continues into the second half, but it it did surprise us a little bit that it was continuing, strong in q two. So really, our our q two mirrored very closely what q one was.

Speaker 0

Further questions queued up at this time. I'll turn the call back over to Mr. Tenda for closing remarks.

Speaker 2

Very good. Well, overall, I think we feel very good about the quarter and the performance at the bottom of the largest in many generations, probably back to the Great Recession down 40% and The U. S. Close to 30%. We've done a lot of good work in preparing for the upturn.

And if history is any guide, we're very excited about the future. And with that, I'll close the call, and we'll see you on the virtual road over the coming months.

Speaker 0

This concludes today's conference call. You may now disconnect.