AptarGroup, Inc.

Ladies and gentlemen, thank you for standing by and welcome to APTAR's 2021 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 Villamaria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Thank you. Hello, everyone. Thanks for being with us today. Joining me on today's call are Stephan Tanda, President and CEO, and Bob Kuhn, Executive Vice President and CFO. Our press release and accompanying slide deck have been posted on our website. If you are following along on our website, you can advance the slides by hovering over the presentation screen and clicking on the arrows on the right and left. As always, we will post a replay of this call on our website. Today's call includes some forward-looking statements. Please refer to our STC 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, Matt, and good morning, everyone. I hope that you are doing well. Starting on slide three, you will find a few highlights from the quarter. We serve patients and consumers across a variety of end markets, and this makes Apter a resilient business through economic cycles, and the most recent period is no exception. We have the industry's widest range of dispensing systems, active material science solutions, and drug delivery technologies and services that we leverage across our reporting segments. Our customers benefit from our commitment to research and development and the new innovations that allow us to help them grow their own businesses. We have also maintained our strong focus on sustainability, and EFSA was recently named among the top 10 companies for reducing environmental impact by just capital, alongside Dell, IBM, Microsoft, MasterCard, and several other large companies. As you saw in our press release issued yesterday, reported sales increased 8% and core sales increased 1%. This is, of course, compared to the first quarter of 2020 when COVID-19 was not yet a major factor in our quarterly results. We also achieved an adjusted EBITDA margin comparable to the prior year while absorbing the mixed shift within our pharma segment and the relative mix across our three segments. Our food and beverage segment delivered a stellar performance this quarter as consumers continued to cook at home during the pandemic, driving strong demand for our innovative food dispensing closures. Price increases also contributed to our top-line growth as we are passing on increased resin costs to our customers. Demand from the beverage market was below the prior year, though sales grew modestly on the resin price adjustments. In pharma, the increased demand for our injectable components, including supplying some of the COVID-19 vaccine distributions, and increased demand for our active material science solution, including those for COVID-19 test kits, offset declines in the prescription drug and consumer healthcare markets. As we had mentioned when giving guidance for the quarter, fewer non-critical doctor visits and the lower incidence of cold and flu illnesses have resulted in certain pharma customers drawing down inventory levels of allergy and other respiratory treatment delivery devices. We continue to be well-positioned in niche healthcare sectors, and we see these pandemic-related supply chain adjustments as transitory. In beauty and home, sales to the personal care and home care markets increased while sales to the beauty market declined due to the continued low level of retail beauty activity related to the ongoing pandemic-related lockdowns. We are cautiously optimistic that the second half of the year will show a recovery in the beauty market. We are also maintaining initiatives to contain costs and manage inflation that includes raising prices to offset increases in raw material and other costs, while investing in key growth areas, including adding capacity to supply the beauty market in China. Many of our customers remain optimistic that consumers are harboring pent-up demand for their beauty products that will help bring a feeling of normalcy to their lives post-pandemic. In addition to the beauty market, we also expect the hair care category to recover as more consumers go outside and move about, and we are already seeing small but positive trends in sun care in the U.S. Turning to slide four and new product launches, I would like to briefly comment on several product introductions that will highlight the breadth of our offerings. In pharma, our active material science technology was selected to protect two new at-home COVID-19 tests that recently received emergency use authorization from the FDA. These tests provide convenient access to testing without the need to visit the doctor's office. Our technology is integrated into these diagnostic kits to protect against moisture and other environmental conditions that would otherwise impact test accuracy. In the prescription drug market, our unidose powder device is being used in a pivotal trial of intranasal powder-based naloxone by Nasus Pharma. Also, Landmark's new nasal spray treatment, which combines an antihistamine with a steroid to treat allergic rhinitis, was recently approved in Europe with our nasal spray device. This confirms that the ongoing conversion to nasal delivery continues in this important area. In the injectables market, we continue to support various COVID-19 vaccine distributions in all regions, with the most recent project being added in India and Latin America. In beauty and home, our e-commerce-capable high-flow pump was chosen by P&G for their new indie brand shampoo called Native. And our post-consumer recycled resin closure was selected by P&G for their Planet Kind Refreshing Face Wash. We are also supplying a PCR solution to Unilever for their Dove brand purifying charcoal and clove hydrating body wash. In Europe, we are providing the pump for in-store refillable personal care products in aluminum bottles for the body shop. And our fragrance pump is featured on the Flora and Guilty Gucci perfumes by Coty. Finally, L'Oreal is using our airless jar for its Revitalift facial skin care product in China. In food and beverage, Aptar's infant nutrition closure was selected for crème de la crème instant-enriched milk powder for Europe and for hip combiotic in China. Our closures with vows for inverted condiments are the dispensing solutions for several barbecue, mayonnaise, ketchup, and jelly products in Brazil. Also in the condiment aisle, our dispensing food closures are featured on Mike's Hot Honey original sauce and Berman's Hot Sauce original here in the U.S. Finally, in the beverage market, our sports closure is featured on two new flavors of a well-known functional drink beverage in China. With that, I will now turn it over to Bob, who will provide additional comments on our results.

Bob. Thank you, Stephan, and good morning, everyone. I will walk through some of the details around the first quarter performance, starting with slide five. As Stefan stated, for the first quarter, we reported sales growth of 8%, with core sales up 1%. I will go into our growth by market shortly, but want to comment on our earnings first. We reported earnings per share of $1.24, which is an increase of 48% over the prior year. Current period reported earnings included a non-cash pre-tax gain of $17 million, or 19 cents per share, related to an increase in the fair value of an equity investment. This investment happens to be our investment in PureCycle Technologies, our strategic partner pursuing ultra-pure post-consumer resin that will one day be part of our circular economy. Turning to slide six, First quarter adjusted earnings per share, excluding restructuring expenses, and the gain on the equity investment increased 10% to $1.09 per share on a comparable basis with the prior year, including adjusting for currency effects. Our earnings also reflect certain tax benefits, including the tax deduction that we receive from stock-based compensation that, as you know, can fluctuate from quarter to quarter. Aptar's adjusted EBITDA increased 6% to $152 million compared to the prior year, and this included the positive effects of currency translation rates, as well as the impact of the shift in business across our markets and resident cost increases. Briefly summarizing our segment results, our pharma business performance was mixed across the different divisions with total segment core sales even with the prior year, and an adjusted EBITDA margin of approximately 35%. Looking at sales growth by market compared to the prior year, core sales to the prescription market decreased 8% and core sales to the consumer healthcare market decreased 1% for the reasons that Stefan mentioned earlier. Core sales to the injectables market increased 14% with higher demand for our vaccine components. Price accounted for approximately 2% of the total growth, and about one-third of the remaining growth is from COVID-related sales, mostly to supply vaccine distributions. Poor sales of our active material science solutions increased 5%, primarily due to increased sales of our active containers used for probiotics. Turning to our beauty and home segment, core sales decreased 3%, and the segment's adjusted EBITDA margin was 10% in the quarter, and was negatively impacted by increased resin and other raw material costs, which are passed through where possible, albeit through a process that has typically been on a 60- to 90-day lag. Looking at sales growth by market on a core basis, core sales to the beauty market decreased 10% due to continued localized lockdowns, especially in Europe, and global travel restrictions, which have caused a significant reduction in traditional retail and duty-free sales. Core sales to the personal care market increased 2% due to continued strong demand for our hand sanitizer and liquid soap dispensers. Core sales to the home care market increased 13% on strong demand for our cleaners and disinfectants and some automotive products. Turning to our food and beverage segment, which had a solid performance, core sales increased 14%, and the segment achieved adjusted eat-at-home margin of 17%, primarily due to the ongoing strength in the food market. Looking at each market, core sales to the food market increased 19% as consumers continued the dine-at-home trend because of the pandemic. Core sales to the beverage market increased 2%, primarily due to the pass-through of higher resin prices. Moving to slide seven, which summarizes our outlook for the second quarter, current underlying demand conditions in most of our markets are not expected to change dramatically from what we experienced in the first quarter. We anticipate that demand for our prescription drug and consumer healthcare devices will remain under pressure compared to the prior year as customers continue to work off existing inventories. however in some of our other markets including beauty we will have easier comparisons to the prior year second quarter which was the most difficult period when you consider the impact of pandemic lockdowns we expect our second quarter adjusted earnings per share excluding restructuring and any change in the fair value of equity investments to be in the range of 91 to 99 cents per share The estimated tax rate range for the second quarter is 26 to 28%. In closing, we continue to have a strong balance sheet with a leverage ratio of 1.4. On a gross basis, that to capital was approximately 37%, while on the net basis, it was approximately 31%. In addition, we continue to invest in innovative growth projects, and we are confirming our forecasted range of capital expenditures for the year at a range of $300 to $330 million. At this time, Stefan will provide a few closing comments before we move to Q&A.

Thank you, Bob. In closing, on slide eight, I'd like to mention that the broad range of end markets that we serve makes APTA a very resilient company through economic cycles, and the most recent period was no exception. The wide variety of technologies and solutions that we provide combined with our commitment to R&D and new innovative solutions will further build upon our solid customer pipeline. We have a profound respect for the environment that drives lower energy consumption, landfill-free facilities, and sustainable product designs. We will continue to advocate for a circular economy in which packaging is reused and recycled. Therefore, our positive and long-term view is unchanged, and when we look past this global pandemic-induced crisis, the future is quite promising. We look forward to growing after for the long-term benefit of all stakeholders. With that, I would like to open up the call for your questions.

Thank you. To ask a question, please press star and the number one on your telephone keypad. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-up question. Then come back into the queue if you have more questions, as time allows. Your first response is from George Stappos of Bank of America Securities. Please go ahead.

Thanks very much. Hi, guys. Thanks for taking my question. Hope you're doing well. Thanks for the details. I guess the first question I had is really more a point of clarification. Bob and Stefan, when you talk about not much change in trends in 2Q versus what you saw in 1Q, I assume you're talking about the year-on-year change that you saw in 1Q in terms of volumes more or less occurring at the same rate in 2Q. You're not saying the volumes are flat. two Q versus one Q. Just want to clarify on that.

Yeah, that's correct. Basically, when you look sequentially, the pattern that we've laid out, I think we will continue to see some destocking on the pharma side and the recovery in beauty and home, which really depends on Europe reopening, will not be in full swing yet, but, of course, sequentially improving. And compared to quarter two of last year, which was the bottom, very strong growth, but the overall demand pattern similar to what we saw in Q1. Okay.

I appreciate the additional call there, Stefan. If we talk about pharma and both consumer health and Rx, We're still going through the destocking. Is there anything that's unique about this destocking period that we're going through relative to others that you've seen in the past? And if you can remind us, whatever that context might be then, you know, when you think we begin to see some inflection on the volumes in those categories as well.

Yeah, I think Bob can speak a bit to history. But what I've learned is that when these happen, It usually is a two-quarter affair, so we certainly expect this to be behind us in the third quarter. You see, of course, potential inventory buildups at multiple levels, at our direct customers, at the drug manufacturers, in the trade, in the homes. And clearly, in hindsight, there has been some buildup as people – We're getting ready for the pandemic, making sure everybody's stocked, and now we see the result with a non-existing flu season. Immuted allergy season last year, as people were saying indoors, they're masking up. On the other hand, it will run its course. You may hear from my wife, I can personally attest the allergy season is in full bloom and strong, and if people go outside, they will be affected, and we have no doubt that that unfortunately flu season will also come back if people are running out and about. You saw that with the Glenmark approval, we continue to see conversion to natal delivery in the allergic rhinitis category. And, of course, on top of that, we have a strong central nervous system franchise. So there's no reason not to believe that the long-term growth rate of around 6% for people um, this category and six to 10 for pharma overall, uh, will not return, but maybe Bobby can speak a bit more to history.

Yeah, no, I think, I think you nailed it. Um, typically, you know, two quarters is about what we've seen in the past. Um, second perspective. So I think as Stefan mentioned, we do see us returning to growth starting in Q3. So I don't see anything unusual about this in fact compared to any others.

Thanks, Bob. Thanks, Stefan. My last one quickly, just you mentioned that beverage was relatively flat. Could you talk about the regional trends there? And are we still seeing the lingering weakness in Asia come back? or was that a non-event in the quarter? Thank you, guys.

Yeah, actually, China, as you know, has reopened already a year ago, so they're in full swing, and the beverage category is no exception. Clearly, what we're missing is the on-the-go beverages in Europe and still also in the U.S., um as the us is really reopening just now i think new york's going back to normal in the coming weeks and and europe is really a quarter to four months behind the us now thankfully we see more and more definition also in europe that things are coming together germany is getting its act together around vaccines the uk is doing better france going to reopen may 15 hopefully that's going to stay open so um We certainly have some confidence that Europe will reopen about a quarter, maybe four months behind the U.S. And that will be very good also for the on-the-go beverage business.

Thank you very much. Yeah, I would just add a little more color on the geographic side. So really beverage was up in every region except for Europe. And if we just look, generally speaking, across all the segments, Europe was either flat or down in Europe for the other segment. So I think the remarks about mid-quarter Europe reopening are going to be very helpful and beneficial across all three segments. Mid-year, you mean, or mid-quarter? Mid-year. Well, May 15th in Europe reopening, so mid-quarter we'll start to see things turn around.

Your next response is from John Krieger of William Blair. Please go ahead.

Hi, thanks very much. Stephon, could you just maybe go back to your, and you quickly just sort of reiterated your long-term expectation for the pharma business, but maybe just kind of reset that a little bit. What is the pipeline of opportunities that you guys have been seeing recently tell you about the various components within the pharma business and what you think that will kind of do long-term as we get beyond the pandemic? Okay.

Yeah, if we just walk through the categories, the punchline is we really don't see any change to the 6% to 10% long term. When you start with allergic rhinitis, clearly the base allergy business is kind of low single digit. You will have additional conversions going on, see the Glandmark approval, and then you have geographic growth in that business as allergies, obviously, not just a Western phenomenon. And then continuing in RX, of course, the central nervous system category continues to grow nicely. We called out the clinical trial with the powder naloxone Just this morning, HICMA got approval for a higher-dose naloxone drug called Cloxado. And we see good project flow in the central nervous system category. So then you go over to consumer healthcare, of course, decongestants, saline, ophthalmic, all target-rich environment. Injectables, as we've discussed on calls before, we've been really heartened by the new project activity and kind of the recognition of Aptar's capability as part of the whole vetting of the COVID supply chain. We're still a small player in this large market, but we see good project activity and continued good growth there. And then the active packaging, we're calling out the approval of the in-home COVID tests. That is another proof point for the powerful technology that our active material solutions business provides for important tests, whether it's diabetes, whether it's COVID. And, of course, the probiotic category continues to grow. So across the board, a lot of reasons to support the 6% to 10%. As you know, we've been for a number of quarters well above that. Clearly, this inventory drawdown normalizes some of that, but no reason not to continue to see that 6% to 10% growth.

That's helpful. Thank you. And then maybe for a follow-up, Keith, just talk a little bit about any supply chain pressures you're seeing and how you're managing it, both from the standpoint of raw materials and also just sort of labor and productivity across your facilities.

Yeah, I think you touched on all the things. Clearly, there are friction losses as the economy starts to sputter up to higher speed again, whether that's logistics issues availability, freight rates, air freight rates, labor availability in pricing. Clearly, as we have to hire people, train them, there is more cost there. And we, of course, are working hard to pass that on. But clearly, we are very cognizant of a more inflationary environment and the I'm making sure that we pass that on so we have price increases slotted in for later in the quarter. Some of those will be announced. Some of them will just be put through. So clearly, as I said, I think last time, you don't just push a button and the economy goes back to full speed. There are friction losses, but we're working through those, and so do our suppliers and so do our customers. Great. Thank you.

Thank you. Your next response is from Mark Wilde of BMO Capital Markets.

Morning, Stefan, Bob, Matt. Good morning. Stefan, I wondered, just to start out, if you could give us a little more color on what you're hearing from your beauty and fragrance customers today. Earlier in the week, one of your peers was suggesting that they were starting to see some pickup in fragrance activity, and you sound a little more cautious about that, so I wondered if you can just update us on what you're seeing around the world in beauty and fragrance.

Sure. Of course, it always depends on what you're comparing to. If you compare to quarter two of last year, of course it's better, but you're comparing to... the abyss with quarter two of last year. But if we walk around the world, China is in full steam, very happy, for example, with this L'Oreal project that we highlight. We're eclipse pre-pandemic level since some time and project activity is good. India is a bit worrisome. So while it's not a big factor in our numbers, you know, the clearly The pandemic there is fully active with significant impacts and that will also impact a bit our beauty business there, less so the pharma business. Latin America has remained quite resilient through the pandemic and obviously very concerning what's going on there, but it hasn't impacted consumption level as much as it has in other regions. In the U.S., clearly we start to see the opening now, so we see improvement there. And the key question for us is Europe, and, of course, that's for us a very important question because that's where a significant part of our business is. And Europe is not where the U.S. is in terms of reopening. We expect a three- to four-month lag in the reopening of Europe. That puts it squarely in the second half. uh and then for us in addition of course it's very important that travel activity resumes and that impulse purchase in the duty-free aisle gets triggered and customers are very positive they have a bunch of launches in their planning we are working with them but they're not going to pull the final trigger until the travel activity resumes and certainly We're not going to eat Mother's Day in Europe. And then the next big events are in the fall in China and end of year Christmas in the Western world. Okay. All right. That's helpful.

And then, Bob, just a couple of financial items as a follow-on. Can you, first of all, give us some sense of how big you estimate the resin headwind to be in both the first quarter and second quarter? And then can you just talk briefly about the tax rate? It's been dancing around a lot in recent quarters. sure so on the resident side um roughly we had about uh six million across all segments kind of negative impact on the data um the majority of that was going to be inside uh beauty and home and then the majority of that relates to uh resin you know resin increases but there's also other substrate increases that we've seen like aluminum and metal as well that are contributing there. We're actually anticipating approximately the same impact in Q2. So if you think about it, we'll be passing on the price increases as Stefan mentioned, but essentially we'll be catching up for Q1 while we believe that the input costs are going to continue to increase in Q2. So it'll be the second half of the year before we catch on Q2 increases, again, assuming some stability in input costs for the second half of the year. On the tax rate, so there's a couple items. The most significant was the additional benefit we get from stock-based compensation. which really is the delta between the in the money exercise price for legacy options versus book expense so those are virtually impossible to forecast but as you can see with the share price having the run-up that it's had you know you do tend to get additional option exercises and then in q1 we had from RSU best things as well. So it's the benefit of the increase in the share price that's triggering outside tax deductions. But that's a good thing. That's a real cash savings.

Yeah, we'll take that.

Absolutely, right. That's not a deferred benefit. That's a true cost savings. So we did also see some state tax law proportionate changes in Alabama, which benefits our active material solutions business down there, but that has a lesser impact on the tax rate. So you see that we guided slightly lower than we typically have for state tax rate, 26 to 28%, and that was really kind of looking at exercises to date already and kind of putting that already baked into the rate. Okay, really helpful on both counts. It's really challenging to forecast what those exercises are going to be because it relates to things that are kind of outside of our control. Okay, thanks so much, Bob. Yep.

Thank you. Your next response is from Gancham Punjabi with Baird. Please go ahead.

Morning, everybody. Hi, Gancham. Hi. So on the beauty and home segment, so I'm just looking at our model. It looks like volumes have been down on a year-over-year basis for about eight quarters. I mean, obviously, a ton has happened in between there in terms of COVID and so on and so forth, channel destocking, etc., uh, but, but Stefan, how would you benchmark, uh, you know, that progression relative to the end markets over that time period? And then on the flip side of that, as you know, vaccines get deployed and some of the bigger markets that you're exposed to in Europe, et cetera, um, will we see a commensurate rebound that's actually faster, uh, than, than maybe, um, uh, you know, maybe, maybe appears just as a consequence of the, of coming out of the flip side of this COVID issue.

Yeah. Um, overall, um, I think, uh, With the exception of some personal care, hair care, in the U.S. before we went into the pandemic, I think we certainly have been in line with the market. There are other areas where I would certainly hear from our people that we've gained market share. So on balance, I would say Those things cancel each other at least out and certainly think that we are in line with market. And on the speed of recovery, whatever assumptions you're making about the reopening of Europe and the travel assumptions, I think the commensurate bounce back of especially fragrant sales but also duty-free sales will go with it.

um so i'm not sure how much color i can give you there but maybe bob you have a different way of describing it no i i don't think you've adequately described it okay then on the uh for the second question in terms of you know your customers i mean clearly you've seen the velocity increase uh for beauty products in china as they came you know on the flip side of covet etc um Can you just touch on activity level for maybe your larger customers specific to B&H as they position in front of, you know, the vaccine deployment and potential reopening of Europe? And then a separate question on active material. You called out some of the technology being used for COVID tests and stuff like that. Are there other opportunities associated with active material that you can sort of leverage into other, you know, future growth verticals within testing and so on and so forth in pharma?

Sure. I'm going to let Bob address the active materials. So let me take the first part of the question. Project activity in China is very brisk. And while I wish we had a much larger footprint there and therefore a larger share of the growth, given our current footprint, given our current activity level is very high, And as I mentioned before, customers appreciate, of course, our global capability to execute, especially on projects that are cross-regional. And while many customers are in the middle of shifting some of their filling and execution capability to Asia, there's still a lot being filled in Europe that is for China. So very happy with the activity level in China. In Europe, I think To use a different analogy, I think basically all the horses are in the gates and they're waiting for the gates to open. Clearly, people have not launched new fragrances during the pandemic, but they have new launches ready. We are on a fair, maybe unfair share, part of those launches. Sampling activity certainly has picked up, also more in the e-commerce format. But having said all that, the proof of the pudding is in the reopening, and we need the reopening in Europe to happen.

And so on the active material solution, so we've also had a presence in the diagnostic category. If you think of diabetes test strips, obviously that's a form of diagnostics. There's also some applications in Europe that are using our technology on DNA test kits as well. So this whole new in-home COVID testing is really interesting and exciting for us. We're also on customers' flu kit, and that was even pre-pandemic as well. So we do like this space a lot. The technology certainly is increasing at warp speed in this space. It will be a crowded space, right? You already see some in-home COVID test kits that are out there, but you have a lot of people talking about this is just the beginning of being able to provide more than just COVID testing. You could have a, you can imagine a diagnostic meter in the home where you could test for, you know, have separate strips for flu, for bronchitis, for you name it, and that could be the first step before you, you know, you reach out to your doctor. So we'll see how it all plays out, but definitely we like this space, and we think it can continue to progress.

Thanks so much.

Thank you. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-up question. Then come back in the queue if you have more questions as time allows. Your next response is from Gabe Hady with Wells Fargo. Please go ahead.

Stefan, Bob, Matt, good morning. I was curious if you guys could comment at all on how some of the joint ventures slash minority interests are performing. I'm kind of thinking about CaliCare and maybe some of the connected devices, and I appreciate that they're relatively small and still embryonic, but I think this is an area where Aftar has been successful in the past in terms of nurturing and cultivating these technologies, and then once they're kind of more widely adopted, being able to leverage your distribution and global footprint. So just Anything that stands out to you, I guess?

Sure. Maybe just as context for everybody, we look at M&A and venturing really to complement our organic activities, complement organic growth with bolt-on acquisitions and complement our in-house R&D and innovation with venturing investments. These venturing investments are really there not necessarily drive an internal venture capital business, but really get a front-row seat of innovations. Usually with a venturing investment, we combine a board seat or some kind of license or rights, so things that make good linkage with our business. You mentioned CaliCare. Of course, we've done Propeller, which then was sold and we made a good gain on. We've had SunMall, also in the connected device space. And in the food area, we've looked at or we've invested in Loop. in a second system in Eastern Europe in terms of refillable containers at retail. And in between the bolt-on M&A and the venturing investments, it's joint ventures, and sometimes those joint ventures are acquisitions and stages, so no doubt. Mainly I would highlight BTY in China, which really is an acquisition in stages. but we are already now leveraging their capability to build our beauty project pipeline in China. So by and large, this is a very rewarding area. Sometimes you win from a capital gain point of view. I mentioned already Propeller. Of course, we recorded a big paper gain this quarter, but that's not the main purpose. The main purpose is really to make sure that these innovations happen. And if we stick with PureCycle for a moment, I mean, the main purpose for pure cycle investment was really to make sure that food-grade, post-consumer recycled polypropylene becomes a reality, because that's what we need. We certainly have no intention of getting into the basic materials business, but we need food-grade, fully recycled polypropylene, and the pure cycle technology certainly has seemed very promising when we did our due diligence, and certainly it seems like the capital market agrees. That's really the purpose of these investments, and if we make a gain on them, that's also great, but the purpose is really to advance the innovations and advance our organic efforts.

Thank you. And I guess my next question comes down to the transformation plan of restructuring that you guys kind of initiated three years ago, give or take. I think it's supposed to yield $80 million in savings, and obviously the pandemic kind of threw a wrench in that. But I think you guys have delayed some footprint consolidation efforts. I was curious if you could update us on how those are progressing, I guess giving a little bit more stability in the operating environment. And then, again, I guess just for us in the outside world to understand that you would still envision came back to kind of mid-teens margins and beating home, again, assuming some sort of normal volume environment.

So the short answer to the last point is yes, that is the expectation. And certainly also with their use the analogy of the horse being ready and the gates ready to go. On your question on the delay, yes, we have delayed the North American footprint optimization. is with the pandemic moving equipment around, starting up equipment in different locations proved more challenging. So that will be with us through the middle of this year, but we should be done by the middle of the year. So certainly between raw material being a drag of about a margin point and this delay in North American footprint optimization, another margin point, those Our transitory will go away and specifically on the footprint optimization that should be done by the middle of the year. Thank you, guys. Good luck.

Thanks, Dave.

Your next response is from Adam Josephson with KeyBank. Please go ahead.

Thanks. Good morning, everyone. I hope that Justin Fields' pick went over well in Crystal Lake last evening.

We won't be coming on that for several years.

Stefan, just on Beauty and Home, just to follow up on a couple of Gabe's questions. So appreciating that Beauty and Fragrance is not coming roaring back as yet, and Europe is still in lockdown, and you have the resin-related hits concentrated in Beauty and Home. What do you think is a reasonable expectation in terms of when you can get back, either get back to mid-teens EBITDA margins or recover a good chunk of, say, the 50 million EBITDA that you lost last year?

I think the best guidance I can give is what we said before. In a normal post-COVID volume environment, we should get back to that 15 range and build from there. So the question is, when is that post-COVID normal volume environment? I'm not going to put a pin in the calendar. We've all sat here a year ago. We're never expecting that this pandemic would still be with us a year later. But we're standing by that guidance. And the The resident pass-through, yes, is slower in the beauty and home business than it is in the food and beverage business, but it will happen. So that I'm very confident about, in addition to passing on the other inflationary increases. And as I mentioned, the North American footprint optimization will be done by middle of the year.

Got it, Stefan. Thank you. And also following up on one of Gabe's questions on the restructuring and beating home, You know, that was over three years ago. Much has happened in terms of currency, COVID, personal care issues, et cetera, et cetera. But what have you learned since then compared to what you were initially expecting in terms of generating that $80 million of savings? What has gone as you expected it to? What has gone differently? And what lessons have you learned since then?

If you go through the different elements, so in terms of restructuring the front end of the business, you can really divide it up in two things. One is creating smaller, accountable entrepreneurial units with dedicated sales forces, and then advancing the practices to contemporary best practices in terms of Salesforce management, customer project management, customer project conversion tracking, moving from longer cadences to weekly cadence, and then making sure the car doesn't go in the ditch, and you course correct before. I think, by and large, I'm very happy with what we did there. You're never finished with this. You need to keep training those muscles. For example, the price increase muscle, again, needs to be trained here as we enter this period. But by and large, from the commercial front end, very happy we keep building there. We have much stronger leaders in place in those small entrepreneurial units and very happy with that. um i think i spoke earlier about the learnings on the operational improvement some of those took longer and in a few cases we had to go back and do it again um those of you who are schooled in six sigma know that you know after with each project there at the end there's a control plan to make sure you don't go back in some cases the control plan was not as good as i would have hoped so that is probably a lifelong learning. The changes you make for them to stick, you got to make sure that those changes are irreversible and don't move out the door with the next organization change or people change. That's a painful learning you make every time, but that's a powerful course, I guess. At this moment, I'm quite happy with the operational performance of those sites. The KPIs are in the right place. Over the same period of time, you know, our safety performance, just to use one benchmark, moved from being much worse than industry average to being now close to world class. That is just one indicator how we've improved how we do these operations. But, of course, we need the volume to go through them. Then when you get to the fixed cost improvements, I think there we are quite happy with what Bob's done in building up a shared service center in the Czech Republic, in streamlining the back office. Only partially happy with the fixed cost reduction in Europe. The learning certainly is that work council in France are not the easiest to deal with, but we make progress piece by piece by piece, and that continues. Now, having said all that, the operational improvements, though, have been quite significant enough that we were able to take plants offline sooner than we thought. In Europe, for example, the plant in Ireland The plant in Spain, in the US, we got hit by the pandemic, but certainly going into the transformation, we were not expecting to take three plants offline in the northeast, which we will now be doing. So there's also some positive surprises. I think overlay of all that is, of course, the massive shift of growth to the east. and you're never done, and we will have to continue to make sure that we are very well positioned to capture the growth in the east. It's kind of a long answer, but to your question.

No, thank you, Stefan. I appreciate it.

Your next response is from Neil Kumar with Morgan Stanley. Please go ahead.

Great, and thank you for taking my question. In food, you've had a few quarters of very strong growth You think that's something that strength can carry through into the second half of the year as at-home consumption starts to come down? And do you see any structural changes in the market post-COVID that apps are to benefit from?

Well, I mean, the food team is really doing an excellent job. It's probably a bit underreported with all the attention to beauty at home, but we have a strong team in place there. And the growth is not only a mathematical result of the pandemic and in-home consumption, but competitive wins for new projects, strong expansion in Asia, and certainly with beverage coming back, I have no doubt that they will continue to grow also in the second half.

And with family in the post-pandemic, I would say the post-COVID advantages. So, I mean, we're going to get some clips and tapes. I think what's important that we're keeping an eye on is how robust does, you know, the sanitizer and the cleansing environment and washing your hands, is that going to stay? Is that here to stay? But certainly as people... move out of the lockdown into getting out and vacationing more, we would expect categories like sunscreen and things like that to improve. Even if people are dining out more on the food side, and we see a little bit of a pullback on some of that in-home consumption. Remember that we've got a struggling part of our food business, which is food safety, that we should see a rebound on. So, you know, as one goes up, the other one may, one goes down rather than the other one to come up. And certainly we talked about, you know, an improving beverage situation when people are back out traveling on the go and gyms and things like that.

Okay. And then in terms of some of the input inflation you're seeing, are the non-resin raw materials also contractually passed through at a similar 15 to 90-day lag of resin, or does that work differently? And then from a cash flow perspective, do you expect the higher resin and raw material prices to negatively impact working capital?

So on the other substrate increases, those are more in general, in many cases, you're talking about complex multi-component products like pumps and aerosol valves and things like that. It tends to be a little bit more of a basket of goods approach. So when we trip certain thresholds, yes, we'll pass it on. And certainly with some of those increases that we've seen, we have tripped some of those. So that is kind of an additional pass-through on that. On your cash flow question, I would say the $15 million decrease in free cash flow that we saw last year, first quarter to this year. is primarily coming from slightly higher inventory levels. And that I would think partially could be due to slightly higher costs, but I think it's probably more due to some of the supply chain disruptions that we experienced in Q1, not having containers to ship internationally, issues in truck capacity and things like that. So we were carrying a little bit higher levels of work and process and finished goods into more plans than we had in the past. I see that as also transitory.

Great. Thank you.

Thank you. Your next response is from Salvatore Tiano with Seaport Global. Please go ahead.

Yeah. Hi, Stephane. So firstly, I want to touch base a little bit on personal care where I think you mentioned that the core sales growth year-on-year was 2%. And if I remember correctly, last year, you know, you were still comping against, well, you should have been comping this year against the stocking you saw. And I'm wondering if that 2% growth shows that there's acceleration in personal care demand now.

Not sure I can follow your question.

I just think so from, yeah.

Go ahead.

I was just going to say just give a little bit more color on personal care. So we're still very strong from a product category in our lotion product category, and that's typically products that you would see for personal cleansing, sanitizers, and body lotions. We're still suffering a little bit on the hair care side and a little bit on the sun care side. So that's moving somewhat that growth coming from the personal cleansing category.

Okay, perfect. My second question is if you can provide, I think, some more color on what was the price contribution in food and beverage and core sales growth, and also if there was any meaningful price in Q1 for beauty and health and pharma as well.

Yeah, so overall, let me start at the top. Overall, for the company as a whole, it was about a 1% positive impact on core sales growth. It had a stronger impact on food and beverage. It was about 6% positive of the 14% positive. And then it was less than a percent positive on beauty in homes, about a half a percent roughly.

Okay, perfect. Just my last question. When we look at pharma, and obviously you have Q1 and also Q2 with software prescription and consumer healthcare demand, But my understanding is, for example, in this quarter, last quarter, I guess, injectable growth got 400 base points roughly from COVID tailwinds. So when we put everything together over the past year, how would you judge COVID's effect on pharma's bottom line when we take into account demand, margins, everything?

I'm going to yield to my CSO on that one.

it's it's it's it's it's talk right i mean we haven't gone through that math i would again it's similar to kind of what i was just discussing in personal care right we are getting a positive on the you know on on on the injectable side of the business we're getting a positive on the active material side of the business but really those are smaller divisions compared to the total um you know rx and chc contributions so if you know how it depends on how you categorize it right if it's cold it is responsible for the lower um incidence of cold and flu that that's a negative on on the nasal decon right if less doctor visits and primary care visits and reason for the allergy and asthma-related products, de-stocking, then that's a negative. And that's about all. But we really haven't gone into that level of granularity on the pharma business.

I mean, just as a reminder, if you zoom out overall – The prescription unit is by far the highest margin, followed by the consumer health care. Then comes active packaging and injectable is in line with the industry, but in this lineup, the lowest in terms of profitability. So certainly as the top line makes moves so does the profitability, we've been able to absorb a good part of that this quarter. But Certainly if you have the top line in mind, I think you can approximate the bottom line impact.

Okay, perfect. That's very helpful.

Thank you. There are no further questions in the queue at this time. I will now turn the call back over to Mr. Tanda.

Thank you very much. This concludes our call today. Certainly this year will be a story of two halves. We're very optimistic about the second half of the year, and I would like to thank everyone for joining us.

Thank you. This concludes today's conference call. You may now disconnect and have a good day.