Matt DellaMaria – Vice President, Corporate Communications
Peter Pfeiffer – President and Chief Executive Officer
Steve Hagge – Chief Operating Officer
Bob Kuhn – Chief Financial Officer
Pat Doherty – President, Aptar Beauty & Home
Olivier Fourment – President, Aptar Pharma
Erik Ruskoski – President, Aptar Food & Beverage
Paul Eckley – State Farm
Aptargroup, Inc. (ATR) Analyst Day September 8, 2011 8:00 AM ET
Matt DellaMaria – Vice President, Corporate Communications
Good morning everyone. I’d like to welcome you to Aptargroup’s 2011 Analyst Day. I am Matt DellaMaria, Vice President of Corporate Communications. It’s nice to be in New York, a city where baseball is still a professional sport these days. So, I always appreciate coming to New York from Chicago. If we could turn our cell phones off or put them in silent mode, we would appreciate that throughout the presentation. We can take a minute to do that.
I’d like to refer to our Safe Harbor slide. Many of you are familiar with this language. If you want to look up additional information about Aptargroup or risks and uncertainties that relate to Aptargroup, please visit our website. All of our SEC filings are there. Today’s presentation will be webcast and the slides will also be on the website for downloading if you wish.
At this time, I would like to turn it over to Peter Pfeiffer, our President and Chief Executive Officer.
Peter Pfeiffer – President and Chief Executive Officer
Good morning ladies and gentlemen. Welcome to our today’s Analyst Day here in New York. Thank you, Matt for introducing me.
Today, ladies and gentlemen, you will have the possibility to listen and also to speak to the senior management of Aptargroup. Today with us is Steve Hagge, our Chief Operating Officer. You might have heard about this that Steve will succeed me when I am going into retirement as the CEO. With us too is the CFO, Bob Kuhn, who will speak to you together with the three Presidents of the Aptargroup segments. Pat Doherty, our President of Aptar Beauty & Home; Olivier Fourment, President of Aptar Pharma; and Erik Ruskoski, President of Aptar Food & Beverage.
I would like to take the opportunity also to introduce to you three other people, which are with us today here in New York. First of all, Ralph Poltermann, Executive Vice President of Aptargroup. You all may be knowing him, because he is in touch with the analysts for many, many years already.
The second one is Ursula Saint-Leger. Ursula is Vice President, Human Resources of Aptargroup. She has joined our company about the year ago and she in her early career she was a consultant of the Hewitt Associates specialized on compensation and organizational efficiency. Together with the President, the CFO, Ursula is completing our management executive committee. She before joining Aptargroup, she was with two companies, Umicore, a multinational company and also TAQA, another multinational company.
The third person I wanted to introduce is Eldon Schaffer. Eldon succeeds Eric Ruskoski as the President of Food & Beverage when Eric is going in retirement at the end of the year. Eldon is with us since now more than 20 years. He has quite a lot of experience in our Pharma Closure segment of Aptar on many places around the world. Eldon today is the President of North American Operations of Beauty & Home.
Now, I certainly note that most of you know Aptargroup pretty well. Anyway, I wanted to point out that most of you if not all of you have products of Aptargroup at your home at the moment. And I am pretty sure that some of you even have used some of our products this morning.
Aptargroup is the leading company in the dispensing systems niche of the overall packaging universe. We, by the way, do not see us as an ordinary packaging company. We are the only pure-play dispensing systems global company worldwide.
We are offering to our customers solutions in this field. Aptargroup has ages, decades of experience in manufacturing and designing dispensing systems and also to support our customers when it comes to improve their products and their brands. So, we are a trusted partner to our customers.
Aptargroup is also a very stable company. Aptargroup is running the business since many years with a long-term strategy and we are pretty well aware that stability in those times today financially and also in the management is very important to the markets, especially in economic difficult times, which we are facing today or may face in the near future.
Let’s, I mean, talk a little bit about the long-term issues of Aptargroup. In this slide, you can see the performance of Aptargroup since we have become a publicly traded company in 1993. The compounded growth rate of sales in these times were about 10%. The growth below the line at the same timeframe was 13%.
Although we are facing our day-by-day issues and short-term issues, we are a company which had the long-term focus I mentioned this already. We are trying to have a long-term view for our business and this long-term view not only includes our shareholders, it includes all our stakeholders, our customers, our employees, our suppliers. So, our long-term focus is very important for us.
The outcome of this long-term focus, you can see on this slide, the return to our shareholders compared with the Standard & Poor 500 companies, there is always the saying a picture tells you more than a 1000 words. I think this picture here shows why many of our shareholders like the long-term focus of our company.
With this, I pass it over to Steve.
Steve Hagge – Chief Operating Officer
Thanks Peter and good morning everyone. I am going to take couple of minutes and talk about Aptar’s strategy.
Now, as Peter talked about, we operate in the niche of the overall packaging industry. And I think if you take a look at the slide here, the overall packaging industry is estimated to be about $500 billion. But within that, we’re part of really a subset of that, so if you come down to that Caps & Closures market on a worldwide basis, that’s estimated to be about $32 billion, and breaking that down further, we really play in the dispensing part of that Caps & Closures market, the dispensing systems part. That represents about $8 billion in revenue.
Now, Aptar is the largest player in that representing about 25% of that dispensing systems niche. Now, when we look at overall growth for Aptar, I think it’s good to step back and say how has Aptar been able to grow? When you look at consumer products companies, it’s been generally a GDP growth company. Aptar is really a GDP plus growth company over the last 30 years and a good deal of that is converting. It’s converting from non-dispensing to dispensing systems. So, as we look to do that, I mean, those were significant growth opportunities and we will talk a little bit about that.
One of the ways we do that is helping our customers differentiate their package and also convert from non-dispensing to dispensing systems. So, the next slide, if you take a look is an excellent example of this. This is Coppertone. If you go back to Coppertone on the far left part of this slide, Coppertone was in a glass jar with the screw of metal cap like in the 60s and 70s. You don’t know how tough it was to find that picture by the way.
So, I mean, we started – if you come back, we didn’t sell anything to Coppertone at that point. They ended up coming back and making their package much easier that is not breakable taking to the beach in terms of a plastic bottle and the dispensing closures that was our cap. Over the last couple of years and actually taken out to the next level making it a spray system, which again adds more value to the package and sprays today in the sun care market with the leading dispenser sun care in the whole marketplace today.
Another example this is differentiation, when you look at differentiation these give you kind of three different examples. Our customers really want to be different on the self. So, on this side, on the left side you have Gillette in terms of a body wash on an inverted closure you have method, which is the target brand on a lotion pump in terms of kind of Embossed top on there is and then you can see you have got a fragrance package on the right side of the, Biotherm on the right side of the package so again very different look.
Now back in the 1990s basically Aptar was a pre-product company, valves, closures, dispensing closures and pumps. And today those still are our core parts of our product today, but it was actually still much broader than what’s you might think. We have expanded dispensing systems to be a wide variety of dispensing systems that we offer to the market today.
In last year, we have talked about at this meeting, we have talked about the realignment that Aptar have gone through at the beginning of 2010. We have realignment our business to really propel us for more future growth and more innovation. So, what we have done is we now have a completely market based organization. We have three different brands and Peter talked about those and you will hear from a little bit more about what are some of the drivers in those brand with Aptar Pharma, Aptar Beauty & Home and Aptar Food & Beverage. All of these segments today also all of Aptar products and are developing future products for Aptar.
Now taking a look at couple of the trends that we see, these are just trends that you monitor, report out earlier this year, you will monitors one of the analyst companies in Europe and I’m not going to reach one of these, but I do want to touch on a couple of them and how it does that we think very well where Aptar future is going.
The first one comes back in consumers seek value for money. If you look at the (indiscernible) package I talked about earlier the consumers really have very well adopted to that and that value proposition is something that they have taken hold off. The third one for us is really pretty easy, easy to open and use package, that’s really what Aptar has been about for the last 30 years and we continue to come back and reinforce that.
The sixth one maybe not as easy for you here, may not be is obvious as sustainability. We see that today with our customers and we see that with the big trend going in the future. So, today we are working with our customers and our suppliers to come back to light weight our products, make them more environmentally friendly in terms of package design and how we go forward.
So, at this time I would like to introduce Bob Kuhn, who will go through some of Aptar’s financials.
Bob Kuhn – Chief Financial Officer
Thank you Steve and good morning everyone. I would like to recap for you just at a very high level some of our recent financial performance. As you all known 2010 was a record year for Aptargroup. It was driven primarily from the sharp rebound of both the U.S. and the Western Europe markets for us from the 2009 crisis. That momentum is carried through the first six months of this year. We have been in a very volatile input cost environment now for quite a while and we have been able to manage that input cost volatility by managing our pricing, where we can by passing that on to our customers.
As you all know Aptargroup as a global company exchange rates also play an important role in the reporting of our results and I will talk about that in a little bit. In the emerging markets the continued growth that we see, as I mentioned in 2009 our emerging markets actually grew double digits, while the U.S. and western markets were depressing, it continue to grow at a double-digit rate ever since.
Looking briefly at the six months results year-to-date, we have reported record topline revenue of about $1.2 billion or 16% increase over the first six months of last year. Currencies contributed approximately 6% to that, leaving us with the good 10% organic growth rate. EPS is also a record at a $1.37 share, up 12% in the first six months of last year, which is $1.22.
We continued through this time to maintain a very strong balance sheet and one that is that let levered than most of our packing peers. Our net debt and net capital at the end of June was approximately 1.5%. We did increase our annual dividend 22% in July to $0.88 per share and we have repurchased approximately 800,000 shares of our common stock in the first six months. In addition, the board authorized an additional 4 million share repurchase in July leaving us after that authorization approximately 4.9 million remaining.
Question we get of the lot is, with the very strong balance sheet and a consistent strong track record of generating cash flows out of Aptargroup view the use of cash. As you saw from the video earlier Aptargroup is very innovation-centric. It’s a key aspect and key components of our strategy.
We continue to invest in R&D at a rate of about 3% of our annual turnover, which is much higher than our peers in the packing industry. We are also very capital-intensive business. We continue to invest in our existing business, in our existing manufacturing platform always seeking new production processes, state-of-the-art facilities to manage our growth in a very cost efficient manner.
Acquisitions have been and it will continue to be an important part of our strategy. We will continue to seek out well managed companies we can add technological aspect to our current product portfolio, but could also the geographic expansion or even a market share growth. And also as I mentioned earlier, we continue to provide guide to our shareholders in the terms of a very balanced dividend and share repurchase on an annual basis.
Take a look really quickly at our emerging markets. Latin America first of all we have been growing in a 15% to 20% range for quite sometime. It’s a very heavy concentrated beauty market driven primarily by the economies in Brazil. You see that now Brazil is one of the major players that Pat will talk about in Latin America and in the world for that standpoint in the fragrance area and it’s continuing to grow.
Asia for us give a very large population base and one where the purchasing power continues to increase and those consumers are no different than you either seeking western packing style packing and that bodes well for Aptargroup.
Lets wind the clock back about 20 years and let’s take a look at what Aptargroup’s presence look like back in 1990, you can see from the map here we are very European and U.S. centric company, with only about 4% of our turnover from emerging markets. Rolling that forward today, you can see we are now a global presence operating in 19 different countries and our emerging markets turnover is now representing more than 14% of the consolidated turnover.
Taking a look at first six months, you can see the organic growth rate in each of the regions we operated, where we can see Asia is growing 22%, Latin America 19%, Europe continues to grow for the six months at 10% and the U.S. at 7% and again those are organic growth rates.
I mentioned exchange rates. This chart here list the five main currencies that Aptargroup operates in other than the U.S. dollar and this chart will show you the six months average exchange rate for this year compared to last year. You can see the significant depreciation of the dollar during that period, not only with the Euro, but also with the Brazilian Real, the Swiss Franc, the Rmb and the British Pound. For us as you know, the depreciating dollar compared to these currencies has a positive effect on the translation of our results, but also tend to squeeze margins a little bit as we continue to be a net import from Europe primarily in to the U.S.
Before we move in to the segment aspect of our presentation, I would like to show you a graph pie chart of how the business segments breakout for the six months. As you can see again not much change since the 2010 results Beauty & Home the largest that about 55%, Pharma representing about 23% and as fast as growing is Food & Beverage at 12%.
At this time I would like to turn the presentation over to Pat Doherty, President of Aptar Beauty & Home.
Pat Doherty – President, Aptar Beauty & Home
Thanks Bob. Good morning everybody. How are you doing? Beauty & Home is the largest Aptar segment represents about 65% of the sales. We have approximately 7,000 employees a little more than 40 factories in 19 countries. We are also the market leader in many of the products we sell or a key market player in many of the products we sell as well plus in the market applications we serve we tend to be market leader or a key market player in each of those.
Now none of our competitors offer the same broad portfolio that we do in Aptar Beauty & Home. If you look at our portfolio, when Steve had a slide that showed us earlier as well, we have to go to next slide down. We have dispensing closures lotion pumps, fine less spray, fragrance pumps, aerosol valves. A lot of our competitors may compete against us in one of these products or several of these products, but we have no one that offers the total product portfolio that we offer.
Second thing is and Steve also alluded to this in our new strategy. We are focused how to lead in the market by application. Now, what this means is we are looking to different market applications like hair care or body care and we are going to those markets and we are learning what the market needs are from the dispensing packaging system. And we are finding new products or solutions for a market application. Now, this contrast to our competitors where they may have a dispensing closure and they are trying to find a home for that product, where we are trying to look at application and find products that fit to that.
Supporting this broad product offering, we have a lot of strength in technology and manufacturing excellence in injection molding. We are in the high-speed automated assembly. We have decorating capability. We do metal stamping anodizing. We do welding in some of the products we have.
And then finally our global footprint, having a large global footprint we have been in 19 countries. This matches up very well against the global multinationals, the Procter & Gamble’s, L'Oréal’s, where we could serve them in the markets they participate. But even more importantly as you see our focus on the developing markets, it shows that we are making inroads and creating footprints in those developing markets to support the markets there.
When we look at the first six months of Beauty & Home, we have sales growth of 14%, about 5% of that is really related to foreign exchange. So, basically, it was 9% organic growth. A lot of this is fueled to that. Coming into 2011, we continued to see this restocking in the pipeline in the fragrance market, where they depleted quite a bit in 2009. We saw many new launches, again more energy into the perfume market, and in some cases, we have taken market share from our competitors.
The other big piece of our growth comes from that developing market from the double-digit growth we are seeing in Latin America and also in Asia. Particularly in Latin America where the Beauty market, Brazil has now exceeded all other countries as the largest consumer fragrances and that has played well into our strategy.
From a long-term growth perspective, we expect that we’ll continue to see 4% to 7% growth. Now, Steve mentioned some of the demographics affecting Aptar. Lot of these demographics affect Beauty & Home in a very positive sense. The ageing consumer, because of this, there is a lot of focus on anti-aging lotions, cosmetic surgeries. I look very good for 90, but unfortunately I am only 55. Lot of this, I wonder these aging consumers where we are focused on not only anti-aging, which is different types of ointments, lotions, requiring a lot of dispensers we need, but there is also a big focus on skin cancer and prevention of skin cancer and sun care, which again plays well into the portfolio of Aptar.
If I look at the developing markets just because of the populations there and the growing economic strength of each of the persons in those populations, it just naturally makes them consumers for our products, hair care, body care, skin care. They are natural consumers. So, as following those markets with our products and with our factories give us an opportunity.
In the mature markets, we’ll be speaking more to the North America and Western Europe. The competition is pretty aggressive when you look in these product applications. So, now the marketer has to find the way at the shelf to draw the consumer to his package and that requires some sort of differentiation in that first moment of truth when the consumer comes to the store and a lot of that is driven by packaging. It is some unique function of the packaging or some aesthetic of the packaging that drives that consumer on the shelf to their package versus the other 20 or 30 shampoos that might be sitting on the counters with them.
And then finally, the whole focused on environment and sustainability drives part of our strategy. When you look at a lot of our packages have quite bit of plastic in them or other raw materials. It creates the need for us to focus on making products using less raw materials or making them recyclable and also because of the large manufacturing footprint versus to look at how can we become more environmentally-friendly with our manufacturing reducing energy, reducing waste, and also reducing our carbon footprint.
Now, one of our markets, the personal care market represents about 46% of our sales. The strategic approach we are taking to this market, we are really exploiting this application field approach I spoke of earlier meaning that we are doing globally to all the different markets learning what the needs are. And I’ll use hair care again, for example, what are the unique hair care needs for Latin America versus North America, what are the global needs for that market? And we are learning that data for consumers. We are learning that data from the market. We are learning from other sorts of resources.
And now we bring that information to our customer and that’s made the customer look at us as a different type of company and it brings value to us that now they are bringing us to the table with our marketing people, looking at new packaging opportunities, and taking away that now we have some knowledge that’s helpful to them.
The other thing is you could see (indiscernible), we have talked about it couple of times. We have this broad product portfolio. And if you were looking into the back, you will see areas where for example in hair care, we can offer if you are launching a new product line, now we could offer you the dispensing closure for the shampoo, we could give you the spray pump for the hair spray part of it. We can give you a two, where the closure goes. We could give a lotion pump for some of the treatments. So, now you could come to us when you have that new offering and we are able to work with you on all of these different product applications.
The other thing that ties into that, again, there is a display in the back that we also take these multiple products and we create a family look. So, when you are having the new launch, not only can you have a family of all these different dispensing products, we could actually give them an aesthetic that makes that look like unique family.
Now, when you look at the application fields with personal care, this is I am not going to go from each of them, but today the ones that we are very dominant in would be the body care, body lotions, hair care shampoos, spray treatment to hair spray, and the sun care market we have been growing quite a bit. But as you look at here, you’ve already see that in the last year there has been packaging that’s changed in these applications.
This first package up to the right, that’s actually a Bag-on-Valve system about explaining basically what the system is, but typically those would have been in pumps or dispensing closures. Now, it’s in the system and the way it evacuates from the can that comes out and like it a decorative ribbon like you would see as you decorate a cake. So, it kind of gives the richness to the product and it gives the new platform for some of your launch body lotion.
Again because of our breadth of products, we are a big player in the sun care market. Couple of years ago, we were the ones that brought the spray in the aerosol can to the sun care market, which now is the dominant platform for sun care, particularly North America, but we also supply the dispensing closures. We also supply spray pumps, because of this broad portfolio, it allows us to dominate that category.
Now, in the Beauty market, that’s really rapid in terms of fragrance, facial skin care, and cosmetics. If any of you go to a department store and go to the perfume department or you go to a (indiscernible), what you will see is that the aesthetics of the package, the artistry that goes into the package is just as important in selling that product as it is the fragrance itself. So, one of the strengths of Aptar and one of our focus is we focused on providing this customization to the fragrance in the skin care market. And that comes back to our manufacturing capabilities of decoration and metallization or we have the capability to manage the full project and help them take that whole package to the market actually providing them a total solution for that package.
We take the same focus in the Latin American market. Bob alluded to the fact that, that Latin America market is growing, that’s predominantly a beauty market. We talk about Brazil, but if you go into ambient region, Columbia, Peru, Ecuador, all of those countries are following the same type of demographic, very strong beauty growth. The difference in Latin America though is the approach to the market, it’s a direct sales, it’s that Avon approach to the market. There is a lot of local companies, but they sell directly that also requires a unique manufacturing, a unique approach to servicing them, because now they have many launches coming out, many promotionals every other week, very small orders, a lot of customization. So, it requires you setup capability not only to provide this customization, but you have to be a very flexible company in order to support that.
And as (indiscernible) alluded to the anti-aging and what that does for the skin care markets in terms of former license and also aesthetics, but another thing that’s happened we look at Asia, Asia, there is a big market for skin care, a unique thing to Asia is like skin whitening. What you also see in that market, we see a lot of the major marketers like L'Oréal, Procter & Gamble. They are actually moving their skin care R&D centers to the Asian market. So, they see that’s an opportunity for that product category and we follow them now.
When you look at the application fields of Beauty, it’s basically fragrance. We have separated into prestige fragrance, which will be your high-end channels DR or the mass-markets being your Beauty avenues, your Avon. If you see in this, this gives a good display of how the aesthetic plays big into both the fragrance market and also in the skin care market and this picture also shows you in the skin care the broad array of products that Aptar has in skin care. You could see some tubes with dispensing closures. You see airless systems. You see small pumps. You will see some Bag-on-Valve systems. So, that broad portfolio really sets us up well or penetrating this skin care market.
Because of the growth in developing markets, we continue to expand our footprint in these regions. The example is just this year in Mexico we have taken several of our existing factories. We are expanding into a much larger factory that allows us to follow the growth in that market, but it also allows us to gain the synergies of putting these factories all under one roof. We are taking a similar approach in Brazil. We have four factories in Brazil today. Now, we are going to consolidate several of these factories, again putting them in a much larger footprint, so that we can follow the growth in that market and also gain the synergies from an operational perspective. And then in Eastern Europe, we are extending our facility in Vladimir, Russia.
So, again with this investment, we feel that we’ll continuously be able to take advantage of the growth in these markets and we’ll continue to expand in those markets.
With that, I am going to let Olivier Fourment, President, Pharma.
Olivier Fourment – President, Aptar Pharma
Thank you, Pat. Good morning everyone. I am Olivier Fourment and I am in charge of the Pharma segment in the Aptargroup. So, development of drugs is more and more costly and lengthy for both for us and for our customers that caused between the healthcare cost pressure and the safety scrutiny pressure.
Consequently, those customers who want to partner with the best suppliers that are here to stay that understand the regulatory science and have a proven track record. Our main products deliver medicine through the nasal and pulmonary roots. We have a very broad portfolio of products and services and we produce around 1 billion pharmaceutical drug delivery devices in six GMP factories around the world.
Innovation has always been a cornerstone of the strategy and we have about 150 engineers and technicians working in developing new devices. This year we are very proud to showing new entrants in our product range called the OSD stands for Ophthalmic Squeeze Dispenser. And I will be talking about it in a few minutes in more detail.
In these days, cost effective innovation is what is requisite. Cost of the device is often a smaller issue than fostering compliance, reducing risk, or allowing self administration and cost effective innovation is producing for us some opportunities for conversion opportunities to switch from pill and syringes into our nasal and pulmonary devices. We are also expanding globally and big to serve our customers and I will be talking about this in a minute as well.
In terms of competitive advantage, we believe that we are the only one in the industry with the business development and R&D organization organized by therapy and roots of administration. And this fosters a unique understanding of patient expectations’ and caregivers’ expectation. Our R&D efforts have contributed to a very strong patent portfolio and we are producing some of the most progressive drug delivery devices in the industry.
Our six and seven pharmaceutical facilities around the world are unique and that they all produced in the clean room environment and this is again on the worldwide footprint. In addition, our pharmaceutical segment, first, variety of laboratory services that includes things like spray pattern, drug and container compatibility test that will support our customer during the drug development and also that allow a very close dialogue with the regulatory agencies such as FDA or EMEA in Europe or the young design in Brazil and so forth. And I can say that overlying all our product and services is the understanding of this regulatory environment that has been built over years and years.
Now, if I look at our recent financials, for the first six months of the year, we have reported sales, sales increase of 17% with currency movement contributing to 7% of that. So, it’s a 10% core sales increase of the first six months. Year-to-date segment income over the same period increased 25%. Thanks primarily to a good capacity utilization and quite strong volumes. On the long-term, we expect a core sales growth of 6% to 10% per year.
Now, if we knew to take a look at the trends affecting our segment. I would say that aging of the – well the demographics and the aging of the population in the Western world is a major factor and that the increasing access to healthcare in the developing world is another key factor. Generics and consumer healthcare products are on the rise due to the one hand to healthcare cost pressures and on the other hand to patent expiries that post promoting generics and we expect that to continue in the coming years with more patent expiry coming up.
Safety scrutiny is reducing the number of drugs of new drugs reaching the market, but also for our clients and for us, its increase is the regulatory expectations in terms of not only production conditions, but also the quality of the development data. And the FDA, of course, is at the forefront of this increase in the demand, but we have very (till new) commerce and I would like to call it the Chinese FDA in the wake of the recent food and drug scandal. So, we believe that Aptar Pharma is well-positioned to take advantage of these trends.
Now, looking that the Pharma can be broken down into prescription and consumer healthcare, looking at prescription markets, this has been representing 71% of our sales last year. And when we had the very strong first half of the year, we have growth in the first six months of 7% of the same period of the prior year.
MDI valves and nasal pumps remain in these two products will remain the leader, by far the leader. In this market, regulatory compliance is key not only in U.S., but also in other markets and the understanding of such is very important. We have regular discussions right now with young design Brazil to discuss future regulation in the Brazilian markets and also we have been audited twice in the past six months by the Chinese FDA, our local facility has been audited twice in the past six months as Chinese FDA successfully of course.
Our special expertise may need to serve this business, include clean-room manufacturing, where we have been the pioneer for the past 15 or 20 years and it pays off. In-house rubber gasket manufacturing, development and manufacturing is key for the MDI valve for asthma. And analytical & formulation services, of course, are great support to our customers for drug development that enable this dialogue that is so essential with the regulatory authorities at the FDA, like the FDA and Chinese FDA and so forth.
Now, taking a broader look to this prescription market, we are organized now by therapies and you can see the list of those therapies over the left hand side of the slide. We have had the leading position in asthma vales and allergic rhinitis from four years.
I have previously been reporting on the growth of pain drugs in drugs for pain management. And we are talking here of very important drugs such as opiates that are used in for breakthrough pain in very difficult conditions like cancer pain or multiple sclerosis. These drugs often are available already in pure form with the drawback that very often patient with such condition, they cannot swallow or they cannot even keep what this will. So, in such a case, the alternative is to inject, but then it just has to be done by a very experienced caregiver often in hospital.
So, moving to a nasal spray form enabled the administration of those drugs either by the patient independently or more important it can be done at home. So, this is all I can imagine very big improvement in convenience and also cost saving opportunity. And also additionally, moving away from injection, improve the safety for the caregiver, because you don’t have the need to take injury risk. And you should know that the onset of action of the nasal drug is just as fast as with the injection, that’s interesting. So, we’ve been associated with five new launches in the past two years in this pain management and this is so far 100 percentage rate.
Now, looking at the other part of the Pharma segment for us, consumer healthcare segment, it represents approximately 29% of our sales. And this is the segment we didn’t talk so much about it in the past that we have always been there present and leading. It’s only that now we have more focused. Their recent reorganization of our structure is providing for dedicated human and capital investment, I would say.
There are many untapped application fields in this business. I will be talking about them in the next slide. And we are able to leverage our prescription in our regulatory expertise to develop it. This is a very important part of Aptar Pharma future we believe. And you can see that our dedicated focus already has produced some interesting result because in the first six months of this year, we are growing 16% over prior year.
Looking at this application sales, you can see on the left hand side, this is a very diverse sub-segment with a lot of potential. And nasal decongestant is a pump market. We are there the market leader. I mean, during the present four years, we have had a dominant position in this market for Europe well-known example is Afrin in the U.S. Nasal saline is interesting. They are also contributing a lot to our growth in this segment, it just to be evolved. Now, it’s converting to our Bag-on-Valve system and to preservative-free pumps.
In the past, in this nasal saline business, it used to be handled by Beauty & Home for the valves and by Pharma for the pumps. Now, it’s all handled by Pharma with as a result of better understanding of the expectation of the customers and better view of new projects and non-expansion opportunities.
Now, the picture at the bottom of the slide is what I mentioned in the beginning of my presentation. This is a new ophthalmic product that reached the market last week in Europe. It’s a preservative-free product and it’s using our OSD, Ophthalmic Squeeze Dispenser. It’s for dry eyes. But we have lot of other projects in this field in this application field with this device for conditions such as glaucoma, age-related macular degeneration, and the infective anti-allergy, so lot of hopes for this application field.
I’d like to say a word also on Dermal Drug Delivery, which is probably a very important product range for the future, where we do a lot of efforts. And there our objective is to pickup that from the Beauty & Home range in cosmetic and adapted to the needs of the dermatologic sector. So, our hope to be able to report on that Dermal Drug Delivery at the meeting next year with some progress.
Now, talking about generics, generics are enjoying growth fueled by patent expiration and healthcare cost pressure. And the very exacting requirements of the (ABA) that we are able to meet as well our leading position for the originator drugs is providing for very healthy margins in this area. These generics are also providing the backbone of our growth in developing markets in like India, China, and Latin America either for local consumption or for export to other markets. And there I would say that we couldn’t have achieved the results we have achieved without the local push from our teams in terms of commercial, technical, and regulatory understanding again.
Here are couple of examples to the state my point. There is also a little quiz to test your knowledge of geography and flags and we’ll see. Albuterol, the first one, volume wise is the largest asthma lifesaving drug in the world. It has volume in the MDI forms in excess of 200 million every year and the biggest drug is Ventolin by the originator GSK, GlaxoSmithKline. And because of the ease-of-use and the cost competitiveness, the MDI forms are the free-for-dosage forms. Aptar supplies the majority of all the valves for these Ventolin generics all over the world and as my sale of MDI for the large valves all over the world, in general.
Similar story for the next drug, which is fluticasone propionate known as Flonase in the U.S. again a GSK drug, we supply the nasal forms for all the U.S. generics as well as for the originator, of course, and the majority of the farms for all generics all over the world. And in USA and Canada for this drug, it’s been such a success lately that we have to enlarge our Congress New York facility to cope with the DMF.
Talking about our footprint, I am very happy to report that we have to invest in expanding our capacity to better serve our customers in the different regions. And all of these factories asking room environment, now let’s look out into few examples. I just mentioned the Congress New York facility, where again because of the success of the nasal generics, we have increased our (inhume) and facilities as well as different capacity in the past 12 months.
Talking about emerging markets, this is an environment where we have been present in the past 15 years starting with Latin America and China. This year to cope with the demand we have to modernize and enlarge our Chinese suture facility to increase the capacity for the asthma valves. And we also will be opening in Mumbai, India early 2012, a similar facility to produce MDI valves and nasal pumps to cope with the growing demand in India.
So, with this, I’d like to turn it over to Erik.
Erik Ruskoski – President, Aptar Food & Beverage
Thanks Olivier. I am Erik Ruskoski. Good morning everyone. I am responsible for Aptar’s Food & Beverage segment and I hope to give you a little color behind the Food & Beverage story. We created this business unit to capture attractive market opportunities that could be exploited by leveraging our leadership position in the condiment and isotonic beverage categories.
We discovered that by unlocking the synergies of the complete range of Aptar products and technologies, we would open new approaches to packaged solutions for our customers. In both of these categories, we have had long experience in working with our customers to transform and differentiate their packages. This can be seen in the example of the pictured Heinz ketchup package, where over the past 28 years, we have worked with them to enable the conversion from glass to a squeezable plastic bottle with a convenient (force) valve dispensing closure. And in response to consumer inputs and feedback progress to an inverted bottle with a consumer-friendly closure offering clean, flow-control dispensing characteristics and continued to progress this year by yet again developing a more eco-friendly dispensing system.
In addition to that, we have enabled Heinz to maintain the package identity and performance around their worlds. So, we have strong double-digit growth expectations driven by the many opportunities that we see to develop new products for solutions that are specific to application fields and that are receptive and ready for innovation.
We’ve studied consumer needs in our target customers’ application fields and we believe that we are well-positioned and ready to grow with existing as well as new customers by offering these solutions that give them a sustainable competitive advantage in their Food & Beverage packaging. We do this by taking a deep dive into our consumers’ needs and to try to satisfy consumers’ desires to have a positive experience when evacuating a product from a package.
We are excited about the areas, where we can add value in these new markets. We have had recently high volume success in the coffee creamer application field with International Delight and with perhaps new water enhancer called MiO. We are confident that we can build upon these successes and grow strategically with new and existing customers.
Our customers recognize and appreciate that we give them competitive advantages in the eyes of the consumers by the way of convenient, secure, and smart dispensing solutions. To support the execution of this strategy, we have distinctive competences, best-in-class resources, capabilities, and most importantly, the people who can be relied upon to develop and execute solutions from the idea to the industrialization in a cost effective manner.
Looking at our year-to-date financial results, reported sales increased 24% with currency movements contributing to about 3% are resulting in an organic growth of 21%. Of that organic growth, increased custom tooling sales accounted for about 12% and therefore the impact of the resin cost pass-throughs accounted for about 3% of the growth. This results in organic product sales growth of about 6%.
Year-to-date, segment income declined approximately 12%, primarily due to the usual delay in passing through resin cost increases and the cost associated with building the structure to support the new strategy. We have added quite a few new technical people and marketing people to support our new strategy. We expect 15% or more core sales growth over the long-term for this business.
As we consider industry trends, we focused on those which present opportunities to be exploited by our strategy. We intentionally avoid commodity applications. Marketers are listening to consumers and consumers are demanding more convenient, clean, and safe and secure packaging. Consumers are expressing their desire for performance that improves their experience in accessing the product. This requires innovative solutions to old problems in many cases. So, there is no shortage of opportunities.
Conversions from non-dispensing to dispensing systems continues to play a key role in our growth plan. Innovative solutions are welcomed when they deliver a competitive advantage and differentiate the marketers’ package, satisfy a customer value equation generally total cost improvement, and contribute to green eco-friendly sustainable efforts or simply wow the consumer with performance or novelty such is the case with perhaps MiO package. It’s newly launched water enhancer and high volume which is packaged in small bottles using our dispensing closure.
As the Head of perhaps Global Marketing Group expressed, the magic of MiO is in the jet stream produced by Aptar’s patented silicon valve. As we spoke earlier of the Heinz ketchup progression of conversion and innovation, Heinz is now using the recycling friendly silicon valve that we developed specifically to meet our and their commitment to sustainable packages. As you see, there is truly a package, which uses our wide mouth jar to and jar lid to enable a consumer to more conveniently access the granular or dry products as sweeteners have historically used messy paper sachets in this case.
Food is our largest market within the Food & Beverage group and at 72% and we grew by 16% over the prior year. We expect to continue at high double-digit growth by leveraging our expertise and export an insight into customers and application fields in order to expand our product scope beyond closures. This is a big step for us.
And as I said, the solutions are taking a much broader range and utilizing all of Aptar’s technologies and focusing on the best opportunities within the supermarket by utilizing our strategic filter process and avoiding commodity situations. Additionally, we see continuing opportunities to grow in the foodservice sector, where our liquid molded silicon products are being used by McDonald’s, Subway, and 7-Eleven stores in custom applications to solve a number of age-old problems with uniquely designed systems.
As we speak about specific application fields, you can see that we have attractive opportunities to expand beyond the condiment aisle and the squeezable packages which have historically been our domain. Readiness of the market is all. We are being asked by our customers to design more and more solutions for confectionery granulars and other dry products.
In all of these cases, we are working with our customers to explore transformation of packages and formats that you can see the example of the Wrigley’s package, that’s currently on the market globally that we will come up with solutions for snacks, nuts, dry fruits, and candies. Our simple concept, which is a standard product featured in the red there utilizes intellectual property that we referred to as the bonded aluminum laminate to plastic. This intellectual property helps us address the megatrend of consumer’s desire for convenience, safety, and security.
Furthermore, within the cooking oils and butter application field, we are leveraging the full range of Aptar’s portfolio as you can see with the Crisco olive oil spray. We are also developing solutions that are targeted at satisfying the needs in innovative ways not formally considered by actively leveraging the synergies created by accessing the full range of Aptar products, portfolios, intellectual properties, and capabilities.
Beverage is 28% of our total sales in Food & Beverage. It grew 34% in the first six months compared to 2010. We intend to continue to grow this business by using similar tactics that we have been using in the food segment. Leveraging our expertise and insights into application fields has been very rewarding and keeping us very busy.
To look at these specific application fields, we continue to see opportunities to grow with the ready-to-drink application field. Maspex is a great example of a customer that has grown rapidly to become the leading beverage player in Poland. They continue to present additional growth opportunities by expanding rapidly in Eastern Europe and export markets including the Chicago area.
In the carbonates application field, (indiscernible) a UK customer has launched an innovative one package for beverage utilizing in the aerosol valve and a custom actuator in a new Turbo Tango, which is featured on one of the samples in the back and just hold on to your hat if you take a drink from it.
Finally, the Tropicana package, we see here is demonstrates our focus on the juice application field, which is extremely high volume and this package also utilizes the bonded aluminum to plastic technology that I mentioned earlier.
In addition to new products and new markets, we are also investing in facilities to support our growth. We are building a new facility in the USA in Lincolnton, North Carolina, where we planned over the next five years to create at least 150 jobs with an investment of approximately $40 million to $50 million. Additionally, we are also building a dedicated factory within our campus in Suzhou, China to address the needs of our growing food and beverage business in the Asian market.
With that, I will turn it over to Peter.
Peter Pfeiffer – President and Chief Executive Officer
Thank you very much gentlemen. Ladies and gentlemen, let me make a final statement, as the leaving CEO of this company and since this is also the last Analyst Day I will be participating. The history of Aptargroup takes back to the 1940s, when individual entrepreneurs created their businesses. The guiding principles and values of which drove them at their time still driving me and our management team today.
Continuity and stability is very important for this company, but the number one success, the key success factor already for the founding father of our business is innovation and customer focus. I will now passing these two traditions to my successor and I am pretty sure that he will carry on these traditions. Thank you very much.
Now, we are ready for questions and we will try to give some answers.
Thanks. Good morning. Just looking at the Pharma business, the current split between Rx and OTC is about 70:30 like just looking at the new product opportunities that you have highlighted there seem to be some very different new products that you are not currently in that you see a lot of growth. Could this be sort of a push towards conversions between the 50:50 split in the next five years between Rx and OTC and also I would assume that you are going to have more SKUs in OTC versus Rx and maybe got some mistaken assumption, but how you can change the manufacturing footprint to sort of the gap towards that. Thanks.
Olivier you will have to.
Whether it’s going to come, thank you for your question. The growth of the relative division Rx and OTC or CHC as we call it would be as difficult to give you a figure, but I would agree with you that yes, consumer healthcare is growing faster than Rx okay. So, unless this is completely changed by the going in to a new technology through an acquisition if we look just at the core of the business, yes, CHC will grow faster than Rx, whether it will reach 50:50 in five years. Okay and that’s the right the answer. Your next question was about SKUs.
Yeah, that’s a very good question. You have Aptar invest, it’s a question mark that is valid throughout the Aptar business. We have to control the cost of the input cost and another cost of labor going in to our assistance and every year a large part of our investment goes in to modernizing for productivity and so on and for automation. We already very, very automated including in the developing market and so I don’t see this as an issue what maybe even as a competitive advantage compared to our competition.
Thanks Peter. And congratulations a good luck to everyone again and their new roles and next portion of their career. Two questions, one as we look at Food & Beverage and Beauty & Home, margins have been more recently flat for a number of reasons. The investors has been making the new strategy certainly there has been input cost pressure. Do you anticipate that the new strategy should allow you to expend margins over the next number of years or really have margins, should margins be relatively stable and improving the return come basically just from the growth.
The second question were micro, you had on the slide with bonded aluminum-to-plastic, a not customer were hypothetical in that package, many of those are not in plastic as we know. I’m guessing that because of bonded aluminum-to-plastic you could use it for paper, but unless I wanted to the asked the question. Thanks.
Bob, do you wanted to answer the margin question?
Sure. Yeah, I think certainly the new strategy, which is really leveraging the whole product portfolio and the manufacturing footprint. I think you will see as the volumes and the penetration as market continue, we should see if you will margin expansion. I do think (indiscernible) I think in this strategy really helped in that area and really leveraging not only human capital element of the business, but also the new invested capital partner.
And I can address the second question about the (indiscernible) package and the confectionary type of packaging. The non-application field is still right with metal cans and two ring metal closures that are consumer has been in some cases and the customers and the consumers are both really searching for a better solution, which is where the containers there is a huge advantage to move from tin plate or aluminum to a plastic container with a bonded aluminum-to-plastic two ring that would make it a little bit safe, little more convenient and just as secure.
Yes, I would like to follow-up on the manufacturing side a little bit and geographic. With respect to the map you showed Latin America and Asia are growing much faster, I would like to how some of the strategies you have there if you take advantage of that long-term growth, which should growing for a while and then also what is the thinking in opening new facility in North Carolina. I would think that a lot of your products are relatively easy to transport around instead of what is the strategy relatively to additional facility in North Carolina?
Maybe I can address that part of the question first about North Carolina. Well the last part of your question about the shipability of our products. Actually it’s not very efficient to shift our products long distances and North Carolina happens to be in the sweet spot of the geographic location to service to juice market, juice application field in the south as well as a number of the other significant application fields one of which you will see products out in about eight or nine months that are located in the middle Atlantic state.
And the reason that we need in fact we guess essentially the demand we are out of capacity and the tights of projects that the Food and Beverage market addresses are high volume work cells producing multimillion ranges of four to five million units. So, we needed this capacity and we needed to be able to introduce new technology, new automation etcetera.
Talking about the global footprint you motioned. Yes, it is our one of the key cornerstones of our long-term saving to increase our global footprint. So, we will continue to grow in this emerging market in Asia, in Latin America and yes this is the reason for this is to be close to our customers, the same reason that Eric mentioned for America.
Yeah, I would just add that I think prior to the new realignment I think we are very opportunistic, when we went to those markets. So, fastest growing as we said in Latin America was beauty. So, we focused all of our efforts in that beauty market and obviously the result has been very successful. With the new strategy now we can now create the Food and Beverage organization as Olivier mentioned also a little bit on the Pharma side. So, again we think that now new alignment allows not only continue to take advantage of that beauty market, but also penetrate other existing market.
And in Asia I think we always had a great balance approach in that market, the main difference there is really being the little most selective on the growth side and trying to achieve not just growth, for growth sake the profitable growth that fits out business.
Two questions if I may, number one, would you bring this up-to-date on your thoughts on the outlook on the resin market. And secondly you referred several times to plant expansions in this country and abroad. Did you see any particular jump in capital expenditures as you look out over the next three to five years or will it be a more gradual incline? Thank you.
I think unfortunately we do not have the crystal ball to predict the development in the resin prices. So, this is very difficult and its very much depends also I think on the global development of the economy. So, it’s very difficult to say.
But I think at least on the resin side to-date in the U.S. we started to see resin go up frankly higher than what we thought in the first half of the year that is started to trend down, starting in July. Expectations are that we don’t see, we would expect more of a flattish to downside movement in resins for the remainder of the year however that is purely that’s what we are getting from what we are hearing from the resin guys. So, I don’t think we are seeing as spikes.
On the capital side, I think as Peter had mentioned, we’ve always taken a very long-term approach to managing this company and I think our strong cash flow and a strong balance sheet allow us to really continue to reinvest in our core business as well as our new business. So, I think what you are seeing is if you will an opportunity to reinvest in our existing business model, if you will, I think speaks volumes about our confidence in those areas, more efficient manufacturing. And then to answer your question, where we see CapEx going this year, we mentioned that CapEx would probably be around $85 million, which is quite a bit higher than the D&A anticipated this year about $135 million, but I wouldn’t say that, that would be a trend that would continue for very long. We’ve had little spikes here and there, but typically we are spending at or above depreciation.
I just want to follow-on to different types in terms of the geographic mix your Latin American business is two and a half times of our Asian business. What would explain that and then could you just outline given that there is obviously a much larger population maybe six times in Asia, how you better exploit that market and bring that up to or exceed the success you met in Latin America?
Pat maybe you answering this?
Well, I would say, it really kind of ties in what I just said. I think in the Beauty market is being growing very fascinate, that’s been a fairly profitable business for us. I think in the Asian region, it’s been more of a controlled growth story. So, it’s you got a lot more competitors there. You got a very different landscape. We got to be very careful with which products we enter that market with. It’s a different margin profile to begin with. So, we have to be very careful on how we grow that. So, I would say that really the Latin America was more of a traditional growth story in a very growing market with traditional type margin profile. Asia is a little bit trickier from other companies and we want to control that growth.
But also as mentioned, Pat has mentioned it, for example, today is one of the largest markets for fragrances and personal care products. So, the customers there are much bigger than for the time being in Asia, in China for example, or in India.
I mean, in Asia, in China, we are already since 15 years with our Pharma business and we were one of the first supplying products to the Pharma industry in Asia and in China and in India. So, this is the very fast growing market for us already.
Yeah, I would like to comment about the Asian market leaving aside Japan, which is quite special, but there is in Pharma, in especially in our nasal and pulmonary business, there is a very strong know-how that is needed, that no total countries have mastered. The best I would say right now are the Indians and then you have the Chinese. And the growth is going to come from these two countries for us really, China and India. So, that’s where we are investing in terms of production facilities. And our customers there which are very often especially in India, generic giants are exporting all over Asia without difficulty including Malaysia, Vietnam, and so forth.
Peter, a couple of questions. Can you talk a little bit about how you protect intellectual property in emerging markets, particularly in Asia? And then also in the fragrance business, we have talked about how a market is growing so rapidly in Brazil? I think historically, the model in the fragrance business produced in Western Europe and export to the rest of the world. I just wondered your customers are now going to change their strategy that you are going to have to change your footprints a little bit as a result of that perhaps downsizing in Europe a bit as you expand elsewhere?
First, answering the market in the Latin America for the perfume business. By the way, the customers there are different from the rest of the world. You see a lot of big companies there is direct sales. So, this is a totally different model of selling personal care and fragrance products like in Europe or in United States and this requires a very different way of manufacturing. So, we have already a pretty good footprint for these kind of products in Latin America, in Argentina, in Brazil, in Mexico.
Yeah, if I could add to that, traditionally in the perfume market, yes, it was very European-centric product made at France and in order to keep that (cachet) of being made in France and had to be actually made there and exported into the U.S. and there was not a lot of feeling or production in the United States. And there is not a big fragrance market in Asia. When you go to the Latin American market, just as Peter said, there is companies that you might not be able familiar without not (indiscernible). There are these Avon type companies that are focused on direct sales and they are the dominant players in this region. You don’t see the big markets for the (indiscernible) and the traditional prestige market in Brazil or Columbia that you see in Europe and United States.
So, when you look at our Latin American footprint sector in the Beauty & Home, the largest part of that footprint is manufacturing for the fragrance and beauty market not as much some of the other product categories as we have. In fact, we are layered on expanding in other applications in Latin America than we have been in fragrance.
The other one we should probably comment is on the intellectual property, because that was the first part of your question. That is the key going into those markets a lot of that is because we need to do our own production as to protect the technology around what we produced. I think there is another plus that we have had in these markets than we are selling to international marketers.
And frankly, they have even a bigger problem if you will on intellectual property than we do. So, there is a sense if somebody is copying our product and trying to sell back into a Procter, they are very sensitive to that. So, today, we will aggressively even in those markets pursue legal enforcement of the patents we have, but for the most part, we have been able to come back and it had a minimal impact on us to-date.
Paul Eckley – State Farm
Yeah, Paul Eckley from State Farm. Two questions if I can. Olivier, could you talk about the development of the margin profile and consumer healthcare versus the Rx side? And also Erik, you mentioned the foodservice opportunity, could you expand on that please?
Okay. Well, so far I might say the margins in CHC are identical to Rx. And as long as we are able to maintain our competitive advantage and our uniqueness in terms of regulatory understanding and innovation, I think we are well-positioned to maintain that. So, this is not for me a worry at all right now.
Well, to adjust the foodservice business, this is a small, but growing niche that we have been participating in. Our capabilities in the liquid molding silicone business have enabled us to provide McDonald’s with a valve. It’s actually two valves in the system that enables their smoothing machines, which have been a very big growth piece of their product offerings to enable their smoothing machines to work more efficiently and clean with no drips etcetera.
And 7-Eleven has been using a similar custom type application of silicone valves to eliminate the health problems that are created by in their stores, where they offer condiments. They get quite messy and can get contaminated and they approached us to specifically design a system that enables that to be a little bit more health conscious.
And in the Subway, if you go into a Subway store and buy a sandwich and they use a squeeze bottle to apply some of the condiments, there is a valving system that enables that to stand on its head, so that the sandwich maker is more efficient in his use and its clean system.
Paul Eckley – State Farm
Yes, just a couple of ones. I think looking longer term at Food & Beverage, you mentioned in the first half, you all had grown 34% in the Food & Beverage side and I would guess that means the food side grew around 20% and yet you are investing, it looks like more in the beverage side. Should we see the beverage side over the next five years maybe grow twice as fast as the food part and maybe become half the segment?
Well, that’s an excellent question. I don’t have a crystal ball out that far, but there are equal number of opportunities and I think we do evaluate which do we feel will be the most productive for us long-term. And we’d like to see this segment get to be billion dollars in scale and it will take significant growth in both food and beverage and we have a very solid filter process to try or evaluate which are the winners to put our investment into.
Paul Eckley – State Farm
Got you. And then we watched the markets in the last five or six weeks kind of go through some convulsions, and I remember back in ‘08/09 that it seems like you all got hit two ways, one was I guess lower volumes, where you have higher end applications. And I think some of your customers were less likely to take on new innovations, have you seen any change in their behavior this time around or is it pretty much as it looked two months ago?
Let me take a little bit of that, because I think it’s interesting to give the parallel to ‘08/09 as you talked about. First of all, I think if you take a look at Aptar in that period, two of the segments during that time, two of the beverage segments and the Pharma segment actually grew. So, if you take that time, those were actually growing and Food & Beverage it was the conversion market. So, the people were still converting.
The other thing that I think that had a very big impact on us was significant drops in inventory while the consumer may have dropped for Beauty & Home 4% to 5%, well you are seeing 30% drops, because we saw inventory contraction all the way from the consumer back. One of the differences we are hearing from our customers at this point, there is not as much inventory out there.
So, in terms of that cycle, we don’t think there is going to be as much pullback, but that’s kind of what we are hearing right now. So, I think there is a difference to where the ‘08/09. There was probably – there was some drop off in the consumer, but it certainly wasn’t at the levels we saw.
Paul Eckley – State Farm
Yeah, I was wondering if you could talk a little bit about some of your more (nasal) areas in the Pharma market expansion into ocular dose counters help us kind of size the opportunity of expansion there? And how long of the timeframe do you see this playing out?
Okay, that’s a difficult question, because of (indiscernible) of the reasons. We kind of disclosed all the projects we are working on, but I think in your question, you highlighted some of the key opportunities. Yes, ophthalmic drug delivery is a great opportunity exposed on Rx and CHC opportunity. So, on the Rx side, I will be on this with you. It will take five to 10 years how that go on Rx drugs. On the CHC, we have quite a few things in the pipeline and will see some growth in the coming year already, because if it’s already done. So, yes, it’s growing.
Dose counter, it’s kind of a niche in the niche. And we have some projects, we have – we had one project shaping the market this year with nasal dose counter that maybe was not highlighted enough. One of the main products – one of the centennial main products by a European company called Archimedes is using one of our nasal dose counter and just maybe to the market. And we have some more dose counters in the asthma category that are in the pipe and should reach the market next year. So, it’s growing, yes. Did I answer your question?
Sure. Just to clarify on the ocular side, could you maybe help us frame out how large the existing size of that ocular market is?
Okay, let me explain, yeah, that’s a valid question. Right now, the ocular market is very big, but its most of it is when you take as a multi-dose system, you know (indiscernible) the eyedroppers, its products with preservatives in the formulation. Okay, you have the products without the preservative that they are the implosive and still unique dose that you use once and for a way because of the contamination, immediate contamination.
So, what our new product is covering is an unmet need which is a multi-dose unpreserved device, that’s what the innovation is. Okay. And so, there has been one or two such devices, but they have not been at all patient-friendly and they have not been successful in the market. And we provide, last week, the first was we believe patient-friendly, patient-compliant device, which is preservative-free is reaching the market. And it’s very important in ophthalmic delivery, because most of the ophthalmic conditions, if you take glaucoma or even allergy are chronic things that are going to be a repeat, it’s not a one of crisis. It’s very often the chronic disease age macular degeneration and so forth. So, if you can have formulation without preservative free agent that is inherent you will have much better compliance in terms of using the formulation. So, that’s why the great fruit is in the product we bring in.
So, let see what conversion will be. Okay, thank you.
The question for you regarding the dividend policy of the company obviously you have a very good record of raising the dividend historically I think 22% in most recent year, but given the tax changes that maybe coming in the U.S. and Europe very strong free cash flow. I wonder if you having sort of set pay out ratio or goals that you maybe looking at relative to potential changes in tax policy. How it may affect your own dividend?
Our payout ratio hasn’t changed all that much. We always targeted in the 25% to 30% area and again we evaluated on a regular basis at the board level and we will continue to do that and evaluate that on an ongoing basis.
Right now there is no specific plan because of the tax change to make a big change to that.
And I have a follow-up regarding the research and development, you mentioned about 3% of sales for the company, but for each one of the three segment can you detail what that maybe as a percentage of their sales?
It’s closer to 5% on the Pharma side that Eric you will agree and then closer to 2% in the other ones.
Good morning. I was wondering if you could address that I guess in the past you talked about Pharma margins run in the 25% to 30% range its been running in the higher it sounds like some of your comment suggest that the consumer healthcare run higher margins. I’m just wondering if you now expect those margins to maintain higher rate.
I think we are going to stay with 25% to 30% margin range, which is we have been saying for the last several years and as Olivier said today, the consumer healthcare part of the business is running pretty high margins. That frankly if we look at growth opportunities in those areas, if they happen to be 25% it’s not business, we are going to turn away from. So, again I still think its going to be in the 25% to 30% margin and you are going to see fluctuations even quarter by quarters we are seeing over the last couple of years.
And then just one more on the realignment I believe in last year you talked about that not being really a bad cost. I’m wondering as you have gone through the process are there more cost saving opportunities that you are finding and is that level future cost savings?
I think yes, there are some opportunities we are working on consolidating some of our manufacturing side in Europe and also in other countries. In Brazil we have already completed one. So, we are using the new realignment as a means to squeeze cost out of our manufacturing site.
Peter question I want to come back to some degree on the outlook question from earlier if you comment on it. You mentioned that Food and Pharma grew in ‘08 and ‘09 certainly Beauty & Home and Fragrance really didn’t have quite as much success during that period as you mentioned.
In the last few months maybe not for you, but there have been some evident is that, that market have done perhaps a little bit shaker I think Natura had a miss. As we got luxury good producing it seems some slowdown we have been seen. Can you comment on in terms of what you have seen any change in that particular market in the last several months?
I mean I can comment on the general market that in our quarter results. So, we are seeing certain different trends in different areas in the world. For example, we are seeing some good growth in the Latin America, Natura was the special case, because they have introduce I think new visitor, which is existing, which created some problem for them.
We are seeing quite some growth still in the Asian area more and more so in India and China. Europe and America has a different game. America dealer seems to have some problems to grow and they are some rumors that maybe have double-digit so in order to come down the economy again.
In Europe, it’s also a very, very split situation. We have some countries in Europe, which having problems you all know them from the press talking about Greece, Spain, Italy and other countries like France are doing reasonably well. Germany is doing very well for the time being. So, it’s not a consistent picture all over the world. So, we have to add to the respective areas.
I would like add also on the Natura comment, in understanding that market we have talked about a lot of direct sales in the Brazilian market, when Natura being the biggest player. But when you are looking at the strength of the Brazilian economy what happens, when the economies very strong and there is store brand there is another company called Boticario, which is having extremely strong growth in fragrance and cosmetic. It’s more like bath and body was North America type.
When the economy strong those businesses tend to be stronger than the direct sales because when the economies weaker a lot of these consultants, which are just the average housewife pushing the Natura products, when they need the additional money they are pushing harder and harder. So, when the economy gets a little weaker you see the direct sales go up and the store brand sales go down. So, it’s a little bit of (indiscernible) going on right now.
One quick question for Olivier, Olivier to possible to size what pain management is right now in terms of your revenue generation market opportunity relative what was two to three years ago you have been certainly talking about at least in the last two or three years. Thanks.
We normally don’t disclose those kinds of details. What I can tell you is that is being growing in the wake of the recent introductions, okay. And we are quite pleased with what we see, we have always cautious about how much it will go in the next year, what I can tell you is that we have plenty projects that are kind of the consequence of the pain management some are in pain management. Other projects are in the broader central nervous system field for things like brain is part of the central nervous system and so the success in pain has given some ideas to marketers to give a lot of things like for seizure for sleeping aids and so on. So, we are quite optimistic that this broad central nervous system field will grow.
I have a question on the sales cycle, the average sales cycle maybe in each division. First, a couple of years ago for current customers they can try and expand and then for new customers, is that London currently or it just starting to London in terms of getting new product in the marketplace. And then R&D is obviously a big focus of the company and I’m just curious I assuming we are very closely with your customers and does not sure how that impact might change as you go forward trying to get more dollars out of the R&D cycle if you are working customers giving new idea they contribute something to be R&D cycle as you work with them.
On the Beauty & Home side, Personal Care, Fragrance/Cosmetic, actually the sell cycle is shortening and there is more pressure and for people when they want to launch a beauty product, re-launching an existing product to the market they want to get it to the market quickly and be able to react quickly because as soon as still there is typically going to be someone else trying to copy or come against that particular lines. So, all of the discussions and it goes globally its not just unique to any particular region is for much more speed to the market in terms of launching new product.
If I can respond to the Food & Beverage segment part of that question. I have to say that each situation is unique anecdotically the cramp new launch the cycle was actually about three years with as coming in with the final solution that they chose in the last nine months of that cycle. So, it tells you that first of all there are other suppliers could not come up with an adequate solution and then secondly the once the solution is deemed to be consumer acceptable, the launch time and is accelerated.
So, it means we have to be very flexible that you will see in the next eight to nine months new application fields with really transform in a package that generally takes about 12 to 14 months to develop and get in to the industrial phase. So, I would say Food and Beverage has very specific project oriented sell cycles and it can be short or could be long depending on the type of solution.
Yes, just a follow-up to perhaps George’s question on the Beauty & Home segment, how would you clarify your visibility versus other packaging component providers. So, for example if the shampoo provider, produce at a size you know what we have huge inventory we want to cut back do they call you guys is actually the same time as the guys they do the bottle and the labels because the guys they do the bottle and labels have already said that there is weakness in their market. So, I’m just curious why there is disconnect?
Typically the bottle people have earlier visibility than we did. It’s more of a commodity. We are much more make the orders, much more shortly time. So, they will get visibility quicker than we will get.
Would that typically be a quarter?
Yes, probably as much as quarter.
But I think the other thing we have really not commenting on what we are seeing in this quarter I mean specifically we stay out of comments of what we are seeing in the third until we get out to the earnings.
Yes, with regard to product development first of all in the pharmaceutical area clearly generics are growing quite a bit and there is an opportunity with regard to your branded customers when you develop a new dispenser for them. Is there any discussion of exclusivity whereby your dispenser might be a benefit to them in competing with the generic site and perhaps help their product link sustainability? And the other question is has there been any development or changes in the area of a gel pump that we work in any particular array or perhaps either Pharma or other areas?
Maybe starting with the Pharma question, yes, certainly that the new drug developments the originators are coming to us of our innovation capability and what they see is also the fact that we have the very strong pattern portfolio. We patent what we invent until for them deceit as a competitive advantage that they can get some protection for their drugs when they work with us and the reach the market.
Now the protection as limited in duration either by the agreements we have with them mostly simply because of the patent are I would say that lapsing out, okay. So, that has a limited duration, but typically they could get because of the duration of their development, which is at eight to 10 years that very often to enjoy about eight year to 10 year protection. And then after that the generic kick in that’s a normal cycle in our industry. It’s well understood and accepted and some as you probably know now some of the big companies are not only originators, but they also working on they have some generic divisions, okay and also some sequential care division. So, this is parts of the game and its well understood and appreciated, but at the beginning one of the attractiveness of Aptar is its innovation and patent portfolio.
In regard to question about gel and we already have several formats that we can dispense gel and it depends on the viscosity of the gel you are speaking at. So, we have small cosmetic lotion, but we actually promote that gel, serums you had larger doses lotion pumps that can evacuate gel. Again coming down to the viscosity, we actually have systems where sun gel you can spray and even in our bag-on-valves systems and shave gel for example you are seeing tooth gel in some of our packages. So, when you speak of gel it really depends on the viscosity will determine which of our packages we offer for that application. Well, there are competitive offerings in most product categories. I would say the climate not changed.
Question for you regarding the acquisition market, obviously you have been very disciplined over the past and you probably stated that you are looking at company that have technology your geographic expansion opportunities, we are also well aware that I think Aptar has a very good culture and I don’t think want to mess-up by saying all that just wonder what is your thoughts are on the current merger acquisition market out there and what you are seeing in regard to price whether or not they come down or change their opportunities of expense area less.
I mean basically the trade we are using in for acquisition has not changed. You mentioned already all are looking for strategic reasons for an acquisition. The market really has not dramatically changed and the prices have not changed at all in the recent time. So, when there was a crisis what you was willing to discuss because of us it was cheap, now it’s going up. So, it always depends on the target we are looking to. We have some broad list of potential candidate to be acquired, but I always using this case my things were need two to tango. So, you need somebody who is willing to sell when someone who is using to buy. So, it’s a long process.
And one other one that I guess broader topic, but wanted to dwell into the sale side of things. On the foodservice, I think you mentioned the McDonald's and the Subway in 7/11 and I’m wondering is that more that the customer driven or is that Aptar sales going after these both because there is quite a few restaurant change and others out there it could easily use the solutions that you just walk in some of the places that you can see the method out there. That just was specific example I’m wondering about the other segment as well. How you attack sales in overall sales focus of the company maybe growth and sales people?
Well, in this particular case for foodservices, the sales approach is handled by one of our specialty business units and it’s a very small probably about four or five people on that sales organization. And we use strategically very specific filter process and trying to identify opportunities and I think it’s also it takes the combination of receptiveness as I said in my talk. The market seems to be much more ready and receptive to solutions like this and there are willing to pay for the innovation and the development.
A question on Beauty & Home and personal care there has been a divergence between sort of what your experiencing on the closure side of the business first that being weaker versus there what you are seeing in pumps. I wondered if you could just elaborate a little bit more on what’s driving that bifurcation number one and then two, there are any parallels that you see that to ’08 where perhaps closures on the personal care side with one of the earlier one to see some weakness. Thanks.
Go in to your first question expensing closure in comparing to some of the other product. The one key different in that product versus say pumps or aerosol valves some of those product is that there is part of that market where the market brings to us their own design, their own dispending closure and our competitor is not a another company that has their own product lines like dispensing closures. We are actually competing against a contractor. So, because of that it really makes the competitive base much larger than we see in other products. It makes more difficult to differentiate and we really it goes back to things Eric said about the Food & Beverage business.
Two things we have to do now, one we really filter those opportunities carefully to make sure they fit with our margin target. And then second thing for us is having more innovative stock products and what you are seeing some of families of stock products that we can be penetrate in their market with differentiation instead of just competing as the contract (indiscernible).
Two longer term strategic questions. Number one, given the three niche market that’s you have do you feel earning interest or compulsion over the next several years to move in to fourth legs of the stool are not just removing one hard at one of your niche market in to a pretty standing market. And secondly, what need have you in the technology side, how do you asses your own technological expertise removing in to the next decade. Do you sense a major renovation of any of your systems currently?
To the first question, I guess yes, we are seeing quite some growth potential in the existing segments we are working on. So, this is not our primary focus to have a fourth one or to get rid of one of them. We are working in because we are pretty well better understand the good knowledge. If they comes the opportunity to open fourth segment it will be welcome. It fits to our overall strategy, yes.
Looking at the second question was technology. Now I mean we are constantly screening the potential of new technologies, which could be used in our business. There are some new things coming up like the nanotechnology, which could have other certain areas or other new technology inject molding. We are always constantly with monitoring this we have people to do this. We have prepared to use that available and became based on that it’s a constant win for us and opportunity.
What I think the other side of the technology, just to reinforce Peter was talking about internal technologies, we have recently added as Eric talked about the bonded to aluminum technology. We see growth on certain other technologies that we continue to bring in. So, those are things that I think the new strategy where we look at the market, what is the market need will actually enhance the new technology when we bring to the company over the next decade.
And as far as your own internal IT systems and so on you don’t see any major systems introduction.
What we done as we have introduced over the last several years we been on SAP on several different systems, we are harmonizing those and that’s been several of your process and that’s an ongoing process. So, we don’t see anything significant in terms of changes to that progression that’s already out there.
And if I just add another question relating to your cash position, you are still I assuming Europe has still invested in CDs and comparable conservative investments. There has been no change in that strategy and the cap on this Swiss Franc is not influencing that in someway?
No, you are correct. I mean the majority of our cash is in Europe and continues to be conservatively invested with reputable European banks, very conservative overnight investments and note to your point, the Swiss Franc fixed in to Euro as it really affected any of that for us.
Can I ask a question and actually you have talked about margins goals for each of the segments that we touched on Pharma. Could you comment on the other two segments please?
Okay. I think on the Beauty & Home side we have been running around 9 to 9.5 recently again we think that with the continued volume, growth and expansion that margin can move up above 10%. On the Food & Beverage, we had obviously we had a very strong growth trajectory right now. We have seen margins as high as 17% and as low as the 11%. We think in that area, we can stabilize margins over the long-term in the 11% to 14%.
Peter Pfeiffer – President and Chief Executive Officer
Okay. Ladies and gentlemen, since there are no further questions, I thank you very much for participating to our today’s Analyst Day. Wish you a good way back home and maybe we will see you in next year at the same time and the same place, not me by the way. There is a gift for everybody outside. So don’t forget to take it with you. Thank you.
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