Aptargroup Inc

NYSE:ATR

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to AptarGroup 2020 First Quarter Conference Call. At this time, all participants will be in listen-only mode. Later we will conduct a question-and-answer session. Introducing today's conference call is Mr. Matt DellaMaria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

[Matt DellaMaria, Investor Relations]

Thank you, and welcome, everyone. Participating on the call today are Stephan Tanda, President and Chief Executive Officer; and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. You could find a copy of our press release as well as the slide presentation that summarizes our results on the website. If you are following along on our website, you can advance the slides by hovering over the presentation screen and clicking on the arrows. We will also post a replay of this conference call on our website.

Today's call includes some forward-looking statements. Please refer to our SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements. Aptar undertakes no obligation to update the forward-looking information contained therein.

I would now like to turn the conference call over to Stephan.

[Stephan Tanda, Chief Executive Officer]

Thanks, Matt, and good morning, everyone. Thank you for joining us. Let me start by expressing my hope that you and your families are doing well and are staying safe during this difficult time. Before I comment on the results, I would like to share some thoughts on the COVID-19 crisis, starting on Slide 3.

During this unprecedented time, we are guided by our values as we support and care for each other and look forward to a brighter tomorrow. On this slide, you see some of the many photos and stories of our people rising to the challenge of supporting customers, consumers and patients. To our employees around the world listening in on this call, I want to say thank you for all your efforts and continued perseverance to deliver on our promises. We have great pride in what we do, and our customers have expressed their immense gratitude for all of your efforts. Keep up the great work.

Turning now to Slide 4. Our facilities are open and operating, albeit some at reduced capacity. Aptar is an essential supply chain partner supporting industries such as pharmaceuticals, consumer products, food and healthcare, all industries identified as critical by the U.S. Department of Homeland Security and by most other governments in the 20 countries in which we operate. Almost all of our customers and suppliers continue to operate as well. To date, we've experienced minimal supply chain disruptions, and we have been able to maintain substantially all of the incoming supply flows from our primary vendors.

On Slide 5, you will see but a sample of our global solutions, which are critical to society during this time. Our drug delivery, dispensing, sealing and active packaging solutions can be found on a number of medicines, sanitizers, cleaners and food and beverage products. We have engaged in very transparent discussions with our customers and suppliers about the state of the supply chain and our end markets. We are working closely together to bring specific COVID-19-related solutions to market, including sanitizers, which are now being made by some of our fragrance customers. In some cases, we have repurposed our food and beverage closures for sanitizer dispensing and ramped up certain production where needed.

Turning to Slide 6. The health and safety of our people continues to be our first priority. Our COVID-19 global action team meets daily to identify and mitigate potential risks and the COVID-19 Exposure Control Plan has been implemented at each Aptar location early on. We maintain a proper balance of remote workers and on-site staff in order to support our ongoing production efforts. We are restricting all visitors to only those essential for business continuity and have escalated our cleaning and sanitizing procedures. We continue to encourage everyone to practice good hygiene and social distancing, and we are distributing masks as they have become available. We are also reporting and monitoring COVID-19 instances in real time, and we are keeping our people informed via frequent virtual town hall meetings.

Moving to Slide 7. I would like to recognize just a few ways in which we are supporting the communities where we live and work. Some of the many contributions include donating masks, gowns and protective glasses to local hospitals, 3D printing mask holders and face shields that are donated to local healthcare workers, partnering with the repurposed brewery to produce and package gel sanitizer for children's hospitals and raising money to support other local hospitals. These are just a few of the many examples of selfless acts of kindness from our people around the world.

Turning to Slide 8. I would like to offer a few comments on the quarter. Our Pharma business delivered another strong performance even when comparing to an outstanding first quarter last year. Core sales grew across each end market, with particularly strong growth in our injectables and active packaging businesses. The Pharma team has identified over 150 potential project as a result of the COVID-19 pandemic and continues to receive inquiries from the healthcare industry on an almost-daily basis.

Now turning to a recent product introduction. Our PureHale respiratory device was chosen by Blairex Laboratories for their new Breathe Free Essentials brand. Our PureHale device dispenses a fine mist of moisturizing saline and natural essential oils. Unlike traditional nebulizers, the PureHale system does not require batteries or the prefilling of any reservoir and can be used on the go.

Finally, as previously announced, we have also submitted an Emergency Use Authorization request to the U.S. FDA for N95 respirator decontamination using Aptar's ActivShield materials and technology. The request is progressing within the FDA, but final approval is still pending at this time. Based on the strong data package we have developed, we continue to be excited about the potential of this highly relevant innovation for decontamination and disinfecting solutions.

Our Beauty and Home segment was negatively impacted by the closing of the travel retail sector during the quarter and the closing of traditional beauty retail settings during March. Reduced demand for hair care and sunscreen products also impacted our results, while increased demand for our dispensing solutions for sanitizers and cleaners was not enough to offset the declines. I would like to highlight that our spray actuator is featured on Lysol's Neutra Air disinfectant spray, and our postconsumer recycled resins, closures and spray pumps are featured on a line of pet-care products from the indie brand WildWash.

Turning now to Food anf Beverage. Sales were negatively impacted by a sharp decrease in on-the-go beverage closure sales and lower foodservice sales due to the COVID-19 crisis as well as the passing on of lower resin costs. However, in the quarter, we also supported Coca-Cola with is expanding its Powerade product line for the first time in several years with a new zero-sugar beverage that features our sports closure.

Turning to Slide 9. We are continuing to execute our strategic priorities in parallel with our near-term actions related to COVID-19. To advance our capabilities and reach in Asia, we have completed our strategic equity investments in BTY, a leading manufacturer of metal and decorative accessories for the beauty market. As previously announced, we entered into a partnership with digital platform provider, Sonmol, to bring to market new connected platforms for respiratory-related therapies. We also completed the acquisition of FusionPKG, adding agile concept-to-launch and turnkey capabilities for the North American beauty market.

While we invest for the long-term in high-growth areas of our beauty business, we remain committed to bringing our transformation initiatives over the finish line with our goal to reach our long-term EBITDA margin target range. We also continue to work toward a circular economy where most packaging is reused and recycled. Furthermore, we are exploring opportunities for sustainable resins and collaborating with customers on refillable products. All these efforts position us well to help our customers achieve their objectives, many of which are to achieve packaging that is 100% recyclable or reusable by 2025. In addition, we continue to seek new applications for our material science, active packaging solutions and have invested in growing our service platforms.

With that, I will now turn it over to Bob, who is going to provide additional comments on our results.

[Bob Kuhn, Chief Financial Officer]

Thank you, Stephan, and good morning, everyone. I'll walk through some of the details concerning our first quarter results and the impact of the COVID-19 pandemic, starting with Slide number 10.

For the first quarter 2020, reported sales declined 3% and were negatively impacted by changes in currency rates, the timing of passing on lower resin cost to customers and COVID-19-related impacts. Core sales, excluding currency and acquisition effects, declined 2%.

Taking a look at our segment performance. We saw strong performance by our Pharma segment, which achieved core sales growth of 7% and an adjusted EBITDA margin of 37% compared to a very strong first quarter a year ago. Core sales to the prescription market increased 2% due to growth in sales of our nasal pump delivery systems used on allergic rhinitis products. Core sales to the consumer healthcare market increased 2% due to increased demand for our products used with nasal decongestants and eye care treatments.

Core sales to the injectables market increased 21% due to increased demand across a variety of components. Core sales to the active packaging market increased 26% primarily due to the new HIV preventative drug launch that was approved with our Activ-Blister technology that provides in-package stability to the oral solid dose of the medicine.

Turning to our Beauty and Home segment. Core sales decreased 9% due to the negative impact of COVID-19. Sales to the beauty market declined due to the effects of reduced travel and the closing of retail stores that began toward the end of the quarter. Certain categories within personal care, such as sunscreen and hair care, were also negatively impacted. Beauty and Home's adjusted EBITDA margin was 11% in the quarter and was negatively impacted by the sales decline in the quarter, which led to underabsorbed fixed costs and the first quarter expense related to the onetime cash Thank You Award to employees.

Looking at sales growth by market on a core basis. Core sales to the beauty market decreased 13% as beauty sales in Europe and Latin America were negatively impacted by the closing of retail shops selling beauty-related products. And additionally, our sales in Europe were also impacted by lower sales of beauty products in the travel retail channel from the reduction in international travel.

Core sales to the personal care market decreased 5% primarily due to the previously mentioned softness in sun care and hair care products that was partially offset by an increase in demand for dispensing solutions for sanitizers and lotion moisturizers. Core sales to the home care market decreased 6% also due to decreases across a variety of categories, including insect repellants.

Looking at our Food and Beverage segment. Core sales decreased 2% in the quarter primarily due to the passing through of lower resin prices to our customers, which accounted for approximately 5% of negative growth on the top line. Certain products were also negatively impacted by COVID-19 restrictions mainly related to on-the-go beverages. Food and Beverage's adjusted EBITDA margin was 15%, and it was negatively impacted by the reduced volumes in our beverage closure business.

Looking at each market, core sales to the food market increased 2% due to increased sales of our products used on dairy and spreads. Core sales to the beverage market decreased 13% due to the decline in sales of our on-the-go functional-drink products, which were significantly impacted by COVID-19 restrictions.

Turning to Slide 11. First quarter adjusted earnings per share totaled $0.93. Prior year comparable earnings per share totaled $1.05.

Slide 12 is meant to give a high-level view of how we see the scale of impact from the current economic conditions according to the major markets we serve. No surprises here that the beauty market is the most affected, similar to what happened in 2009. With retail beauty stores closing and international travel grinding to a halt, this has a significant impact on our customers' businesses.

Beverage, as we have discussed, is also affected as the majority of our beverage business is single serve, which is highly linked to the on-the-go lifestyles and purchasing habits. Moving up the scale, we can see that our Pharma business, in all of the different end categories, is the least affected. People have access to their medicines, delivery of prescription and over-the-counter treatments continues with limited interruption.

Moving to Slide 13. We are taking several cost-containment actions across the company due to the continuing impact of COVID-19. We are reducing temporary-labor headcount, holding in subcontracted work and modifying our production schedules. In our businesses where we face market softness, we have undergone regional and site-specific furloughs and requested that some employees use their vacation time during this period. We are following country travel guidelines and have eliminated all business travel and reduced all nonessential spending. We are also passing through price adjustments to our customers.

Slide 14 refers to our liquidity. As of March 31, 2020, Aptar had available cash on hand of approximately $411 million with the ability to borrow under existing revolving credit facilities up to an additional $265 million. Aptar's total debt was approximately $1.4 billion at the end of the first quarter with $56 million maturing in 2020 relating to our outstanding term loan. Our leverage ratio was approximately 2 times after the funding of the FusionPKG acquisition.

Slide 15 outlines our outlook for the second quarter. We expect the near-term effects related to the COVID-19 pandemic to continue through the second quarter and anticipate that they will be more pronounced than we experienced in the first quarter. We are diligently managing our cost structure while we balance the need to keep the engines idling as we expect Q2 to be the low point with a gradual recovery in the second half of the year.

The results of our Beauty and Home segment are expected to be significantly impacted by continued weakness across each end market primarily related to the effects of COVID-19. Our Food and Beverage segment, which had very strong growth in the prior year second quarter, is expected to see continued weakness in the beverage market primarily related to COVID-19 and the impact from passing on lower resin costs. Our Pharma segment is facing difficult comparisons compared to the prior year's exceptional growth, especially within its prescription division. We are also expecting lower sales in active packaging for the second quarter.

Our second quarter results will include approximately $3.6 million of pre-tax expense related to the Thank You Award being given to employees who have made it possible for us to continue to supply critical infrastructure industries during the COVID-19 crisis. I will share a few more details around our financial results and then turn the call over to Stephan for closing remarks.

In the quarter, reported cash flow from operations was strong and totaled approximately $85 million. Capital expenditures were approximately $62 million. And as shown on Slide 16, our free cash flow was $23 million compared to $26 million in the prior year. We continue to have a strong balance sheet, and on a gross basis, debt-to-capital was approximately 46%, while on a net basis, it was approximately 37%. The current dividend policy is intact. And we will temporarily pause our share repurchasing program as a precautionary measure given the near-term uncertainties. In addition, we continue to evaluate and challenge our capital expenditure needs and are forecasting a range of $220 million to $240 million.

At this time, Stephan will provide a few comments before we move to Q&A

[Stephan Tanda, Chief Executive Officer]

Thank you, Bob. Let me cover a few key takeaways to close out. On Slide 17, on behalf of my Aptar colleagues around the world, we are proud to live up to our purpose and responsibility to the society. Most of the products and solutions we make at Aptar play an important role in everyday life, maybe now more than ever. We all have these products in our homes, dispensing the medicines we take, the food we consume and the beauty and personal care and household products we count on to get us through the day. I am confident we will emerge from this difficult time with fresh perspectives and new ideas.

When I look to the courage, performance and dedication of our incredible people, I have no doubt that Aptar will become an even stronger organization with deeper connections to our partners. I continue to have confidence in our opportunities for growth and long-term value creation. We have a broad portfolio of innovative and differentiating solutions that serve diverse and attractive end markets, regions and customers.

We have weathered severe recession in the past, and we will navigate the current challenging conditions with our strong balance sheet, cash-flow-generation ability, cost-containment focus and commitments to our customers. We are making a difference in our local communities and in the world, and we will continue to rise to the challenge.

With that, I would like to open it up for your questions.

[Operator]

[Operator Instructions] Your first question comes from Ghansham Panjabi with Baird. Your line is open.

[Ghansham Panjabi, Baird]

Hey guys, good morning. Hope all of you are doing well. Yes, just in the context of obviously pantry loading at the consumer level across many categories, just curious as to whether you think Pharma benefited in any way in the first quarter from any sort of pull forward? It doesn't seem like it in terms of OTC and prescription versus injectables. But maybe can you just start off there? And then also, give us a sense as to how April sales have performed across each of your three segments.

[Stephan Tanda, Chief Executive Officer]

I'll take the first one, and Bob, take the second one. So the one area where we might have seen a pull forward is really in the active packaging area, where in the we serve the diabetes market and people want to make sure that the supply chain is well filled. And in addition, of course, we had this Activ-Blister launch. But for the rest of the portfolio, I don't really see that.

[Bob Kuhn, Chief Financial Officer]

And regarding the April patterns and trends that we're seeing, as you can appreciate, if we take a step back to March, I mean, it wasn't until midway through the month of March when we really started to see the significant impact from customer shutdowns and the shelter-at-home restrictions that were out there. So here we are in April, and as you might expect, we're getting the full impact on the month of April. So I would say that right now, April is trending where we expected it to be when we started looking at the pandemic, so clearly worse than the activity that we saw for the full month of March.

[Ghansham Panjabi, Baird]

Okay. And then in terms of the pipeline of activity within the Pharma segment, I mean, how do you think the current dynamic of limited mobility, lab access, etc, may impact that segment as you kind of think through the rest of this year? And then related to that, you had talked, Stephan, about 150-some-odd projects that your Pharma team has identified specific to COVID-19. What exactly does that entail?

[Stephan Tanda, Chief Executive Officer]

Sure. So on the project activity, actually, when you think about early stage pipeline development, there's really no impact. We have obviously switched to virtual collaboration with customers, and that is actually going surprisingly well. We all find that a lot of things can be done remotely where we used to have face-to-face meetings. So the pipeline fill is continuing well. No doubt that there will be instances or there are instances where some clinical trials are delayed because of priority is going to fighting the pandemic. And in some cases where an on-site audit is needed for getting things approved for launch, there is some delay. Now if we're getting back to the "new normal" sometime in the second half, I think, yes, you will not be able to find this effect in the long term. As we know, pharma pipelines are projects take five to 10 years, and there will be an opportunity to catch up. But obviously, if this went on for years, then we would have an impact.

On the second question, let me qualify the 150 number a little bit. So of course, there are many hundreds, maybe a thousand projects out there in the pharma industry targeting COVID-19. The 150 is really projects that are relevant to us, the capabilities that we bring in inhaler, nasal, injectable space. And so we're working those through. And probably one of those, we work actively on to advance in projects in the company. Realize that we have a large pipeline with a few thousand projects at any one time, but it is a notable uptick, of course, for COVID-19. The majority of that is, as you would expect, injectable-related, but some of them are also in the inhaler space and in the nasal space. Maybe the one I would, of course, also remind people on is the Emergency Use Authorization effort that we've got going on with the FDA for the decontamination of N95 masks. It's certainly a project we're also proud of.

[Operator]

Your next question comes from Adam Josephson with KeyBanc. Your line is open.

[Adam Josephson, KeyBanc]

Bob, just following up on Ghansham's question about April, this isn't specific to April. But just in terms of your 2Q guidance, can you help us at all with roughly what magnitude of core sales declines you're expecting either in total or by segment? And then also what obviously some of the companies I follow have declined to provide second quarter guidance just given that the very substantial uncertainties that you referenced. So what went into your decision to actually give 2Q guidance?

[Bob Kuhn, Chief Financial Officer]

So I mean, we're not typically giving forward-looking sales guidance in any of our projections in the past. But I mean what I can tell you is qualitatively, as I kind of mentioned to Ghansham's response, we're going to see a much more pronounced impact in Q2 because we really, in the Western part of our business really only saw, it's at best one-month impact, and in some cases, slightly less than that. And now as we head into the second quarter, with the exception of China, who's getting back to more normal activity, the rest of our business is now kind of right in the throes of the pandemic. And so I would say that you can take a look at what our Q1 performance is, certainly in Beauty and Home, and kind of project forward what the Q2 might look like.

And then in terms of what went into our Q2 guidance and why give Q2 guidance, I think we have a pretty good team who's close to the market and we wanted to put some, I guess, goalposts around where we think some of the activity could go, realizing that it is a very uncertain market but it's really just a culmination of a lot of work on the ground with customer-by-customer calls and research and things. And obviously, we opened up the range a little bit from what we've traditionally given, but we feel that it should fall somewhere in the middle there.

[Adam Josephson, KeyBanc]

One more on just for modeling purposes. Normally, I look back at the last several years. Normally, earnings are down sequentially 2Q to 3Q, and I don't know how much seasonality there is in your business 2Q to 3Q. But I'm just wondering, to the extent that activity gradually picks up from 2Q onward, I'm just wondering to what extent that may be offset by just the normal seasonal declines in sales and earnings from 2Q through the balance of the year. Can you just help me just think about the seasonality of your business and why earnings in recent years have been higher 2Q versus the rest of the year?

[Bob Kuhn, Chief Financial Officer]

Sure. So you're right on the seasonality part. I mean we have been tracking Q2 as is typically one of our stronger quarters and typically slightly higher than Q3. A lot of that is due to the summer season, condiment sales, strong beverage sales, things of that nature, also gearing up for end of the year. Beauty launches, those typically get starting with their customized projects. So traditionally, we do see higher activity in Q2. But I think the pandemic is going to trump really any seasonality that we have, right? I mean I think if you looked at the one slide in the presentation, Q2 right now as we see it is projected to be the low point in the year. And so I would think that if we do start to gradually pull out of it toward the back half of the second quarter, I don't think seasonality is going to weigh negative on that. If anything, I see the pulling out being more of a positive. And again, I think the pandemic far outweighs any seasonality in our business.

[Stephan Tanda, Chief Executive Officer]

Yes. I just wanted to add. There's no question that the with the balance of our business, that we have upside on the other end of this low point, if you want, and that there is pent-up demand. I mean people want to get back to the salon. People want to get back out there. And clearly, some demand is lost, but there will be significant pent-up demand to be caught up with. And whether that falls now exactly in Q3 or in Q3 and Q4, let's see. But as Bob said, I don't think seasonality for this particular year will be a big factor here.

[Adam Josephson, KeyBanc]

No, sure, Stephan. And just Bob, one last one on the tax rate. Should we think of the 2Q level of 32% as elevated relative to what normal would be? Or I mean I know there's a lot that's abnormal right now. But any thoughts on the tax rate and the sustainability of what you're guiding to for 2Q?

[Bob Kuhn, Chief Financial Officer]

Sure. So as we've touched on in previous quarters, one of the more significant positive impacts to our effective tax rate or lowering the effective tax rate comes from the gain we get on the delta on the stock option exercises, so the delta between the actual and the money versus the book expense. So that accounting change started several years ago. In this environment, obviously we're not forecasting a significant amount of option exercises. So we're very conservative on that estimate. And then the other thing I would point out is that as we're expecting to kind of hit the low point in Q2, we are forecasting that we have some losses in some of our countries. And due to the uncertainty going forward, we've chosen not to tax effect some of those loss carryforwards. So in essence, you're pulling down your pre-tax income without any corresponding asset on the books for the loss carryforward. So those two things are negatively increasing, I would say, our tax rate in Q2 versus what we've traditionally seen.

[Operator]

Question comes from Neel Kumar with Morgan Stanley. Your line is open.

[Neel Kumar, Morgan Stanley]

Hi, good morning. Thanks for taking my question and. You have a pretty strong first quarter growth of Pharma in the injectables and active packaging businesses. From a mix perspective, given these are lower-margin areas, what contributed to Pharma achieving margins above the high end of your target range? And generally, what is your outlook on margins for Pharma going forward, given the tougher comps in the higher-margin prescription business?

[Stephan Tanda, Chief Executive Officer]

Bob, you want to take that?

[Bob Kuhn, Chief Financial Officer]

Sure. So Neel, you're right. I mean traditionally, the injectable and the active packaging space, we've mentioned in the past, it traditionally has slightly lower margin, but in fact, the strength was so strong in both of those divisions, both up 20%, we did see some incremental move on the overall margin. So in fact, we didn't see the degradation that you would normally expect in, I would say, a normal growth pattern. And both prescription and CHC both were up a couple of percent each. So that's what kind of boosted that first quarter margin in Pharma. I think looking forward, again, I think our guidance is that it's going to it's really going to depend very much on the mix going forward and what we're going to see in Q2. So prescription, certainly for us, contributes higher-income margin. And if you look at it, Q2 last year was a really strong quarter for us. So we're up against some very, very difficult comps. So we're not forecasting that, that margin that we hit in Q1 is going to be sustainable going forward. We'll have to see how the ultimate mix and final sales come in division by division.

[Neel Kumar, Morgan Stanley]

Okay. That's helpful context. And I noticed you lowered capex guidance for the full year by $5 million at the midpoint. Can you just talk about where there's opportunity for further reductions if some of the weak environment persists? And you also mentioned a greater focus on working capital management. How should we think about the potential benefits of these initiatives?

[Bob Kuhn, Chief Financial Officer]

Well on the capital side, all our divisions are actively challenging the projects that we have in the pipeline. And as you can imagine, the world has kind of been turned upside down, capacity increases that we thought we needed a few months ago are no longer needed. Some of those projects may have been started already as it takes many months, and in some cases, to build the molds and the assembly machines necessary. So we're looking at those to see which ones can be delayed, stopped, and if they haven't started, certainly, put on hold. But in other areas where we're seeing growth, and as we mentioned on the call, the hand sanitizers and lotion moisturizers, we are seeing some capacity restraint. So we're trying to balance and actively look at that.

I think we'll have to see how that progresses as we go through, but we're going to continue to challenge what that is. And if we don't see continued improvement, I would imagine you could further pull back some of those investments. But we do run this business for the long term, and many of the investments that we've started already are long term in nature. There are efficiency enhancements in our facilities. Sometimes, it's a new facility. In certain cases, state-of-the-art facility. So we're going to continue to make those long-term investments because we feel really this while this is a tragic situation, it is transitory and we will come out on the other end of this. And we want to be prepared for, as Stephan said, that pent-up demand to be able to meet that demand.

On the working capital side, we continue to make progress on the payables front. Inventory, again, is challenging because on the one hand, you want to make sure that you don't have supply disruptions. But at the same time, with the decrease in demand, we don't want to be carrying too much. So we're going to continue to work in that area. AR is the one, quite honestly, that we have to keep the strongest eye on as customers who maybe are not essential business and have shut down some of their facilities. We need to make sure that we maintain our current payment terms and remain diligent on collections and things. So I do think there's a little bit more that we can extract overall on working capital, but it's going to be it's going to take a concerted effort across all three of those levers.

[Stephan Tanda, Chief Executive Officer]

Let me just build on this a bit more. This downturn, crisis, whatever you want to call it, is unique. I mean we are looking for [Indiscernible] similar [Indiscernible] to those [Indiscernible] price, what have you. But this is really different. Our business, and especially also our consumer-facing businesses, are resilient in a postrecessionary environment. So even as the world is going [Indiscernible] kind of product [Indiscernible] that context, now right now, demand is artificially [Indiscernible] with the confinement procedures and orders. But as soon as people are able to go back to more regular consumption, they will not go and buy that shiny new car or a new house or the large electronic, but the basic consuming [Indiscernible] almost. So we are really balancing being ready for that uptick in buying these products and not being taking plants off-line and then that kind of stuff.

[Operator]

Question comes from Mark Wilde with Bank of Montreal. Your next question comes from George Staphos with Bank of America. Your line is open.

[George Staphos, Bank of America]

Thanks for all you're doing with COVID. I guess I want to come back to the COVID question Ghansham had catered up to begin with. If you can, to some degree, comment on what you're seeing now from your customers, you mentioned the number of products that you're working on. But in terms of vaccine manufacturing capacity, obviously those conversations have to start now ahead of any vaccine approval because, hopefully, if there is an approval on one or two vaccines, production has to start right away. Can you talk about what conversations you're having with your customer in terms of why they are leaning toward your components, what they're asking you in terms of data, anything that would help us determine how much traction you would ultimately have once, again, hopefully, there's a vaccine approved and remedies are being produced?

[Stephan Tanda, Chief Executive Officer]

Yes, we cannot really comment on individual projects, as you can appreciate. But we are part of some clinical trials of vaccines and, of course, discussions around the scale-up required if that particular vaccine would be successful. And we certainly have the capacity to meet demand as needed. I think that's probably as far as I can go.

[George Staphos, Bank of America]

Stephan, I would imagine that the number of trials you're on is less than, I think, the 150 COVID-related project you talked about. Is there a way that you could size the number of trials that you're on?

[Stephan Tanda, Chief Executive Officer]

No. It's but it's not insignificant. Let me stop it there.

[George Staphos, Bank of America]

Okay. I appreciate that. I wanted to switch a little bit to trends you're seeing in Food and Beverage. And we recognize obviously that the on-the-go beverage piece of the business was impacted by shelter-in-place. Can you comment at all in terms of how the challenges have been ameliorated or not in Asian beverage, that issue that's been lingering for the last couple of years? Has that largely run its course with the customer seeking second supply? And on the food side, we've seen pantry loading driving volume for some of the other companies in our space. Were you pleased with the volume growth you saw for food? Or would you have expected more pantry loading effect?

[Stephan Tanda, Chief Executive Officer]

Well, it's obviously different by geography. So let's start in China. Actually, our particular beverage is mainly consumed by kids and young adults who go to school. So while China has been, as an economy, snapped or has snapped back much earlier than in the West, return to school is only happening now. So certainly, a significant part of that beverage shortfall is in Asia because of that particularity. On the other hand, infant nutrition, coming back to your pantry loading, is significantly up in China and we benefit from that. Would I love to see more condiment sales in the West? Yes. And for us, it's a little bit hard to call it where the foodservice decline and what is pantry loading. And the net balance for us is positive, but certainly, the foodservice decline has an impact also on condiments.

[George Staphos, Bank of America]

Okay. And my last one, and I'll turn it over. In the past, Aptar has gotten recorded benefit from having the three segments, the developing of R&D and innovation in one segment that can be used to feed into the other segments and leverage. Can you remind us why you like that portfolio with obviously the challenges that you still are going through in Beauty and Home? And obviously, COVID is a one-off, hopefully, event that's just hurting results there. But it stands in stark contrast with Pharma, which is obviously doing quite well and obviously would have a higher multiple independent. So what's, as you see it, the benefit of having that portfolio? And good luck in the quarter.

[Stephan Tanda, Chief Executive Officer]

Well, maybe Exhibit A is the ActivShield application that we just made to the FDA, that it came out of food safety application, that we use that technology for food safety in quick-service restaurants. And we now pull the same technology into Pharma, if you want, into a pharma application. Of course, the larger question behind your question, we've addressed frequently. The core technology of dispensing and the core manufacturing operations are the same, injection precision injection molding followed by high-speed assembly. In Pharma, of course, we do it inside a clean room. But also, for example, infant nutrition, we do work operate inside clean rooms. So there's a lot of leverage there. And especially in these times, people do appreciate also some degree of diversification. Of course, we all understand the pure-play advantages in the short term. But in the long term, a certain balance is also beneficial. Let me stop there.

[Operator]

Question comes from Gabe Hajde with WF Securities. Your line is open.

[Gabrial Hajde]

Curious maybe, Bob, if you can comment at all in regards to maybe underabsorbed fixed overhead, most specifically, I'm interested in Beauty and Home. And then I guess on the heels of, I guess, if we have a vaccine and life is back to normal in 2021, would you see this current downturn as maybe a trigger for transformation 2.0?

[Bob Kuhn, Chief Financial Officer]

So on the underabsorbed fixed overhead, I mean, it's hard to generalize on an overall segment worldwide basis because obviously there's regional effects. But as you know, we're organized from a manufacturing perspective by technology. So in some of our plants that we're supplying lotion pumps for moisturizers and hand sanitizers, we were putting up some pretty strong numbers in terms of productivity coming out of those facilities. And contrast that with, let's say, a plant that focuses on fragrance pumps or skin care pumps for which beauty was negatively impacted.

And as I talked about, you can't just turn off the lights and cut down all the fixed costs. I mean we need to run it at low idle speed for our customers because not all of them are shut down. So as you can appreciate, you've got a pretty heavy infrastructure in some of those. So it's a mixed bag by technology and within those regions on that. So but where you've got significant shortfalls in volume, it hurts you pretty bad. And then on the ones where you're getting good throughput, you're traditionally also spending a little bit on overtime and things like that just to get the capacity out. So tends to be a net negative overall because of the weight of the beauty business on our overall Beauty and Home segment.

[Stephan Tanda, Chief Executive Officer]

Maybe let me address the second part of the question. We are still executing on the transformation. What the transformation has brought is a different level of operating intensity and operating capability on the front-end commercial side of the business. I mean just the fact that I can rattle off everything that's in the Pharma pipeline or could is one result of having a much more well-defined front-end execution capability and tracking capability. The same for some of our continuous improvement activities in the plants. One side effect even at this time, or especially at this time, some of our plants actually run at record levels in terms of efficiency, at low levels with low overhead absorption but much better execution capability. So transformation, we certainly don't have to do that again. Having said that, of course, all of us will try to assess what does the new normal mean in terms of consumer behavior, the kind of products that will be needed, that will be popular, will be successful, the channels they will be bought through. And with our broad set of capabilities, we will look to find solutions, services, maybe add even more services to the mix. And then that may lead to, okay, I need a little bit more of this footprint rather than that footprint. You can call it transformation 2.0 or you can just call it continuous evolution of the company, and we will never stop evolving. That's one of our key strengths is that we face reality and adapt to the reality. And that will also mean a lot of opportunity in the "new normal."

[Gabrial Hajde]

I was curious also if you can give us any insight, I guess, as China begins to emerge from a thaw, what you're seeing in terms of customer dialogue or, I guess, sell-through activity in that region?

[Stephan Tanda, Chief Executive Officer]

Sorry, in which region?

[Gabrial Hajde]

In China specifically or in Southeast Asia.

[Stephan Tanda, Chief Executive Officer]

Yes, so yes, what we've seen in China is a pretty rapid snapback of daily life or the new daily life because many of us have traveled to Asia, realized they've probably been used to wearing masks ever since SARS, and that is now continuing in the office context. The eating out after work is not as pronounced as it used to be. So there's more in-home consumption. e-commerce is even more off the charts than it's already been. So the other part, though, to realize is the impact of the crisis on China has been much, much lower than it is in the West.

I mean realize basically Wuhan was and the province around Wuhan was shut down for an extended period of time. Factories were shut down maybe an extra week after Chinese New Year holiday, and people went back to work within a few weeks after that in the offices. That's by far not as extensive as we had to do in the West for a number of reasons. But we certainly expect more e-commerce, maybe significantly more e-commerce going forward in the West. We certainly expect continued focus on cleaning, sanitizing, disinfecting, just to mention a few. But it's really too early to tell what the new normal will look like.

[Operator]

Question comes from Debbie Jones with Deutsche Bank. Your line is open.

[Deborah Jones]

I wanted to see if you could talk a bit about your exposure in Brazil. Some other companies have had a harder time in that region with the impact of COVID-19 and just kind of get a sense of how that's been progressing for you and the impact.

[Stephan Tanda, Chief Executive Officer]

Yes. Thanks, Debbie. Yes, Brazil certainly is a topic. And in terms of evolution of the pandemic, it's much later or later than the West. Certainly, it started with China, Asia then Europe, the U.S. and Brazil is now probably where Spain and Italy were a month ago, so still on the way up. And beauty is an important part of our business in Brazil. So it has an impact, but it is different for different companies. Those companies who are very well geared toward e-commerce are actually doing quite well. Others who are more geared toward the retail environment are faring poorer. So it is a topic. But as I said, it's a mixed impact, but clearly, part of our outlook for Q2.

[Deborah Jones]

And I realize that it's difficult to talk about the vaccine possibility but I'm going to try to ask anyway. Because the and the way I think about this, there would be it would almost be impossible to not have Aptar part of its process along with a lot of the major drug delivery suppliers just given the need for it globally. But is there anything around your portfolio in terms of drug delivery that for vaccines in general, that would make you more unique?

[Stephan Tanda, Chief Executive Officer]

I mean for vaccines, I think we are well positioned, supply to all the majors as a second supplier, sometimes as the first supplier. So I fully agree with your statement. Of course, the breakout scenario would be if a vaccine could be delivered via nasal delivery, but that is pure speculation, where we would have a particularly strong position. But we will participate in this one way or another.

[Operator]

Comes from Courtney Owens with William Blair. Your line is open.

[Courtney Owens, William Blair]

So for my first question, can you guys talk a little bit about the split of the beauty slowdown between travel and retail and traditional retail closures? I realize it's probably pretty hard to quantify, but which part of that slowdown has been more impactful to your book of business? And I guess as regions continue to hopefully or start to rather hopefully lift kind of some of the closures and some of the social distancing measures, how do you guys kind of think about a return to normalcy in each of those different pockets, that being the travel retail and then the traditional retail business?

[Stephan Tanda, Chief Executive Officer]

Yes, I'm not sure that we can break it out this way. But the one thing I can say is what we observed from our European beauty clients is that those and American, that those who have a significant Asian portion were much quicker to come back because they want to participate in the rebound in Asia, in particular, China. And those who are pure, let's say, European suppliers have been much slower on coming back.

And the second one, not surprisingly, those who are more apt and savvy in e-commerce have fared better than those who are more in the traditional retail stores. Clearly, travel was shut down first already in the February period, whereas the traditional retail only was really shut down in the West, let's say, beginning in the middle of March. So there is a sequencing effect.

[Operator]

Comes from Adam Josephson with KeyBanc. Your line is open.

[Adam Josephson, KeyBanc]

Stephan or Bob, how would you would you draw any parallels between this situation in '08, '09? And I we've had some other companies that have done that. And basically said, look, we're whatever we're down this year, we fully expect to get back next year. And obviously, in '09, you guys were down. I think your core sales were down 7%. And then the next year, they were up, I think, 14%, and your sales were right back to '08 levels in 2010. Do you see similarities, differences this time around?

[Bob Kuhn, Chief Financial Officer]

Well, let me team effort

[Stephan Tanda, Chief Executive Officer]

Well, I think, yes, of course, there are similarities, but it's also very unique. I mean to have airline travel basically shut down, to have people staying in their homes in all Western economies for two months, that is very different. I mean in 9/11, we started traveling back after a week, we started traveling again and TSA was up and running. And it became a national duty to go out and consume. It's different here. 2008, 2009, of course, what's the same is that we have a strong balance sheet, and that we can continue to run the company and take advantage of the rebound. I think we will have more pent-up demand here as people were holed up. But that's a bit of a speculation. Bob?

[Bob Kuhn, Chief Financial Officer]

Yes. I would just add that '08, '09, Stephan's 100% right. I mean on the reduction in discretionary spend like we've seen in beauty, those trends are similar. But '08, '09 obviously was a financial crisis and people cut back, companies cut back because they weren't sure whether liquidity was going to be in the market and would they have access to borrowings and things like that. This one is going to be entirely dependent on the confidence of the consumer. Even with the lifting of the restriction state by state, it's going to be a question of how comfortable people are going to be going back to the movie theaters, how comfortable are they going to be going into shopping malls and small stores and things like that. And that, we'll have to see.

And I think that's why the big push for either antiviral drugs, where people feel that, hey, even if I get it, I may not die from it now because there's medication for it. But ultimately, it's the vaccine that will probably put people at ease and to go back and same thing with the travel side, right? I mean, as you said before, it's a different it's going to be a different experience coming out. So I think we're going to have to really watch the confidence and what happens with the virus up until we get a vaccine.

[Adam Josephson, KeyBanc]

Yes. No, understood. And Bob, just one on the balance sheet. So I mean you maintain a good balance sheet for precisely times like this, and kudos to you guys for having such a good balance sheet. And I understand why you've suspended share repurchase. Many companies have done the same and everyone's battening down the hatches. At some point, I know the U.S. markets come roaring back from the low, so it's not as if the market is that dislocated anymore. And I don't know what it's like on the private side. But is there a point which you would say, you know what, there's we've seen this sudden dislocation, we know times are very uncertain, but we've got this great balance sheet for a reason. Why don't we use it? I mean how are you thinking about when to use this really good balance sheet of yours?

[Bob Kuhn, Chief Financial Officer]

Well, I think what we're looking at is obviously we're looking for some more clarity on the horizon, first and foremost. And secondly, I think like we saw in the '08, '09 crisis, while there were there's winners at the end of the day, there's also losers along the way. So we have to keep a close eye on supply chain, competition, technologies that are in the market. And we've got got a lot of where Aptar has been successful, I would say, on the M&A front is acquiring smaller technology-rich companies with know-how and capabilities. Those are the companies right now that are struggling. You look at what's happening in the venture capital market, there's still a lot of great ideas out in the market. And I think one of the things that I think we would love to use the balance sheet for is an opportunity maybe to acquire someone who may be unable to get their technology across the finish line and something that we could leverage. I mean that certainly would be a preference in our mind in terms of utilizing that strong balance sheet. I don't know, Stephan, if you have any other thoughts on that.

[Stephan Tanda, Chief Executive Officer]

No. I think that's well said. The larger point is we are not suspending, of course, our strategic development of the group, of the company, being that the virtual strategy session earlier this year, like we do every year. So there will be new opportunities to act on. And certainly, we will do that responsibly.

[Operator]

There are no further questions queued up at this time. I will now turn the call back over to Mr. Stephan Tanda for closing remarks.

[Stephan Tanda, Chief Executive Officer]

All right. Thank you all for joining us in these interesting times. Look forward to some virtual road shows to elaborate more. And everybody, please stay safe. Thank you.

[Operator]

This does conclude today’s conference call. You may now disconnect.