Ladies and gentlemen, thank you for standing by. Welcome to Aptar's 2022 Third Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Introducing today's conference call is Ms. Mary Skafidas, Senior Vice President of Investor Relations and Communications. Please go ahead..

Thank you. Hello everyone and thanks for being with us today. Joining me on today's call are Stephan Tanda, President and CEO; and Bob Kuhn, Executive Vice President and CFO. Our press release and accompanying slide deck have been posted to our website where we will also post a replay of this call as is our practice.

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 what we are discussing today. And now I would like to turn the conference call over to Stephan..

Thank you Mary and good morning everyone. We appreciate you joining us on our call today. Beginning on Slide 3 I'm happy to report that amid a seemingly worsening economic backdrop Aptar achieved core sales growth of 9% and delivered adjusted EPS of $0.95 per share which is the midpoint of our previously given guidance range.

The majority of the growth in the quarter was driven by our pharma segment. Later on in our call Bob Kuhn as usual will provide additional details on the quarter. I would like to cover a few key items now.

Our adjusted earnings per share includes a previously announced one-time inflation payment made to certain European employees that equates to approximately $0.05 a share. Our industry-leading pharma segment grew across all end markets with prescription, consumer healthcare, and active materials being particularly strong.

We were pleased to announce that our investments in digital health are beginning to bear fruit as we recently entered into a contract with a major European pharmaceutical company. This is another validation of our strategy and our capabilities in this exciting field.

Beauty and home, achieved strong growth in Europe, especially in prestige fragrance fueled in part by Western travel retail. In addition, pandemic related lockdowns in China affected parts of the business.

Core sales in food and beverage were flat due to difficult comparisons with the prior year period, and were impacted by softening consumer demand in North America, which is causing certain customers to work through inventory levels. Our pricing initiatives to recover increased costs resulted in a net positive inflation impact in the quarter.

However, we are still facing a variety of rising costs. Even though rising prices decreased, other costs are on the rise including energy primarily in Europe and labor and transportation around the world. Currency headwinds continued to be significant especially for our pharma segment.

While we remain focused on pricing initiatives with customers, we are also diligently scrutinizing and managing our cost. Now turning to Slide 4, I want to highlight an announcement made earlier this month by our newest division within pharma Aptar Digital Health.

This division entered into a contract with Chiesi Group, an international research focused biopharmaceutical and healthcare company to bring the market a disease management platform for asthma and COPD.

Our digital health platforms combined mobile and web applications, connected drug delivery systems, patient onboarding, training and advanced data analytics services to actively empower patients and create the positive treatment journey. Bringing together healthcare, software, and device expertise is unique to Aptar.

Over several years, we have made a number of bolt on acquisitions to expand our pharmaceutical services and digital health offerings, the largest of which was Voluntis, a pioneer in digital therapeutics. We acquired Voluntis in the second quarter of 2021 for approximately $100 million.

This was a significant step in building our foundation in the fast-growing, digital healthcare space.

If we have learned anything from the pandemic, it is that advancement in healthcare are rapidly accelerating and things like remote patient engagement and patient monitoring whether for clinical trials, or real world treatments will be a big part of our future. Turning to Slide 5.

In addition to our investments in digital healthcare solutions, we have also increased our offerings in pharmaceutical services. This is part of our long-term strategy to build an even stronger position around our leading delivery devices.

Our recent acquisition of Metaphase Design Group adds the capabilities of ergonomic product design and human factors engineering. Meaning how people think, how they feel, behaves, and respond when using devices and systems.

More than half of all drugs being developed today are developed by small to mid-size biotech labs or universities what we affectionately termed as two people in the molecule. These earlier developers had limited experience with the long regulatory approval process and the hurdles they will face when bringing a new drug to market.

It can take anywhere from 5 years to 12 years or more for a new drug to come to market if the journey is successful. Our portfolio of services allows us to partner with healthcare companies earlier in the drug development process. These strategic capabilities further enable us also to deliver on our pharma segment’s growth and margin targets.

Our stated compound annual growth rate target for pharma is 6% to 10% and while the pandemic interrupted the consistency of our trajectory, it is important to note that the segment achieved an annual sales compounded rate of 8% over the previous decade.

Turning to Slide 6, we create value by leveraging our technology platforms across our three business segments. On this slide you can see some examples of recent launches on the market including innovative and sustainable solutions. In our food and beverage segment our spray technology is being used to dispense oils and salad dressings.

Our nasal spray system with child-resistant features was chosen for Children's Afrin no drip decongestion. In the beauty market our safe spray technology for fragrance is featured on perfume brands including Estee Lauder, Guerlain, and Calvin Klein in Europe, along with the Boticario Group in Latin America.

Let me also briefly highlight a sustainable solution that has been very successful in the quarter, our award winning, fully recyclable mono-material pump called Future. It is featured on several products, ranging from hand soap to lotions to cleansers. These are only a few examples of some of the new applications brought to market during the quarter.

On Slide 7, I want to briefly comment on the strength of our balance sheet and our capital allocation. As you know Aptar has historically maintained a strong and relatively conservative balance sheet. This approach has certainly served our customers and shareholders well during challenging economic times.

More recently we have focused our investments in the business and M&A towards our higher margin, fast-growing pharma segment. Dividends and share repurchases are also part of our balanced capital allocation strategy and for the first time nine months of 2022, we returned approximately $147 million to shareholders.

Before handing over to Bob, I just want to mention as previously announced, we were very pleased to welcome Matt Trerotola to our Board of Directors in September. Matt is the CEO of Enovis, a medical technology company.

He brings a breadth of experience in medical devices as well as a proven track record of driving product innovation, profitability, and continuous improvement in prestigious enterprises like Danaher and DuPont. With that I will now turn it over to Bob, who will share detailed comments on our quarterly results. Bob, over to you. .

Thank you, Stephan and good morning, everyone. Starting on Slide 8, I would like to summarize the quarter. Our reported sales increased 1% and this included currency translation headwinds of approximately 8%. Therefore, core sales grew 9% primarily due to the strong volume growth in our pharma segment.

As shown on Slide 9, we reported adjusted earnings per share of $0.95, which is a 12% increase over prior year adjusted EPS when we neutralize the currency headwinds we are facing. The year-over-year improvement was driven by increased earnings in our pharma segment despite the currency headwinds.

We achieved adjusted EBITDA of $154 million, which includes foreign currency headwinds of approximately $13 million and the previously announced onetime inflationary payment made to certain European employees that totaled approximately $5 million.

Our reported net income and EPS includes a tax charge of $7.2 million related to a legal entity reorganization. Without the charge, our reported tax rate would have been approximately 28%. This tax charge has been excluded from adjusted EPS.

Slide 10 and 11 cover our year-to-date performance with core sales growth of 11% and adjusted earnings per share growth of 5%, including comparable exchange rates. Year-to-date, cash flow from operations was $306 million. Free cash flow doubled from the prior year level to $97 million.

Turning to some of the details by segment for the quarter, our pharma segment's core sales increased 20%. Approximately 16% of the growth came from increased volumes. The remainder of the increase was due to higher tooling sales and price adjustments.

Sales were up across all markets led by strong results in prescription, consumer healthcare, and active materials. Looking at sales in each pharma market, prescription core sales increased 17%, primarily due to the continued recovery in demand for allergic rhinitis and asthma treatments with the continued steady demand for emergency medicine devices.

Consumer healthcare core sales increased 26% on strong demand for nasal decongestants and saline rinses as greater consumer mobility contributed to more common ailments, including colds and influenza. Consumers also turned to some of the same treatments to alleviate symptoms of COVID-19.

Our elastomer solutions for the injectables market grew core sales 5%, primarily due to higher volumes for biologics and vaccines. Turning to our active material science solutions, core sales grew 33%, with tooling accounting for 21% of the 33% growth.

The remaining double-digit core product sales growth came from an increase in demand across a variety of applications including solutions for probiotics and oral solid dose medications. Pharma's adjusted EBITDA margin was 31%, which included the onetime inflationary wage payment to certain employees in Europe of approximately $2.2 million.

Margins in the quarter were also affected by inflationary costs that are being passed through on a one-for-one basis as well as higher tooling sales, which traditionally carry lower margins.

Our Beauty and Home segment's core sales increased 4%, primarily on price adjustments related to inflation cost recovery however, overall volumes decreased by 3%. Europe's strong growth, especially in fragrance, was offset by declines in other regions, especially in North America due to lingering supply chain issues and softening demand.

Sales were also affected by periodic lockdowns in China, which remain ongoing. Looking at each Beauty and Home market, Beauty market core sales increased 6%, primarily due to increased sales in the prestige fragrance and color cosmetic categories.

Personal Care core sales increased 5%, primarily due to increased sales in the hair care and sun care dispensing systems. Home Care core sales decreased 6% due to lower sales in the household cleaner and laundry care categories.

This segment's adjusted EBITDA margin for the quarter was 12%, and this included the onetime inflationary wage payment to certain employees in Europe of approximately $1.9 million. The Food and Beverage segment was up against a difficult comparison to a strong prior year, and core sales were more or less in line with the prior year.

Product volume declines were partially offset by higher custom tooling sales. Pricing had an immaterial impact as inflationary cost pass-throughs were offset by the passing through of lower resin costs. Looking at each market, food core sales increased 7%, of which tooling increased 9%.

The decline in dispensing closures was partially offset by strong growth in our food service market, which includes food trays. Beverage core sales decreased 16%, of which lower tooling sales accounted for 14% of the decrease. Excluding the impact of tooling sales, product sales decreased slightly. The segment's adjusted EBITDA margin was 14%.

Lower food closure volumes and higher tooling sales in the quarter had a negative impact on margins. Moving to Slide 12, which summarizes our outlook for the fourth quarter, we expect currency headwinds to persist reflecting continued strengthening of the U.S. dollar. With the majority of our sales coming from outside of the U.S., the stronger U.S.

dollar negatively impacts the translation of our foreign results. The Euro rate for the prior year Q4 was 1.14, and our guidance for the coming fourth quarter is assuming a $0.98 Euro rate. As a reminder, we had said that roughly for every 1 penny move in the Euro rate, this equates to approximately $0.02 per share for the full year.

So for the coming quarter, we could be looking at approximately an $0.08 currency drag on earnings compared to the prior year.

Considering the currency headwinds and the uncertainties we are facing, as outlined by Stephan, we expect our fourth quarter adjusted earnings per share to be in the range of $0.73 to $0.83 per share, which includes approximately $0.05 per share impact due to the start-up and ERP implementation costs related to our injectables division.

Additionally, the strong fourth quarter 2021 sales of our active film for at-home COVID-19 antigen test will not repeat. This guidance assumes an estimated tax rate range of 28% to 30%.

For the year 2022, we currently estimate depreciation and amortization to be between $230 million to $240 million and capital expenditures net of any government grants to be between $300 million and $320 million. Even though our practice is to provide earnings per share guidance for the upcoming quarter, I would like to mention that should the U.S.

dollar and Euro remain at parity for the first half of 2023, we would expect a headwind of approximately $0.10. In closing, our balance sheet is in excellent condition, and our current leverage ratio was 1.8. At this time, Stephan will provide a few closing comments before we move to Q&A..

Thanks, Bob. In closing, on Slide 12, we now turn to our outlook for the fourth quarter, which has even more moving parts than normal. Our prescription drug, consumer healthcare, and injectables business are expected to continue to grow at more normalized levels.

As Bob mentioned, our active materials business is up against a difficult comparison to the prior year when we had significant orders for our active film used with at-home COVID-19 antigen tests.

As you will recall, this business was recorded in the fourth quarter of 2021 and to an even greater extent in the first quarter of 2022, so we will have a difficult comparison in both of these quarters.

Additionally, the start-up and ERP implementation costs for our injectable division that will impact EPS in the fourth quarter will also have some effect on our quarter on earnings. We have faith in the number of uncertainties as the macroeconomic backdrop continued to deteriorate as the Euro and other currencies remain weak against the dollar.

And the North American consumer packaged goods market, in particular, are decelerating at a breathtaking rate. For Beauty and Home, it's mixed with certain sectors seeing stronger demand such as prestige fragrance, while others such as personal care are starting to see a softening in demand.

Regionally, the strength in the fourth quarter is expected to come from Europe and Latin America with weakness in North America and Asia continued. Our Food and Beverage segment will be up against difficult comparisons versus Q4 2021.

Additionally, certain customers have built up inventory after a long period of supply chain issues, and we see a softening in demand. Due to the slowing North American demand in the food, beverage and personal care markets, we have taken actions by periodically shutting down certain U.S. facilities that have lower capacity utilization.

This is quite a change from just the previous quarter. Rising cost of energy has been covered extensively in the news, especially in Europe.

For Aptar, utilities as a percentage of our cost of goods sold have typically been in the mid-single digits, while they represent a smaller portion of our overall costs, energy prices in Europe where our largest manufacturing footprint is, have increased dramatically.

We have every intention of continuing to push for price increases and have instituted energy surcharges, including for manufacturing processes that have higher energy costs like metal analyzation. As an essential business, we are confident we are able to source energy and have obtained volume guarantees for the remainder of 2022 and for all of 2023.

To weather the potential storm ahead, we remain focused on selective and disciplined capital allocation as well as maintaining the strength of our balance sheet, a method that is well developed at Aptar. And now I will open the call up to your questions..

Thank you Mr. Tanda. [Operator Instructions]. Our first question today comes from the line of George Staphos with Bank of America. Mr. Staphos, your line is now open. .

Hi everyone. Good morning. Thanks for the details. I wanted to peer back into the some of the headwinds you noted Stephan to start the -- if there was bit more granularity that you could provide. I know it is difficult at this juncture to project when things might change or reaccelerate.

But how does this -- how does the current environment compare to past recessions that you've seen? So that's kind of question number one. Question number two, we recognize that you're now taking action to shut down operations, call it on a rolling basis where you don't have the utilization.

Is it not time perhaps to take even more aggressive action within Beauty and Home in particular and Food and Beverage, where the operations performance, frankly, haven't been, I don't think, where you would have expected margin-wise for a number of years and how do you use this bad news in terms of the environment to catalyze more aggressive action, which is what you should be doing in this kind of period? Thank you guys.

.

Good morning George. Thanks. I'm not sure that I can give you a comparable environment. In my 30 years, I've never seen a deceleration and whiplash from one quarter to next like this one. So just to kind of back up a little bit, I think in the beginning of the summer we were still trying to find labor being understaffed 10%, 15%, 20%.

We finally catch up with our staffing teams, get our lead times down, and then retailers and customers kind of plan the brakes. I think while I don't have perfect analytics, the whole supply chain especially in the U.S. because it being a U.S.

topic has been plugged up, people have taken safety stock, have ordered what they could get, and now waking up to the headlines of an impending recession and try to get the inventories down before the year-end just as fully addressed for the party having labor here.

So clearly, this is a story of under coverage in North America, the likes I've certainly not seen. Now there is -- even within that, there's some regional differences. This is particular on our personal care. There's still a beauty plant where some products we don't have enough supply, and it's not the European story.

So it's unique in that I see a question about, okay, when is this going to end, clearly, we've seen the softening of the food market that people went from a home meeting tomorrow eating out and some inventory actions already by customers earlier. So it will probably be the second if not the third quarter of food softness.

So we expect that to come out sooner. Personal care is usually an early indicator that we're heading into economic slowdown, and then there probably is a couple of quarters. But crystal ball is certainly we didn't see the timing of this whiplash coming. One of the reasons why we only guide for the quarter.

On your question about more aggressive actions, clearly, we are turning over more zones and more rocks and taking and considering what you're talking about, but this is not the time or place to discuss it..

Alright, well turn it over and will come back. Thank you. .

Thank you Mr. Staphos. The next question is from the line of Kyle White with Deutsche Bank. Mr. White, your line is now open..

Hi, good morning. Thanks for taking the questions. Looking forward to the 4Q guidance, I think you said there was a $0.05 headwind related to start-up costs and ERP implementation in pharma. Two questions on this.

Just how much startup costs have you incurred this year in pharma in total and do those go away next year? And then what should we expect from the ERP implementation in terms of will it be a headwind going into the first half of 2023 as well?.

Sure. So as a reminder, we are deploying unprecedented capital to increase capacity in our injectable division to the tune of $180 million. The chunk of that goes into Europe as a fee goes into the U.S. and the capacity brought online increments.

And then once the increment is brought online, it needs to be operated, product produced and shared with customers. They need to do the validation. And then you get revenue about 12 months to 18 months after you've restarted up the equipment.

So basically, you have a drag on results while you have these units left and the revenue -- this is typical pharma. So we told you it is about, I think, a couple of million a quarter. Sometimes a bit more, sometimes a bit less. And certainly, throughout this year and into next year that will be the case.

I think we will mechanically complete all of this sometime middle of next year. And then again, the revenue lag from that little bit 12 to 18 months later. The ERP is about $0.05 to the quarter four and quarter one, and this is really a bit delta [ph] to spenders because this is not an SAP upgrade from one version to the next.

We really bring this business from a non-SAP environment to SAP environment, which is clearly needed to make sure we're ready for scale.

And the last point I want to make, yes, this is a capacity increase but even more important it is a dramatic mix enrichment because we are -- most of that investment goes into the -- towards the premium product which sells much, much higher prices than the standard product..

That's helpful.

And then just on price cost, can you just give us an update on where you were from a price cost standpoint this quarter as a company? And what is embedded for your 4Q guidance on that front?.

Sure Kyle, I can take that one. So we look slightly positive in the quarter, it is a little bit more than what we did in Q2. It's difficult to forecast because of the demand picture. Obviously, it will all depend on where the volumes shake out, but we would expect the positive to accelerate a little bit into the fourth quarter.

Now as far as margins are concerned, it wasn't significant enough segment by segment to be material in terms of margin expansion, but, it is looking a little bit more positive. But I have to still point out that we're still catching up from the net $30 million that we were behind in 2021..

Got it, thank you. I will turn it over. .

Thank you Mr. White. The next question comes from the line of Adam Josephson with KeyBanc. Adam, your line is now open..

Thanks a lot, good morning everyone. Hope you are well. Bob, one is for you and then one for Stephan. Bob, just back to the 4Q guidance. So to bridge from 3Q to 4Q, the $0.95 to the midpoint of 78%, I know you talked about the $0.05 of start-up and ERP costs, some of which will recur thereafter.

And then FX will be a little bit worse sequentially, maybe a couple of cents. Tax rate, a little bit higher. But that would get me from, call it, $0.95 to perhaps high $0.80s.

So I'm just trying to bridge the 3Q guidance to the 4Q guidance and think about if that 4Q earnings is a reasonable run rate to assume thereafter or if there's any particular seasonality or any onetime items in there other than that $0.05, which is kind of onetime but not exactly as you mentioned earlier?.

Sure. I mean, obviously, it's a lot..

If you know what I mean..

Yes. No, I understand. There's a lot of puts and takes, right. So I guess the first thing, if you want to call it a one-off going from Q3 to Q4 is we did have higher tooling sales in total in Q3 than what we're anticipating in Q4. So let’s add another couple of pennies in on that.

But after that, it's really a regional demand picture story, as Stephan alluded to. So in both the Beauty and Home and Food and Beverage for North America, we're seeing a worsening situation or at least as we see it for Q4 from a demand perspective. So it's a question of under absorbed overhead in the region.

We're also seeing a slightly deteriorating situation on our beverage business in Latin America in Q4. Again, as we mentioned, we're up against a little bit more difficult comps, which you are seeing in some cases, some of our [indiscernible] business, a trade down to more throughout cap.

So for me, we obviously sketch out what it is region by region, but primarily this is a North American volume story. Is it indicative of what to expect going forward, it's all going to really hinge on the recovery in the North American market..

I appreciate that. And relatedly, and this, I guess, for you or Stephan. I mean there have been so many mixed signals. So some of the North American CPG companies have been saying, look, we're raising prices by a lot. And frankly, the demand elasticity has, if anything, been more muted than what we feared.

In other words, demand has held up pretty well from their perspective given the magnitude of the price increases. On the other hand, things like box demand rapidly deteriorated. Beverage can demand rapidly deteriorated. So we're seeing all kinds of mixed signals in North America in CPG land.

So can you just kind of highlight exactly what you're seeing and whether it's in line with what your customers have been reporting or it's different, just any better perspective on exactly what's going on would be helpful?.

Yes, kind of coming back to what I said earlier. I agree with you, it's not that the end consumer demand is falling off a cliff. For me, the best I can explain it is the supply chain whiplash. We have been supply-constrained at lead times starting out with three quarters and then starting to reduce them. And of course, we were not alone.

Our competitors -- so everybody did the best they could to kind of get what they needed and build up inventories. And I think our lead time is done now after we were able to finally get the labor, we need it back to a normal level. Also true, we're not alone. So all of our customers say, hey, I can get the stuff I need.

Now let's see what I have in my warehouse and what I expect the consumer demand to be down road. And we should see our customers in response to what retailers are telling them, slamming the brakes they got to get the inventory down before the end of the year because the recession is coming.

So that's why I call it whiplash, a whiplash I haven't seen before. [Multiple Speakers] It's also amazing to me when you look -- in Europe, Beauty is up double digits, Fragrance is up double digits. So it is a very regionalized story. And part of the fragrance demand, of course, we know is not ending up in Europe.

Some of that is bought by American tourist in Paris, some of it is shipped to China, some of it is shipped here. So there's also, for us, a particular regional dislocation of where we have the factories, how are they being tested and where the demand is..

No, I appreciate.

Just want to follow -- is there anything -- do you think it might have to do with retail -- not retailers, but the CPG companies just wanting to get their inventories down by fiscal year-end, such that their working capital looks better or I'm just trying to understand why they would have let their inventory so high to begin with?.

Because they couldn't get what they wanted, so they probably double placed orders. I'm speculating now.

But that's one thing that I've seen repeated throughout the ages is when you are tight and you can't satisfy customer demand, they place orders -- more orders, they place orders earlier so that they can yell on you and at least they get -- they do that with everybody.

Until they realize you can supply and look in one portfolio or two while we work up our safety stock. That is not an unusual phenomenon. Now when you combine that with all the recession talk and the fact that year-end is coming, I think your suspicion share that a lot of this is year-end management..

Yeah, no thank you Stephan..

Thank you Mr. Josephson. The next question is from the line of Ghansham Panjabi with Baird. Ghansham, your line is now open..

Thank you, good morning everybody. I guess, Stephan on your comments on pharma and sort of normalization and volumes, I know there's a lot going on between the various sub segments in there.

But what do you think is a reasonable sort of normalized rate for 2023 at this point? And maybe if you could just kind of tie it into new product pipeline in the segment because clearly, you have longer lead times in many of these products?.

Sure. Look Ghansham we feel very confident with our 6% to 10% top line growth and the order book continues to be very strong in prescription, in consumer healthcare. As you know, people expect the heavy flu season. Omicron is still around. So strong order book for those two businesses.

Injectable, we have very good pipeline growth as we bring the premium capacity, and it's validated that it is being sold with good pipeline with biologics, not depending on the huge spike in vaccines, just normal growth. And the active materials business is doing very well.

Of course, we won't have the enormous platform for the at-home COVID testing that we had in quarter one last year or quarter of this year. So that will create a bit the comparison. The one area where we continue to have limited visibility is the emergency treatment, especially in [indiscernible].

Demand is very strong, we have generic players coming on the market who we supply, of course, as well. Teva is using that of the currency to total some of their lawsuit. So at the same time, other than -- came out on shelves is nearing our past expiration date.

So it's not clear how people will handle that or they just use it even if it's three, four, five years old or a little bit building their stock. So that's the one where we've said before, it's a lumpy business with no clear distribution, but it's pulling very strongly..

Got it. And then for my second question, maybe for Bob on 2023 guidance, I understand that you only guide one quarter out, but a lot of your peers have talked about below the line sort of headwinds, interest expense, and also FX.

Can you give us a sense as to what FX would be as a headwind if rates hold at this point on an annual EPS basis, 2023 versus 2022 and whatever else you can share in terms of interest expense, etcetera?.

Sure. So again, these are obviously based on assumption of parity, right. So if we model out the first quarter, you talked -- so as I mentioned in my prepared remarks, the $0.08 is Q4. Then we get to Q1, we're looking at roughly $0.06. It will start decreasing a little bit as we get into Q2, roughly $0.03, $0.035.

And then then Q3 and Q4, we're right at or close to parity anyway. So we wouldn't expect anything there. On the interest expense side, if you're looking at Q4 to Q4, we're actually going to have a $0.04 headwind on higher interest expense.

Now for us, I think it's important to note that that's coming from the execution of our inaugural offering that we did earlier in this year prior to the increase in rates. So if you remember, we locked in at 3.6%. So if you look at our total leverage, we're at about 1.8 times.

We're about 94% fixed, 6% variable that is slightly higher than its average 3% interest rate. So that's how the interest affects us..

Very good, thank you. .

Thank you for questions. The next question is from the line of Mark Wilde with BMO Capital Markets. Mark, you may proceed..

Thanks, good morning Stephan and good morning Bob. For the first question, I'm curious, Stephan, if you can put any more color about this drop-off in demand that you called breathtaking.

And I just want to preface by saying back in early 2009, I remember sitting down with Bob and your predecessor, Steve Hagge, and Steve saying, there are customers we haven't heard from in like five months.

Is it of that magnitude right now or is there any way to just help us put a little more color around the drop-off in demand?.

Yes. Let me start Bob. Look, it's a very regional dislocation, and it has a lot to do with COVID and the general way of how the U.S. responded to COVID, and it also has to do with our own situation where, if you remember, we shut down two plants just quarter before COVID to take more serious action and absorb that demand into our other plants.

And of course, we get tripped off by COVID in executing that, and that has exacerbated some of our labor shortages. So we just caught up with that now.

So next to the general huge supply chain disruption and labor disruption and COVID cost, we had an exacerbated picture of that, that led to coming to this juncture where we just caught up with setting of our plants while demand cutoff and leading to the under coverage [Multiple Speakers]..

Sure. So 2009, obviously, was more of a financial crisis and a concern over liquidity. And whereas this one is very well documented, it's more pandemic-related and then we saw that Stephan has been talking about. So in 2009 a lot of our customers were concerned that due to the lack of liquidity, some of their supply base would disappear.

So obviously, the gravitation towards Aptar and its strong financial balance sheet was what led to those customers saying, "Hey, we're willing to now lock up on more longer-term contracts because we know you have staying power." This is a little bit different. I mean I don't see that same effect.

It's probably more based around supply and major products than it is around financial strength..

Okay. And then just for my follow-up, Stephan. I'm just curious over in Europe. I mean, clearly, you've not only got a war going on in the East, you've got these big increases in energy costs.

Are you seeing any signs that this is starting to really cut into consumer behavior over in Europe because there have definitely been some hints of this over the last few days from some of the other packages that are reported?.

Yes. Look, when we report Europe sales, we report what we make in Europe. This doesn't mean that, that is sold in Europe. Again, it's -- we estimated about 30% of our products in aggregate end up in Asia. A good part of European beauty sales are now going back into travel retail, either for American system in Europe or duty-free travel retail.

So our European sales are not a reflection of consumer demand in Europe. I think that's number one. Number two, for a lot of different reasons, labor flexibility, government policies, housing market, recessions don't tend to be as volatile in Europe as they are here. Most people rent. They are not affected by wealth effects like a U.S. consumer is.

They tend to be more muted. So I'm actually quite proud of what the team has done in terms of the performance of our European business, on top of that, coming up with additional efficiency and cost reduction measures.

And the consumers do intend to disappear, Europe didn't have the kind of whiplash in supply chain because of different COVID policies in the U.S. So it's just a very different situation. Now having said that, we are facing labor increases as of January 1st, no doubt about it. We will not be the 2% to 3% that are usual. We are in negotiations right now.

And of course, energy will go up. Having said that, we have every intention of passing that on. Price increase is scheduled in for January 1st. And some of our customers actually benefit from the weaker Euro as they sell into the dollar area. So that demand elasticity to higher prices for some of these customers might be lower.

I'm not saying it's easier to pass on price increases but certainly, we live in the same energy environment, and inflation environment as our people doing the same consumers. So it's not a surprise to them..

Okay, that’s helpful. Thanks Stephan. Good luck in the fourth quarter. .

Thank you Mark. The next question is from the line of Angel Castillo with Morgan Stanley. Angel, your line is now open..

Thanks for taking my question. I just wanted to dive a little bit deeper into the pharma expectations that we've been talking about a lot of the headwinds, but I was hoping you could talk to us a little bit about what your expectations are for the fourth quarter, particularly in prescription and consumer health.

Obviously, both fairly robust in the third quarter.

As you think about the fourth quarter, what are your core sales growth expectations and also, could you kind of break out how much of that you think is maybe some restocking as consumed by customers that maybe destocked much more now with the demand being a lot stronger? How much of that is getting back to normal versus just underlying demand?.

Yes. As I mentioned, a strong order book across Rx consumer healthcare. We don't really hear from customer or see inventory buildup. Certainly, we ended last year with very low inventories.

I think we're now normalized inventories is an isolated case here or there where a customer might build some inventory, but not -- we don't see inventory building in those two areas. The one exception -- or not the exception, but caveat I have to make is the NARCAN story.

It's just for us very hard to gauge the quarter-to-quarter order pattern just because of the nontraditional supply chain and distribution channels here. It was also good order intake for injectables. Yes, it will be muted on the bottom line with the onetime cost that we talked about. And the active material business also performing well.

Yes, it will also have a tough comparison given at the at-home COVID test last year. Now when you add it all up, we're still comfortable with the 6% to 10% even for a quarter with so many puts and takes..

Got it. That's helpful. And then particularly in the Beauty and Home business as you think about some of that strength that you kind of outlined in Europe where it's maybe holding off and acknowledging that it is difficult to kind of parse out what the consumer or what consumer is actually kind of representative of that.

But as you think about the fourth quarter, what is kind of baked into your assumptions, are you assuming there is still some this kind of persistent, perhaps, prestige demand continuing or do you have more kind of conservative assumptions that this will kind of drop off in the fourth quarter?.

Yes. Look, I think at Luxbet in October, I talked with one of our largest accounts earlier this week, and we keep probing that. And on the fragrance side, they want more and more and more. So I don't see that softening, certainly not in the quarter. But as juxtaposed, what we said at the top of the call with this whiplash in the U.S. and even in the U.S.

the difference is some of the beauty stuff, prestige beauty, you cannot supply enough and other stuff. We have plans that we need to give them all. I think that the one thing I can say with certainty you go through any airport, whether in Europe or in the U.S., it's crazy.

So clearly, travel retail is back with a vengeance, but it's only half the picture because it's clearly the Chinese consumer is not traveling and what has been covered there with travel retail to Hainan Island has also been used because Hainan was in lockdown for a couple of weeks. But clearly, Western travel retail is back with a vengeance..

Okay, I appreciate it. Thank you. .

Thank you Mr. Castillo. The next question is from the line of Gabe Hajde with Wells Fargo. Mr. Hajde, your line is open..

Stephan, Bob, Mary, good morning. Maybe I don't want to read too much into this, but you mentioned the tax charge as it relates to the legal entity reorganization. And I don't want to misinterpret this as being sort of a corporate modernization.

But just curious if this was something that's been on the docket for a while in terms of you guys looking at and evaluating and wanting to do? Has it inhibited you from doing something strategically maybe here in the U.S.

or elsewhere maybe in Europe from executing, so just any color on that?.

Sure, Gabe. I can take that one. No, I mean it's part of ongoing efforts always to simplify our legal structure, your legal organization. And obviously, as tax loss change in various jurisdictions, we're always looking for the most efficient legal structure, particularly when you're looking at repatriating dividends from outside the U.S.

So yes, I wouldn't look too far into it. Unfortunately, sometimes when you're executing on some of these entity -- legal entity restructurings, they do trigger taxes because the owners have changed of that entity. But I wouldn't look any further into that. It's just -- it's more of a long-term consistent look at our overall efficient legal structure..

Thanks Bob. And then you called out in the press release that growth in Europe, again, I think Stephan mentioned it as well in terms of your fragrance customers and Beauty and Home doing actually pretty well on the demand side.

And I think last quarter, Bob, you mentioned Europe profitability actually being kind of at that 15% threshold that you're looking for in Beauty and Home. It's really the U.S. that's been lagging. So I guess, confirm that if you will? And then it sounds like labor issues have been resolved.

So maybe outside of underutilized capacity or lower demand, is there anything that you see in the structure that would prohibit you from getting that 15% target then in Beauty and Home or has it -- I heard Stephan say more work to do and just not the time to talk about it?.

Yes. So first, I think your summary is great, can’t confirm that. And I would put it this way, there's a lot as it relates to with the transformation to get European plants operating, humming again with the commercial front end working. And I'm delighted that, that is now working.

And though it's been a while, interrupted by COVID, that was kind of the rough cut. There's really fine-tuning to do that needs to be done carefully, also keeping in mind that European industrial relations are different than in the U.S. where you can just go in and do stuff.

But we're not done in that sense, but I'm very proud of what the team has accomplished. And as I said, they keep coming up with new ideas. It's a pity that when Europe was in the workshop, so to speak, the U.S. was pooling and not without the -- workshops..

Okay. Last one, if I could squeeze it in. Sorry, guys. Just you had a large injectable producer report yesterday and talked a little bit, for lack of a better term, a hangover from the vaccine.

Given, I guess, that you guys didn't necessarily participate as largely, do you envision something like that happening for you or just as it sits today, the best visibility on the inventory front, you don't anticipate something like that happening for you on the injectable side? Thank you. .

Yes, I don't know what you're talking about. No, just kidding. Look, it is -- as we said -- we had some benefits from COVID from technical business, but it was mainly the people get diligent about the flu shot. And we got some supply position for vaccines, but it was not as dramatic for some other people.

The biggest benefit of COVID for our injectable business was that we basically were validated as a technologically equivalent player and get adopted with new projects in the biologics and vaccine space.

You saw the effect in announcement some time ago and the many others like that, that we haven't announced or they haven't announced so that we feel so strong about our order pipeline and our project pipeline to make this investment in COVID products. But no, I would not anticipate a COVID hangover..

Thank you guys, good luck. .

Thank you Mr. Hajde. We have a follow-up from Mr. Staphos with Bank of America. Your line is now open sir. .

Thanks very much. Hi, guys. I hope you can hear me okay. So Stephan, I want to come back to Food and Beverage in particular and you mentioned that understandably, your customers are now trying to destock quickly after they had ordered a fair amount.

A year ago, volumes are very, very strong and despite sort of questions about you, is that a sustainable growth rate or not, the view that your customers were sharing and that the company Aptar was sharing was that we think it's a return to more consumption at home, we think this is reasonably sustainable.

And obviously, it wasn't, and we're going through a destocking period.

As you sit back and look at the last 18 months, what changes do you have to make perhaps in terms of how your -- you serve your customers Food and Beverage, maybe even Beauty and Home in terms of how much you allow them to order ahead? I've covered after going back to late 1990s, I can't remember a period where Food and Beverage and Beauty and Home have sort of resisted any kind of improvement and I recognize their macro challenges, but it seems like maybe on that front on what you're providing your customers, you could be tightening up there.

So what are you doing on the sales side there to improve and get better data and analytics that you're now in a position where you're sort of going through a period right now? And then relatedly, the rebuttal could be, well, George, we're in a competitive market, if we didn't offer the volume to our customers or a competitor would.

So can you talk to the competitive dynamic that you're seeing in Food and beverage and also within Beauty and Home and how you're taking steps to improve your moat over the next number of years? Thanks guys and good luck in the quarter..

Yes, the most exciting question. A couple of things, one is I give you some example. What we're doing with Beauty and Home, especially when we were so short of supply is streamlining SKU and doing, hey, we're making 20 shades of black. Can we agree on three because we can't keep making 20 shades of black.

So that is a strong effort and sometimes they want to go out because they want another shades. So the -- that is certainly going on. So let's say big theme product line rationalization. The other thing that I think is maybe in the long run much more important is sustainability.

So having products that are mono-materials that are recyclable, where the cap is tethered to the bottle, the mono-material lotion pumps that I mentioned in my opening remarks is highly desirable. So SKU streamlining, yes, innovation and innovation sustainability for me, those are the big themes. And….

I guess, Stephan, your sales force and with the volume you allow your customers to order, so they are not over-ordering and that you have better sort of analytics and visibility into your business? I guess that's where I was going with the question in particular..

Yes. Look, when you have a supply constraint, you are automatically allocating customers. And certainly, we have prioritized the global key accounts with long-term strategic relationships over smaller accounts, and -- they're on allocation to short change everybody to some extent. I'm not sure you can elaborate more than that George..

I think I know where you're going with it. The reality is a lot of times, the actual consumer data comes out several months afterwards, right. So I think we're doing a better job from a market intelligence perspective, but there's still a lag to that.

So it would be virtually impossible for a customer that came to us and said, "Hey, we need X million units from you." And we say, "Wow, we don't think you do. No, we're only going to sell you 50," right. We're not going to turn away that volume, right, even if we think they don't need it.

We have no idea into their supply chain and what they have in their warehouses or how they're perceiving the broader distribution outlet. So I appreciate the frustration around what are we doing to manage that. But the reality is that the customer wants a certain amount on an order, we're going to give them that order if we can supply it..

Yes. I understand, Bob. It kind of gets to ultimately the moat within the business relative to your other businesses. But I'll leave it there. We wish you a good performance in the fourth quarter, and we'll see you in a few months. Thanks guys..

Thank you Mr. Staphos. Our last question today comes from the line of Adam Josephson with KeyBanc. Mr. Josephson..

Thanks very much for taking my follow-ups. Just one kind of follow-up to George's question, which is when you look at the long-term margin targets for these segments, Beauty and Home is 15% to 17%. I think the five-year -- the trailing five-year average will have been 12%. Food and beverage, somewhat similar story.

Do you think you have the right footprint, if you will, for the demand levels and everything else that you're experiencing, do you think those long-term targets are still actually achievable, and how is that informing how much you're investing in these businesses given that, again, for years, you've been -- you've had real difficulty achieving those long-term targets?.

Yes. So look, I fully appreciate the question. It's something we are very busy with and having go in all the repeating why we are where we are. Clearly, we had a pandemic and all that. But we remain committed to that, and we have a series of measures in mind to get us there.

And clearly, the capital allocation has dramatically shifted away from these businesses, if you like, towards our pharma business, and that's both in CAPEX and in M&A dollars while continuing to make sure that we return money to shareholders. So we certainly nothing we're done here, not by a far stretch, and we remain committed to those targets..

Yes. And maybe one other point, Adam, on capital. We recognize that it is a changing landscape, right. So we're leading them heavily into more automation and I would call it more flexible manufacturing. In years past, we were geared towards very large runs.

So we're investing more heavily into more flexible work sales and things like that, that will enable us to better adapt to the volatile demand market that we're seeing. So I think we're making the investments in some of the right places and things that ultimately are more conducive to the environments that we're operating in..

Yes. I appreciate it.

And just one last one, Bob or Stephan, which is when we think about kind of a normalized sales or demand level, it's so hard to know what it is because if your customers were in effect over ordering in previous quarters and now they're making up for it by under ordering, it's hard to know what's normal, was previous quarter earnings levels normal, was fourth quarter normal, any kind of context you could give me in terms of what normal even is in terms of extrapolating from your fourth quarter guidance or the earnings you had in previous quarters in terms of what represents kind of a sustainable demand level, if you will?.

I don't think we have better insight for using our long-term targets also on the top line. Those are, of course, more on a volume basis. So inflationary price increases are -- if you want on come top of that. They have ways beyond that, with what transpired for the last three years I'm not smart enough. .

Got it, appreciate it Stephan. Thank you. .

Alright, I think with that, we can conclude our call. Looking forward to the discussion during the quarter, and we'll talk to you next quarter. Thank you..

That concludes Aptar's 2022 third quarter conference call. Thank you all for your participation. You may now disconnect your lines..