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 combine 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 advancements 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, behave, 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, which we affectionately term 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 in 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 one-time 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 one-time 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 one-time 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 the 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 tests 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 continuing. 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. Our first question today comes from George Staphos with Bank of America. Mr. Staphos, your line is now open.

Hi everyone. Good morning. Thank you for the information. I wanted to revisit some of the challenges you mentioned, Stephan, and see if you could provide more detail. I understand that it's tough right now to predict when things might improve or speed up. How does the current situation stack up against past recessions you’ve experienced? That's my first question. For my second question, we see that you're now systematically shutting down operations in areas with low utilization. Would it make sense to consider taking even bolder actions in Beauty and Home, as well as Food and Beverage, where the operations haven't performed as expected in terms of margins for several years? How can you leverage this difficult environment to drive more proactive measures, which seems warranted in this kind of situation? Thank you.

Good morning, George. Thanks. I can't really compare this environment to anything else. In my 30 years, I've never experienced such a rapid deceleration from one quarter to the next. Looking back, at the start of summer, we were struggling with staffing shortages of 10%, 15%, or even 20%. Once we caught up with our staffing needs and reduced lead times, retailers and customers suddenly hit the brakes. Although I don't have all the analytics, the entire U.S. supply chain has been clogged. People have been stocking up and ordering whatever they could, and now, with headlines about an impending recession, they're trying to reduce their inventories before the year ends, particularly with labor shortages still affecting us. This situation highlights an unprecedented level of undercoverage in North America, unlike anything I've seen before. That said, there are regional differences. For instance, in our personal care division, there's a beauty plant struggling with product supply, and this isn't just a European issue. Regarding when this will all stabilize, we've noticed a softening in the food market, with consumers shifting from dining at home to eating out and some customers already taking inventory actions. We expect food market softness to last into at least the second or third quarter. Personal care often indicates an economic slowdown, and there may be a couple of quarters before we see improvement. Unfortunately, we didn't anticipate this sudden shift. That’s why we only provide quarterly guidance. As for your question about taking more aggressive actions, we are actively exploring various opportunities, but this isn’t the right setting to elaborate on that.

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. As a reminder, we are investing a significant amount of capital, $180 million, to expand our injectable division's capacity. A portion of this investment is directed towards Europe, while another part will go to the U.S. Once we bring additional capacity online, it's essential to operate it, produce the product, and share it with customers. They then need to complete the validation process. Revenue typically starts coming in about 12 to 18 months after we resume operations with the equipment. This means there will be a temporary drag on our results as we manage these initial units. It's common in the pharmaceutical industry. We've indicated that the impact is around a couple of million per quarter, sometimes slightly more or less. This trend will likely continue throughout this year and into the next. We expect to complete the majority of our expansion by mid-next year, followed by a revenue lag of 12 to 18 months. Regarding the ERP costs, there is around a $0.05 impact on the fourth and first quarters. It's important to note that this is not just an upgrade from one SAP version to another; we are transitioning our business from a non-SAP environment to an SAP framework, which is essential for scaling. Lastly, while this investment increases capacity, it also significantly enriches our product mix since most of the capital is going towards premium products that are priced much higher than standard products.

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 the 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 one-time items in there, other than that $0.05, which is kind of one-time 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 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, I agree with you that the end consumer demand isn't collapsing. The situation can be best described as supply chain whiplash. Initially, we faced supply constraints with lead times extending to three quarters, but we've started to reduce them. Our competitors were in a similar position, all doing their best to secure what they needed to build up inventories. Now that we've secured the necessary labor, our lead times are back to normal. Our customers are also saying they can now obtain what they need, and they're assessing their warehouse inventory alongside expected consumer demand. In response to retailers’ feedback, customers are looking to reduce their inventory before year-end, anticipating an upcoming recession. That's why I refer to it as whiplash, a phenomenon I haven't experienced before. It's also notable that in Europe, beauty and fragrance categories are experiencing double-digit growth, indicating regional variations in demand. Some fragrance products are being purchased by American tourists in Paris, while others are being shipped to China or here, highlighting a specific regional disparity influenced by our factory locations and testing processes.

No, I appreciate it. I just want to follow up; do you think it might relate to consumer packaged goods companies wanting to reduce their inventories by the fiscal year-end to improve their working capital? I'm trying to understand why they allowed their inventory to be so high in the first place.

Because they couldn't obtain what they wanted, they likely placed duplicate orders. I'm speculating here. However, one recurring theme I've observed over time is that when supply is tight and customer demand cannot be met, companies tend to place more orders or do so earlier to ensure they at least receive some product. This happens with everyone until they recognize that we can fulfill their needs, especially as we build our safety stock. This isn't an uncommon situation. Coupling this with the ongoing recession discussions and the approaching year-end, it's reasonable to suspect that much of this relates to year-end inventory management.

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 the new product pipeline in the segment because clearly, you have longer lead times in many of these products?

Sure. We are very confident in our projected top line growth of 6% to 10%, and our order book remains strong in both prescription and consumer healthcare. With expectations of a heavy flu season and the continued presence of Omicron, we see good demand in these areas. In injectables, our pipeline is growing significantly as we introduce premium capacity, and we are experiencing solid sales growth with biologics without relying solely on vaccine spikes. The active materials business is performing well. However, we will not see the same level of at-home COVID testing sales as we did in the first quarter of last year or the most recent quarter, which will affect comparisons. One area where we have limited visibility is emergency treatments, especially as generic competitors enter the market, which we also supply. Teva is leveraging this market situation for some of their ongoing lawsuits. Additionally, there are concerns about products nearing their expiration date on shelves, making it unclear how consumers will respond—whether they will use older products or build up their stock. As we've mentioned, this business can be unpredictable and lacks clear distribution patterns, but it's showing strong demand.

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. These figures are based on the assumption of parity. For the first quarter, I mentioned in my remarks that the $0.08 refers to Q4. In Q1, we anticipate around $0.06. This will gradually decrease as we head into Q2, projected at approximately $0.03 to $0.035. By Q3 and Q4, we expect to be at or near parity, so we don't foresee any significant changes there. Regarding interest expense, comparing Q4 to Q4, we expect a $0.04 disadvantage due to higher interest costs. It's important to note that this stems from our initial offering earlier this year, which took place before the rate increases. We locked in at 3.6%, and our total leverage is about 1.8 times, with 94% fixed and 6% variable, which is slightly higher than the average 3% interest rate. That's how interest impacts 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 a 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 costs, 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.

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, we estimate that 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 systems 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.

Thank you, Stephan. 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, we have a strong order book in both prescription and consumer healthcare. We haven't received feedback from customers suggesting an inventory surplus. Last year, our inventories were quite low, and we believe they are now at normalized levels, with only isolated instances of customers increasing their inventory. However, there is a caveat regarding the NARCAN situation, which makes it difficult to predict quarterly order patterns due to the unique supply chain and distribution methods involved. Our order intake for injectables has also been positive. However, we anticipate that the bottom line may be impacted by one-time costs that we previously discussed. The active material business is performing well, though it will face tough comparisons to last year's at-home COVID test sales. Overall, we feel confident in maintaining our growth expectations of 6% to 10%, even with the various factors at play.

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 in Europe from executing, so just any color on that?

Sure, Gabe. I can address that. It's part of our ongoing efforts to simplify our legal structure and organization. As tax laws evolve in different areas, we consistently seek the most efficient legal structure, especially regarding repatriating dividends from abroad. So, I wouldn't read too much into it. Sometimes, when implementing these legal entity restructurings, taxes may arise due to changes in ownership of that entity. However, I wouldn't dwell on it. It's simply a long-term strategy aimed at enhancing our overall legal efficiency.

Thanks, Bob. You mentioned in the press release that growth in Europe is notable, and Stephan also highlighted that your fragrance customers and the Beauty and Home segment are performing well in terms of demand. Last quarter, you noted that profitability in Europe was around the 15% threshold you've been aiming for in Beauty and Home. It seems that the U.S. is currently lagging behind. Can you confirm that? Additionally, it appears that labor issues have been resolved. Aside from underutilized capacity or lower demand, is there anything in the structure that would prevent you from reaching that 15% target in Beauty and Home, or did I hear Stephan correctly that there is more work to be done and it's not the right time to discuss it?

Yes, I think your summary is excellent, though I can't confirm it entirely. In terms of the transformation needed to get our European plants up and running smoothly along with the commercial operations, I’m pleased to say that this is now functioning well. Although it took some time, especially considering the interruptions from COVID, we are really at the point of fine-tuning everything, which must be done thoughtfully, especially since labor relations in Europe differ significantly from those in the U.S., where changes can be implemented more easily. While we have made progress, there is still more work to be done, and I am very proud of what our team has achieved. They continue to come up with innovative ideas. It’s unfortunate that during the time Europe was focused on improvements, the U.S. faced its own challenges.

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.

I don't know what you're talking about. Just kidding. As we mentioned, we benefited somewhat from COVID in terms of technical business, primarily because people became more diligent about receiving flu shots. We did secure some supply for vaccines, but it wasn't as significant as it was for others. The main advantage of COVID for our injectable business was that we were recognized as a technologically equivalent player, which led to new projects in the biologics and vaccine sectors. You've seen some effects in past announcements and there are many others that either we haven't announced or they haven't announced, which gives us strong confidence in our order and project pipelines to invest in COVID products. However, I wouldn't expect any negative fallout from COVID.

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.

Thank you very much. Hi, everyone. I hope you can hear me well. Stephan, I want to revisit the Food and Beverage sector specifically. You noted that your customers are understandably looking to quickly reduce their stock after having ordered significantly last year. The volumes were quite strong, and despite questions about whether this growth rate is sustainable, both your customers and Aptar expressed a belief that there would be a shift toward more at-home consumption, which they considered fairly sustainable. However, that hasn’t turned out to be the case, and we are currently experiencing a destocking phase. Reflecting on the past 18 months, what adjustments do you need to make regarding how you serve your customers in Food and Beverage and perhaps even in Beauty and Home, particularly concerning how much they can order in advance? From my experience since the late 1990s, I can’t recall a time when Food and Beverage and Beauty and Home sectors didn’t embrace some level of improvement. I understand the macro challenges, but it seems there might be opportunities for you to tighten your offerings to customers. What are your strategies on the sales front to enhance your data and analytics as you navigate through this period? Additionally, a potential counterpoint might be that, given the competitive landscape, if you don’t provide the volumes to your customers, a competitor certainly would. Can you discuss the competitive dynamics in Food and Beverage and Beauty and Home, and what steps you’re taking to fortify your position over the coming years? Thank you, and best of luck this quarter.

Yes, the most exciting question. A couple of things, one is I give you some examples. 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 shade. So 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.

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, when faced with supply constraints, we must prioritize customers. We've focused on our global key accounts that have long-term relationships with us over smaller accounts, and this allocation inevitably affects everyone to some degree. I'm not sure there's much more I can add to 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 afterward, 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.

Thank you for addressing my follow-ups. I want to follow up on George's question regarding the long-term margin targets for the Beauty and Home segments, which are set at 15% to 17%. The trailing five-year average is around 12%. The Food and Beverage segment has a similar situation. Do you believe you have the appropriate infrastructure to meet current demand levels? Are those long-term targets still attainable, and how is that shaping your investment strategies in these areas, considering the struggles you've faced in meeting those targets over the years?

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 believe we have clearer insight into how our long-term targets apply to the top line. These targets are primarily based on volume. Inflationary price increases are an additional factor. Considering what has happened over the past three years makes it difficult for me to determine a clear understanding.

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.