AptarGroup, Inc. (NYSE:ATR) Q4 2023 Earnings Call Transcript
AptarGroup, Inc. (NYSE:ATR) Q4 2023 Earnings Call Transcript February 9, 2024
AptarGroup, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen. Thank you for standing by. Welcome to Aptar's 2023 Fourth 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 Ms. Mary Skafidas, Senior Vice President, Investor Relations and Communications. Please go ahead.
Mary Skafidas: Thank you. Hello, everyone, and thanks for being with us today. Joining me on today's call are Stephan Tanda, President and CEO at Aptar; and Bob Kuhn, Executive Vice President and CFO at Apt. Our press release and accompanying slide deck have been posted on our website under the Investor Relations page. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measure and our reconciliation are set in the press release. Please to the press release disseminated yesterday for reconciliation of non-GAAP measures to the most comparable GAAP measures discussed during this earnings call. As always, we will also post a replay of this call on our website. And I would now like to turn the conference over to Stephan.
Stephan Tanda: Thank you, Mary, and good morning, everyone. We appreciate you joining us on the call today. I will begin my remarks by highlighting our results for the fourth quarter and the full year. Later in the call, Bob Kuhn, our CFO will provide additional details on the quarter and yearend results. Starting on slide 3 for the fourth quarter, Aptar achieved core sales growth of 2% and finished a year strong with adjusted EPS of $1.21 per share due to the record year for both our proprietary drug delivery systems as well as our fragrance dispensing technologies. We achieved significant margin improvement in the quarter with an adjusted EBITDA margin of more than 21%, a three point increase over the prior year's quarter.
The margin improvement was driven by a strong focus on cost management across the company as well as rapid growth in the pharma end markets. In quarter four, robust demand continued for proprietary pharma drug delivery systems which grew across several key applications such as emergency medicines, allergic rhinitis, central nervous system therapeutics, and natal decongestions. Solid growth from fragrance dispensing solutions also drove positive results in the quarter. Turning to slide 4 for the full year, Aptar delivered core sales growth of 3% with Pharma delivering 10% core sales growth, while Beauty was up 2% and Closures declined 7%. About half of the decrease for Closures was due to the passing through of lower resin costs to our customers.
As a reminder, our Pharma business is a pipeline-driven business, its projects taking anywhere from 5 to 15 years to be ready for commercialization. In 2023, we had the highest number of new product launches since 2018, while adding an equal, risk-adjusted value of new project opportunities to the pipeline, which bodes well for continued solid growth. It is important to note that sales from most of our new launches continue to build once they have been on the market for a few years, which underpins the raising of our long-term core sales growth targets for our Pharma segment. Turning to our Beauty and Closure segments, order books have steadily grown. In our Beauty segment, we have improved our win rate of new business and the retention of existing business.
After our first full year of operating the Closure segment, we are also seeing our beauty, home, care, and personal care closure opportunities increase. As a reminder, focusing more intently on opportunities in these areas was one of the reasons we brought Closures under one roof. Overall, 2023 was a pivotal year filled with many accomplishments. With an increased focus on both the top and bottom line, Aptar our achieved double-digit earnings growth, double-digit adjusted earnings per share growth and increase of 24%, very meaningful EBITDA growth and significant margin improvement across each segment. Improved ROIC by two percentage points within our raised long-term target range and reduced SG&A expenses as a percentage of sales. In 2024, we will continue to focus on growth and disciplined cost management, which will in turn help us expand our EBITDA margins into our long-term target range.
Our cost management efforts will remain a key focus as we continue to reduce SG&A expenses as a percentage of sales. Looking back at 2023, we also took several important steps operationally that I would like to touch on now. These efforts are critical to executing our strategy and are helping to propel the company forward. We realigned the company to be closer to our customers, simplifying our Beauty segment and bringing Closures all under one roof. We continue to invest in our manufacturing operations with capacity expansion as well as new state-of-the-art sites in France, the United States, China and India. We initiated restructuring and cost reduction actions in all regions. For example, in our Closure segment, these actions will continue to drive asset utilization with benefits realized in the second half of 2024.
And while 2023 was focused on organic growth, especially with two of our three large capital projects coming online, partnerships and acquisitions continue to play a key role in growing the company by adding key capabilities, technologies, and talent worldwide. After digital health had a productive year from that perspective. We extended our partnership with Chiesi to conduct clinical studies in the US for asthma and COPD, which will help demonstrate the positive effect of digital health and improving patient outcomes. Aptar Digital Health also recently signed an enterprise agreement with Biogen, a leading global biotechnology company, to operate and develop their digital health solutions. The initial scope of the multiyear contract covers several indications in neurology and immunology across 15 countries.
This opportunity will help us broaden the ways we can monetize our digital health capabilities. Not only to build and deploy our own solutions, but also supporting our customers to deploy and commercialize their solutions. The details of this agreement will be announced in the press release right after this call. I also wanted to talk about an exciting development to increase the competitiveness of our operations in Asia and beyond. We recently signed a joint venture agreement with a China-based pump manufacturer. As part of the partnership agreement, we will acquire a 40% stake in the company. Through this partnership, Aptar will have access to cost-effective pump manufacturing in the region, faster go-to-market agility, and a more complete end-to-end local supply chain, all of which will further increase our profitability in China and the Asian market more broadly.
We expect to explore leveraging this partnership also for certain regional consumer healthcare dispensing systems. Additionally, we will have access to competitive mold and machine building capabilities that can be used globally and will provide us with high quality, better cost, capital investment alternatives. Finally, the partnership will also give us access to much needed regional anonymization manufacturing capabilities. These capabilities will help us meet growing demand of the middle class consumer across Asia, a consumer that is driving profitable growth across each of our segments. The transaction is subject to satisfaction and completion of various conditions and is expected to close later in 2024, at which time we will be able to disclose more details.
Now, let me highlight a few of our recent innovations and product launches shown on slide 5. In the pharma space, Aptar's unidose device is the nasal delivery system for another opioid overdose rescue treatment recently launched. Aptar's elastomeric components are featured on an existing GLP-1 molecule recently launched for a new indication. Turning to Beauty, in Europe, our customizable and interchangeable fragrance pump is featured on Yves Saint Laurent’s new prestige fragrance. And our premium pump is also the dispensing solution for a new L 'Oreal facial skincare product. In the Closure segment, we have a new technology on the market in China for the Gongfu Tea and Cephei coffee brands. Our solution separates the powder from the water until the user activates the closure with a push to dispense the powder into the bottle.
While our active polymer technology protects the quality of the powder until it is ready to be used. This is just a great example of combining our active material science protection technology with our dispensing closure. Now pivoting to sustainability, we are proud to receive recognition from both Newsweek and Forbes during the quarter. We ranked number 29 on Newsweek's America's Most Responsible Companies lineup. And Forbes ranked us number 13 among the World's Top Companies for Women, which places us in the top 5% of the 400 companies ranked. Before I turn the call over to Bob to share further details on quarter four, let me summarize shareholder returns for 2023. We returned over $104 million to shareholders through dividends and the repurchase of over 399, 000 shares for $47.6 million.
We also completed our 30th year of paying an increased annual total dividend and celebrated our 30th anniversary as a New York Stock Exchange listed company. With that, I will turn the call over to Bob.
Bob Kuhn : Thank you, Stephan. Good morning, everyone. Starting on slide 6, I would like to say summarize the quarter. Our reported sales increased 5%. This included a currency translation benefit of approximately 3%. Therefore, core sales grew 2%, primarily due to strong growth in farmers' proprietary drug delivery systems and continued demand for fragrance dispensing solutions in Europe and Latin America. As shown on slide 7, we reported fourth quarter adjusted earnings per share of $1.21, which is a 27% increase over the prior year's adjusted EPS. During the quarter, we achieved adjusted EBITDA of $179 million, which increased from the prior year's fourth quarter by 22%, driven by expanding margins in all three segments. Turning to some of the details by segment for the quarter, our Pharma segment’s core sales increased 11%.
Approximately 9% of the growth came from increased volumes, especially in our proprietary drug delivery systems. Looking at sales in the Pharma segment by market, for our proprietary drug delivery systems, prescription core sales increased 24%, primarily due to continued strong demand for dosing and dispensing technologies for emergency medicines, allergic rhinitis, and central nervous system therapeutics. Consumer healthcare core sales increased 13%, driven by higher sales for eye care, nasal saline rinse solutions, and nasal decongestants. Injectables core sales were basically flat due to difficult comparisons over the prior year fourth quarter. Demand for elastomeric components used for biologics continues to grow, and this helped offset other categories that were down in the quarter.
Additionally, turning to our active material science solutions, core sales decreased 15%, excluding non-recurring sales of COVID-19 at home test kits in the fourth quarter of 2022, core sales decreased 7%. Lower demand for our products used on probiotics, which experienced rapid growth over the last couple years also contributed to the decline in sales. Pharma's adjusted EBITDA margin was 34%, a two point improvement from prior year. The margin improvement was driven primarily by strong product mix. Turning to our Beauty segment, core sales decreased 6% in the quarter. Looking at the Beauty segment by market, Beauty core sales decreased 4% due primarily to lower sales in North America. Fragrance sales in Europe continued to be strong, but were offset by lower sales of our products used in facial skin care applications.
Personal Care core sales decreased 7% with lower demand across all regions. Home Care core sales decreased 20% due to lower demand in both North America and Europe. This segment's adjusted EBITDA margin for the quarter was 15%. The improvement in the margin was due to our continued focus on cost management, restructuring actions, and a net positive impact of one-time items. The Closure segment's core sales declined by 4% compared with the prior year's quarter due to the passing through to our customers of lower resin costs as well as lower volumes. When looking at the market fields for Closures, food core sales decreased 10%. The decline in sales was driven by lower sales in Europe and North America for sauces and condiments and Asia for infant nutrition.
Beverage core sales increased 17% due to healthy demand across all regions with higher sales of bottled water, concentrates, and sports drinks. Personal care core sales decreased 2% compared to the prior year's quarter. While we saw improved volumes particularly in North America and Latin America, the resin pass-through more than offset volume increases we experienced in this market. In our fourth category, which includes beauty, home care, and health care, core sales decreased 2%. The segment's adjusted EBITDA margin was around 13%. This represents a three point improvement over the past year. same period last year primarily due to cost and productivity management. Our total CapEx spend for Q4 2023 was $81 million with the majority going to our Pharma segment.
Two of our three large capital expansion projects are now online with our injectables capacity expansion targeted to be completed by the end of 2024. For the quarter, the three large capital projects made up about 15% of our total CapEx spend with the majority allocated to our injectables capacity expansion. Slides 8 and 9 cover our year-to-date performance and show 3% core sales growth and our adjusted earnings per share which were $4.78, up 24% compared to $3.87 a year ago including comparable exchange rates. Reflecting on 2023, Aptar finished the year with good top-line growth and adjusted EBITDA despite a difficult environment in North America and our injectables expansion and ERP implementation. We also took steps to reduce our fixed costs, a focus that will continue in 2024.
In 2023, cash flow from operations was a record $575 million. Free cash flow was $263 million for the year, up from $196 million in 2022 due to improved earnings and working capital management. Our strong cash flow has allowed us to neutralize any impacts on our interest expense coming from the rising rates by paying down a portion of our debt that had come due. Reported depreciation and amortization expense increased 6% or $15 million to approximately $249 million in 2023. Moving to slide 10, which summarizes our outlook for the first quarter, we anticipate our strong momentum to continue and expect first quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs, and changes in the unrealized fair value of equity investments to be in the range of $1.10 to $1.18 per share.
The estimated tax rate range for the first quarter is 24.5% to 26.5%. We are not expecting currencies to have an impact compared to the prior year. We currently estimate depreciation and amortization for 2024 to be between $260 million to $270 million. We expect our capital expenditures in 2024, net of any government grants, to be between $280 million and $300 million, with the majority of capital allocated toward our Pharma segment. In closing, we continue to have a strong balance sheet with a leverage ratio of approximately 1.5, which allows us to continue to invest in the business, pursue strategic opportunities, and continue to return value to shareholders in the form of dividends and share repurchases. In addition to our cash dividend payments to shareholders, which totaled $27 million in the quarter, we repurchased approximately 81, 000 shares for approximately $10 million.
At this time, Stephan will provide a few closing comments before we move to Q &A.
Stephan Tanda: Thank you, Bob. In 2023, we delivered very strong results, and we intend to build on this momentum in 2024, starting the year with a solid first quarter. Our first quarter growth will be spurred by our Pharma's franchise proprietary drug delivery systems, which saw double-digit core sales growth already in the quarter one of 2023, as well as the demand for elastomeric components for biologics. We also expect our Beauty and Closure segment to benefit from the progressive recovery of the North American market, and we anticipate continued demand for our fragrance dispensing technologies, which also had double-digit core sales growth in quarter one of last year. We remain focused in reducing SG&A expenses and reducing our manufacturing fixed costs as a percentage of sales.
We took several steps in 2023 to expand our margins and that remains a key priority for 2024. We serve attractive, rapidly growing markets where we create differentiation throughout technologies with an emphasis on sustainable solutions. We are a trusted partner to our customers because of our regulatory expertise and our end user focus. Our advantage market position enables top-line growth while our focus and prudent cost management benefits our bottom line. We are energized and excited for the year ahead and expect a strong start of the year. With that, I would like to open the call up for your questions.
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