Ladies and gentlemen, thank you for standing by, and welcome to Aptar's 2021 Second 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 Mr. Matt DellaMaria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Thank you. Hello everyone. 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 on our website. If you are following along on the website, you can advance the slides by hovering over the presentation screen and clicking on the arrows on the right and the left. As always, we will post a replay of this call on the 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 what we are discussing today. I would now like to turn the conference call over to Stephan.

Thanks Matt, and good morning everyone. I hope that you are doing well. As you saw in our press release from yesterday, we announced strong top line growth in the quarter with reported sales up 16% and core sales up 10%, with EBITDA improvement over the prior year. I would like to discuss a few highlights as mentioned on slide 3. In summary, sales increased in each of our reporting segments with currency-related tailwinds adding to the core growth. The wide breadth of our portfolio of solutions and services continues to be a key strength of Aptar, as we generated growth in each segment and double-digit growth overall for the company. Bob will speak in more detail on sales by market when he gives his update. Similar to the first quarter, growth of our Pharma segment was driven by strong demand for elastomeric components for injectable drugs and active material solutions, which offset declines in sales to the prescription and consumer healthcare markets, which continue to be impacted by customers drawing down inventory levels in key categories. Our Beauty + Home segment reported solid growth in the beauty and home care markets, the former being mostly on easier comparison to the depressed second quarter of 2020, although with some initial signs of recovery. Sales to the personal care market were slightly below the prior year's strong performance, as hand sanitizer demand is normalizing. Approximately 75% of the growth came from increased volumes. In our Food + Beverage segment, top line growth was strong across each market segment, with about 60% of the growth coming from price adjustments related to the passing through of higher resin costs. It continues to be a very challenging input cost environment, and we are in the process of passing through higher input costs to our customers. I would like to remind you that the passing through of increased input cost has the effect of compressing margin percentages. Our overall margin was also affected by the mix of sales within our Pharma segment favoring some of our lower-margin businesses in Pharma. We also remain active on the M&A front, making several strategic investments. During the quarter, we announced that we were in the process of acquiring the outstanding shares of Voluntis, a pioneer in digital therapeutics. This is 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 advancements in healthcare are rapidly accelerating, and things like remote patient engagement and patient monitoring, whether for clinical trials or real-world treatment, will be a big part of each of our futures. Just this week, we announced another pharma transaction. We have entered into an agreement to acquire 80% of Weihai Hengyu Medical Products, a leading manufacturer of elastomeric components for injection devices in China. This investment gives us immediate local and regional supply capabilities in the critical and growing injectable space. Also, subsequent to the quarter, we announced the collaboration with a Chinese skincare company called YAT to bring new skincare solutions to the market. We look forward to leveraging YAT's expansive market insight database, focused on specific consumer skincare needs and skincare profiles, and we will use YAT's in-depth experience and customized turnkey solutions, as well as online product distribution and promotion. On the sustainability front, we have been active in forming strategic partnerships to further our progress towards a more circular economy where plastic can be recycled and reused. To that end, we have formed a partnership and are serving as a strategic advisor to a company called REBO to offer a reusable water bottle that uses technology to help people stay hydrated while helping to collect tossed away plastic bottles. Now on slide 4, I would like to speak to a few environment, social and governance, or ESG updates. As previously announced, 3BL Media evaluated the 1,000 largest public US companies on ESG performance and Aptar is honored to be named among the top 50 companies, leading in corporate citizenship. We also announced the launch of our 2020 Sustainability Report, which highlights again our extensive sustainability initiatives that have been implemented across our global operations and we invite you to read the report on our website. Our first comprehensive sustainability report was for the year 2014. So our experience and engagement is built on deep expertise and a long track record. Finally, we are delighted to welcome Candace Matthews to our Board of Directors. Candace is a highly accomplished business leader with over 30 years of experience developing and marketing products for the healthcare, cosmetics, food, and beverage industries. She has held leadership positions with Amway, L'Oreal, Coca-Cola, and Procter & Gamble, amongst others. Our directors provide valuable guidance and keen oversight based on their first-hand operating experience in the end markets and geographic regions in which we operate, as well as functional expertise and multicultural insights. Candace is a valuable addition to Aptar's Board with deep contemporary knowledge of our markets, including having spent a significant time in China. Turning now to slide 5. In new product and technology launches, I would like to briefly comment on several product introductions that will highlight the breadth of our offerings. In Pharma, our elastomer stoppers used with injection systems continue to play an important role in the COVID-19 vaccine distributions worldwide, including a vaccine approved in Latin America. We're also supplying stoppers for several animal vaccines in Mexico. In the prescription drug market, the central nervous system pipeline is active and we have several customers making progress with nasal delivery of a variety of medicines in the area of opioid overdose antidote and epinephrine medicines to treat suicidal tendencies. We also supplied our prestige fragrance pump for a new Tom Ford fragrance and our dispensing closure for Dollar Shave Club's new shampoo and conditioner line, most recently launched in the US. Also in the US, our airless pump is the dispensing solution for Coty's Cover Girl and Olay brand color cosmetics product called Eye Rehab. Finally, in the home care market, our closure with SimpliSqueeze valve is featured on the NUK dish care product in Europe. In Food & Beverage, we received critical guidance recognition from the Association of Plastic Recyclers for our SimpliCycle recyclable valve technology. This recognition acknowledges technologies or packaging components that solve long-standing problems in sustainable packaging design. Our SimpliCycle valve is made from low-density materials that allow the valve to float, so it is easily separated from the polyester stream and then ultimately recycled twisted polypropylene or polyethylene olefin stream. In the food market, our custom closures are featured on a limited additional line of mash-up sauces, including hot sales coupled with ranch and tartar sauce combined with ketchup by Kraft Heinz in Canada. Nestle has also launched a new range of condiments with flavors from the Middle East called Mezeast, which feature our food closures. Turning to the beverage market, our closure with SimpliSqueeze valve is the dispensing solution for a new concentrate product in Germany called Creme de la Cream Concentrates by ALDI. With that, I will now turn it over to Bob, who will provide additional comments on our second-quarter results.

Thank you, Stephan, and good morning, everyone. Starting with slide 6. As Stephan mentioned, we had a strong top line performance in the quarter, and I will walk through some of the market growth in a few minutes. Turning to slide 7. Second-quarter adjusted earnings per share increased 7% to $0.91 per share on a comparable basis with the prior year and when neutralizing currency effects. Aptar's adjusted EBITDA increased 8% to $148 million compared to the prior year, and this included the negative impact of the shift in business across our markets as well as a net negative inflation impact of approximately $9 million. Our consolidated adjusted EBITDA margin would have been approximately 180 basis points higher without the net negative inflation effect and the margin compression impact from passing on the higher costs. Slides 8 and 9 cover our year-to-date performance and show the 5% core sales growth and our adjusted earnings per share which were $2.01, up 10% compared to the $1.83 a year ago, including comparable exchange rates. Briefly summarizing our segment results, our Pharma business performance was mixed across the different divisions with total segment core sales growth of 2%. Pharma had an adjusted EBITDA margin of approximately 33%, which was reflective of the mix of business across the different markets compared to the previous year. Additionally, Pharma's margin was negatively impacted by approximately 100 basis points due to net negative inflation costs in the quarter of approximately $2 million. Looking at sales growth by market compared to the prior year, core sales to the prescription market decreased 7%, and core sales to the consumer healthcare market decreased 1% as certain pharma customers in these markets continue to draw down inventory levels as treatment for allergic rhinitis and cough and cold are impacted by low levels of patient consumption and fewer overall non-critical doctor appointments. It was another strong quarter for components used for injectable medicines and our active material solutions. Core sales to the injectables market increased 14%, and half of the growth was related to vaccine administration of which the majority was for COVID-19 vaccines. Core sales of our active material science solutions increased 20%, primarily due to increased sales of our protective packaging solutions for probiotic products and COVID-19 diagnostic test solutions. Turning to our Beauty & Home segment. Core sales increased 13% over the prior year second quarter, which is the most difficult period during the COVID-19 pandemic. Approximately 75% of the growth came from increased volumes. This segment's adjusted EBITDA margin was 11% in the quarter and was negatively impacted by the timing of passing through increased resin and other raw material costs as well as other inflationary costs, which had negatively affected adjusted EBITDA by roughly $5 million. Had we not had this net negative inflation impact and we did not have the margin compression effect of passing through the higher costs, EBITDA margins would have been approximately 180 basis points higher. Looking at sales growth by market on a core basis, core sales to the beauty market increased 28% due to higher consumer demand for fragrances and facial skincare products. Core sales to the personal care market decreased 1%, as higher sales to the hair care and sun care markets were offset by declines in personal cleansing as hand sanitizer demand normalizes. Core sales to the home care market increased 26% on strong demand for a variety of applications and increased custom tooling sales. Turning to our Food & Beverage segment, which had another solid performance, core sales increased 23%. Approximately 60% of the core sales increase is due to passing through higher resin and other input costs. The segment had an adjusted EBITDA margin of 16% and was negatively impacted by net inflationary cost increases of approximately $2 million. Had we not had this net negative inflation impact and we did not have the margin compression effect of passing through higher costs, EBITDA margins would have been approximately 360 basis points higher. Looking at each market, core sales to the food market increased 21% as volume rose on increased demand for specialty food dispensing closures as consumers continue to cook at home. Core sales to the beverage market increased 26% as we realized some recovery over a very low prior year second quarter. Moving now to slide 10, which summarizes our outlook for the third quarter. I'd like to take a minute to remind everyone that in the prior year third quarter, we had a significant amount of cost and tooling sales that caused an atypical jump in our sales last year in our Active Material Solutions Group, where we were up over 50% in year-over-year top line growth. As Stephan mentioned, while we expect the second half to continue to show signs of recovery, our expectation is now for a stronger recovery toward the end of the year. There's still a lot of uncertainty regarding the pace of economic recovery, and many of our customers remain cautious. We don't yet see a significant change in the prescription drug market in the third quarter, but are anticipating an improvement in the fourth. We expect our third quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs and changes in the fair value of equity investments to be in the range of $0.90 to $0.98 per share. The estimated tax rate range for the third quarter is 28% to 30%. While we don't give guidance beyond the coming quarter EPS range, we have mentioned our optimism around the fourth quarter, and that would imply that our fourth quarter adjusted EPS range should be above the third quarter, nearer to the current published consensus of equity research analysts. In closing, we continue to have a strong balance sheet with a leverage ratio of approximately 1.5. On a gross basis, debt to capital was approximately 36%, while on a net basis it was approximately 29%. In addition, we continue to invest in innovative growth projects, and we are confirming our forecasted range of capital expenditures for the year at a range of $300 million to $330 million. At this time, Stephan will provide a few closing comments before we move to Q&A.

Thank you, Bob. In closing, on slide 11, I'm very proud of our people and the work we have accomplished through the first half of the year, amidst these unprecedented times. As certain economies begin to reopen, we expect the recovery in our beauty, beverage, and prescription pharma business to gradually progress. However, this recovery is likely to occur at a measured pace, given the uncertainties around the COVID-19 variants, and very limited intercontinental and inter-Asian travel. We anticipate a stronger performance towards the end of the year. As Bob pointed out, our fourth quarter should be stronger than our third despite the fact that certain inflationary costs will remain a headwind, especially labor and likely transportation. To mitigate those effects, we aim to implement further price adjustments where necessary to pass on these costs. As we look out further, vaccine distributions will eventually be more widespread and successful, and life will eventually return to more normal experiences with more robust social activities and international travel. Our business is built for the long haul. As I mentioned earlier, because of our breadth across attractive markets we are able to generate growth even when conditions are not always ordinary in each market. We will continue to focus on sustainable growth and returns across all areas of our business and anticipate that our consolidated margins will improve as we transition to a more balanced and steady growth pattern. The long-term outlook for our company has not changed and remains quite promising. We are making strategic investments today that will further strengthen our competitive position, including expanding capacity in key high-growth regions and markets. With that, I would like to open the call up for your questions.

Thank you. Your first question comes from George Staphos from Bank of America Securities.

Hi everyone. Good morning. Hope you’re doing well. Thanks for the details. I just wanted to start maybe with one line item that we didn't – I don't think talked too much about in the opening remarks, which was corporate expense. It was up a little bit more than we would have expected. What was driving that? Was that related to some of the strategic moves you've been working on, Stephan or Bob? And if not, what was driving that? And what should we expect going forward? And I had a couple of follow-ons on Pharma.

Yeah, I can take that one, George, and Stephan. So yeah, George about half of the increase is from some of our strategic activities and some projects that are expected to continue in the near term. The other half is really more, I would say, variable. And the increase in – versus the first quarter was really an increase in accounting for some short-term compensation accruals as we look to the outlook and where we think the end of the year is going to finish. Looking forward, I don't think the run rate is it should be at the $16 million that we saw this quarter. It would be probably closer somewhere between the $14 million and $15 million range.

Okay. Understood. On Pharma, you mentioned that Rx was down about 7% in the quarter and you've talked about destocking for a while, so we understand. But it was notable to us just because I think last year prescription was down about 6%. So a weak number off of what I recall, if I'm remembering the numbers correctly, kind of an easy comparison. Was there anything else going on that we should be mindful of relative to your standing in Pharma relative to longer-term outlook? Why, why not?

No, not really. Obviously, we have gone back with the fine-tooth comb even the last seven years and looked at all the different movements and scanning data that is available to us. Hindsight is 2020; clearly, there was already more inventory in the chain than usual by a bit before we hit COVID. And during 2020, orders were slightly reduced but not in line with reduced consumer consumption. So that actually exacerbated inventory build still in 2020 despite the lower sales that you referred to. And then finally, in January, everybody hit the emergency brake seeing that we had a year of very low consumer consumption and that inventory in the chain. So clearly, the inventory destocking is more extensive than we would have liked. But what we see from customer conversations is that that should run its course during the third quarter. Certainly, have more indications about Q4 recovering than we had about Q3 a quarter ago, that we were rolling off that historically these adjustments were two quarters. But as I said, we've done a lot more research. There's nothing around share or other shifts that you might be concerned about. This will recover. Clearly, the allergic rhinitis category is a low single-digit growth category. The one variable that we will always look at is conversion at what base is the conversion continuing or not from oral solid dose to nasal spray. As we mentioned last time, Glenmark the new combination nasal spray approved. So these will continue to come. And that's always one variable. And beyond allergic rhinitis which really drives most of this destocking in Rx, of course we are very excited about the central nervous system category. That continues to grow very well but off a much smaller base of course. In consumer healthcare where most of the flu treatments are destocking is still going on but it's less pronounced. And of course, flu season is, I think, much more visible now. Even summer flu is going around. So those two give us some confidence for quarter four returning to a more normal pattern.

Stephan, thanks for that rundown. Last one for me. When we look at deals like Weihai Hengyu and Voluntis and the company obviously has said not just today, but in the past that you are built for longer haul nonetheless these are not large deals, but they are going to divert some of your attention and capital. They don't add to earnings. In fact they're dilutive through '22. Can you quantify what the benefit of having these two businesses will be to Aptar, say '23, '24, '25? How will your shareholders see this in your return in your earnings in your growth? Tell us why these are good businesses?

Sure. So let me give you a qualitative view and then Bob please answer on the quantitative side. So let me start with Weihai and Hengyu. I mean we've talked about the regionalization of pharma supply chains before. Governments have woken up to the fact, that especially in the category as critical as vaccines, they're dependent on substantial cross-regional flows. So it is critical for us to have supply capability in the U.S., which we built around Congers. In Europe, of course, we've had historically. And in China. Hengyu is very well set up in China and has all the regulatory approvals. It's not that big a business, but if we had to build it and get approvals, you'll five years later with substantially more money. So, I think this is a very important strategic acquisition that will pay dividends very soon in the very large and constantly growing Chinese market. When it comes to Voluntis this is clearly more of a building of capability in digital therapies. We can't say too much, but Voluntis is still a publicly traded company. So there are research reports available on it. But clearly they are one of the very few who have gotten FDA approvals on digital therapies. What is that? That's basically a combination approval with a drug and the digital companion to manage a disease whether it's oncology or others. And we see that as the future. And we've made of course digital investments before and built the group. Clearly that is the future investment and pharma timelines are an average project is maybe seven years. And digital is probably while growing fast, it is no faster than other projects. But we see that critical to supplement our device business and enable our device business with digital companions. And I think that built an even deeper moat around it. Plus, as patients we know the engagement with our healthcare providers is more and more digital. And these digital companions will just become a way of managing both chronic diseases, but also acute diseases. So overall we see that very important growth driver in the future. Maybe I'll turn it over to Bob with some numbers.

Yes, looking ahead at the numbers, it is slightly dilutive in 2022, primarily due to purchase accounting adjustments related to most transactions. Stephan highlighted the strategic aspects of this. I believe the growth in our injectables division within the Pharma segment will become significantly larger in the future, especially considering the growth we've observed over the last 18 months and our projections for capacity expansions in the U.S., along with the addition of Hengyu. This enhances our injectable manufacturing capabilities across various regions.

Okay. Thanks very much. I will turn it over.

Your next question comes from John Kreger from William Blair.

Hey, thanks guys. Maybe just a couple of follow-up questions on the elastomer business. I think I heard you say that vaccine work in the second quarter gave you about half the growth that you saw in elastomers. Can you just talk about what sort of visibility you have on that sort of contribution longer term? What sort of COVID vaccine order book do you have out through next year?

Yes. We don't really guide into that much detail, but our order portfolio and our project portfolio is very broad both COVID vaccines and the traditional flu vaccine in different formats in different geographies. Plus, as we discussed before as a result of the pandemic and the vetting of suppliers, we also see much more activity around biologics treatment in general. So overall, we feel confident of continued good growth in that business and that's why we're accelerating the capital expenditure that Bob already referred to and that is well underway.

Great. Thanks. And then the Hengyu purchase does that give you any new sort of product capabilities, or is that really just about again a localized supply chain with elastomers?

I think that's the most important part, but that maybe sounds a bit too trivial. Getting regulatory approval for new manufacturing in pharma in China is maybe a half a decade process. So, for us, it really accelerates our presence in that market from local supply as opposed to importing from Europe by saving many, many years. And of course, they have some technologies that are more adjusted to local demand. But of course, we can also transfer in some technologies. A lot of that has long timelines with customer approvals. But boots on the ground in a large market that's rapidly growing with full regulatory approvals is very important.

Great, thanks. And then, Bob a quick follow-up. You gave us lots of detail on the inflationary pressures in the second quarter. Can you talk about what sort of assumptions you're making for the second half?

Sure. So, I mentioned it was roughly a net negative $9 million in the first quarter. Based on the pass-throughs we've already implemented and where we see the inflationary cost landing in Q3, we expect to be better than we were in Q1, but certainly, will still be a net negative in the quarter. Right now, I mean again, it's tough to truly estimate where it lands, particularly in the raw materials side, which is the biggest component of it. But if I had to guess right now, I would say we'd probably be somewhere in the $7 million to $7.5 million negative in Q3.

Great, thank you.

Thanks, John.

Your next question comes from the line of Mark Wilde from BMO Capital Markets.

Good morning, Stephan. Good morning, Bob.

Hi, Mark.

You previously talked about kind of a second half pickup. It seems like it's become more of a fourth quarter pickup. Some of that, as Bob mentioned, is inflation, but I wondered if you could just put a little more color around the other factors that are in play for you.

Sure. I mean the biggest factor clearly is that the pharma destocking being extended basically by a quarter. I was speaking earlier to the increased granular understanding we have of that. And therefore, the call we are making on the fourth quarter. When you look at the other segments, Beauty and Home is starting to recover. We have good customer conversations and start to see order patterns that are quite encouraging. Unfortunately, we also see some supply chain dislocations as we all start to realize, you just don't restart the economy by pushing a button. Just one example, as government support for some of the smaller companies in Europe dries up, some of our suppliers go bankrupt and we have to go to other suppliers, which puts strains on supply chains and expands lead times. But the demand is clearly there and visible. And customers are excited about the Christmas season and all the different events in China 11/11 and so on. Now, the uncertainty that we all have is the variants and what it will or will not do to the opening up of international travel. Clearly, we are behind to where I personally thought we were a quarter ago in terms of international travel. Americans can travel to Europe, but the Europeans cannot travel to the US. And that you would think that's the basics, let alone Asians traveling outside of the region or even within the region. And clearly, the Chinese consumer is going to be bottled up in China for at least another year. That means a lot of that spending is being redirected to domestic spending. And while we do as much as we can to grow our footprint in China, our share of the consumer basket for domestic purchase Hainan Island, for example, is lower than our share of a basket that they spend downtown London and New York or Paris. So, the pace of reopening of international travel is a big uncertainty for us. That's why we are optimistic, but with some caution on the pace of opening up of intercontinental travel and especially where the Chinese consumer spends their discretionary spending. And that would kind of temper my comments. Food and Beverage, we continue to see obviously good growth as people continue to cook at home. Beverage, which is more of a domestic purchase, of course, there's some travel aspect on-the-go beverage, but we see a decent recovery. And that gives recoveries further along, I would say, than the beauty recovery. But clearly, we are making progress, and we expect sequential progress, but we're not back at 2019 level yet.

Okay. Just for my follow-on just real quickly. You've done so many kind of small acquisitions and joint ventures. I just wondered if you can talk generally about how you're kind of managing and tracking performance on all of those investments.

Yes, there are three main aspects to consider. First, we view acquisitions as a way to enhance our organic growth, similar to our bolt-on acquisitions like Hengyu, and to support our innovation efforts, such as our investment in YAT. We only pursue venturing investments if there's a solid business rationale and if the business leaders are committed to being actively involved, whether that's through attending board meetings, engaging in licensing agreements, or establishing another meaningful connection to ensure a strong ongoing relationship. In nearly all cases, we have one of our business or innovation leaders closely collaborate with the company to ensure that progress is made, allowing us to derive future value. Second, Bob's team works diligently to maintain accurate financial records and proper accounting for these investments. Lastly, our executive committee conducts a review of these ventures to confirm that our overall portfolio remains aligned and makes sense. If selling an asset is advantageous, we will consider that option, as seen with the sale of Propeller and the evolution of our PureCycle investment. Our track record has been quite successful, contributing significantly to our innovation pipeline and future value. However, developing this capability has required effort to ensure we follow through effectively and gain optimal value from our investments.

Excellent, that’s what I was looking for. I’ll turn it over. Thanks, Stephan.

Your next question comes from Ghansham Panjabi from Baird.

Thanks. Good morning. I guess on Beauty and Home, can you just give us a sense as to how 2Q volumes compared to the pre-COVID level baseline, and also the same for the major subcategories, so we can get a better chance as to where we are in the recovery for that segment.

All right. I can take that one, Ghansham. So if we look at Q2 and we look at the segment as a whole so Beauty + Home, we're about 95% of the 2019 levels for the segment. And if I look at it on a year-to-date basis, we're probably closer to 90% for the year. Now if I break it down into where we are from – specifically from a beauty category, we're about 85% for Q2 where we were pre-pandemic in Q2 2019. And then if I were to look year-to-date 2019 versus year-to-date 2021 for beauty, we're about 80% of the way there. So we're getting closer on the beauty side.

Got it. And then in terms of incremental margins on an as-reported basis, it looks like it's about 21% for that segment. If I adjust for the, I think you've called out $5 million of price cost impact in Beauty + Home, it's closer to $30 million. Is that the right baseline to think about going forward in the context of all the productivity initiatives you've had for that segment?

It's really hard for me to generalize. In the Beauty + Home segment, we've got so many different product lines and so many different SKUs across multiple regions. On an average basis, probably not too far from that. But it's really hard for me to – it's going to truly depend on what categories are growing. And remember, if you don't have – if you've got one particular area that is down impacting a particular factory that has a significant downward pull or headwind on the overall average. So it's hard to really say that that's going to hold true for every category.

Got it. And then maybe just one final one for Stephan on Pharma. I think you're sharing some optimism in terms of the destock, kind of cycling through 3Q. But can you just give us some other – what is that based on? I think you mentioned conversations with customers but is there anything more concrete that you can share in terms of inventory to sales or some version of that that gives you confidence that 4Q will see that improvement that you sort of implied?

Yes. Look, I refer to the forward-looking statement language, but within that context, as I said, we look at scanning data. We look at proprietary database, data subscription data that we have for the U.S. and Europe. As you know, these data do not cover club stores nor online, which gives them some caveats. And we went back with a fine-tooth comb and kind of okay what are those inventory levels? Where are they? What probably is in homes in CMO locations in finished form. We know there's a two-year shelf life on finished forms and triangulate backwards where we were at the beginning of the pandemic and what the evolution of consumer demand is given that at least in the U.S. and Europe people are out and about allergies in full bloom. And then correlate that with customer conversations, order forecasts which they are giving us. And I would say, it's a more informed call than we had three months ago, but it's not a perfect call by any stretch. The one thing we know if everybody goes outside and puts on masks while outside, the incidence will be less. But that's – I think the likelihood of that in the U.S. and Europe is not high. I think that's probably as much as I can give you.

Your next question comes from Kyle White from Deutsche Bank.

Hey, good morning. Thanks for taking my questions. I wanted to go back to Mark's question regarding kind of the acceleration that you expect towards the end of the year. And I know you're not guiding towards 4Q earnings, but you kind of pointed to what it could be. And I'm just curious what the outlook for some of your costs like resin are embedded in that kind of outlook that you provided. Do you have any benefits from resin volume there?

Yes. I don't know if we've actually embedded any positive. Certainly, I think we're seeing some signs of abatement on the raw material side. So there is a certain amount of expectations that we're going to be catching up on some of the delays. But again hate to be very concrete on that. I mean we are just now getting into hurricane season. As we know anything can happen. But certainly there is an expectation that we're getting closer to catching up on some of the raw pass-throughs.

Understood. And then on beauty, you talked about the travel restrictions and how it's impacting some of your Asian customers. But I'm curious if you're seeing anything from your customers in terms of potential product launches being delayed or paused just given the variants and some of the travel restrictions that you mentioned?

No. Specifically to that question, we don't see that. Customers remain confident, probably excited, bullish about the Christmas season. We haven't seen product launches, frankly right now it's – a lot of our challenge is to make sure that our lead times meet with the customers' needs towards the end of the year, given supply chain dislocations. And certainly we see the demand strengthening. Having said that, of course, consumer confidence plays a big role in what people actually spend. So I'm probably less concerned about the demand being there. Probably more concerned about if there's something coming with COVID and the sell-through doesn't happen what does it mean for next year. But your guess on that is as good as anybody's.

Your next question comes from Adam Josephson from KeyBanc.

Nice. Good morning, everyone. I hope you’re well? Bob just one question on – I think Kyle asked you about this as well but the kind of implied 4Q guidance. You said – you prefaced your comments with we don't normally talk about quarters beyond the current quarter but nonetheless say that, we expect to be close to the analyst consensus, which I believe is $1.05. I guess what prompted that comment? I mean what prompted you to talk about quarters beyond the current one, which is obviously not typical for the company?

I would say more of our visibility and more of our confidence looking out further. I mean we're getting some good signals from our customers as Stephan alluded to. Stephan also talked very much about some of the research data, external data that we collaborate with and take a look at and triangulate our numbers with. And so it's more of – I would say more of a direct correlation to our confidence. And we see this improving in Q4, rather than leaving you with the Q3 quarter that is lower than what the consensus is today and people kind of wondering what's going to happen in Q4.

The other thing I would add, Adam, is a normal fourth quarter for us is lower than the third quarter, just because end of year Europe holidays, all that. And since this is a year where we think this pattern will not be a normal pattern, we just wanted you guys to know that, we don't think it will be like other years, where the fourth quarter is lower than the third quarter.

Yes. No, I appreciate that, Stephan. And on pharma, there is some thought kind of close to the end of last year that the vaccines might be quite good for your Pharma business and therefore the pandemic as a whole would be beneficial to your Pharma business. And then, obviously, the cold and flu season never happened and there's been this significant customer destocking as a result. How would you characterize the overall impact that the pandemic has had on your Pharma business? And given what's happening with the Delta variant, et cetera, what do you see the ongoing impact as? In other words, good, bad, indifferent, et cetera?

For people to be exposed to dust and pollen, they need to be outside without wearing masks. We can then assist with allergic rhinitis products and more COPD, although that has been less affected. However, if people wear masks consistently, their chances of catching the flu and common cold decrease significantly. This is a downside; while it's beneficial for people’s health, it poses challenges for treatments. Regarding the vaccine, as vaccination rates increase in key markets, aiming for thresholds like 75% or 85%, we will benefit from both the vaccine and a rise in allergies, colds, and flu. This scenario would yield positive effects. If booster shots are rolled out successfully, that would further boost our business. Conversely, if everyone returns to wearing masks indoors, that shifts the situation significantly, affecting both the beauty and beverage industries. We've noticed this trend already. However, if we remain optimistic, it seems the U.S. government is committed to increasing vaccination rates, and Europe is also catching up. These two markets should balance out well for us. China presents a more complicated picture with low vaccination rates and strict lockdowns, which affects both inbound and outbound tourism and business travel. Consequently, our strategy should be to expand our presence to leverage the domestic market in China. However, the ongoing lack of travel, tied to the low vaccination rates, will negatively impact our beauty business.

Appreciate it, Stephan. Thanks a lot.

Yes, Adam. I would like to add a couple of points specifically regarding our Pharma segment. While stepping away from the data surrounding COVID, I believe it's been a net positive for the Pharma business. The focus we gained has allowed us to reach many new customers, especially in our injectables division, which we had not previously targeted. This has effectively put us on the map with a new clientele. It has led us to have a positive outlook on investing in additional capacity expansions, along with the recent acquisition we mentioned in China. Additionally, within our active materials solutions division, we have been able to advance our material science technology into new domains. Although we initially believed we had a viable solution for N95 decontamination, the need for that did not materialize. Nonetheless, our technology is now being utilized for test kits and similar applications, and I anticipate this trend will continue as in-home testing grows, not just for COVID-19 but also for potential future pandemics and even past flu outbreaks. Overall, I would say it has been a qualitatively beneficial experience, enhancing our innovation and technology while also granting us access to new customers and a brighter outlook on injectables overall.

Your next question comes from Neel Kumar from Morgan Stanley.

Hi, good morning.

Hi Neel.

In Pharma, you mentioned a negative 100 bps impact from inflation and an impact of mix as well on margins. Could you just talk about, where specifically you're seeing inflation in the business and the impact mix had on margins, during the quarter? Do you expect 3Q Pharma margins to generally be in line with the second quarter level?

Yes. So, I mean the biggest piece, if I look at it for Pharma is really coming on some of the specific resins that we used in our active material solutions category. And that's probably the biggest. And then there was another piece on the regular resin. A little bit also on the labor side in addition. But I would say that the bigger needle mover on the margin is going to be the mix of where the business fell in Q2, right, with both consumer healthcare and prescription being down and injectables and active packaging being up.

Got it. That's helpful. And my impression was that resins is actually more of an immediate pass-through in Pharma versus having a lag in Beauty and Home and Food and Beverage. Is the structure different in the active packaging business?

We have some large contracts on the active packaging side. Some of the larger contracts are based on annual reassessments of total cost, so some of those won't be fully passed on or will only be passed on when we reach 2022. This presents a bit of a challenge. We'll need to see how things look for 2022. However, the contractual situation in the active materials solutions side appears somewhat different.

Okay. That's helpful. And then just besides for allergies, can you just talk about how some of the other areas in prescription performed in the quarter? Were there any other areas you would call out as coming in below expectations?

I wouldn't say so. I mean, central nervous system continues to do very well, growing double digits, but off a small base. And the COPD area is not as affected by the destocking as the allergic rhinitis, but still lower than normal.

Your next question comes from Daniel Rizzo from Jefferies.

Good morning. I'm sorry if I missed this, but CapEx is up a bit this year. Can you just remind us what's spending on there and just provide some color on that?

Sure. So, I mean, we've got three pretty significant projects that we had mentioned at the beginning of the year that led us to our total target range of $300 million to $330 million. One of those is that injectable capacity expansion that is underway and we've begun to make investments there. So we got about $35 million expected there in terms of cash outlays in 2021. We also have started our project in China on one facility for our existing operations, primarily focused around pharma. And there again, we expect that there's going to be cash spend this year about $14 million. And then, we are optimizing our footprint in France also for our decorative capabilities. And there hasn't been a lot that's come through yet. But there we expect about $22 million in cash outlays in 2021. So, all in all, you got about $71 million on 2021 CapEx that's included in that $300 million to $330 million.

And for 2022, I mean, will a portion of that will be the similar cost next year for the same projects or what I miss here?

Sure. Yes, there'll be some bleed over into 2022, as these projects are getting closer to completion. We have not yet given 2022 guidance on cash capital expenditure.

Right, right. No, just in general terms.

Yes.

Your next question comes from Gabe Hajde from Wells Fargo.

Good morning, gentlemen. I hopped also kind of late in the call. Just two quick ones for you. One, obviously, inflation I think came a little bit hotter and quicker than what people were thinking coming into this year. Have you guys taken this opportunity? It sounds like most of it is centered on resins, but perhaps to kind of maybe revisit some contracts as they do come up to shorten that lag, or is that something that you don't view as necessary? And, I guess, talk about briefly just other input costs to provide more openness?

Yes, the answer is affirmative on both points. You may have observed that the pass-through for food and beverage has significantly accelerated compared to historical trends due to changes we've made to contracts in the past. Although it's somewhat more challenging as prices rise, we're already experiencing benefits from these adjustments. Regarding other input costs, we are indeed implementing general inflationary increases that are not tied to raw materials, and all three business segments are looking to enforce these changes, as evidenced by our public announcements in June that were not related to raw material cost increases, but rather general inflation. In the Pharmaceutical sector, this process primarily occurs during the renewal of long-term contracts where such adjustments are incorporated. Aside from the active material solutions business, we generally do not have automatic pass-through provisions. However, there's increased pricing power that comes with contract renewals, often including price maintenance clauses. Clearly, we have a variety of strategies at our disposal beyond just raw material pass-through, and we are actively utilizing all of these options.

Thank you, Stephan. And then, I mean, obviously, you guys kind of had three transactions to announce to us. We've heard some chatter that private equity has backed out a little bit from the M&A market. Just curious if there's anything still in the pipeline? I mean, I appreciate you guys are probably always active to some degree. But anything that you feel like you're getting close on? I guess, a kind of update there?

Yes. Look, our M&A activity is active, as active as it’s always been. You work on a dozen deals and you do one. In the end, you lose some and you win some. And there is no change to that. And our leverage is at 1.5, so we certainly have the firepower. And we continue to look at M&A to complement our organic growth and geographic growth, as well as our innovation activities. So there's no change to that and it remains an active environment. But it's not done until it's done and the press release goes out. So I can't really speculate beyond that.

Understood. Thank you

Your final question comes from Salvator Tiano from Seaport Global Securities.

Yes, thank you for taking my questions. Since you've provided some insights on Q4, I would like to know more about each of the businesses regarding lead times. When do customers typically give you their initial indications? Also, when do they need to confirm their orders for the quarter?

Yeah. I don't want to really go in that detail, except we did tell you. And I'm happy to reiterate that our lead times in Beauty + Home are higher than we want them to be. Last year we were even written up in the Wall Street Journal that we can't get enough hand sanitizer pumps out there. And pumps are still a little bit backed up. And as we see a rebound and have some of these supply chain disruptions or dislocations that I mentioned, lead times are higher than we would like them to be in the Beauty + Home area. I think, I would leave it at that.

Okay. And with regard to the other segments especially on Pharma, I guess, what I'm trying to understand is, how strong confidence you have here?

Yeah. So, we are not supply constrained to any extent in the prescription drug business or the consumer healthcare business, as you can imagine from the volume levels. Certainly, supply chain is getting a little tight in the injectable space, but we have the capacity to service the demand. But the only area where this is really a topic, is in Beauty.

Yeah. Okay. And just switching gears a little bit, sustainability, you published I think your report was in May. I want to understand a little bit, what actions have you taken? And what line of sight do you have for procurement to get I think to get your PCR consumption to around 10%, I think is your 2025 target. And I think your recyclability of products went up from 35% last year to 64% this year, pretty big move. What have you done to increase the recyclability of your products that much?

A lot has to do with making products more mono-material, as we discussed with the Future pump, and also modifying our special SimpliSqueeze valve to be recyclable. These are just two examples. In terms of the long-term outlook, one factor is what we provide and another is what clients actually purchase. Our commitment to increasing recycled content is dependent on clients choosing solutions that have higher PCR content or are fully recyclable. We have had certain PCR offerings for a while, but clients didn't purchase as much as we anticipated. However, we do expect this to rise. The availability of the right grade of PCR is indeed a concern, which is why we invested in PureCycle to boost food-grade-approved polypropylene production. We have also co-invested with some customers in this effort. Additionally, we closely monitor the advancement of chemical recycling, which involves converting mixed-use plastic back to monomers and re-polymerizing them. There's a lot of ongoing activity that will hopefully enable our customers to meet their public commitments, but ultimately they need to align their orders with those commitments.

Great. Thank you very much.

Thank you. I think this concludes our call. Thanks for your interest. And look forward to meeting you on the road virtually.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now all disconnect.