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 continue 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 benefited 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 personnel 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 or Newsweek's America's most responsible…

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 at the upper end of the range we gave 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…

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 to 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 5 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 full year of 2022. With that, I would like to open up the call for your questions.

[Operator Instructions] 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 mix time line 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. Maybe we start off with pharma. We have very robust order books for prescription and consumer health care see good growth in injectable and active materials with the exception of the at home COVID test comparison. Clearly, allergic rhinitis is growing well above trend. Now part of that is just catching up from the low points during COVID. We just reached about 2019 volume levels in allergic rhinitis. Anecdotally, we see that usage of nasal -- allergic rhinitis product is picking up further as more products come out, more combination products come out, so we're quite positive on allergic rhinitis. And on the consumer health care, clearly, nasal hygiene has become a very different place in personal hygiene regimes, and we just see a very good order book. The one area where the, for sure, is some inventory build is in emergency medicine as we expect Naloxone Narcan to go over the calendar sometime as early as next month or into the second quarter, and customers are building inventory for that effect. When it comes to the consumer product side, as we mentioned, we see food starting to normalize. The big question mark is, of course, in personal care, home care, beverage -- we were maybe a bit early in indicating that inventory correction with our quarter 3 announcement. And since then, I think a lot of people observed the same. What we've heard from customers is pretty much, hey, your service levels weren't great during COVID, so we ordered from multiple suppliers. We built up our safety stock with [Indiscernible] because then you wouldn't have sold as anything. And now we got 90 days safety stock, and we really only need 30. So we're going to work that down over the coming quarters. We are proactively working with customers to smoothen those lashes a little bit by producing at a certain level so that we don't have to lay off a ton of people. But clearly, it will take you well into through quarter 1 and maybe into quarter 2 for some of these end users. I think that's the best we can say. It is primarily lower situation for North America. I want to be clear about that. And as a reminder, North America is about 20% of our business and -- 30% of our business, sorry. And Europe doesn't have these issues because it dealt very differently with COVID. And of course, China has also different dynamics. But it is -- the impact from us from the U.S. nevertheless, is significant.

Great. That's very helpful. And then -- maybe just touching on the raw material situation. Can you talk about any sort of raw material benefit that you saw during the quarter in 4Q? What sort of potential impact or benefit there could be from lower raw material costs in the first quarter of 2023 and guidance? And then maybe some detail on what you're thinking about for the full year as to how that develops. We've seen some fluctuations with oil and resin actually ticking up recently after heading lower for quite some time. So just how that would flow through the portfolio would be helpful.

Sure. I can take that question. So for the fourth quarter, it had a rather immaterial impact on the top line, approximately 1% on a consolidated basis and had a slight positive in each of the segments, but nothing significant. In Q1, we're actually seeing sequentially resin in North America and Europe, increasing slightly from Q4 levels, but they are still on a year-on-year comparison going to be much lower than where they were in Q1 of 2022. So -- it really depends. It's difficult for us in our projections to forecast what the impact is going to be because there are different pass-through delays depending on the customers, and obviously, it's going to depend a lot on the volume. So I couldn't even begin to lean out for the year, what we would expect -- but again, resin is our largest purchase, but we're still seeing increased cost in other areas such as metal and aluminum and things like that.

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. Hope you are doing well. Thanks for the details. My question -- the first one is on beauty and the overall realignment to the extent that you can comment, is there any way to bracket what the margin or cost benefits might be over a 1-year or 2-year basis, recognizing you have a lot of discussions to go through with employees, works council, etcetera, which may prevent you from talking to that. Assuming that you might not be able to give some color there. Just can you talk a bit about how much non-beauty will be within the Beauty segment as a percentage of revenues and talk about what you're seeing in terms of launch activity in beauty? And then I had a quick follow- on 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 second realignment is really moving about $200 million of closures revenues from beauty to food and beverage, which is almost exclusively a closures business. And the benefits are really, one, it allows the closure business to go after any and all end users. And just as an example, health care closures are very attractive closures and the pharma people are not going to be bothered to go after health care closures, but the closures people will. And while it's just food and beverage, they won't. The one is it really position us to be more go after all closures business. The second one is really reflecting how customers buy it. We already get good feedback from also multinational customers because even in shared accounts, multinational customers, they have different people buying closures than they won't have buying high-end fragrances or skin care products. And then, of course, as you pull common assets and common operations, you have increased efficiencies in both on the cost side and on the capital side. With that said, on beauty, and share cost, we really look at as we emerge from the pandemic with good top line momentum and are not happy with our margins. It's as simple as that, we are committed to our long-term targets. And 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 that easy to get at. That's why we need these consultation processes. But when we look at where our EBITDA margin is versus our long-term targets, is your 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 realignment of the segments, rather, it was about 43% to 45% of the total Beauty and Home segment. So then you take out the closures piece of the Personal Care and Home Care, which Stephan mentioned is about $200 million. So 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 than directionally that you will give us at some point, the benefits you expect to get from both initiatives to margin?

Sure. One -- go ahead.

And then my related question -- or my second question is just how long can you keep at these CapEx levels, which are quite a nice step down from where we've been? Thanks guys.

Yes. So sure. Once we have reached agreements with the labor representatives and can kind of mark in both the onetime costs and the implementation time line we will share with you the related savings. But look at that towards the second half of the year, these processes are nominally long. And on the CapEx as well, we have concurrently executed on 3 large projects, 2 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 project anymore. But clearly we want to live within our means and these CapEx levels makes 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, right, to get more efficient, to automate where we can. These new state-of-the-art facilities are one example of that. So we always have a run out of activities over the years. So we've got some new technologies, which are coming on stream. And I would hope that we continue to invest in new innovative products like some of the sustainable pumps that Stephan was mentioning that his type certainly in the pharma said all that requires CapEx to keep going.

Thank you very much.

Thank you George. 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 [Ph] 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 time line on the potential initiatives?

Sure. Thanks for the question, Stefan. For those who are interested in this, so if you operate across multiple countries, and if it's requested by more than one country, you have to have legally what's called the European Works Council. We have that since a few years. So any restructuring that you do that spans multiple countries, you first have to do consultation with the European work counsel. In our case, we have big operations in France, Germany and Italy. So you already have three countries that are affected. And then -- this is very well regulated, what you need to cover and how you need to cover it. The books with hundreds and hundreds of pages. And then you have to, in parallel, negotiate with the National works councils and unions. So unlike the U.S. where you either unionized or not, and that's it. In Europe, you always have a work council and at the national -- local union. And of course, those dynamics are different and time lines are different by country. So that's why it takes quite some time to get all this done before you actually can implement. And then, of course, there are different stages of implementation first you need to give employees an opportunity to voluntarily take a package and then you look for redeployment and then you look for reductions. So this is a very thoroughly prescribed process and it takes the time, but you get -- once you get to the end, you got to execute.

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 cost by itself. And the capital allocation does not really change that much. Clearly, we expect some capital savings by pooling assets that do the same thing, 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. And yes, we certainly count in more capital efficiencies, but you also see in overall CapEx guidance.

Great. Thanks for taking my question and good luck in 2023.

Thank you. Our next question comes from Dan Rizzo from Jefferies. Dan, your line is now open.

Good morning everyone. Thank you for taking my question. You talked a lot about margins, I think, in Beauty and Home. And I was just wondering in the Pharma segment, what the EBITDA or EBIT margin target is? And now over -- this year and over the next couple of years where we expect to get to?

Yes. Our external targets for pharma are 6% to 10% top line growth and 32% to 36% EBITDA margin. Not that the guarantee there's every single quarter, but over time, that's what we look for. And clearly, we are growing quite nicely at the moment. Now we're putting in a lot of new capacity in our injectable business, which has created a drag. Bob mentioned $8 million in quarter one, going then down to $2 million to $3 million a quarter for the balance of the year. And we are also investing in digital health, which is a lumpy business, but on average, it's also about $0.02 a quarter drag. So even with that, we look at the 32% to 36% EBITDA margin.

Those investments are most of this year or will it be over the next several years? I assume it would continue.

The injectable investment is in multiple phases. So maybe let's just step back. Injectables, we basically have three manufacturing steps. One is what we call the mixing where you prepare the polymer. Two is the molding where you create the stopper or the plunger or the needle shield. And then three is the washing and finishing that then creates the finished product. And we have three locations, two in France, one in the U.S. And those investments are made in all three locations at different steps of the value chain or this process that I described. We've concluded the first two in France are now making a third one, which is a big building next to the existing facility in Congers in New York also. So these increments come on stream at different times, and we'll be done with everything about in 2024.

All right. Thank you very much.

Thank you Dan. Our next question comes from Kyle White from Deutsche Bank. Kyle, your line is now open.

Hey good morning. Thanks for taking the question. I actually wanted to follow up on Dan's question there earlier regarding pharma. There's a lot of puts and takes in pharma on the volume side, the top line side. You have a pretty challenging comp year-over-year, but there's a lot of positives that seem to be in the development, right? You mentioned the Narcan moving to over-the-counter. Is there any way to quantify the benefit of volumes you're expecting from this? And then even longer-term, it seems like there's a lot of developments being made for nasal delivery solutions of drug molecules and then you also have the injectables capacity expansion. So just trying to understand kind of your line of sight to hitting that 6% to 10% target for 2023? And then even longer-term, is that the right target given all the positives that seem to be in the development?

Yes. Thanks Kyle. We discussed it I think when we had the Investor Day in Congers. You always have moving pieces, and this is a pipeline business. So everything that we start developing today really comes out of the pipeline 5 to 7 years from now. So it's really our confidence in the pipeline that underpins the 6% to 10% growth. Clearly, right now, we are growing above that. This will be allergic rhinitis will revert back to me. No question. It's going to keep growing at double digits. And yes, consumer health care is very strong at the moment. So we are quite comfortable with the 6% to 10%, not only this year, but for years to come but we're also ready to raise it.

Got it. Is there any way -- I mean, just to follow up, is there any to size the Narcan potential, what that means for you? And then my second question was going to be on pharma and the cost side. Can you just remind us the cost that you incurred this past year related to start-up costs and the ERP implementation? And then when do those costs go away. We're just trying to get a better understanding of kind of the more run rate normalized earnings power of this business when those one-time costs are behind you?

Sure. So I think Bob mentioned the quarter four and the quarter one numbers. Again, quarter one, it was $0.08 or $8 million, which will then go down to 2 to 3 for the balance of the year. And it will also continue in 2024, if 2024 comes on stream, but then it will go away. That's as far as we see. I mean, it's for this business, remember compared to some other company, it's a small business, and we're putting in substantial capital. So the rent is all takes quite a metric. And -- we bought this business 10 years ago. And now we're putting in our standard SAP system, which is also a major effort.

Yes. I mean on relating to 2022, we had roughly a $0.02 to $0.03 as we began the validation in the expansion that was done in 2022. And then in Q4 of this year, we had about total of $0.03 to $0.04 related to the start-up and the ERP implementation. And then Stephan gave you the forward-looking part.

Sounds good. Good luck in the year.

Thank you, Kyle. Our next question comes from Gabe Hajde from Wells Fargo Securities. Gabe, your line is now open.

Stephan, Bob very good morning. I just had one quick one. A lot of ground has been covered, just one quick one on corporate. It was a little bit higher than maybe what we were looking for -- and it sounds like the ERP and start-up costs that were distributed to the segments. So I'm just curious if there's anything in there and then maybe a little bit of view for what you're expecting for 2023?

Gabe, you're always good to drag me down the rabbit hole. So bear with me on this one. The biggest increase in the corporate expense comes from some of our supplemental pension in the U.S., and this is a kind of a quirk of the accounting rules, right? So we -- we have annuity contracts on the books, which sit on the asset side. So any fluctuations in those asset contracts have to go through P&L while any fluctuations in the liability for the pension go through OCI. So what you had last year is you had a $2 million positive right, as the run it through corporate expense, and now it's flipped to $2 million negative as the interest rates are increasing. So there's an additional cost in theory on the annuity contracts, even though that they're covered. So that accounts for about $3.5 million, $4 million of the delta.

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 for other than the corridor of 1 to 3 times but the 1.7 is where we are at.

Understood. [Indiscernible] Thank you guys. Good luck.

Thank you Gabe. We have a follow-up question from George Staphos from Bank of America. George, your line is now open.

Hi, thanks for taking the call. I had asked earlier about the launch activity that you might be seeing in beauty and fragrance. Can you talk to that? And then somewhat relatedly, can you give us assurances on what additional information you'll be providing to us as we get on the call and have been getting on the calls underlying the segment data, will you be giving a kind of the end market data in the new reclassified segments. So launch activity that we'll be getting post -- please go ahead.

Let me take the first one and then Bob follow up. So on the launches, look, 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 past year. Now as we exit that period of tremendous uncertainty, certainly, you will see a lot of launches in this what 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 certainly the second half also looks very good. So overall, there are good momentum in launches. And then I'll give you the assurance question, Bob.

Sure. So George, consistent with requirements and what we've done in past segment realignment prior to our Q1 earnings, we'll probably 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. And 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 one, just on sustainability. Can you give us across the entity in total? And then within pharma specifically, what percentage of your products are recyclable, reasonable or composable, which I imagine is very little, but any metrics around that for the company and for pharma would be great. Thanks guys, good luck in the quarter and congrats on the performance this year to end the quarter -- end of the year.

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 in the growing recognition around everything sustainability, ESG. One is, of course, that is very important, 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, Hey, I really love what you're doing around sustainability. And therefore, we can compete above our weight class in recruiting. And clearly, for customers, it's important that, in the end, drives preference when it comes to who 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. Really appreciate everything the team has done. We ended with a solid quarter four despite the North American weakness in some of the consumer end users. We clearly are off to a strong year in quarter one, and we will overcome the consumer weakness here as well as well as the top pharma comps. As you know, the onetime costs, especially the ERP cost in injectable will be transitory, and we see good demand patterns in pharma and beauty continuing. Clearly, the first half will be strong and second half China should add to the momentum. I want to come back to the innovation pipeline. We showcased that in Congers for pharma, but also the beauty pipeline is building nicely as customers see our commitment with the innovation center and the new state-of-the-art facilities in Europe and in China. As our major investments come online, our capital expenditures will come down somewhat -- and I just talked about the sustainability recognition. So really looking ahead to a solid year. You may have also noticed that we are narrowing our range a bit. Hopefully, that some of this major uncertainty is behind us. And with that, we look forward to talking to you on the road.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.