AptarGroup, Inc.

Ladies and gentlemen, thank you for standing by and welcome to APTAR's Group 2020 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Introducing today's conference call is Mr. Matt Della Maria, the Senior Vice President in Best Relations and Communications. Please go ahead, sir.

Thank you and welcome, everyone. Participating on the call today are Stefan Sanda, President and Chief Executive Officer, and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. You can find a copy of our press release as well as a slide presentation that summarizes our results on the website. If you are following along on our website, you can advance the slides by hovering over the presentation screen and clicking on the arrows. We will also post a replay of this conference 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 those projected or contained in the forward-looking statements. APTAR undertakes no obligation to update the forward-looking information contained therein. I would now like to turn the comments call over to Sethan.

Thanks, Matt, and good morning, everyone. Thank you for joining us. Let me start by expressing my hope that you and your families are doing well and are staying safe during this difficult time. Before I comment on the results, I would like to share some thoughts on the COVID-19 crisis starting on slide three. During this unprecedented time, we are guided by our values as we support and care for each other and look forward to a brighter tomorrow. On this slide, you see some of the many photos and stories of our people rising to the challenge of supporting customers, consumers, and patients. To our employees around the world listening in on this call, I want to say thank you for all your efforts and continued perseverance to deliver on our promises. We have great pride in what we do, and our customers have expressed their immense gratitude for all of your efforts. Keep up the great work. Turning now to slide four, our facilities are open and operating, albeit some at reduced capacity. APTAR is an essential supply chain partner, supporting industries such as pharmaceuticals, consumer products, food and healthcare, all industries identified as critical by the U.S. Department of Homeland Security and by most other governments in the 20 countries in which we operate. Almost all of our customers and suppliers continue to operate as well. To date, we've experienced minimal supply chain disruptions, and we have been able to maintain substantially all of the incoming supply flows from our primary vendors. On slide five, you will see but a sample of our global solutions, which are critical to society during this time. Drug delivery, dispensing, sealing, and active packaging solutions can be found on a number of medicines, sanitizers, cleaners, and food and beverage products. We have engaged in very transparent discussions with our customers and suppliers about the state of the supply chain and our end markets. We are working closely together to bring specific COVID-19-related solutions to market, including sanitizers, which are now being made by some of our fragrance customers. In some cases, we have repurposed our food and beverage closures for sanitizer dispensing and ramped up certain production where needed. Turning to slide six, the health and safety of our people continues to be our first priority. Our COVID-19 global action team meets daily to identify and mitigate potential risks and the COVID-19 exposure control plan has been implemented at each APTA location early on. We maintain a proper balance of remote workers and on-site staff in order to support our ongoing production efforts. We are restricting all visitors to only those essential for business continuity and have escalated our cleaning and sanitizing procedures. We continue to encourage everyone to practice good hygiene and social distancing, and we are distributing masks as they have become available. We are also reporting and monitoring COVID-19 instances in real time, and we are keeping our people informed via frequent virtual town hall meetings. Moving to slide seven, I would like to recognize just a few ways in which we are supporting the communities where we live and work. Some of the many contributions include donating masks, gowns and protective glasses to local hospitals, 3D printing, mask holders, and face shields that are donated to local healthcare workers, partnering with a repurposed brewery to produce and package child sanitizer for children's hospitals, and raising money to support other local hospitals. These are just a few of the many examples of selfless acts of kindness from our people around the world. Turning to slide eight, I would like to offer a few comments on the quarter. our pharma business delivered another strong performance even when comparing to an outstanding first quarter last year. Core sales grew across each end market, with particularly strong growth in our injectables and active packaging businesses. The pharma team has identified over 150 potential projects as a result of the COVID-19 pandemic and continues to receive inquiries from the healthcare industry on an almost daily basis. Now turning to a recent product introduction, our PureHale respiratory device was chosen by Blair Exploratories for their new Breathe Free Essentials brand. Our PureHale device dispenses a fine mist of moisturizing saline and natural essential oils. Unlike traditional nebulizers, the PureHale system does not require batteries or the pre-filling of any reservoir and can be used on the go. Finally, as previously announced, we have also submitted an emergency use authorization request to the US FDA for N95 respirator decontamination using Apsaris ActiveShield material science technology. The request is progressing within the FDA. The final approval is still pending at this time. Based on the strong data package we have developed, we continue to be excited about the potential of this highly relevant innovation for decontamination and disinfecting solutions. Our beauty and home segment was negatively impacted by the closing of the travel retail sector during the quarter and the closing of traditional beauty retail settings during March. Reduced demand for hair care and sunscreen products also impacted our results, while increased demand for our dispensing solutions for sanitizers and cleaners was not enough to offset the declines. I would like to highlight that our spray actuator is featured on Lysol's NutriAir disinfectant spray, and our post-consumer recycled resin closures and spray pumps are featured on a line of pet care products from the Indie brand, Wild Wash. Turning now to food and beverage, sales were negatively impacted by a sharp decrease in on-the-go beverage closure sales and lower food service sales. due to the COVID-19 crisis, as well as the passing on of lower resin costs. However, in the quarter, we also supported Coca-Cola with expanding its Powerade product line for the first time in several years with a new zero-sugar beverage that features our sports closure. Turning to slide nine, we are continuing to execute our strategic priorities in parallel with our near-term actions related to COVID-19. To advance our capabilities and reach in Asia, we have completed our strategic equity investments in BTY, a leading manufacturer of metal and decorative accessories for the beauty market. As previously announced, we entered into a partnership with digital platform provider SunMall to bring to market new connected platforms for respiratory-related therapies. We also completed the acquisition of Fusion PKG, adding agile concept to launch and turnkey capabilities for the North American beauty market. While we met for the long term in high-growth areas of our beauty business, we remain committed to bring our transformation initiatives over the finish line with our goal to reach our long-term EBITDA margin target range. We also continue to work towards a circular economy where most packaging is reused and recycled. Furthermore, we are exploring opportunities for sustainable resins and collaborating with customers on refillable products. All these efforts position us well to help our customers achieve their objectives, many of which are to achieve packaging that is 100% recyclable or reusable by 2025. In addition, we continue to seek new applications for our material science active packaging solutions and have invested in growing our service platforms. With that, I will now turn it over to Bob, who is going to provide additional comments on our results.

Thank you, Stephan, and good morning, everyone. I'll walk through some of the details concerning our first quarter results and the impact of the COVID-19 pandemic, starting with slide number 10. For the first quarter 2020, reported sales declined 3% and were negatively impacted by changes in currency rates, The timing of passing on lower resin costs to customers and COVID-19-related impacts. Core sales, excluding currency and acquisition effects, declined 2%. Taking a look at our segment performance, we saw strong performance by our pharma segment, which achieved core sales growth of 7% and an adjusted EBITDA margin of 37% compared to a very strong first quarter a year ago. Core sales to the prescription market increased 2% due to growth in sales of our nasal pump delivery systems used on allergic rhinitis products. Core sales to the consumer healthcare market increased 2% due to increased demand for our products used with nasal decongestants and eye care treatments. Core sales to the injectables market increased 21% us a variety of components. Core sales to the active packaging market increased 26%, primarily due to the new HIV preventative drug launch that was approved with our active blister technology that provides in-package stability to the oral solid dose of the medicine. Turning to our beauty and home segment, core sales decreased 9% due to the negative impact of COVID-19. Sales to the beauty market declined due to the effects of reduced travel and the closing of retail stores that began toward the end of the quarter. Certain categories within personal care, such as sunscreen and hair care, were also negatively impacted. Beauty and homes adjusted EBITDA margin was 11% in the quarter and was negatively impacted by the sales decline in the quarter, which led to under-absorbed fixed costs, and the first quarter expense related to the one-time cash thank you award to employees. Looking at sales growth by market on a core basis, core sales to the beauty market decreased 13% as beauty sales in Europe and Latin America were negatively impacted by the closing of retail shops selling beauty-related products. And additionally, our sales in Europe were also impacted by lower sales of beauty products in the travel retail channel from the reduction in international travel. Poor sales to the personal care, primarily due to the previously mentioned softness in sun care and hair care products, that was partially offset by an increase in demand for dispensing solutions for sanitizers and lotion moisturizers. Poor sales to the home care market decreased 6%, also due to decreases across a variety of accounts. Looking at our food and beverage segment, core sales decreased 2% in the quarter, primarily due to the passing through of lower resin prices to our customers, which accounted for approximately 5% of negative growth on the top line. Certain products were also negatively impacted by COVID-19 restrictions, mainly related to food and beverages adjusted and what is negatively impacted by the reduced volumes in our beverage. Looking at each market, Poor sales to the food market increased 2%. Products used on dairy and spreads. Poor sales to the beverage market decreased 13% due to the decline in sales of our on-the-go functional drink products, which were significantly impacted by COVID-19 restrictions. Turning the quarter adjusted earnings per share totaled 93 cents. Prior year comparable earnings per share totaled $1.05. Slide 12 is meant to give a high-level view of how we see the scale of impact from the current economic conditions according to the major markets we serve. It says here that the beauty market is the most in 2009. With retail beauty stores closing to a halt, This has a significant impact on our customers' businesses. Beverage, as we have discussed, is also affected, as the majority of our beverage business is single-serve, which is highly linked to the on-the-go lifestyle. You can see that our pharma business, in all of the different end categories, is the least affected. People have access to their medicines. Over-the-counter treatments continue. continues with limited interruption. Moving to slide 13, across the company due to the continuing impact of COVID-19. We are reducing pulling in subcontracted work and modifying our production schedules. It's softness. We have undergone regional and site-specific furlough. Employees use their vacation time during this period. Travel guidelines have eliminated all business travel and reduced all non-essential spending. Also passing through price adjustments to our customers. Slide 14 refers to our liquidity. As of March 31st, 2020, APTAR had available cash on hand with the ability to borrow under existing revolving credit facilities up to an additional $265 million. APTAR's total debt was approximately $1.4 billion at the end of the first quarter, maturing in 2020, relating to our outstanding Our leverage ratio is approximately two times after the funding of the fusion PKG acquisition. the second quarter. We expect the near-term effects related to the second quarter and anticipate that they will be more pronounced than we experienced in the first quarter. We are diligently managing our cost structure We expect Q2 to be the low point with the gradual recovery in the second half of the year. The results of our beauty and home segment are expected to be significantly impacted by continued weakness across each end market, primarily related to the effects of COVID-19. Our food and beverage segment, which had very strong growth in the prior year's second quarter, is expected to see continued related to COVID-19 and the impact from passing on lower resin costs. Comparisons compared to the prior year's exceptional growth, especially within its prescription division. We are also for the second quarter. Our second quarter results will include approximately $3.6 million of pre-tax expense related to the employees who have made it possible for critical infrastructure industries during the COVID-19 crisis. ...around our financial results, and then turn the call over to Stefan for closing remarks. In the quarter, reported cash flow from operations was strong and totaled approximately $85 million. Capital expenditures were approximately $62 million, and as shown on slide 16, it was $23 million compared to the prior year. We continued to have a strong balance sheet, and on a gross basis, that the capital was approximately 46%, On a net basis, it was approximately $30,000. The current dividend policy is intact, and we will temporarily pause our share repurchasing program as a precautionary measure given the near-term uncertainties. In addition, we continue to evaluate and are forecasting a range of $220,000 to $250,000. At this time, Stefan will provide a few comments before we move to Q&A. Thank you, Bob.

Let me cover a few key takeaways to close out. On slide 17, on behalf of my AFDA colleagues around the world, we are proud to live up to our purpose and responsibility to this society. Most of the products and solutions we make at AFDA play an important role in everyday life. We all have these products in our homes, dispensing the medicines we take, the food we consume, and the beauty and personal care and household products to count on to get us through the day. I am confident we will emerge from this difficult time with fresh perspectives and new ideas. When I look to the courage, performance, and dedication of our incredible people, I have no doubt that AFTA will become an even stronger organization with I continue to have confidence in our opportunities for growth and long-term value creation. We have a broad portfolio of innovative and differentiating solutions that serve diverse and attractive end markets, regions, and customers. We have weathered severe recession in the past, and we will navigate the current challenging conditions with our strong balance sheet, cash flow generation ability, and commitments to our customers. We are making a difference in our local communities and in the world, and we will continue to rise to the challenge. Questions?

Ladies and gentlemen, to ask a question, press the pound key. In the interest of time and fairness to all participants, if you have more questions as time goes on, follows. Your first question comes from Ganshan Punjabi with Baird. Your line is open.

Yeah, just, you know, in the context of, you know, obviously pantry loading at the consumer level, just curious as to whether you think pharma benefited in any way in the first quarter from any sort of pull forward. It doesn't seem like like it in terms of OTC and maybe can you just start off there and then also give us a sense as to how April failed to perform the class EGD36.

Take the first one and Bob take the second one. So the one area where we might have seen where in the research And people want to make sure that the supply chain is well-filled. And in addition, of course, we have this active blister launch.

But for the rest of the portfolio... And regarding the April patterns and trends that we're seeing, as you can appreciate, you know, I think it wasn't until midway through the month of march when we really started to see uh the significant shutdowns in the shelter at home um here we are in april and and as you might expect we're getting the so i i would say that right now this trending's where we expected it to be when we um when we started looking at the pandemic. So clearly work that we saw for the full month.

Okay. And then in terms of the, you know, the pipeline of activity within the pharma segment, I mean, how do you think that the current dynamic of limited, et cetera, may impact that segment as we kind of think through the rest of this? You had talked, Stefan, about 150 something. some odd projects that your pharma team has identified. What exactly does that entail?

Sure. So on the project activity, actually, when you think about development, there's really no – we have obviously switched to virtual collaboration with customers, and that is actually going surprisingly well. It can be done remotely. where we used to have face-to-face meetings. So the pipeline fill, no doubt that there will be instances or there are instances where some clinical trials are delayed because of priority pandemic. And one-site audit is needed for approved for launch. There is some delay. Now, if we're getting back more sometime in the second half, I think you will not be able to find this effect in the long term. As we know, pharma pipelines are for 10 years. And obviously, if this went on for years, then... On the second question, let me qualify the 150 number a little bit. So, of course, there are many hundreds, maybe thousands, industry targeting COVID-19. To us, the capabilities that we bring in inhaler, nasal injection, so we're working those through and probably a third of those we work actively on in projects in the company. a large pipeline with a few thousand projects at any one time, but it is a notable uptake, of course. The majority of that is, as you would expect, injectable-related, but some of them are also in the inhaler space.

Thanks so much, Stefan.

I'll turn it over. Maybe the one I would, of course, also immerse in the use of FDA for the new project we're also proud of.

Thank you.

Your next question, KeyBank. Your line is open.

Stefan, Bob, Matt, good morning. I hope you and your families are well and healthy. Bob, Just morning, Matt, a question about April. This isn't specific to April, but just in terms of your teeth at all with roughly what magnitude of core sales declines you're expecting, and also what, you know, obviously some of the companies I follow have declined to provide second quarter guidance just given the certainties that you referenced. So what went into your decision to actually give? Q2 guidance? So, I mean, we're not typically giving forward-looking sales guidance in any of our in the past, but I mean, what I can tell you is qualitatively, as I kind of mentioned to Gaston's response, you know, we're going to see a much more impact in Q2 because we really in the western part of our business really it's at best slightly less than that and now as we head into the second quarter of China who's getting back the rest of our businesses is now kind of right in the throes of the pandemic and so I would you know I would say that you can take a look at what our Q1 might look like. And then in terms of what went into our Q2 guidance and, you know, we, you know, who's close to the market, and we wanted to put some, I guess, goalposts, some of the activity could go, realizing that it is a very uncertain market, culmination of a lot of work on the ground with, you know, customer-by-customer calls and research and things, and, you know, obviously we opened up the range a little bit from what we traditionally give them, but we feel that it should fall somewhere. Thanks, Bob. One more on just for modeling purposes. Several years. Normally earnings are down sequentially 2Q to 3Q, and I don't know how much seasonality there is in your business 2Q to 3Q, but I'm just wondering to the extent that activity gradually onward, I'm just wondering to what extent that that may be offset by just the normal seasonal declines in sales and earnings from QQ through the balance of the year. Can you just help me with your business and why earnings in recent years have been higher QQ versus the... Sure. So you're right on QQ is typically one of our stronger quarters and typically slightly higher than summer season. sales, things that make end-of-the-year beauty launches or customized projects. So traditionally we do see higher activity in Q2, but I think depending on really any seasonality that we have, right? I mean, I think if you looked at that one slide in the presentation, you know, Q2 right now as we see it, is projected to be the low point in the year. You know, if we do start to gradually pull out of it towards the back half of the second quarter, I'm going to weigh negative on that. If anything, I see the pulling out being more of a positive. And, again, I think the pandemic far outweighs any seasonality in our business. Yeah. No, thanks. And just on the –

Yeah, I just question that with the balance of our business, that we have upside on the other low point, if you want, and that there is pent-up demand. I mean, people want to get back to the saloon. People want to get back out there. clearly some, there will be significant pent-up, and whether that falls now exactly in Q3 or Q3 and Q4, let's see. But as Bob said, I don't think seasonality for this particular year will... No, sure.

Just, Bob, one last one. On the tax rate, should we think of the 2Q level of 32 as elevated would be, or, I mean, I know there's a lot that's abnormal right now, but any thoughts on the tax rate and the sustainability of what you're going to for 2Q? Sure. So, as we've touched on in previous quarters, one of the more significant positive or lowering the effective tax rate comes from the gain in the stock option exercises. So, the result of the between the actual and the money versus the book expense. So, you know, that accounting units environment, obviously, we're not forecasting a significant amount of option exercises. So, we're very conservative on that estimate. And then the other thing I would point out is that, you know, as we're expecting to kind of hit the low point in Q2, We are forecasting that we have some losses in some of our countries, and due to the uncertainty going forward, we've chosen not to tax-effect some of those lost carry-forwards. So in essence, you're pulling down your pre-tax income without any corresponding, you know, asset on the books for the lost carry-forwards. So those two things are negatively increasing, I would say, our tax-raising Q2 versus what we've traditionally seen. Thanks so much, Bob.

The next question comes from Neil Kumar with Morgan Stanley.

Hi. Good morning. Thanks for taking my question. First quarter growth for pharma in the injectables and active packaging businesses. From a mixed perspective, given these are lower margin areas, what contributed to pharma and human margins above the high-end gift margin range? And generally, what is your outlook on margin for pharma going forward in the tough and constant higher margin description business?

Bob, you want to take that? Sure. So, Emilio, you're right. I mean, traditionally, the injectable and the active packaging space, we've mentioned in the past, traditionally have slightly lower margin. But, you know, in fact, the strength was so... strong in both of those divisions, both up 20%, we did see some incremental move on the overall margin. So, in fact, we didn't see the degradation that, you know, that you would normally expect on, I would say, a normal growth pattern. And both prescription and NCAC both were up a couple percent each. So, you know, that's what kind of boosted that trend. that first quarter margin in pharma I think looking forward again I think our guidance is that it's really going to depend very much on the mix going forward and what we're going to see in Q2 so highest income margin and if you look at it Q2 last year was a really strong quarter for us so we're up against some very difficult times so we're not forecasting that that's but that margin that we hit in Q1 is going to be sustainable going forward. We'll have to see how the ultimate mix and final sales come in division by division.

Okay. Thanks. That's helpful context. And I noticed you lowered CapEx guidance the full year by $5 million at the midpoint. Can you talk about where there's opportunity for further reductions assuming the weak environment persists? And you also mentioned there's a focus in capital management. How should we think about the potential benefits of these initialists?

So on the capital side, you know, all our divisions are actively challenging the projects that we have in the pipeline and, you know, as you can imagine, the world has kind of been turned upside down. Capacity increases that we thought we needed a few months ago are no longer needed. Some of those projects may have been started already. It takes many months, in some cases, to build the molds and the assembly machines necessary. So we're looking at those to see which ones can be delayed, stopped, and if they haven't started, certainly put on hold. And as we mentioned on the call, hand sanitizers and motion moisturizers, we are seeing some capacity restraints. So we're trying to balance and actively look at that. I think we'll have to see how that progresses as we go through, but we're going to continue to challenge what that is, and if we don't see key improvement, I would imagine we could further pull back some of those investments. But we do run this business for the long term, and many of the investments that we've started already are long-term in nature. They're efficiency enhancements in our facilities. Sometimes it's a new facility in certain cases, state-of-the-art facilities. So we're going to continue to make those long-term investments because we feel really this, you know, while this is a tragic situation, it is transitory and we will come out on the other end of this and we want to be prepared for, as Stefan said, you know, that pent-up demand to be able to meet that demand. On the working capital side, you can see the payables front. Inventory, again, is challenging because on the one hand, you want to make sure that you don't have supply disruptions, but at the same time, you know, with the decrease in demand, you don't want to be carrying too much. So we're going to continue to work in that area. AR is the one, quite honestly, that we have to keep the strongest eye on. as customers who maybe are not essential business and have shut down some of their facilities, we need to make sure that we maintain our current payment terms and we remain diligent on collections and things. So I do think there's a little bit more that we can extract overall on working capital, but it's going to be, you know, it's going to take a concerted effort across all three of those levers.

Let me just build on this a bit more. This downturn, crisis, whatever you want to call it, is similar to the 9-11 crisis, what have you. But this is really different. Our business is resilient in a crisis. both recessionary environment. So even as the world is going kind of product that context, now right now demand is artificially with the confinement procedures and orders. People are able to go back to more regular consumption, they will not go and buy that shiny new car or the large electronic. But the basic consuming is normal. So we are really balancing being ready for that uptake and buying these products and not taking plants offline and that kind of stuff.

Question comes from Mark Wilde with Bank of Montreal. Your line is open. Mark Wilde, your line is open. Mark Wilde, your line is open. Your next question comes from George Stafford with Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for taking my question. Thanks for all you're doing with COVID, and thanks for the details. I guess I want to come back to the COVID question. I think Gansham had teed it up to begin with. If you can, to some degree, comment on what you're seeing now from your customers. You mentioned the number of products that you're working on, but in terms of, you know, vaccine manufacturing capacity, obviously those conversations have to start now ahead of any vaccine approval, you know, because hopefully if there is an approval on one or two vaccines, production has to start right away. Can you talk about what conversations you're having with your customer in terms of why they are leaning towards your components, what they're asking of you in terms of data, you know, anything that would help us determine how much traction you would ultimately have once, again, hopefully, there's a vaccine approved and, you know, remedies are being produced.

Yeah, we cannot really comment on the individual project, as you can appreciate, but we are... part of some clinical trials of vaccines and, of course, discussions around the scale-up required if that particular vaccine would be successful. And we certainly have the capacity to meet demand as needed. I think that's probably as far as I can go.

Stefan, I would imagine that the number of trials you're on is less than, I think, the 150 COVID-related projects you talked about. Is there a way that you could size the number of trials that you're on?

No. But it's not insignificant. Let me stop it there.

Okay. I appreciate that. I wanted to... switch a little bit to and we recognize obviously that the on-the-go beverage piece of the business was impacted by shelter in place. Can you comment at all in terms of how the challenges have been ameliorated or not in Asian beverage, that issue that's been lingering for the last couple of years. Has that largely run its course with the customers seeking second supply? And on the food side, you know, we've seen pantry loading driving volume for some of the other companies in our space. Were you pleased with the volume growth you saw for food, or would you have expected more pantry loading effect?

Well, it's obviously different by geography, so let's start in China. Actually, our particular beverage is mainly consumed by kids who go to school. So while China has been, as an economy, has snapped back much earlier than in the West, Return to school is only happening now. So certainly a significant part of that beverage shortfall is in Asia because of that particularity. On the other hand, infant nutrition, coming back to your pantry loading in China, and we benefit from it. Would I love to see more condiments? And what? call is where is the food service decline and what is pantry loading? And the next has an impact also on condiments.

Okay. And the past APTAR has gotten a reported benefit from having The three segments, the developing of R&D and innovation in one segment, that can be used to and leverage. Can you remind us, you know, why you like that portfolio, you know, with obviously the challenges that you still are going through in Beauty and Home, and obviously COVID is a one-off results there, but, you know, it stands in stark contrast with pharma, which is obviously doing quite well and obviously would have a higher multiple independence. So what's, as you see, the benefit of having that portfolio? And good luck in the quarter. Thanks for the insights.

Well, Exhibit A is the ActiShield application that we just made to the FDA, that it came out of that we used that technology for food safety in quick service restaurants. And we now pull the same technology into pharma, if you want, into a pharma application. Of course, a lot of questions we've addressed frequently The core technology of dispensing and the core manufacturing operations are the same. Precision injection molding followed by high-speed assembly. Of course, we do it inside the cleanroom. We do work operating inside cleanrooms. So, there's a lot of leverage there. especially in these times, people do appreciate also some degree of diversification. Of course, we all understand the pure play advantages in the short term, but in the long term, a certain balance is also beneficial. Let me stop there.

Okay. Sure. Thank you, guys.

The next question comes from Gabe Hagee with QA. WS, security, your line is open.

Thank you, Stephon, Bob, Matt, for everything that I was doing. I'm curious, maybe, Bob, if you can comment at all in regards to maybe under-absorbed fixed overhead, most specifically in Manchester City and Beauty and Home. And then I guess on the heels of... I guess if we have a vaccine and life is back to normal in 2021, would you see this current downturn as maybe a trigger for Transformation 2.0?

So on the under-absorbed fixed overhead, I mean, it's hard to generalize on an overall segment, you know, worldwide basis because obviously, you know, But as you know, we're organized from a manufacturing perspective by technology. So in some of our plants that were supplying lotion pumps for moisturizers and hand sanitizers, you know, we were putting up some pretty strong numbers in terms of productivity coming out of those facilities. You contrast that with, let's say, a plant that focuses on fragrance pumps or skin care pumps, for which beauty was negatively impacted. And as I talked about, you know, you can't just turn off the lights and cut down all the fixed costs. I mean, we need to run it at low idle speed for our customers because not all of them are shut down. So as you can appreciate, you've got a pretty heavy infrastructure in some of those. So it's a mixed bag by, you know, by technology and within those regions on that. But where you've got significant shortfalls in volume, it hurts you pretty bad. And then on the ones where you're getting good throughput, you're traditionally also spending a little bit on overtime and things like that just to get the capacity out. So it tends to be a net negative overall because of the weight of the beauty business on our overall beauty at home segments.

Maybe let me address the second part of the question. We are still executing on the transformation. What the transformation has brought is different to the operating capability on the front-end commercial side of the business. I mean, just the fact that I can rattle off everything that's in the pharma pipeline or could is one result of having a much more more well-defined front-end execution capability and tracking capability. The same for some of our continuous improvement activities in the plants. One side effect, even at this time, or especially at this time, some of our plants actually run at record levels in terms of efficiency at low levels with low overhead absorption, but a much better execution capability. So transformation, we certainly don't have to do that again. Having said that, of course, all of us will try to assess what does the new normal mean in terms of consumer behavior, the kind of products that will be needed, that will be popular, will be successful, the channels they will be brought through. And with our broad set of capabilities, we will look to find solutions, services, maybe add even more services to the mix. And then that may lead to, okay, I need a little bit more of this footprint rather than that footprint. You can call it transformation 2.0, or you can just call it continuous evolution of the company, and we will never stop evolving. That's one of our key strengths is that we face reality and adapt to the reality. And that will also mean a lot of opportunity and, quote, the new normal. Thank you, Stefan, for that.

I'm curious also if you can give us any insight, I guess, as China begins to emerge from a thaw, what you're seeing in terms of customer dialogue or, you know, I guess, sell-through activity in that region.

Sorry, in which region?

In China specifically.

Yeah, what we've seen in China is a pretty rapid snapback of daily life, but a new daily life. Because many of us who travel to Asia realize they've probably been used to wearing masks ever since SARS, and that is now continuing in the office context. The eating out after work is not as pronounced as it used to be. So there's more in-home consumption. E-commerce is even more off the charts than it's already been. So the other part, though, to realize is the impact of the crisis on China has been much, much lower. than it is in the West. Basically, Wuhan and the province around Wuhan were shut down for an extended period of time. Factories were shut down maybe an extra week after Chinese New Year holiday, and people went back to work within a few weeks after that in the offices. That's by far not as extensive as we had to do in the West for a number of reasons. But we certainly expect more e-commerce, maybe significantly more e-commerce going forward in the West. We certainly expect continuous focus on cleaning, sanitizing, disinfecting, just to mention a few. But it's really too early to tell what the new normal will look like.

Question comes from Debbie Jones with Deutsche Bank. Your line is open.

Hi, good morning. Hi, I wanted to see if you could talk a bit about your exposure in Brazil. Some other companies have had a harder time in that region with the impact of COVID-19 and just kind of get a sense of how that's been progressing for you and the impact.

Yeah, thanks, Debbie. Brazil certainly is a topic and in terms of evolution of the pandemic, it's much later or later than the West. So certainly it started with China, Asia, then Europe, the U.S., and Brazil is now probably where Spain and Italy were months ago, so still on the way up. And beauty is an important part of our business in Brazil. So it has an impact, but it is different for different companies. Those companies who are very well geared towards e-commerce are actually doing quite well, Others who are more geared towards the retail environment are faring poorer. So it is a topic, but as I said, it's a mixed impact, but clearly part of our outlook for Q2.

Okay, thanks. And I realize that it's difficult to talk about the vaccine possibility, but I'm going to try to ask anyway, because the way I think about this, it would almost be impossible – to not have Aptar part of this process along with a lot of the major drug delivery suppliers just given the need for it globally. But is there anything around your portfolio in terms of drug delivery that, you know, for vaccines in general, that would make you more unique?

I mean, for vaccines, I think we are well positioned and supplied to all the majors. as a second supplier, sometimes as the first supplier. So I fully agree with your statement. Of course, the breakout scenario would be if a vaccine could be delivered via nasal delivery, but that is pure speculation where we would have a particularly strong position. But we will participate in this one way or another.

Okay, thank you. I'll turn it over.

It comes from Courtney Owens with William Blair. Your line is open.

Hi, guys. Good morning. So for my first question, can you guys talk a little bit about the split of the beauty slowdown between travel and retail and traditional retail closures? I realize it's probably pretty hard to quantify, but which part of that slowdown has been more impactful to your book of business? And I guess as regions continue to hopefully or start to rather hopefully lift kind of some of the closures and some of the social distancing measures, how do you guys kind of think about a return to normalcy in each of those different pockets, that being the travel retail and then the traditional retail business? Thank you.

Yeah, I'm not sure that we can break it out this way. The one thing I can say is what we observe from our European beauty clients is that those in American, that those who have a significant Asian portion were much quicker to come back because they wanted to participate in the rebound in Asia, in particular China, and those who are pure, let's say, European suppliers have been much slower on coming back. And the second one, not surprisingly, those who are more apt and savvy in e-commerce has fared better than those who are more in the traditional retail stores. Clearly, travel was shut down first already in the February period, whereas the traditional retail only was really shut down in the West, let's say, beginning in the middle of March. So there is a sequencing effect.

Got it. Thanks, guys.

It comes from Adam Josephson with KeyBank. Your line is open.

Thanks for taking my follow-ons. Stefan or Bob, would you draw any parallels between this situation and 08-09? We've had some other companies that have done that and basically said, look, whatever we're down this year, we fully expect to get back next year. And obviously, in 2009, you guys were down. I think your core sales were down seven. And then the next year, they were up, I think, 14. And your sales were right back to 08 levels in 2010. Do you see similarities, differences this time around?

Well, you know, when we – Yes, of course, there are similarities, but it's also very unique. I mean, to have airline travel basically shut down, to have people stay in their homes in all Western economies for two months, that is very different. I mean, in 9-11, we started traveling back after a week. We started traveling again, and TSA was up and running, and it became a national... duty to go out and consume. It's different here. 2008, 2009, of course, what's the same is that we have a strong balance sheet and that we can continue to run the company and take advantage of the rebound. I think we will have more pent-up demand here as people hold up, but That's a bit of a speculation. Bob?

Yeah, I would just add that, you know, 08-09, Stefan's 100% right. I mean, you know, on the reduction in discretionary spend, like we've seen in beauty, those trends are similar. But, you know, 08-09 obviously was a financial crisis, and people cut back, companies cut back because they weren't sure – you know, where the liquidity was going to be in the market and where they have access to borrowings and things like that. This one's going to be entirely dependent on the confidence of the consumer. You know, even with the lifting of the restrictions state by state, it's going to be a question of, you know, how comfortable people are going to be going back to the movie theaters, how comfortable they're going to be going into shopping malls and small stores. and things like that. And that will have to see. And I think that's why the big push for, you know, either antiviral drugs, where people feel that, hey, even if I get it, you know, I may not die from it now, because there's medication for it. But ultimately, the vaccine that will probably put people at ease and to go back and same thing with the travel side, right? I mean, As you said before, it's a different – it's going to be a different experience coming out. So I think we're going to have to really watch the confidence and what happens with the virus up until we get a vaccine. Yeah, no, I understood. And, Bob, just one on the balance sheet. So, I mean – You maintain a good balance sheet for precisely times like this, and kudos to you guys for having such a good balance sheet. And I understand why you suspended share repurchase. Many companies have done the same, and everyone's patenting down the hatches. At some point, I know the U.S. markets come roaring back from the low, so it's not as if the market is that dislocated anymore. And I don't know what it's like on the private side, but Is there a point which you would say, you know what, we've seen this sudden dislocation. We know times are very uncertain, but we've got this great balance sheet for a reason. Why don't we use it? I mean, how are you thinking about when to use this really good balance sheet of yours? Well, I think, you know, what we're looking at is obviously we're looking for some more clarity on the horizon, first and foremost. And secondly, I think like we saw in the 08-09 crisis, you know, while there's winners at the end of the day, there's also losers along the way. So we have to keep a close eye on our supply chain, competition, technologies that are in the market. I mean, you've got a lot of, you know, where Epic has been successful, I would say, on the M&A front is acquiring smaller technology-rich companies with know-how and capabilities, those are the companies right now that are struggling. I mean, look at what's happening in the venture capital market. There's still a lot of great ideas out in the market, and I think one of the things that I think we would love to use the balance sheet for is an opportunity, you know, maybe to acquire someone who may be unable to get their technology across the finish line is something that we could leverage, and that certainly would be a preference in our mind in terms of utilizing that strong balance sheet. I don't know, Stefan, if you have any other thoughts on that.

No, I think that's well said. The larger point is we are not suspending, of course, our strategic development of the group, of the company. We ended the virtual strategy session earlier this year like we do every year. So there will be new opportunities to act on, and certainly we will do that responsibly. Thanks so much, and best of luck, and stay safe.

Thanks, Adam.

If there are no further questions kept up at this time, I will now turn the call back over to Mr. Stephan Tonda for closing remarks.

all right uh thank you all for joining us uh in these interesting custom virtual road shows to elaborate more and everybody please stay safe thank you conference call you may now disconnect