Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Matthew DellaMaria - Vice President, Investor Relations

Stephen Hagge - President and Chief Executive Officer

Robert Kuhn - Executive Vice President, Chief Financial Officer and Secretary

Analysts

Ghansham Panjabi - Robert W. Baird

Phil Gresh - JPMorgan

Adam Josephson - KeyBanc Capital Markets

Chip Dillon - Vertical Research Partners

Chris Manuel - Wells Fargo Securities

Alex Ovshey - Goldman Sachs

Mark Wilde - Deutsche Bank

Todd Wenning - Morningstar

Brian Rafn - Morgan Dempsey

Greg Halter - Great Lakes Review

AptarGroup, Inc. (ATR) Q4 2012 Earnings Call February 8, 2013 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2012 Fourth Quarter and Annual 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 of Investor Relations. Please go ahead, sir.

Matthew DellaMaria

Thank you, Samia, and welcome everyone. 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 quarterly and annual 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.

Stephen Hagge

Thanks, Matt, and good morning everyone. Yesterday we reported results for the fourth quarter and for the full year. Those of you who are familiar with Aptar know that there is a certain balance to our company that support our growth even in uncertain times. When you look at our business we have three market focused segments that serve seven different end consumer markets. You combine that with the fact that we take a regional approach to each end market and offer the broadest spectrum of innovative dispensing systems, and you have a well diversified business model.

This model together with our dedicated people is the reason we once again recorded core growth in a challenging quarter. We knew coming into the quarter that the economic situation was causing some customers to remain cautious when it came to orders and we knew that customers in our U.S. generic allergy markets were going to work off inventory levels before resuming normal order levels. In spite of these factors, our diversity allowed us to post core sales growth of 2% in the quarter.

Now looking at our segments performances for the quarter. Our Beauty & Home segment saw growth in Latin America and Asia, which more than offset softness we saw in Europe and North America. The softness in Europe was mainly in the personal care and home care markets. But this was offset by the growth in the beauty market. In North America both beauty and personal care markets were soft. However, project activity remains at a good level for our beauty and home products and we participated in several new launches by customers this quarter. Some of which include, several new fragrance were equipped with our unique retro valve atomizer, including Zara’s women fragrance, Bottega's Veneta fragrance.

Shiseido also launched their Pure and Mild skin moisturizer with our cosmetic lotion pump. In our gift and promotion business, Zara released a new men’s fragrance sample packaging using flat mailable system know as Imagine. In personal care, Unilever launched a spray from of their flagship Vaseline product using our Bag-on-Valve and locking actuator. And finally, in the home care market, SC Johnson introduced a revolutionary customer dispenser on their Windex Touch-Up Cleaner product. This is really a very interesting product and it’s just now hitting the market shelves.

Now looking to our Pharma segment. As I mentioned, we knew the fourth quarter was going to be a difficult one for our legacy pharma business. Customers in the U.S. generic allergy market were working off inventory levels and it delayed some orders. This was partially offset by sales to the consumer healthcare market. In the quarter there were several interesting consumer healthcare launches, including an eyelid moisturizing product in Latin America using one our spray pumps. Two additional ophthalmic product introductions in Europe using our ophthalmic squeeze dispenser, and Church and Dwight launched a saline rinse called Simply Saline for babies in the U.S. using our Bag-on-Valve and (inaudible) actuator.

On the prescription side, MEDA’s Dymista allergy treatment that was approved in U.S. last summer using our nasal spray system was recently approved in Europe. Aptar Stelmi had another good quarter and elastomer component volumes were up double-digits over the previous year. I want to reiterate that we are extremely pleased with the progress of the Aptar Stelmi integration and look forward to the opportunity to leverage our business, to leverage our commercial network and customer relations to continue growing this terrific business.

Now turning to our Food and Beverage segment. This segment had a good quarter, primarily driven by strong growth in our beverage closure business. We saw an increase in sales to the food market in the quarter but that was primarily an increase in tooling sales year-over-year. Our market focus strategy continues to present opportunity to penetrate new food and beverage categories. We are very pleased to report that we have entered a new food category in the quarter, and that’s infant formula.

Perrigo Nutraceutical recently introduced a major launch in the U.S. of a new package for their infant formula using our customer made closure with an easy to remove liner with our bonded to aluminum technology. You can now find this product at Target, Wal-Mart and other large retailers.

Regarding a few other important product introductions in the quarter. Kraft has now extended their MiO line to include a MiO FIT concentrate that provides benefits similar to sports drinks. And Kraft also launched two new liquid concentrates. One, a new Crystal Light concentrate, and the other a Kool-Aid concentrate, both using our SimpliSqueeze closures. Also Pepsi rolled out their Trop50 brand of orange juice using the same Kraft package with our custom closure and pull ring that they introduced earlier in the year on their main brand of orange juice.

Now just a brief update on our European operations optimization plan. This plan is to streamline certain product technologies, reduce complexity for our people and our customers, and our optimize our production footprint, is progressing as anticipated. We are currently in the process of shutting down two facilities, one in Italy, and the other in Switzerland. As you know we did not include of this plan on our fourth quarter guidance or also in our first quarter guidance. This is due to the uncertainty around when the events would occur that trigger a recognition under the accounting rules. Bob will go over the details about the charges in his comments.

I would like to offer a few comments about our performance for the year 2012. In spite of the typical condition in certain markets, we are able to grow core sales by 3% over last year’s very strong performance. It was a particularly challenging most of the year for our largest segment, Beauty and Home. Primarily due to the economic situation in Europe causing customers to reduce orders. We also experienced a slowdown in our most profitable segment, pharma, in the second half. Our food and beverage segment had a good year driven by strength of our beverage closure business, which more than offset a flat performance in the food market.

Now looking at our business on a geographic basis. While Europe was softer than the prior year, primarily due to the softness in the beauty and home and personal care markets, we continued to grow nicely in Latin America and Asia while our business in the U.S. was up slightly from the prior year. As I just mentioned, we are very pleased with the Aptar Stelmi transaction. As you know this was the largest acquisition in Aptar’s history and we are well along on the integration work. This transaction which was completed in July, added 2% for the year to our top line. We continue to expect the Aptar Stelmi business to be accretive annually between $0.12 and $0.16 per share, and again we look forward to continuing to leverage our commercial network and our strong customer relations to continue growing this business.

Our strong financial condition allowed us to return to our shareholders through corporate actions during the year. We spent approximately $80 million to repurchase approximately 1.6 million shares of common stock in 2012, leaving approximately 2 million shares authorized for repurchase at the end of the year. In 2012, over $58 million was paid to stockholders in the form of dividends, or $0.88 per share. Also, in January 2013, our board increased the quarterly dividend by 14% to $0.25 per share.

Now as we look ahead to the first quarter of 2013, significant increases in U.S. raw materials, particularly plastic resin, will create headwinds in the first quarter due to the timing of the pass-through of these increases to our customers. We are optimistic that both the U.S. and Europe will improve as the year progresses but we are somewhat cautious on the speed of those recoveries going into the first quarter. And finally, we continue to expect good growth coming out of our Latin America and Asia operations.

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

Robert Kuhn

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 fourth quarter. Our reported sales growth of 5% is comprised of the 2% core growth. The contribution from Aptar Stelmi which added 6%, and a negative impact of 3% coming from changes in currency exchange rates. As Steve mentioned, our fourth quarter guidance did not include any impact from our European operations optimization plan, which was $0.05 in the quarter.

So on a comparable basis to our guidance, when you adjust for the $0.05 from the optimization plan, we earned $0.57 in the quarter, and this compares to the $0.57 we reported in the prior year. Aptar Stelmi contributed $0.03 per share in the quarter. Similar to sales, earnings were also negatively impacted by changes in currency rates and we were positively impacted in the quarter by approximately $1.3 million of onetime tax related items.

Turning to free cash flow which we define as cash flow from operations less capital expenditures, in the quarter we had a strong positive free cash flow of approximately $82 million, compared to approximately $23 million a year ago. On the gross basis, debt to capital is about 24%, while on net basis it is roughly 13%. We were active in our share repurchase program in the quarter and we spent approximately $38.9 million to repurchase 817,000 shares in the quarter. We had approximately 2 million shares authorized for repurchase at the end of the year.

Turning to our business segments. Our Beauty and Home segment’s reported sales were equal to the prior year. Changes in currency rate had a negative effect of 3%, therefore on a core a basis, segment sales were up 3%. Looking at our markets on a constant currency basis, sales to the beauty market increased 6% from the prior year. While sales to the personal care market increased 2%, and sales to the home care market decreased 8%. But that was entirely related to lower tooling sales in the quarter.

Our Pharma segment reported sales increased 17%. But if we back out the impact of the Aptar Stelmi acquisition, which accounted for 23% of the quarterly growth, and add back the negative impact from changes in currency exchange rates of 2%, we can see that our core sales declined 4% in the quarter. Now taking a look at the markets on a constant currency basis. Sales to the prescription market, excluding the Aptar Stelmi acquisition, decreased 7% due to the softness that Steve mentioned in the U.S. generic allergy market. 2% of the decrease is coming from lower tooling sales.

Sales to the consumer healthcare market increased 5%. Our Food and Beverage segment reported sales growth of 8%. Currencies also had a negative impact of about 1%, therefore core sales were up 9% over the prior year. On a constant currency basis, sales to the beverage market increased 16%, and this included a negative impact from a decline in tooling sales of 15%, while sales to the food market increased 7%.

Now turning to our annual results. Our full year core sales excluding changes in currency rates and acquisitions, increased 3% over the prior year. Our reported sales were approximately the same as the prior year sales. Our core growth of 3% and the additional 2% contributed by Aptar Stelmi, was entirely offset a negative impact of 5% from changes in currency rates. For the year, we reported earnings per share of $2.38, which included the negative impact of $0.05 related to charges from our European operations optimization plan, and a negative impact of $0.05 per share related to the Aptar Stelmi acquisition.

We also generated a strong free cash flow for the year of $146 million, which compares to $81 million in 2011. Just a few comments on our European operations optimization plan. As Steve mentioned, the plan is progressing as planned. Charges recorded in the quarter included approximately $4.9 million of expense, $1.6 million which is non-cash and is included in our depreciation and amortization line. The remaining $3.3 million is primarily related to severance payments and is included in the line called restructuring initiatives.

This line also includes a small credit from our previous plan that was completed. We anticipate that in 2013, we will recognize approximately $14 million in additional expense related to the European operations optimization plan, of which $4 million will be non-cash. 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. Annual savings are expected to be approximately $12 million, and we expect to start seeing some impact from those savings in 2013.

Looking forward, presently we expect depreciation and amortization for 2013 to be in the area of $155 million, with capital expenditures expected to be in the area of $165 million. And again I would like to point out that these amounts could vary depending on changes and exchange rates. We currently anticipate that our full year tax rate for next year will be between 33% and 34%, and we currently estimate that our diluted earnings per share for the first quarter of 2013, will be in the range of $0.64 to $0.69 per share compared to the $0.64 per share reported in the prior year first quarter.

Our first quarter earnings per share guidance, again, does not include any potential impact coming from our European operations optimization plan. At this time Steve and I will be glad to answer any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ghansham Panjabi of Robert W. Baird. Your line is now open.

Ghansham Panjabi - Robert W. Baird

Just trying to get some more color on the first quarter guidance. So as you pointed out, the base number of $0.64 from the first quarter of ’12. Steve, I think you mentioned Stelmi $0.03 to $0.04 on a quarterly basis. You know resin, can you just kind of give us some parameters on how to think about resin, maybe stock option expense. And I assume none of the cost savings are starting to flow through in the first quarter, if you could just confirm that. Thanks.

Stephen Hagge

Yeah, I will start from the end and go back. Yeah, the cost savings that we saw on the European restructuring we have going on, doesn’t impact the first quarter. It’s going to be more back-end weighted in 2013 and much more into 2014. Now in terms of your other questions, coming back. You are right, what we are seeing is that Stelmi should be in that again on a full year basis, $0.12 to $0.14, or $0.12 to $0.16. So we are seeing $0.03 to $0.04 per quarter. What we have got coming into the, we’re a bit softer on the generic allergy market. That we thought we would start to see a bigger increase in the first quarter. We still have the orders on the books but they have been delayed somewhat to late first quarter and into the second quarter. So that’s been of a bit of a slowdown.

And frankly, while most of our customers were seeing, Ghansham, being pretty positive about ‘13, all are pretty cautious as they get into the first quarter. So that’s having the impact. The other side on the resin that you brought up, resin, and again the resin that we're seeing is like mostly polypropylene and is mostly U. S. But we're seeing from the first quarter of 12 going in significant increases in January, little bit less in February. But those are up about over 20% from the fourth quarter going on. So that’s having an impact as we’re going to be able to pass those through. So, we feel comfortable we will get them passed through but frankly it's going to take us till, starting in late first quarter and into the second quarter to get them passed.

Ghansham Panjabi - Robert W. Baird

Okay. And then as a follow-up on Stelmi. Obviously the integration seems to be on track. Steve, can you just touch on whether there has been any top line accretion, just leveraging your global footprint or is that sort of a second half story? Thanks.

Stephen Hagge

Going back, I think what we're seeing in Stelmi is, the good news is, the market is doing real well. As I mentioned, in the fourth quarter we are actually seeing double-digit increases in volume. I would like to tell you that’s just on the integration but frankly it’s a strong market trend. So that’s actually propelling the top line. I think it will be more second half that we will get integration positives at the sale side rather than the first half, Ghansham.

Operator

Thank you. Our next question comes from Phil Gresh of JPMorgan. Your line is now open.

Phil Gresh - JPMorgan

Just wanted to follow-up on the pharma side. This year obviously was somewhat more of a challenging year as you think about where the organic growth was relative to your long-term expectations. And it sounds a little bit like some of that continues into 1Q. Just tell us how you are thinking how this plays out and maybe bridge us back to how you think about that long-term growth rate, or at least the low end of it, I believe 6%. And what you're seeing that gives you confidence you can get back to that rate? And do you think that, that at some point in 13 or is that more longer term?

Stephen Hagge

Well I think first of all we are still confident of that 6% to 10% in the pharma growth rate. When you look at -- I think you also have to compare ‘12 to what we had an ‘11 when we saw growth rates in ‘11 being at about 10% in the Pharma segment. You are right, we have seen a little bit of a slowdown in terms of the second half in terms of some inventory issues. We are anticipating that those become corrected more as we get into the second quarter. Now, the other thing that I think continues to give us confidence is, we mentioned in the third quarter we had two good introductions in terms of our Landmark counting device which will continue to positively impact the business. I mentioned in my comments that we have the MEDA Dymista product, we now have European approval. We start to see those. And frankly in our consumer healthcare part of the business, our whole ophthalmic product line continues to grow. So I think if you take all of those, we are still pretty confident in terms of where the business is going in the future.

Phil Gresh - JPMorgan

Got it, okay. And then just in terms of the developed markets, maybe you could give a little bit more color as to how the quarter progressed and what you are seeing this quarter? It sounds like some of your peers saw a pretty sharp fall off towards the end of the quarter and maybe just give a little insight into what you're seeing there?

Robert Kuhn

Sure, Phil, this is Bob. Latin America for us again was very strong in the fourth quarter. We're up about 29%. So we were up strong both in the personal care and the beauty market, and we were down a little bit in the food site. Asia, we were up 12%, and again 12% is coming primarily from the beverage side and the beauty side. And we were down a little bit in personal care and down a little bit in food. So, again, we are -- the 12% for us is of what we were reporting in the first couple of quarters, but that included some of the acquisition affects that we had from the Indian operation that we acquired in 2011. So, for us, we are still seeing very good, strong solid growth.

Phil Gresh - JPMorgan

Okay. I was specifically asking the developed market side, the Western Europe and North America. How you saw those progress? There was some destocking and stuff like that.

Robert Kuhn

Sure. While we did see a 3% decrease in the U.S. and, again, that was primarily liked to the generic allergy market decrease, the destocking that we've been talking about. We're down a little bit on the beauty side, but we saw very good growth in the food and in the household markets primarily on some of the new product introductions that Steve was referring to. And Europe for the quarter was actually flat, which has been an improvement coming off of the second and the third where we were down low single-digits. So in Europe in the fourth, we actually saw good beauty sales increase of 5%. We were up in the RX side, good food sales, and personal care and household were down, and again the household decrease there, as I mentioned, was primarily on the tooling side.

Phil Gresh - JPMorgan

Go it. And then in terms of the first quarter, you are not assuming any kind of reacceleration in U.S. and Europe and relative to what you have been saying.

Stephen Hagge

We are cautious with that. So we are not seeing any fundamental significant changes from the fourth to the first but we are cautiously optimistic that we should see the U.S. continue to improve and Europe certainly not getting any worse.

Operator

Our next question comes from Adam Josephson of KeyBanc. Your line is now open.

Adam Josephson - KeyBanc Capital Markets

How would you characterize inventories at the retail or in customer level relative to what they were in late ‘08 or early ’09? Has there been any comparable destocking that you have seen?

Stephen Hagge

I think the inventory levels have been relatively stable. I mean there has been -- we saw a little bit of conservatism going into the fourth quarter where our customers were looking at inventory levels and being somewhat conservative. But I think there is a big difference from ’08, ‘09 where they took down inventory significantly as they went into the recession. Those inventories never really came back significantly. So I don’t think inventories are a major factor other than, as we pointed out, some certain spot markets like the generic pharma market.

Adam Josephson - KeyBanc Capital Markets

Right. How economically sensitive is your pharma business?

Stephen Hagge

Well, I think it is our most not economically or un-economically, I am not sure what the English term would be. But if you look at the devices we have, certainly when you look at our metered dose inhalers for asthma, that’s frankly a product line that you need. It’s a survival need. The allergy market, we find also has been relatively stable. So we will get more inventory fluctuations. And then frankly the other side that will impact that particularly on the allergy market, would be seasonal impacts. If there is a very strong allergy season, we will see those move up and then again going back, Adam, reiterating, our consumer healthcare is pretty stable. And then we are seeing growth as we get into the ophthalmic market and I continue to come back each quarter, I have talked about new introductions. So we continue to be very positive about that.

Adam Josephson - KeyBanc Capital Markets

Thanks. Stephen, just one last one on resin. I know Ghansham asked about this, but how much of an EPS drag is anticipated in higher resins, your 1Q outlook. Forgive me if you've mentioned this and I missed it.

Stephen Hagge

Adam, to be honest with you, we don't come back and it’s difficult for us to quantify that right now. So I can give you relative terms. It’s a significant item going for us in the quarter but we are not going to be disclosing what we have in our projections related to that.

Operator

Our next question comes from Chip Dillon of Vertical Research. Your line is now open.

Chip Dillon - Vertical Research Partners

Yes. And I might have missed this, but you gave the guidance for next year on CapEx, what was it in 2012?

Stephen Hagge

In 2012, we finished the year at about $179 million.

Chip Dillon - Vertical Research Partners

Got you, got you. And then as you look at -- is 165 kind of, given your current footprint, more normalized. Because I know you had like the North Carolina expansion and other initiatives in ’12. Is 165 more of a normal level, is it going to be slightly above D&A as we look ahead?

Robert Kuhn

The 165, Chip, is still influenced as we continue to roll out our one SAP initiatives. So I would say, really for the last couple of years and the subsequent couple of years, we are still going to have some investments in the system side of things. It’s still too early to tell right now what the Stelmi needs are going to be on a regular basis going forward. But, again, we are always going to target somewhere at or slightly below depreciation and amortization on a go forward basis.

Chip Dillon - Vertical Research Partners

Got you. And lastly, when you look at your, the core sales changes just in the fourth quarter, whether you want to be specific or just in a general sense, was pretty much all of those changes volume related or was there anything that you can say in terms of price because of pass-throughs?

Stephen Hagge

No, the resin impact was really immaterial. It was less than 1% in both the food and beverage and the beauty and home market. So, really most of it was volume related and other than some of the tooling references that I mentioned earlier. So for example, the 8% down in the household was really, actually if you're looking at product sales was actually up 3%. We were down 11% on the tooling. But most of it is going to be volume, very little in the fourth quarter on pricing.

Operator

Our next question comes from Chris Manuel of Wells Fargo. Your line is now open.

Chris Manuel - Wells Fargo Securities

A couple of follow-up questions. One, with relation to Stelmi you talked about, I know in the past you put that in, integrate that in. You have capacity to support growth this year and I think you just mentioned that you are still evaluating what you want to do in terms of putting additional capital there. Can you give us an update? Are you planning on adding capacity for that unit in ‘13? Is that embedded into year capital plans, etcetera?

Stephen Hagge

I think if you look at Stelmi overall, the good news is the market continues to do well. So, we have actually added some capacity at the existing facilities over this year. We are looking at doing some things in terms of staffing to be able to increase, let's call it short-term output. While we are in the process of still looking at our long-term needs, where we may need additional capacity in the future either location wise or what type of products. So, we are doing some short-term things to meet the market needs but we’re taking a look at the long-term where we may be going and where we are still in the process of looking at that, Chris.

Chris Manuel - Wells Fargo Securities

And is there any potential update with respect to making more inroads into the North American market or some of the other markets outside of Europe there?

Stephen Hagge

Well, again, I think it’s important to note that we are shipping quite a bit into the North American markets and other markets. From a production standpoint that’s one of the things we are evaluating is, if we need to add capacity, where should it be. Is it North America, is it other parts of the world. So, those are the things we haven’t made a decision on, yet.

Chris Manuel - Wells Fargo Securities

Okay. Two last questions. One is a housekeeping one. I noticed that the corporate line was pretty high this quarter. Is anything unusual embedded within there or?

Robert Kuhn

No, Chris. It’s, again, a lot of it is just kind of timing of some of the expenses. Remember that we have got LIFO in there, so there was a negative on the LIFO expense. A little bit higher consulting fees in the quarter, again primarily related to some of our IS initiatives. Pension was up a little bit, medical cost, and just a lot of little things, nothing of which is really individually significant. And if you were to look at it going forward, from a modeling perspective you would probably be looking at on average about $9 million per quarter.

Chris Manuel - Wells Fargo Securities

Thank you, that’s helpful. And then the last question I had was, you mentioned a new category that you had commercialized some product into, I think infant formula. As we look forward over the next 12 months, any that you are doing working today that you can share with us? Categories that look very ripe to you as for AptarGroup or etcetera, that we could anticipate seeing product from?

Stephen Hagge

We're not able to really talk about those until our customers would introduce. But I think, frankly, I appreciate you bringing up the infant formula because that’s a significant issue for us. We have been working on that for well over year with Perrigo. And that’s a market that we have not sold anything into. So I think it opens up opportunities not only with Perrigo but with other customers. And not just here in the United States but on a worldwide basis. And I think to me what that -- it’s another reflection that Aptar’s market facing strategy where we are trying to -- where we continue to adapt our products to market needs, is working. Again, as we pointed out in my comments, one of the nice things about the Perrigo, we are using our BAP, or the bonded aluminum to plastic, technology. So, again, it’s taking similar technologies we are developing and moving into new markets.

Operator

Our next question comes from Alex Ovshey of Goldman Sachs. Your line is now open.

Alex Ovshey - Goldman Sachs

You talked about really strong growth in the emerging markets, Brazil and Asia. Can you talk about the margin profile for the company in the emerging markets relative to the developed markets.

Robert Kuhn

Sure. We don't comment specifically on exact percentages by region but obviously we are starting to see some margin improvement as we gain size and breadth within each of those regions. So, we're starting to see the margins in those regions be very near, very similar to what we're seeing in the developed markets.

Alex Ovshey - Goldman Sachs

Helpful, Bob. And then, as you talk to your customer base in Europe, how would you characterize the tone of the conversation and the body language of the customer today relative to where we were 12 months ago?

Stephen Hagge

Well, I think when we talk to our customers in Europe, it’s good to come back and reiterate that our customers in some of our businesses, really are not necessarily European focused but worldwide focused. So, for example, our fragrance, cosmetic customers are looking on a worldwide basis and I would tell you they are cautiously optimistic as they look at the world. When you get to some of the personal care products when we come back, I think they were a bit more cautious given the economic situation in Europe. When we get into the food and beverage market, we see those customers looking for new ways to come back to dispense the product. So we see new market opportunities in those markets. So, it's a bit different as you go from product line to product line, and that same situation that we saw on fragrance cosmetic would be in the pharma side also. So, again, overall a good level of new product dialogue.

Operator

Our next question comes from Mark Wilde of Deutsche Bank. Your line is now open.

Mark Wilde - Deutsche Bank

Bob, is it possible for you or for Steve actually, to put a little more color on that European optimization program? Are those the only two facilities in the program where those -- that increased charges in 2013 suggest that you may be looking at some other plants? Are you walking away from business or is this really just a matter of consolidating business in other plants?

Robert Kuhn

It’s actually affecting more than two because we are moving equipment amongst the -- approximately 12 different facilities, to become more efficient. So, the bulk of those costs are going to be from the two facilities that we are actually closing down. Some of the smaller miscellaneous costs are just the installation and setup, and things like that of moving some of those equipment into those areas.

Stephen Hagge

The other thing, Mark, I think it’s important to note, the reason we went through this was not to walk away from business but frankly we've become much more efficient as we've added new capital. So it's a way to come back and optimize the footprint and still allow for significant growth in Europe. So, for me, it is certainly not just a cost cutting exercise, it is much more of an optimization strategy then just taking out cost.

Mark Wilde - Deutsche Bank

Okay. And then, Bob, as you were going through your comments, it sounded like in, at least a few different areas, that tooling was weak in the fourth quarter. Can you talk about that?

Robert Kuhn

Sure. I mean comparatively to the fourth quarter last year, we were down roughly about $2 million in tooling quarter-to-quarter, but nothing significant. It was about $1 million in pharma down, it was about $600,000 in beauty and home and the remainder was in food and beverage. But for the year we’re actually up a couple of million. We actually finished the year at about $85.6 million in tooling and that was up over $83.4 million in the previous year.

Mark Wilde - Deutsche Bank

Okay, that is very helpful. And finally, can you talk about how those Asian operations, particularly the Indian plants, how they are running right now?

Stephen Hagge

Well, again, I think in terms of the India facility, we made an acquisition a year ago. We are continuing to see that ramping up. We are actually reinforcing that with some additional management structure within that to help future growth. And then as you get into our China facility, we are seeing outstanding growth. We are seeing good growth -- outstanding growth in our beverage part of that business. We are seeing a lot of new technology go there, as well as seeing personal care and also on the fragrance cosmetic business. So we are seeing good growth in both of those. Today, the fragrance/cosmetic business in India is probably less and we see that as more future opportunities rather than current.

Operator

Our next question comes from Todd Wenning of Morningstar. Your line is now open.

Todd Wenning - Morningstar

Could you give us a sense of the returns you're currently seeing from your R&D investments relative to prior years and how you're thinking about allocating your R&D spend in 2013?

Stephen Hagge

It's always difficult to come back and take -- we take a look at as we introduce new products. We take a look at the capital and take returns on those and we are pretty much on target for where we've been historically. I would tell you our R&D spend as in overall Aptar is in the area of about 3%. That has been consistent over the last ten plus years with the company. We are still planning on that in the future and, frankly, as we look at our cost, the one area we've never cut back on is the R&D efforts. Innovation is still the key to this business. So, we are continuing to aggressively pursue that. And again, I think if you look at our fourth quarter, Todd, you will see that the number of new products that we've got coming out is really some of the broadest we've been able to talk about over the last couple of years.

Todd Wenning - Morningstar

That's great, thanks. Did Stelmi benefit at all from the higher demand for flu shots this winter?

Stephen Hagge

I think it’s too early. I think that we are seeing, again, their numbers are up. So, I think that they were -- it's probably we saw that more in December and then were maybe more first quarter weighted than it would have been in the fourth quarter.

Todd Wenning - Morningstar

Okay. And are you seeing any change in customer order patterns in light of the higher payroll tax in the US?

Stephen Hagge

I think, to be honest with you, there was probably in the fourth quarter we were hearing concerns on our customers on the fiscal cliff. What were consumers going to do, what was going to be the impact. At least getting some stability to that, probably it’s not certainly a plus yet but it takes away some of the overall concerns. So, that’s what I think. A little bit in the first quarter, we are still a bit cautious. I think once people get used to that we will see that come back and consumer is starting to get more equalized on their spending patterns.

Operator

Our next question comes from Brian Rafn of Morgan Dempsey Capital Management. Your line is now open.

Brian Rafn - Morgan Dempsey

Could you give me a little -- give me a sense of may be going into the Christmas season and what really happened in the fragrance and cosmetics area? How would you wrap up Christmas 2012?

Stephen Hagge

I think it’s a little too early for us to give you a full because we will get to the reorder pattern as we get into the first quarter. I think as we've had discussions with the customer, overall, I would say that when we've looked at our customers’ announcement, it has been not a great Christmas but not a bad Christmas either. So I would call it more middle of the road. What we do see is still a lot of discussion on new product introductions, Brian, going into 2013. But I wouldn't call Christmas spectacular. But, again, on the strong side, and again one of the things trying to support that is, our beauty business was up about 6% year-on-year basis as we got into the fourth quarter. So, I think there's probably more of a general improvement in that area rather than any negatives.

Brian Rafn - Morgan Dempsey

Okay. If you look at your project pipeline as you're going forward into 2013, kind of breaking up by your seven end markets, give me a sense, maybe pharmaceutical, drug, if you look at food and beverage, the packaged foods side, personal care hygiene side. Give me a sense where you see strengths and where you see weaknesses in the pipeline?

Stephen Hagge

I think across all of them we tend to be very active. I mean we have to talk a little bit about where we are seeing new market introduction. So food and beverage frankly being the smallest of all three segments and the project side typically being a bit larger you will see more of an impact there. That being said, on the personal care side, the fact that we just saw on the household side, nice new introduction by SC Johnson on household products which they are pushing very hard. Vaseline Intensive Care coming back. So, again, I would say, Brian, that we are probably at or above last year’s level in terms of new projects that we are working on across all three segments and all the different markets.

Brian Rafn - Morgan Dempsey

Okay. And then you talked about the instant formula. I'm guessing that’s a liquid, that’s not a powder. You launched it with Perrigo which is kind of a private label. What is your opportunity with some of the larger, maybe branded names in the U.S? And does entry into the instant baby formula give you any forays into the milk business, even though that’s more of a chilled business?

Stephen Hagge

Well, first of all, let me go back. It was actually into the powder formula. The majority of infant formula, I think that’s the real plus for Aptar, in the United States is powder form. What we've come back with Perrigo is offered them a much more hygienic way to dispense the formula. And if you take a look whether it is with Abbott or some of the other guys who are making this, they are also looking at reformulation of packages. So we see that as a plus. So, in terms of going to liquid in terms of milk, what we're doing is we continue to walk down new applications fields and new application fields.

Brian Rafn - Morgan Dempsey

Okay. And then on a global footprint, $165 million, how does that kind of -- where are you seeing that capital addition across your global footprint for 2013?

Robert Kuhn

I don’t have the exact regional splits in front of me but, again, we continue to invest more in our developing markets as those continue to grow, to get a larger footprint there. Obviously, with the optimization plan in Europe, we are consolidating into less facilities there. So, I don't know the exact figures but again it’s more, I would say, emphasized on some of the investments in the developing regions. But we're still getting adequate capital in the developed markets as well.

Brian Rafn - Morgan Dempsey

Okay. Then on SC Johnson, Steve, that Windex product, is that somewhat a breakout product. Obviously they are a great innovator, they have a got a long legacy history in that for Windex. What is that specific product?

Stephen Hagge

It is a tabletop product for an anti-bac on top of the kitchen sink type thing to clean off tabletops, that type of stuff. It is a push down type of thing to applicate a antibacterial liquid to clean stuff up. They are extremely positive with it. I can only give you what SC Johnson is telling us. This is a worldwide introduction for them. And it is a focus in the U.S. and certain other parts of the world. So, we will see what are the [carry-on] but again it’s an exciting new product entry for us.

Operator

(Operator Instructions) Our next question comes from Jason Rogers of Great Lakes Review. Your line is now open.

Greg Halter - Great Lakes Review

Hello, it’s actually Greg Halter on. You mentioned the free cash flow which was obviously very good. I wondered if you could provide the cash flow from operations as well for the year.

Robert Kuhn

Yes, I can, if you hold on just a second. We've got cash operations for the year of $123 million.

Greg Halter - Great Lakes Review

Okay.

Robert Kuhn

No, I'm sorry we’re at $320 million.

Stephen Hagge

Small difference.

Greg Halter - Great Lakes Review

Yeah, that gave me a heart attack. That was for the quarter then, the 123?

Robert Kuhn

No.

Greg Halter - Great Lakes Review

Probably gave you a heart attack too. It was only 120. Wonder if you could provide your outlook for M&A and then in the absence of any of that, obviously, you raised the dividend, you bought back stock. I would consider you to keep on those paths in the absence of M&A?

Stephen Hagge

Yeah, we are going to continue. I mean we don't have anything to be able to disclose today on the M&A front. As you have seen in the past we will continue to evaluate acquisitions. I think there are still opportunities in the market to strategically grow Aptar’s business. The timing of that, I'm very comfortable that our balance sheet allows us to be able to come back and grow through M&A as well as continue the stock repurchase and the dividends that we have out there.

Greg Halter - Great Lakes Review

Okay. And, Steve, regarding the pass-throughs, you sounded a little more cautious than you have, maybe ever in ten years that we've been covering the company, about the ability to be able to get those pass-through. Are there any changes in the contracts or terms, or am I reading that wrong?

Stephen Hagge

Greg, if that’s the case, I'm glad you brought that up. We will be able to pass all of those through. It is really a timing issue for us. And frankly what we are seeing is, given the size of the increase, when you've got more of than a 20 some percent increase quarter-to-quarter, it just takes to get it through. That’s the headwinds that we are going into. But from ours, I'm absolutely confident there is no difference in being able to get those pass-through. And for the most part, the whole industry is doing that also. So it’s not that we are an outlier to what the industry practices.

Greg Halter - Great Lakes Review

Okay. I saw that with, I think, Newell had talked about a significant increase as well in their resins.

Stephen Hagge

You just couldn't -- it would be impossible to be able to absorb the increase. There is just not enough -- it's too big.

Greg Halter - Great Lakes Review

And one last one for you. Any idea how much Stelmi added to your receivables and inventory or maybe what those two line items would be on a core basis year-over-year?

Robert Kuhn

Off the top of my head I can't give you that right now.

Greg Halter - Great Lakes Review

That’s okay. I just thought...

Robert Kuhn

We can follow it back up with you.

Operator

Our next question comes from John Anderson of William Blair. Your line is now open.

Unidentified Analyst

It’s actually [Brian Sundy] in for John. Most of my questions have been answered, so I just kind of wanted to hit on the progression of the year. It sounds like most of the companies we follow are really going to, they are pointing to a step-up in innovation and advertising this year. And I guess I was wondering, one, are you seeing that from your customers? It sounds like you are, from the commentary you gave on new products. And, two, this more refers to my question, how important is this to your business in terms of your ability to trade-off existing customers, win over new customers. And do you expect that to kind of increase as we go through the year?

Stephen Hagge

I think first of all we are seeing our customers come back and focus on new products and new packaging ways to come back and differentiate that. When you talk about how key it’s to Aptar, it’s been the key to Aptar to long-term success and that’s innovating around our products and dealing with market trend. So for us, we view that, and we think from our perspective that our customers come to us to help them innovate their new products. So we think that the trend is very positive for Aptar. And, again, as I said, while I think we are somewhat cautious going into the first quarter, what I am hearing customers say is that there is still more positive as we get to the last three quarters of the year. So we will see where that goes, but right now I would say it’s more positive.

Operator

Our next question is a follow-up from Brian Rafn of Morgan Dempsey Capital Management. Your line is now open.

Brian Rafn - Morgan Dempsey

Yeah, Steve, question for you. What is your sense when you look at going into 2013, what is your sense of your customers attitude at using, as they innovate products and innovate colors and sizes, would utilize some of your state-of-the-art, kind of lead-edge technology. Talk about bonded aluminum and some of the other areas. Give me a sense as to how well they are willing to pay up for premium new technology?

Stephen Hagge

I think, Brian, I think that maybe a bit -- first of all, I think our customers want the new innovation. And a lot of what we are bringing to the market is necessarily increase in cost, it’s different functions. It’s cost effective innovation, I guess is the best term I would use. So if everybody is looking at increased packet sizes or increased packaging cost, that’s more of a challenge. What we are trying to do is go give them differentiation in their package at a cost effective price. That is what our customers are looking for and I think what's Aptar has always been able to bring to them in the past. So in terms of these new technologies, when you look at infant formula, it’s not necessarily increasing the package cost, it’s really making sure that there is integrity of the package itself. It’s the freshness of the package. So, again, we are giving significant benefits to the package.

Brian Rafn - Morgan Dempsey

Okay. And as you look at the market going forward, maybe a 50,000 foot view, what is your sense if you see a weakening economy and you see the caution building throughout the year? Does that give you on the M&A front, more of a though process that Aptar is a safe-harbor, it’s a global umbrella. And would you might see as large an opportunity to make acquisitions in 2013, even if the markets do deteriorate?

Stephen Hagge

Well, I think if the markets deteriorate, one of the things Aptar has had and continues to have, is a very strong balance sheet. So in term of coming to us, people that maybe looking to sell the business, we have the financial wherewithal to do a lot of different transactions. So while we see -- I think it’s important that we are not looking at mergers and acquisitions just as the way to grow the business, but they need to be strategic. But right now I think we are well positioned to be able to do that.

Operator

And at this time I am not showing any further questions, I would like to turn the call back to Mr. Hagge for any closing comments.

Stephen Hagge

Thank you. This concludes our call today and I would like to thank everyone for joining us and we will talk to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AptarGroup's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts