Ladies and gentlemen, thank you for standing by. Welcome to Aptar's 2022 Fourth 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 the 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. If you are following along on our website, you can advance the slide by hovering over the presentation screen and clicking on the arrows on the right and left. As always, we will also post a replay of this call on our website. Today's call includes some forward-looking statements. Please refer to our SEC filings to review factors that could cause actual results to differ materially from what we are discussing today. I would now like to turn the conference call over to Stephan.

Thank you Mary and good morning everyone. We appreciate you joining us on the call today. I'm going to begin my remarks by highlighting our results for the fourth quarter and the full year. Later on in the call, Bob Kuhn, our CFO will provide additional details on the quarter and year-end results. I will also spend some time talking about the strategic realignment that we announced in early December and the benefits we expect to achieve. Starting on Slide 3 for the fourth quarter, I’m pleased to report that Aptar achieved core sales growth of 4% and delivered adjusted EPS of $0.92 per share. We guided our adjusted earnings per share for the fourth quarter to be in the range of $0.73 to $0.83. The results are driven by strong volume growth in our pharma segment, which continues to benefit from demand for nasal decongestants and saline rinses, as well as allergic rhinitis and emergency medications. Solid volume growth from Beauty dispensing solutions, especially in prestige fragrance and skincare, also drove positive results in the quarter. We also ended the quarter with a more favorable exchange rate and a lower tax rate than we previously anticipated. As we identified during our third quarter call, our dispensing solutions for food, personal and home care areas that had benefitted from the pandemic were experiencing a decline in sales as certain customers, especially in North America, are working through the safety stock they had built up over the pandemic. We are seeing signs that sales for food dispensing solutions, which were impacted first, are starting to stabilize, while beverage, personal care, and homecare are still being affected, although we see a few green shoots. We received a number of recognitions during the fourth quarter. We ranked number 15 on Newsweek's America's most responsible companies and number 70 on the World’s Top Female-Friendly Companies 2022 by Forbes. In China, sHero recognized us as one of the Best Companies for Female Executives awards. And in France, the country where we have the single largest footprint, Le Point, a leading French news magazine named us as one of the most responsible companies. More recently, we again achieved the platinum level rating in recognition of our sustainability efforts from EcoVadis. This places us among the top 1% of the more than 90,000 companies that are rated by EcoVadis across all industries. For the year, Aptar achieved strong core sales growth of 9% with pharma delivering 13% core sales growth, while beauty and home’s core sales were up 7% and food and beverage grew 5% for the year. Growth in core sales for the year was driven almost evenly between volume and pricing. I am very proud of our Aptar team members around the world who have worked tirelessly to create and deliver solutions that make the lives of people better every single day. We ended the year achieving the highest full year sales and adjusted EBITDA, hopefully leaving the pandemic behind us. We do recognize there is more work needed to achieve our long-term profit margin ranges. Some of that work is well underway, including our investments in new state-of-the-art sites in France and China that will enable us to capture growth. And on the cost side, we continue our work to reduce our fixed costs and drive profitable growth and margin improvement, while spending capital wisely. In 2022, we started to leverage our fixed cost base and reduce our SG&A as a percentage of sales. We will continue to focus on increasing efficiencies in 2023 and beyond. Turning to slides 4 through 6. As of January, our three reporting segments are Aptar Pharma, Aptar Beauty, and Aptar Closures. In December, we announced the strategic realignment of our closures and non-pharma complex multi-component dispensing solutions, which is expected to benefit us in four key areas. First, it strengthens our market position in both closures and beauty by aligning us more closely to the way our customers are structured and purchase our products. Secondly, it better positions us to enter new and emerging markets for our closure technologies. Thirdly, it enables bottom line improvements by capturing efficiencies and streamlining operations. And fourth, it increases capital efficiencies by leveraging common assets. In addition, the realignment builds on the work done as part of the transformation and enhances our ability to achieve our long-term targets. A key learning from that work was that closures in our complex multi-component products each require a different focus. Over the last 10 years, we have grown our food and beverage business, which is predominantly a closures business, and have more than doubled its revenue. Our focus was on capturing and driving conversions from a simple closure like a flat cap to value-added solutions like a hinge closure that may also use our elastomeric flow control valve like the Daisy Squeeze Sour Cream pouch. Since then, end markets have evolved considerably. Today, the food and beverage closures market shares much more in common with the personal and home care closures markets we serve. Aligning ourselves to directly serve all these end markets in one segment will enable us to enhance our operational and capital efficiencies. For Aptar beauty, the simplification and focus of the segment allows us to better leverage our complex spray and dispensing solutions for prestige and premium brands in the beauty and personal care markets. The realignment will help us to focus on what is most important to our beauty customers, reinforcing their brand equity and providing consumers with exceptional user experiences. Aptar Beauty will continue to supply home care, food, and beverage customers that use spray technologies, which is a small part of our business today. As we implement this realignment, we are fortunate to be guided by proven leaders in our businesses. Hedi Tlili is leading Aptar Closures and Marc Prieur is leading Aptar Beauty, each of whom has broad experience across Aptar, including deep knowledge of their respective markets. We've shared on past calls about the operational and supply chain challenges we have experienced in North America. That has very much impacted our ability to deliver the benefits of our transformation work to the global bottom line. In Europe, where we did not have these challenges, there has been significant improvement in operations and profitability. Beauty and home in Europe delivered adjusted EBITDA of 14% for the full year, showing consistent improvement and overcoming strong inflationary pressures. As part of our continued focus on cost, we announced internally the closing of a beauty and home plant in North America in December of 2022, as well as a reduction in regional staffing levels, which will be completed by the end of the first quarter of 2023. Earlier this week, we initiated the formal consultation process, which is quite detailed and extensive with the European Works Council, the respective national workers councils, and union representatives regarding a potential reorganization of our European Beauty segment. The processes will take time and will be subject to both Pan-European and national bargaining obligations and timelines in each affected country. We are in the early stages of this process and we will keep you updated. We will also accelerate the streamlining of shared business functions across the company by expanding in-house business service centers in the Czech Republic, Brazil, and the United States. We expect to record one-time costs in the second half of 2023 and into 2024 associated with these efforts. While we cannot preempt the labor consultations and bargaining processes, our objective is to improve our margins by executing on our growth plans as well as managing and leveraging our fixed cost base. On slide 7, I want to comment on the strength of our balance sheet and our capital allocation approach. Aptar has historically maintained a strong and relatively conservative balance sheet, which has served our customers and shareholders well during challenging economic times. In recent years, we have been focusing the majority of our capital allocation toward our higher margin faster-growing pharma segment. Our $180 million injectables expansion program began in 2020 and is ongoing. The first phase of our premium product capacity expansion in Granville, France has been completed. A new, additional large state-of-the-art factory also in Granville, as well as expansions of our U.S.-based manufacturing facility in Congress, New York, will be operational in 2024. In 2023, we expect our capital expenditures to be in the range of $260 to $280 million as two of our large projects are nearing completion. In Suzhou, China, a new plant that will serve all three segments is scheduled to progressively come online, starting in the first half of 2023. Our state-of-the-art site for prestige custom Beauty in Oyonnax, France, in the heart of the French manufacturing beauty industry, is scheduled to open in the second quarter of 2023. The new LEED-certified site brings together operations from five older, inefficient manufacturing plants into one modern site and will serve as a growing part of the market for us. Dividends and share repurchases are also part of our balanced capital allocation strategy. In 2022, we returned over $190 million to shareholders through dividends and the repurchase of over 860,000 shares for $92.1 million. We completed our 29th year of paying an increasing annual dividend. Before I turn the call over to Bob to share further details on Q4, I want to speak about innovation and highlight recent technologies and product launches as shown on slide eight. In Pharma, we recently announced the first metal-free nasal spray pump, a development made possible by the sustainability expertise we've formed in our consumer-facing businesses. When used in combination with a high-density polyethylene or polypropylene container, this pump can be conveniently recycled as one piece without needing to separate or dismantle any parts. This pump strengthens the circular approach for nasal delivery devices and serves the growing needs for simple to recycle packaging. Also in pharma, we launched our first-ever active bottle featuring post-consumer recycled content, which is now part of Aptar CSP technologies Activ-Vial solutions. Incorporating PCR content in our active polymer solutions is yet another step towards material circularity. For Beauty and Home, we are providing refillable packaging made with recycled plastic for Clarins’ JoliRouge lipstick, and our award-winning fully recyclable mono-material pump is the dispensing system for Renpure’s new haircare line and the Body Shop’s shower wash, both in Europe. Several fragrance launches in Europe feature our prestige fragrance spray pumps, including perfume brands by Dior, L'Oreal, and Coty. Turning to food and beverage, Kraft Heinz is featuring our custom closures on several ketchup flavors along with our pour spout closure for their Wild Style condiment line in the U.S. In addition, our closure and flow control valve technology is featured on Hyvee's squeezable cream cheese spread in the U.S. and Prima brand condiments in Spain. As seen on slide 9, this past year also marks the first full year of operation of our InVision lab, Aptar’s state-of-the-art Innovation Center in France. The InVision lab showcases the latest in design, engineering, and material science that Aptar has to offer enterprise-wide. In 2022 we hosted IDH sessions, with about 150 primarily beauty customers. During these sessions, we were able to engage and collaborate with our customers at a high level between our landmark investments in Oyonnax and the InVision lab outside of Paris. Our customer engagement has continuously increased, and our beauty pipeline has been significantly strengthened and grown. Now I would like to turn the call over to Bob. Bob?

Thank you, Stephan. And good morning everyone. Starting on slide 10. I would like to summarize the quarter. Our reported sales decreased 2%. This included currency translation headwinds of approximately 6%. Therefore, core sales grew 4% primarily due to strong volume growth in pharma, in beauty, as well as price increases in beauty and home. As shown on slide 11, we reported fourth quarter adjusted earnings per share of $0.92, which is a 5% increase over the prior year adjusted EPS when we neutralize the currency headwinds we are facing. The original EPS range we gave included a tax range of 28% to 30% and assumed the euro to U.S. dollar FX rate of 0.98. Had these assumptions materialized, our adjusted EPS would have been approximately $0.81, which is the upper end of the range we provided in Q3. We achieved adjusted EBITDA of $147 million, which decreased from the prior year’s fourth quarter and includes foreign currency headwinds of approximately $4 million. About half of the decrease in adjusted EBITDA was due to these foreign currency headwinds. Our team has done a good job of obtaining price increases, especially as we face continued cost pressures. At the end of 2022, we have caught up on our cumulative inflation impact. However, margins continue to be compressed because we have been passing through costs on a one-for-one basis. The two-year cumulative impact on our margins is about 1.5 percentage points. Our reported tax rate for the fourth quarter was 19%, including the reversal of a portion of a tax charge related to legal entity reorganization. Adjusting for this, our tax rate would have been 21%. The midrange of our guidance was 29%. Turning to some of the details by segment for the quarter, our pharma segments core sales increased 8%. Approximately 5% of the growth came from increased volumes, especially in the prescription and consumer healthcare divisions. Looking at sales in the pharma segment by division, prescription core sales increased 9%, primarily due to strengthened demand for allergic rhinitis and emergency medicine devices. Consumer Health Care core sales increased by 11% 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 6%, primarily due to higher volumes for biologics and anti-thrombotic applications. Turning to our active material science solutions, core sales decreased 3%. Active materials faced a difficult comparison to the prior year quarter due to slow sales of active film used for at-home COVID-19 test kits. Excluding those sales, active materials core sales grew 6%. As a reminder, these challenging comparisons will persist next quarter. Pharma's adjusted EBITDA margin was 32%, which included start-up costs for the injectables division capacity expansion and enterprise resource planning system implementation of approximately $4 million. Our beauty and home segments core sales increased 2% based primarily on price adjustments with volume growth and our prestige fragrance and skincare solutions. Regionally, both Europe and Latin America had solid growth for the quarter. This positive was offset by volume declines in other regions, especially in North America, primarily due to our customers working off current inventory levels. Sales were also negatively affected in China due to its reopening and the resurgence of COVID-19 infections. Looking at the beauty and home segment by market, beauty core sales increased 13%, primarily due to increased sales in prestige fragrance and skincare. Personal Care core sales decreased 7%, primarily due to decreased sales in the haircare and body care categories, while suncare continued to increase. Homecare core sales decreased 13%, due to lower sales in the surface disinfectant cleaner and laundry care categories. This segment's adjusted EBITDA margin for the quarter was 12%. The Food and Beverage segment's core sales declined 4% compared to the prior year's quarter as product pricing was affected by lower resin prices. The segment also faced difficult comparisons to strong fourth quarter 2021 sales. Volumes in the food and beverage markets decreased as our customers continue to work through their inventory levels. Demand in North America and Latin America was the most impacted, but we are seeing some signs of orders stabilizing primarily for our food dispensing solutions. Looking at the Food and Beverage segment by market, food core sales were flat as we were able to offset resin price decreases with higher tooling sales and volume increases in our food service products. Beverage core sales decreased 16%, primarily due to the challenging market conditions in North America and Latin America. The segment's adjusted EBITDA margin was 13%, which was affected by lower volumes and related lower factory production levels, primarily in North America and Latin America. Reflecting for a moment on 2022, Aptar finished the year with strong top line growth and adjusted EBITDA. We also took steps to reduce our fixed costs, a focus that will continue in 2023. Slides 12 and 13 cover our annual performance with core sales growth of 9% and adjusted earnings per share growth of 5%, including comparable exchange rates. In 2022, cash flow from operations was $479 million. Free cash flow was $196 million for the year, up from the $58 million in 2021 due to improvements in working capital management and lower restructuring costs. For our three large capital projects, our injectables capacity expansion projects, our state-of-the-art beauty site in France, and our new site in China that will service all three of our segments, we spent about $24 million in the quarter and approximately $108 million in the year. As Stephan mentioned, two of our three large capital projects will come online this year. Reported depreciation and amortization expense decreased less than 1% or $1 million to approximately $234 million in 2022. Depreciation and amortization as a percentage of net sales decreased to 7% in 2022 compared to 7.3% in the prior year. Moving now to Slide 14, which summarizes our outlook for the first quarter. As Stephan covered, we had a strong year and a solid finish even with the industry destocking in food, personal care, and home care experienced in the North American market. We anticipate our strong momentum to continue and expect first quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs, and changes in the unrealized fair value of equity investments to be in the range of $0.85 to $0.93 per share. The estimated tax rate range for the first quarter is 25.5% to 27.5%. In the first quarter, we will have about an $0.08 impact in start-up costs from our injectables expansion program and the rollout of a new ERP system. The start-up costs should step down in Q2, but we anticipate about a $0.02 to $0.03 impact per share per quarter for the year. Additionally, we are expecting some currency headwinds compared to the prior year. For example, the euro rate for the prior year Q1 was $1.12, and our guidance for the coming first quarter is assuming a $1.08 euro rate. We have said that roughly for every $0.01 move in the euro rate, that equates to roughly $0.02 per share for the full year. So for the coming quarter, we are looking at approximately a $0.02 currency drag on earnings compared to the prior year. We currently estimate depreciation and amortization for 2023 to be between $240 million to $250 million. As Stephan mentioned, we expect our capital expenditures in 2023, net of any government grants to be between $260 million and $280 million. In closing, we continue to have a strong balance sheet with a leverage ratio of 1.7, which allows us to continue to invest in the business, pursue strategic opportunities, and continue to return value to shareholders in the form of dividends and repurchases. In addition to our cash dividend payments to shareholders, which totaled $25 million in the quarter, we repurchased approximately 191,000 shares for approximately $20 million. Before I turn it over to Stephan, I want to remind you that in advance of our first quarter earnings call, we will issue recast financials for our new segments. At this time, Stephan will provide a few closing comments before we move to Q&A.

Thanks Bob. In closing, as Bob mentioned, on Slide 14, looking ahead to the first quarter, we expect the momentum to continue in our pharma end markets, especially in prescription and consumer health care as well as in our beauty end markets such as fragrance and skin care. The year is off to a good start, and we are excited about the opportunities ahead of us. We anticipate that the food, personal care, and home care market in North America will continue to be challenged due to destocking. While we are starting to see orders come back in food, it's too early to say when these markets will fully recover. We believe our segment realignment will strengthen the market position of our beauty and our closure segments, allowing us to better serve customers and deliver long-term value for shareholders. The realignment reinforces our commitment to optimizing our portfolio and increasing capital efficiencies by leveraging common assets. As I mentioned earlier, we will continue to work to reduce our fixed costs and drive profitable growth and margin improvements while spending capital wisely. This will be a key focus for 2023 and beyond. Over the last few years, we have concentrated our investments on our higher growth and higher-margin businesses and have built robust pharma opportunities that have grown in both number and value over the last five years. We have also invested in digital health capabilities through our acquisition of Voluntis, which offers patient support algorithms and connected devices. However, the digital health market is still evolving and results may be lumpy. We believe this investment will give us a distinct advantage in the future. Our products are used by millions of people every single day. Our customers recognize us as an innovation leader in the drug delivery, active material science, and consumer product dispensing industries. Additionally, we continue to advance our mission of becoming a proactive leader in sustainability. Our businesses have a very clear competitive advantage in growing markets with unmatched solutions. I'm very proud of all that we have accomplished in the fourth quarter and the full year of 2022. With that, I would like to open up the call for your questions.

Our first question comes from Ghansham Panjabi from Baird. Ghansham, your line is now open.

Hi, good morning. This is actually Matt Krueger sitting in for Ghansham. Thanks a lot for taking my questions. I guess I'd like to dig a little deeper into the inventory situation across the supply chain. So can you provide an update on how you are seeing inventory levels across the supply chain right now, including on a segment basis across your own portfolio but then also some added detail on what you're hearing from the customer base. I think we've seen in the market a mixed timeline for when this destocking effort could be complete, whether it be kind of in the first quarter or maybe lingering into the later part of the first half of the year. Any thoughts on that topic would be helpful.

Sure. Hi Matt. Let's start with pharmaceuticals. We have strong order books for both prescription and consumer healthcare, with notable growth in injectables and active materials, aside from the comparisons with at-home COVID tests. Allergic rhinitis is showing significant growth, partly recovering from the lows during COVID, and we've just reached 2019 volume levels in this area. We’re seeing an increase in the usage of nasal allergic rhinitis products as more options and combination products are introduced, which gives us a positive outlook. On the consumer healthcare side, nasal hygiene has transformed within personal hygiene routines, and we’re seeing a solid order book there as well. However, we are seeing some inventory build in emergency medicine, anticipating that Naloxone Narcan may become available over the counter soon, leading customers to increase their stock. Regarding consumer products, we are observing a normalization in food. The major uncertainty lies in personal care, home care, and beverages. We might have jumped the gun in indicating an inventory correction during our Q3 announcement, and many others have noted the same since then. Customers have conveyed that service levels during COVID weren’t optimal, prompting them to source from multiple suppliers and build extra safety stock out of concern for supply shortages. Currently, they have about 90 days of safety stock when they only need 30 days. We plan to gradually reduce this excess inventory in the upcoming quarters by maintaining consistent production levels to avoid substantial layoffs. It is expected that it will take until the end of the first quarter, or possibly into the second quarter, for some of these end users to adjust. It’s important to mention that this is mainly an issue for North America, which comprises about 30% of our business. Europe is handling the situation differently, as it managed COVID impacts in a unique way. China also presents distinct dynamics. Nonetheless, the effects from the U.S. remain considerable.

Great, that's very helpful. Can you discuss any raw material benefits you experienced during the fourth quarter? What potential impact or benefits might arise from lower raw material costs in the first quarter of 2023 and your guidance? Additionally, could you provide some details about your expectations for the full year regarding this development? We've noticed fluctuations, with oil and resin costs increasing recently after a period of decline. How do you anticipate this will affect your portfolio?

Sure, I can address that question. In the fourth quarter, the impact on our revenue was minimal, around 1% on a consolidated basis, with a slight positive effect in each segment, though nothing major. In the first quarter, we are noticing a slight increase in resin costs in North America and Europe from the fourth quarter, but they remain significantly lower compared to the same time last year. The situation is quite variable, making it challenging for us to project the future impact since different customers experience varying delays in cost adjustments, and it heavily relies on volume. Therefore, I cannot provide a clear expectation for the year ahead. While resin remains our largest expense, we are also experiencing rising costs in other areas such as metal and aluminum.

Got it. Got it, makes sense. I’ll turn it over. Thank you very much.

Thank you. Our next question comes from George Staphos from Bank of America. George, your line is open.

Thanks so much. Hi everyone, good morning. I hope you are doing well. I appreciate the details provided. My first question is about beauty and the overall realignment. To the extent that you can share, could you provide any estimates on what the margin or cost benefits might look like over a one to two-year period? I understand there are ongoing discussions with employees and the works council, which may limit what you can say. If you cannot provide specifics on that, could you discuss how much non-beauty will be included in the Beauty segment as a percentage of revenues? Additionally, can you share your observations regarding launch activity in the beauty category? I also have a quick follow-up regarding CapEx.

Sure. Let me kick it off, George and ask Bob to follow up. First, I want to make it clear that the segment realignment and the cost work that I referred to as we engage the European Works Council are separate and almost independent. So the segmentation realignment is really moving about $200 million of closures revenues from beauty to food and beverage, which is almost exclusively a closures business. The benefits are really, one, it allows the closure business to go after any and all end users. Just as an example, health care closures are very attractive closures and the pharma people are not going to bother going after health care closures, while the closures people will. And while it's just food and beverage, they won't. The second benefit is that it really positions us to be more aggressive in pursuing all closures business. The third one is really reflecting how customers buy it. We already get good feedback from certain multinational customers because even in shared accounts, those multinational customers have different people buying closures than they do high-end fragrances or skincare products. And then, of course, as you pull common assets and common operations, you have increased efficiencies on both the cost side and capital side. With that said, on beauty, we really look at it as we emerge from the pandemic with good top line momentum and are not satisfied with our margins. It's as simple as that; we are committed to our long-term targets. We feel that especially on the fixed cost side, we have some work to do, SG&A as well as operational fixed costs. And of course, the bulk of that sits in Europe. That's not easy to achieve, which is why we need these consultation processes. But when we look at where our EBITDA margin is versus our long-term targets, we sense that we're looking for several tens of millions of improvement on the fixed cost side across SG&A and operations. And maybe Bob, you can comment on the breakdown?

Sure. So how we define personal care and how our customers define personal care are two different things. There are things that we call personal care that they consider beauty. But the way we look at personal care and home care prior to the breakup and realignment of the segments, it was about 43% to 45% of the total Beauty and Home segment. So then you take out the closures piece of Personal Care and Home Care, which Stephan mentioned is about $200 million. We're probably somewhere between 35% and roughly 40%, I would think, as we would define personal care and home care.

Thanks, Bob. Should we assume, if you can't quantify at this juncture then directionally that you will give us at some point, the benefits you expect to get from both initiatives to margin?

Sure. Once we have reached agreements with the labor representatives and can kind of mark in both the one-time costs and the implementation timeline, we will share with you the related savings. But look at that towards the second half of the year; these processes are nominally long. On the CapEx as well, we have concurrently executed on three large projects, two of which are coming to fruition. We're opening the really state-of-the-art custom beauty facility in France and the China facility comes on stream. So as that comes out, I'm not saying that we will never have big projects anymore. But clearly, we want to live within our means, and these CapEx levels make a lot more sense at the moment once you take those large projects out.

Yes. And I would just add that some of the plant consolidations that we've gone through over the last several years should lead to a little bit less on the maintenance side. But as a company, I think a good use of our balance sheet is going to be to continue to automate in the factories to become more efficient, to automate where we can. These new state-of-the-art facilities are one example of that. We always have a run-out of activities over the years. So we've got some new technologies which are coming on stream. So I would hope that we continue to invest in new innovative products like some of the sustainable pumps that Stephan was mentioning.

Thank you very much.

Thank you. Our next question comes from Angel Castillo from Morgan Stanley. Angel, your line is now open.

Hello, thanks for taking my questions. This is actually Stefan Diaz sitting in for Angel. Real quickly on the European Works Council. Would you be able to give any more details on your tentative strategy and any potential timeline on the potential initiatives?

Thank you for the question, Stefan. If you operate in multiple countries and it's requested by more than one, you are required to have what is known as the European Works Council. We have had this for several years. Any restructuring that involves multiple countries must start with consultations with the European Works Council. In our situation, we have significant operations in France, Germany, and Italy, meaning three countries are already impacted. The regulations regarding this process are quite extensive, and you must also negotiate with the national works councils and unions. Unlike in the U.S. where companies choose to unionize, in Europe there is always a works council and a local union to consider. The dynamics and timelines differ by country, which is why the process can take quite some time before implementation can begin. There are different stages of implementation: firstly, you must offer employees a chance to voluntarily accept a package; then look for redeployment opportunities; and finally consider reductions. This is a well-defined process that takes time to complete, but execution is crucial once you reach the end.

Great. Thanks for the color. And then should the realignment change the way we think about capital allocation going forward? And would you be able to quantify some of the costs that you're going to incur due to realignment?

The realignment does not create a lot of costs by itself. The capital allocation does not really change that much. Clearly, we expect some capital savings by pooling assets that do the same function, but we have ramped up our capital deployment towards pharma. From five years ago, it was mid-20s, now being over 50%. They will not change. Yes, we certainly count in more capital efficiencies, but you also see overall CapEx guidance.

Good morning, Bob. I have a quick question. A lot has been discussed, but I want to ask about corporate. It seems to be slightly higher than we anticipated, particularly regarding the ERP and startup costs that were allocated to the segments. Is there anything specific you can share about that? Additionally, could you provide some insight into what you expect for 2023?

Gabe, you always manage to lead me into a deep discussion. So please bear with me on this. The main rise in corporate expenses is due to some of our supplemental pension in the U.S., which is a bit of a curiosity in accounting rules. We have annuity contracts recorded on the asset side. Any changes in those asset contracts influence the profit and loss, while any changes in the pension liability are reflected in other comprehensive income. Last year, there was a $2 million positive contribution to corporate expenses, and now it has turned into a $2 million negative due to rising interest rates. This implies an extra cost associated with the annuity contracts, even though they are covered. This factor accounts for around $3.5 million to $4 million of the difference.

Okay. At least we didn't get into organic chemistry or something crazy. One did pop in my mind as you're talking about this. Did I hear you correctly that you were saying you expect 2023 net leverage to end sort of where you're at today? Or you're saying we're at 1.7; we see some opportunities perhaps on the M&A side, but we'll remain active in the absence of that for share repurchase. I just maybe clarify those comments.

Yes. I mean I think, Gabe, we're comfortable in the 1 to 3 times leverage where we're at. So 1.7 is a nice spot to be in. We have to follow what's going on with the interest rate environment. We've got some debt repayments that are coming due in 2024. We still have about $108 million left on our existing authorization for share repurchases. We'll continue to look at M&A. So again, we're going to stay in that comfortable range for now, and we'll see what opportunities it brings. And we're going to track where the interest rate environment goes for additional borrowings if that was necessary.

Yes, we usually don't guide the leverage ratio other than the corridor of 1 to 3 times, but the 1.7 is where we are at.

Thank you. Our next question comes from George Staphos from Bank of America. George, your line is now open.

Hi, thank you for joining the call. I previously asked about the launch activity you might be observing in beauty and fragrance. Can you elaborate on that? Additionally, can you confirm what more information you'll provide during the call, especially regarding the segment data? Will you share end market data in the newly reclassified segments? I'm looking forward to hearing about the launch activity that we will receive later.

Let me take the first one and then Bob will follow up. So on the launches, there certainly is pent-up eagerness on behalf of our customers to launch new fragrances; that's the business model, but they will not launch into the market that we had during COVID or the uncertainties of the past year. Now as we exit that period of tremendous uncertainty, certainly, you will see a lot of launches in this, which makes us also comfortable with continued strength in fragrance. As for the coming quarters, even if you see a back off at some stage in Europe and the Americas, we certainly hear from customers that as China re-emerges and that consumer comes back, that the second half also looks very good. Overall, there is good momentum in launches. And then I'll give you the assurance question, Bob.

Sure. George, consistent with requirements and what we've done in past segment realignment, prior to our Q1 earnings, we'll likely file an 8-K with the previous two years of 2022 and 2021 restated under the realignment, as well as the quarterly splits for 2022. That should give you the information you'll need then not only for the upcoming 10-Qs, but then the 10-K at the end of the year.

Right. But I guess what I was saying, will you also give us beauty core growth, food core growth, etcetera, within the reclassified segments?

Yes, and we'll definitely give you color by market.

Okay. Last question on sustainability. Can you provide the total across the entity? Specifically within pharma, what percentage of your products are recyclable, reusable, or compostable? I suspect it's very little, but any metrics for the company and for pharma would be appreciated. Thanks, and good luck this quarter. Congratulations on your performance this year as the quarter and year come to a close.

Thanks. So I think the best place where you see this is our sustainability report. Clearly, the ratio is much higher in the consumer-facing products where it might be as much as 15%. In the pharma product, it's just starting with consumer healthcare. While we're talking about sustainability, you've seen the growing recognition around everything sustainability, ESG. One is, of course, that it's very important for the future proof of the company and future-proof the business. But I also want to highlight it's extremely important to our customers, and it's extremely important to talent; whether I recruit for the board or senior positions or frontline positions, the first thing people say is, Hey, I really love what you're doing around sustainability. Therefore, we can compete above our weight class in recruiting. Clearly, for customers, it's important that, in the end, drives preference when it comes to whom to buy from.

Thanks, Stephan.

Thank you, George. We have no further questions on the line. I will now hand the floor back to Mr. Tanda for closing remarks.

Great. Thank you all. I truly appreciate everything the team has accomplished. We finished with a strong fourth quarter despite some weakness in the North American consumer market. We are starting the year off well in the first quarter and we will address the consumer challenges as well as the comparisons with top pharmaceutical companies. The one-time costs, particularly the ERP expenses in injectables, will be temporary, and we are observing robust demand in both the pharmaceutical and beauty sectors. The first half of the year looks promising, and we expect China's contribution will enhance our momentum in the second half. I want to revisit our innovation pipeline. We highlighted this in Congers for pharma, and the beauty pipeline is also developing well as customers recognize our commitment through the innovation center and our new advanced facilities in Europe and China. As our major investments take effect, our capital expenditures will decrease. I also mentioned our recognition in sustainability. Overall, we are looking forward to a strong year ahead. You might have noticed that we are refining our range a bit, which suggests that some of the major uncertainties may be behind us. We look forward to connecting with you on our upcoming road engagements.