AptarGroup, Inc.

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. And until that time, your lines will again be placed on music hold. Thank you for your patience. THE END Ladies and gentlemen, thank you for standing by. Welcome to APTAR's 2021 Third Quarter Conference Call. At this time, our participants are in a listen-only mode. Later, we will conduct a question and answer session. Introduced in today's conference call is Mr. Matt Della Maria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Thank you. Hello, everyone, and thanks for being with us today. Joining me on today's call are Stephan Tanda, President and CEO, and Bob Kuhn, Executive Vice President and CFO.

Our press release and accompanying slide deck have been posted 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 SEC filings to review factors that could cause actual results to differ materially from what we are discussing today. I would now like to turn the conference call over to Stephan.

Thanks, Matt, and good morning, everyone. I hope that you're all doing well, and thank you for joining us today. Starting on slide three, as you saw in our press release, we reported strong top-line growth of 9% and earnings that were in line with our previous guidance. These results were made possible by our diverse product lineup, and our ability to serve multiple markets with our deep portfolio of shared technologies across our segments. When taking a closer look, our elastomer components for injected medicines posted another strong quarter, and our consumer healthcare solutions resumed a positive growth trajectory. Our active material solutions continue to be in high demand, especially for diagnostics and probiotics. However, as we indicated previously, year-over-year sales declined in the quarter as we had a significant custom tuning sales last year that did not repeat. As a reflection of the importance of and high demand for our unique active film technology, we are honored to have been awarded a U.S. government contract that will fund a $19 million expansion for our active film domestic production. This proprietary film is used with at-home COVID-19 antigen tests. This is a validation of our proprietary technology capabilities and the important role that we are playing in the fight against the pandemic. Also in the quarter, sales of our nasal and pulmonary devices for the prescription drug market declined. The increase in COVID-19 cases during the year caused people to again stay at home, wear masks, and keep socially distanced, and this meant fewer common illnesses, fewer doctor visits, and consequently, lower consumption of allergic rhinitis, cough and cold, and certain pulmonary treatments. In effect, this has prolonged the drawdown of inventories at our customers. Thankfully, as vaccination rates continue to rise, we are seeing some positive signs that people are beginning to visit their doctors to a greater degree than before. The Delta variant in particular has caused some regions to again restrict social activities, and this has delayed the recovery of this part of our business. However, anecdotally, we are reading about the recent rise in the number of incidents of colds and even what is referred to in the UK as a super cold. So as people move out and about to a greater degree, it seems, unfortunately, common pre-pandemic illnesses are returning. Our farmer margin in the quarter was below the prior year, mainly due to the mix of business reflecting the lower sales to the prescription market previously mentioned. We achieved double-digit core growth in beauty at home and food and beverage on both increased volumes and higher pricing. The beauty market continued its recovery and we also saw increased demand for hair care and body care dispensers in the personal care market. The food market continued to benefit from at-home cooking trends and we also saw a rebound in our beverage closure business when compared to a particularly weak period a year ago. A beauty in home and food and beverage margins reflected the rapidly accelerating inflationary environment and related pass-through effects, as well as supply chain challenges. We continued to pass on rising costs, but did not fully offset those costs within the quarter. We fully expect to make up more ground in the fourth quarter. As a reminder, the passing through of increased input costs on a dollar-for-dollar basis has the effect of compressing margin percentages. The foundational strength of our business is derived from our shared core technologies and solutions that are leveraged across all of our end markets to enable our customers' growth. I would like to highlight a few recent launches by customers using our technologies in the next few slides, starting with our pharma segment on slide four. Our partner, Baxton Dickinson, announced the launch of a pre-fillable syringe for use with biologics that incorporates our premium code plunger with proven ETFE film coating technology intended to ensure drug integrity. Two new FDA-approved nasally-administered drugs came to market with our devices. OysterPoint Pharma's CareVaya is the first and only nasal spray that treats the symptoms of dry eye disease, further validating the nasal route as an effective channel for a wide variety of medicines. And HICMA has launched Naloxone Treatment Cloxado with our unidose nasal device to treat suspected opioid overdoses. Our active material technology, which protects sensitive drug products, probiotics, medical devices, foods, and more from moisture and other environmental conditions, was recently approved with Gilead Bictarbi, which is an oral medication for patients with HIV. In addition, there is a new probiotic by NutraOne called Probiotic X, which comes in our active wilds. On Flight 5 in Beauty and Home, L'Oreal's Bright Reveal Skin Care Solutions in China features our patented airless packaging with booster cartridge for the formulation of personalized skin care solutions. In North America, our e-commerce capable solution with our twist-to-lock technology that prevents leakage during transportation is featured on Unilever's Baby Duff Oil. And our Fusion PKG business provides several patient skin care packaging solutions for Shiseido's Drunk Elephant brand. In food and beverage, our closure technology for flexible pouches continues to penetrate new categories and is now also dispensing Kroger's squeezable cream cheese. And the brand DeFi is featuring our sports closure on its electrolytes and mineral-infused water. Now turning to slide six, on the M&A front, we have added key capabilities in our pharma segment. During the quarter, we closed on our agreement to acquire 80% of Y-high NU medical products, adding elastomeric and plastic component manufacturing capabilities in China for injectable drug delivery. We also completed the acquisition of a majority stake in Volantis, which expands our digital healthcare portfolio by adding digital therapeutic solutions and broadening our digital healthcare services across multiple chronic conditions and diseases. Subsequent to the quarter, we completed a public tender offer for the remaining shares of Volantis and reached the required threshold to fully acquire the company. Also, in addition to our previously announced investments to expand our last summer component capacity, We will be further increasing our capacity for our active film technology as a result of the contract awarded by the U.S. government, which I referenced earlier. This technology, in addition to protecting antigen test strips, is also leveraged across other platforms, including the protection of oral solid-dose medicines and in the food market, where we are creating antimicrobial solutions to prevent food contamination and spoilage. We expect this investment at our Auburn, Alabama site to be completed in early 2023. On the sustainability front, 10 of our European manufacturing sites are certified with the International Sustainability and Carbon Certification, or ISCC+, certifications to come. This leading certification system ensures traceability... feedstock identity and can help to validate sustainability claims around recycled content and enables all of our segments to provide customers with solutions produced from certified sustainable food grade resin at a quality that is similar to that of conventional resin. With that, I will now turn it over to Bob, who will provide additional comments on our third quarter results. Bob.

Thank you, Stephan, and good morning, everyone. Turning to slide seven, as Stefan briefly mentioned, for the third quarter of 2021, reported sales, including positive effects of currency translation rates, increased 9%, and core sales increased approximately 8%, including price adjustments. Recent acquisitions completed in the quarter had an immaterial effect on the sales in the quarter. Turning to slide eight, third quarter adjusted earnings per share were 94 cents per share and adjusted EBITDA totaled $154 million. Adjusted earnings included the positive effects of currency translation rates and the net negative inflation impact of approximately $13 million. Our consolidated adjusted EBITDA margin would have been approximately 250 basis points higher without the net price cost effect and the margin compression impact from passing on the higher costs. Slides 9 and 10 highlight our year-to-date performance, and we achieved 6% core sales growth, and our adjusted earnings per share were $2.94, up 4% compared to $2.84 a year ago, including comparable exchange rates. Briefly summarizing our third quarter segment results, our pharma segment's core sales declined 2%, partly due to lower cost and tooling sales compared to the prior year. Adjusted EBITDA margin was approximately 32%, and below the prior year's third quarter margin due to mix of growth across the end markets. Looking at each pharma market, core sales to the prescription market decreased 9%, As we have been discussing during the year, fewer non-critical doctor visits this season have resulted in certain pharma customers drawing down inventory levels as sectors such as allergic rhinitis, cough and cold, and certain pulmonary treatments are being impacted by the low levels of patient consumption. Core sales to the consumer healthcare market increased 5%, primarily due to increased revenues in the eye care category. It was another strong quarter for components used for injectable medicines, with core sales increasing 16%, primarily due to continued strong demand for our components used with vaccines. Core sales of our active material science solutions decreased 15%, entirely due to significant custom tooling revenue in the prior year that did not repeat. If we isolate that tooling revenue from the prior year, the underlying business is quite strong and would have continued with the trend of strong double-digit growth on increased demand for our diagnostic and probiotic protective applications. Turning to our beauty and home segment, core sales increased 10% over the prior year third quarter. Approximately half of that growth came from increased volumes and the other half from price increases. This segment's adjusted EBITDA margin was 12% in the quarter and included the net negative inflation effect of approximately $9 million. Had we not had this price-cost negative impact and we did not have the margin compression effect of passing through higher costs, EBITDA margins would have been over 300 basis points higher. Looking at each beauty and home market, core sales to the beauty market increased 18%, with increased demand for our fragrance and facial skincare solutions contributing to the sales growth. Core sales to the personal care market increased 4% as higher sales to the hair care, body care, and sun care markets were partially offset by declines in personal cleansing as hand sanitizer demand continues to normalize. Core sales to the home care market decreased 5% on lower demand for household cleaners. Turning to our food and beverage segment, which had another solid performance, core sales for the third quarter increased 28%. In addition to strong double-digit volume growth, pricing adjustments also contributed and accounted for approximately 60% of the segment's sales growth in the quarter. The segment's adjusted EBITDA margin was 16% in the quarter and included the net negative inflation effect of approximately $2 million. Had we not had this net price cost negative impact and we did not have the margin compression effect of passing through higher costs, EBITDA margins would have been over 400 basis points higher. Looking at each market, core sales to the food market increased 20% due to price adjustments and increased demand for condiment and sauce dispensing closures with consumers continuing to cook at home. Core sales to the beverage market increased 52% due to price adjustments and a partial recovery in the on-the-go beverage closure demand compared to a very weak third quarter of the prior year and a high level of custom tooling sales this year. Approximately 37% of the beverage market growth was from tooling sales. Moving to slide 11, which summarizes our outlook for the fourth quarter, where we expect core sales growth in each business segment, Earnings growth will be tempered by business mix, foreign currency translation headwinds, inflation, and supply chain disruptions. We expect our fourth quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs, and changes in the unrealized fair value of equity investments to be in the range of $0.88 to $0.96 per share. The estimated tax rate range for the fourth quarter is 28% to 30%. In closing, we continue to have a strong balance sheet with a leverage ratio of slightly less than 1.8 times, which allows us to continue to invest in the business, pursue strategic opportunities, and continue to return value to shareholders in the form of dividends and repurchases. In addition to our cash dividend payments to shareholders, which totaled $73 million in the quarter, we repurchased approximately 220,000 shares of common stock for $28.4 million. We had announced earlier this year that we had lifted the suspension on repurchases that was in place to preserve liquidity during the height of the pandemic uncertainty. We currently have approximately $250 million authorized for common share repurchases. We continue to invest in innovative growth projects across our segments, including the three accelerated projects we discussed earlier this year. a new state-of-the-art facility being built in Suzhou, China that will be a shared facility housing production for each of our segments, the capacity expansion in our elastomer components division of our pharma segment to support the future supply chain for injected medicines, and a new state-of-the-art prestige beauty device site in France. We are very excited to have begun each of these projects, and we are on track with our previously 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, from slide 12, we have been pleased with our ability to deliver solid results while navigating the search of the Delta variant over the summer months, various supply chain challenges, and significant inflationary pressures. At the same time, we are excited about the progress we are making in positioning the company for growth beyond the current pandemic and economic environment. The completion of our recent M&A transactions and the investments we are making to support our future growth, including increasing our capacity to produce elastomer components for injected medicines and active material science solutions represents meaningful progress on our growth strategy and ability to succeed across numerous geographic end markets and product applications. As Bob mentioned, We expect solid core growth across each segment in the fourth quarter with considerable headwinds on earnings, including the temporary shift in pharma's business mix. The prescription drug market demand for devices used for central nervous system treatment is expected to be below the very high level of a year ago. At the same time, we are encouraged by a partial recovery in demand for devices for allergy and asthma treatments, which are expected to be near the levels of the prior year's fourth quarter. The beauty market will continue its recovery, albeit at a more gradual pace than previously expected, mainly due to the Delta variant over the summer, delaying some projects. Our food and beverage segment will be up against a tough comparison to a year ago, which saw high levels of consumer stocking trends. We will continue to contain costs, improve efficiencies, and raise prices to recover the effects of rising inflation. Our global procurement team is working diligently to navigate the challenging energy markets and tenuous supply chains to secure all the materials, supplies, and equipment we need as we move forward. Aptar is a resilient and adaptable company. I am very proud of our global workforce and their commitment to provide the drug delivery, consumer dispensing, and active material science solutions that millions of people around the world rely on every single day. With that, I would now like to open the call for your questions.

At this time, if you would like to ask a question, press star 1 on your telephone keypad. In the interest of time and fairness to all participants, please limit yourself to two questions and then come back into the queue if you have more questions as time allows. Your first question comes from the line of George Zepos with Bank of America Securities.

Hi, everyone. Good morning. Thanks for all the details. Hope you're doing well.

Hey, so first question that I had for you, and I know it's very difficult to project, and you gave us some helpful qualitative commentary in terms of the fourth quarter.

When do you think we will be through, when will you be through the destocking phase in pharma?

Do you think, given what you know right now, given your end market channel checks, that this will be more or less resolved by the fourth quarter or first quarter? Any help there would be terrific. The second question I had is just on guidance for the fourth quarter uh you know last quarter when you were commenting i think you said fourth quarter should be relatively close to what was the consensus at the time which was i think a little over a dollar uh obviously there are lots of headwinds that you're suffering through and everybody else is in terms of supply chain inflation and so on and the range is where it is is there any way to quantify uh if guidance now is somewhat below where you would have expected a quarter ago How much is in inflation? How much is in supply chain? Anything like that would be helpful.

Thank you, guys. Hi, George. Good morning. Let me kind of try to break it down. For the pharma picture, it's hard to give you an exact time, but clearly we see quite some encouragement in consumer health care. Unfortunately for people, the business code is clearly returning. We see more and more customers pointing to that, and the order intake that we've seen for consumer health care related to cold and cough is clearly on the up. The allergic rhinitis destocking we feel is coming close to an end with the fourth quarter. We think the fourth quarter will be about in line with the fourth quarter from last year. What is, however, a drag on the fourth quarter in this prescription business is that last year we had a huge lump of CMS orders coming through. That's kind of a lumpy business, and I cannot tell you will that be done in the fourth quarter or will that be some spillover in the first quarter of this year-over-year effect. Now, the rest of the pharma business is continuing to go from strength to strength. Our injectable business continues to grow very nicely, and we see us investing in capacity, and we don't see any reduction in that. Of course, the math on year-on-year comparisons Good growth in that business. And then the active material business is really continuing to grow nicely. And you saw that nice award from the U.S. government, in fact, from the Air Force, confirming the technology we have and wanting more of that. So overall, I think if we're kind of middle of next year for sure, we'll be in a normal state. Whether it's already in the first quarter, I really can't tell you. But we see the right signs. Allergic rhinitis seems to have run its course by the end of the quarter. And overall, clearly a rebound in pharma on the horizon. Now, on your second question, I'll just eat some humble pie before Bob gets into detail. Clearly, we cleaned out the window a little bit more than we should have in July, but we're in a very distant world now. One, the Delta variant has done a huge impact on everybody, but also our businesses. Two, the inflationary pressures have really accelerated tremendously. And then the supply chain disruptions that you hear everywhere are very real. And then on top of that, you have the U.S. labor situation, which just creates enormous inefficiencies and friction losses. So I think those are the big ones that have changed our outlook, and Bob can break it down a bit. Sure.

So sitting back in July, When we were looking out, the two biggest drivers are going to be coming from inflation being stronger now than what we anticipated back in July. So we were anticipating back then, and those were very, very rough numbers, about a two-cent headwind in the inflation for Q4. We're now projecting it to be closer to seven. So that's about 5 cents of the dust right there. And then our exchange rate assumptions back in July, we were at a 119 euro, and we're now projecting Q4 to be about 116. So you got about 2 to 3 cents there, depending on roundings coming from FX. And just to give you a rough idea, coming back to Q3, we were actually expecting you know i think on the call i mentioned we thought that that the net headwinds on inflation came through was going to be about seven and a half million And as you heard from my earlier remarks, they ended up about 13. So it is truly a fluid situation, as Stefan mentioned. You know, we didn't know about rolling electricity, you know, shutdowns in Asia back in July. We weren't talking at all or even thinking about energy prices spiking in Europe at the time. So these are things that are, you know, that are influencing our guidance for Q4 as well.

On that front, join the back of the line.

Thanks, guys. I'll turn it over. They're very helpful.

Your next question is from the line of Ghasham Hajabi with Baird.

Yeah, thanks. Good morning, everybody. Good morning. So I guess, you know, sticking with pharma for a second. So, you know, the last three years, 18, 19, and 20, you know, double-digit growth from a volume standpoint. 2021 looks to be about flat, just sort of using your implied, you know, guidance for Q. And, you know, I guess my question is, is that, you know, I understand the reasons in terms of inventory destocks, et cetera, but will 2022 also be sort of a transition year before we get back to historical growth rates? And then in terms of beauty, you know, obviously you're seeing some level of mean reversion in terms of volumes, et cetera, as the world has reopened and comparisons versus last year. How much of that is inventory sort of realignment, if you will, at the customer level? And should we expect a headwind at some point as we cycle through 2022? Yeah.

On pharma, I would first of all say we are very much staying behind our published targets. Everything that we have in the pipeline and that we see work in the market is not discouraging one bit from that. In fact, it's encouraging us. I think very big picture, pharma's COVID impact just came a year later. And all the effects that we talked through and the lumpiness in CMS, I think those kind of is what the other business experiences 2020. Pharma is clearly taking an off year in 2021. I don't disagree with your flattish assumption. Let's see if our portfolio ends. Fundamentally, there is nothing broken in pharma. Quite the opposite. We're starting to build or we're adding capabilities with the actions that we've mentioned in the R&D investments. Fully I do not see 2022 as another off year. We can debate the first quarter, but clearly we see this business going back to its guided growth rates. On beauty, I think there is some inventory effect, but the industry is clearly a lot more cautious. There was a lot of optimism going into the summer. uh and as delta hit people immediately pulled back and now there's again a lot of optimism So, as you know, the beauty business is always about launches and how successful is the sell-through on the launches. So, I think that's the biggest question. How will the 11-11 go? How will Christmas go? And that kind of sets us up for next year. But clearly, after kind of a down on the delta, There is a lot of optimism. I was recently in Europe at Luxpark in Monaco, and we had Luxpark in New York last week. There's a lot of optimism in that industry also. Clearly, everybody is dealing with the same supply chain disruptions of their operations are organized chaos. So having also to deal with their own manufacturing issues, labor availability, short shipments, and all that. So the industry is gearing up for a growth year with all the additional areas that we discussed, but we're here to manage those.

Okay, thanks for that, Stephan. And just a second question, maybe for Bob on free cash flow. I mean, how should we sort of think about pre-cash flow for full year 21, obviously, you know, materially below last year. I understand there's some reasons with inventory and working capital adjustments, et cetera, but how should we think about the fourth quarter and just, you know, the full year relative to last year?

Yeah, I mean, I think you nailed it qualitatively, Kamishan. I mean, we're going to be down, you know, off of last year, and some of the reasons are obvious, right? I mean, our Our cash spend on capital is going to be higher than it was last year. That's one thing that's influencing our free cash flow. But what we're seeing on the working capital side is as business picks up, we are seeing our receivable balances increasing. No real change compared to base sales outstanding, no collectability issues or anything like that. On the inventory side, you know, obviously the increased costs on all the raws that are coming in, and that's having an increase in the inventory valuation. And because of the supply chain disruptions that we've been talking about, you know, in certain resins and certain raw materials like colorants and things like that, you know, we've come dangerously low in previous quarters. almost being out of stock on some of our componentry. So when we have the opportunity to replenish the supplies, we are doing so. So we're probably a little bit conservative on the raw material side, and then we're carrying slightly higher finished goods than we have in the past, and that's just partially due to kind of transient issues in terms of transportation and things like that. Thank you so much.

Your next question is from the line of Mark Wolde with BMO Capital Markets.

Morning, Stefan. Morning, Matt, Bob. Morning, Mark. Sorry, Bob.

I wondered if you could just help us with any way of quantifying drag in the third quarter from the labor issues that you mentioned, but also any issues with global logistics. I'm conscious that historically you've shipped component pieces from one part of the world to another. So I can't really give you hard numbers on the breakout between supply chain and labor. I will tell you that of the total net negative inflation, about 80% of it is coming from materials. is really making up the rest. Our labor issues are primarily North America. That's more of a North American issue. The transportation and supply chain is more of a global issue. We're doing okay on our intercompany component shipments and things like that. It's more, in many cases, lack of truck drivers to be able to ship finished goods to customers, etc. You know, we're doing what we can to make sure that, you know, in some cases we're producing in advance of shipment dates to make sure that the customers are getting the, you know, the products on time. But I can't really break out specifically how much is later. That's more of a U.S. issue.

maybe let me add some qualitative comments here because it is really pervasive so in the end what happens is we are understaffed at several of our large facilities to the tune of often you know having 10 to 15 percent of the headcount not staffed that results in you know you can't run certain shifts you can't ship some products Obviously, we have to raise wages across all of the factories, and then often we have to pay sign-up bonuses, retention bonuses, and often people just wait for the first day after they got the retention bonus, and they punch out. So it is a very unprecedented environment. It's not only us facing that. It's our customers facing that. Europe is by far better, but also Germany is pretty tough to hire qualified people. But by far, the U.S. is the biggest impact. And then, as Bob said, truck drivers are in very high demand, and our customers just can't pick up the shipment. So the U.S. environment is pretty hard now. Over time, we will certainly look more to automation than before. It's just the logical consequence, because the labor market is not going to ease up anytime soon.

And, Stefan, did you actually lose or defer any sales in the third quarter because of just inability to, you know, produce enough or to deliver enough?

Yeah, I mean, it's a whole portfolio. Clearly, we have some lines that are flat out where if we could make more, we could sell more. There are other lines that is not applicable. Everybody is tight. And then sometimes, you know, we... work very hard to get things done, and then the customer doesn't pick it up because they have to change because they don't have the labor. So in general, it's more fraction. Mathematically, could we have sold more? Yes, I think so. But will that automatically be a percentage or two for the fourth quarter? I'm not so sure.

Yeah, I mean, I would add, Mark, that, you know, when we started to see these transportation disruptions, we did have some shipments that were ready to go that didn't go. But I think now what you got is, you know, what was supposed to go in Q2 ended up now going in Q3. And maybe we've got some sitting that should have gone in Q3 that's going to go into Q4. We're going to have things in Q4 that's going to go into Q1. So I don't think quarter on quarter, it's a significant effect. And certainly I wouldn't sit here and say that we're sitting on massive shipments that will fall into Q1. That's right.

The main thing is that highly kinetic, dynamic environment, and you change on the dime, and in the end, you end up with more cost. Okay. I'll turn it over. Thank you.

The next question is from Ryan F. Kyle White with Georgia Bank.

Hey, good morning. Thanks for taking my question. I wanted to focus on pharma. I think we all recognize the inflationary environment, supply chain issues in regards to packaging, and you gave the inflation impact in your other segments. But pharma is a bit more unique. Can you just talk about how your price class has been in that segment? What level of inflation are you seeing outside of materials? And are you able to price to cover it, or is there a headwind until contractual resets there? Thank you.

So on the pharma side, the net negative for the entire segment was around $2 million. So roughly about 100 basis points on the margin. I would say the majority of that is probably from our active material science division than it is from the others. Again, I can't really break down what the, you know, I can't parse out what's coming from labor or anything else.

I mean, we are also repricing in pharma, but that is more on an annual basis and where you can breaking the contracts. We do that, but this is much more long-term industry, and it's not something that you do month to month.

Got it. And then on beauty, it seems like consumers are looking to do holiday shopping sooner. Are you seeing this or hearing this from customers, and what kind of impact does this have on you, how you manage it in terms of lead times with your customers given the tight supply chain?

Yeah, I mean, lead times are obviously a lot longer. So I'm not sure I can give you more calls than that. We saw people taking the foot off the gas as Delta hits, and now they're stepping on the gas again. Obviously, a lot of regional differences. China with 11.11 is spooling that up and then spooling up for the Chinese New Year. U.S. Christmas Eve will tell us a lot. Europe is actually going very well as vaccination rates have moved ahead of this country. I must say moving around is much easier and shops are open. So the recovery in Europe is actually going well. So overall, we are very positive on the pickup. Thanks, I'll turn it over.

Next question is from the line of Gabe Hady with Wells Fargo.

Good morning, Stephon, Bob. Good morning, Gabe.

I wanted to, I guess, clarify what I heard for Beauty and Home that the lag in recovery was about 300 basis points in EBITDA margin. So it puts us close to kind of that 15% range. Um, so if you could confirm that and then more importantly, it looked like restructuring had kind of jumped up again this quarter, and I don't know if that's a timing issue or if there are some other things that you guys are trying to accomplish to kind of restore the margin profile there and get to that $80 million of transformation savings that you talked about before.

Sure. So, yeah, I can confirm the 300 basis point impact on the median home in that negative, which was in terms of S&P dollars about $9 million. As far as the larger than expected restructuring costs, we had talked about even last year shutting down some of our East Coast operations. and merging them into existing North American facilities. We had to delay that, as you remember, last year because of the demand for sanitizers and pumps, which were being produced at the time in our East Coast facility. So the majority of that large construction cost was coming from the finalization of that plan, and now we've moved everything into the other North American facilities.

Okay. Could you maybe quantify for us what the fixed cost savings might be with just that action right there?

I don't know. I'd have to check and get back to you. I don't have enough time ahead.

All right. Thanks, Tom. The other one, I was curious, just thinking about kind of capital redeployment. You guys bought back, what, $20 million in shares this quarter. How active kind of the M&A environment is

And, you know, kind of how you guys kind of go through the decision tree, you know, share repo versus making an acquisition and sort of in the context of ROIC targets that you guys put out there with Capital Markets Day and then appreciating that it's also part of your kind of, you know, incentive comp strategy.

Yeah, I mean, in general, the M&A environment continues to be very active and we continue to be very disciplined. So there's a lot of deals that we look at and in the end decide to step away or simply don't pay the prices the seller expects. But if we step back in our overall capital allocation, clearly first priority is to invest in the business with capital expenditure projects. The return on those are the most predictable, and throughout the returns on our capital expenditure projects have been very steady and north of 20%. So that is first priority. Then, of course, we have... now I think 28 years of annually rising dividend. I'm not about to break that streak. And then comes M&A and share buybacks. Clearly we've paused the share buybacks at the height of the pandemic to be more cautious and preserve liquidity. But now we're back in the market as we've been before and certainly have no reason not to continue that. Thanks for the clarity there, Stefan. Good luck.

Thank you. Your next question is from the line of Adam Judson with KeyBank.

Stefan, Bob, Matt, good morning. I hope you're well. Bob or Stefan, just on that restructuring issue that Gabe was just asking about, is it fair to assume then that we should not expect to see much of the way of restructuring charges in future quarters and just Relatively, how would you frame the returns that you think you've realized on all of your restructuring actions over the past, say, three or four years? So I'll take the first part of the question. You know, yeah, I think it's safe to say that we're at the tail end of the official kind of restructuring charges and whatnot. So I think that's a true statement. As far as As far as the actual returns, I mean, you know, it's a multi-year project, but I think what you're seeing is that, you know, we continue to right-size the business, improve the capability at the front end of the business during some very difficult times. And so we've taken about eight plants offline in our business. We've gotten... more efficient investments in capital. So I think really if you take a step back, we've done what we said we were going to do in the transformation, and I think we're very well situated for the rebound to come. So difficult right now with COVID and everything there to say, hey, we got a great return out of this. Talk to me in a couple of years when business normalizes, and I think we'll have a different discussion.

Yeah, I would just add immediately, I know it's been a while, but if I compare our position in the market, our feedback from customers, both qualitative and quantitative, I would compare a business that's on the back foot losing share to now a business that's on the front foot that's gaining share. And it's also pivoted geographically to the high growth areas. So for me, that's a pretty important consequence of all the work. Now, we're never done, but certainly being involved on the restructuring charges, I think that for the most part, that's it.

I appreciate it, Sivan. Bob, you made a comment that when business conditions normalize in a couple of years, we'll see the fruits of this labor, and to that point, There have been so many unanticipated problems from the pharma destocking to the Delta variant, inflation, supply chain issues, et cetera. How do you foresee at this preliminary stage, I mean, how do you foresee next year shaping up? Do you expect... many of these same problems to persist? The other form of destocking aside, for the most part, do you expect many of these problems to persist, or do you think it'll be a clean year next year? Just any thoughts about how next year might evolve compared to this year, just given how unexpected so much of what's happened this year has been for you?

Yeah, maybe let me kind of zoom out for a moment and then, Bob, please add that. Look, How do you forecast Black Swan events? Nobody predicted COVID, nor all the variants that came. I'm actually very proud of the team, how the team has managed through the COVID. And, you know, Delta probably, hopefully, was the last of that story. I wouldn't characterize it as problems. I would characterize it as issues that the team stood up and dealt with, including the current. And that is one of the strengths of AFTAR. When you look at the resiliency, last year we were flat. This year we're growing again. And we're dealing, of course, with the after-effects of pharma, but there's also related to COVID. I think the company is handling those issues very well. Now, if you tell me that none of these issues will be there next year, we'll have again just a year. But if there is another Delta variant, we will have to deal with it. We will be dealing with it. We have a capable team. I think I gave good color on our expectations on pharma and beauty. So now if you tell me there will be no echo and whatever variant, then I think we'll have a good, great year.

Yeah, I mean, I would just add, Adam, I mean, how do we look at it? It's a challenge, right? But as Stefan said, I mean, go back to 2008, 2009, in that crisis, and the only way you can deal with it is... through on-the-shelf contingency planning. And that's something that we did in 08 and 09. We continue to do today. So do we have a budget and a forecast for next year? Of course we do, based on a number of assumptions. But we also have various contingency plans in place that we're ready and willing to execute should, as Stefan said, another black swan event happen, right? And on the flip side, we also have the balance sheets and... and the wherewithal to invest where we need to invest if things go better than we expected as well. So, I mean, I think that's the only way we can manage through this. It's difficult to predict, but I think having the flexibility and the muscle and the contingency plans in place and the experience that we've had really is what makes us kind of weather through these storms. Thanks a lot, Bob.

Our next question is from Angel Castello with Morgan Stanley.

Good morning, and thanks for taking my question. Just to pay to the labor to the point on pharma, which is maybe a different way of looking at it, as you think about kind of destocking here that continues into the fourth quarter, would you say, would you characterize, I guess, customer levels of inventory as getting closer to normal, or are they looking to run leaner than they have historically?

Yeah, so, again, I would break this down. Remember, we have four units in pharma, three of which are growing nicely, and active materials and injectables is double-digit. Within the prescription division, we had significant destocking in allergic rhinitis and cold and cough. Cold and cough is behind us. We clearly see that business on the uptake. Allergic rhinitis seems to be normalizing, as we said, that we think 20, quarter four, 21 levels will be in line with quarter four, 20 levels, which were unaffected from the destocking. So the one additional item that we're calling out in our prepared remarks is that we had a very big lump of CNS sales last year that will not most likely repeat, and that's why we see prescriptions still being not in a growing mode compared to the rest of the pharma businesses.

Yeah, and I guess that's my point. Thank you. I guess just to clarify, the way I'm kind of thinking about it is If we kind of get more to a normal environment, do your customers have enough inventory, or do they have to kind of, particularly within prescription, I mean, as we think about kind of easier comp in the next couple quarters and the destocking that's happened, is there the opportunity for maybe a little bit of restocking or kind of a little bit of improvement there?

Yeah, I would not want to speculate. The one thing I also would call out, we've done really a deep dive into kind of what's sold in pharmacies and the retail environment, but please also remember that the CNS distribution channels are very completely unconventional. They go through emergency response crews and schools, and there is no data.

I understand. Thank you. That's very helpful. And then just a separate one on, you mentioned automation investments as a potential, I guess, answer to some of the labor issues that we continue to have in the U.S. So is that contemplated in the restructuring that you've done? Or one, I guess, maybe what would that mean if we look forward to 2022 and we continue to have these persistent kind of labor, tight labor issues? What would be kind of the thought process around that? How much would you need to kind of invest in the business to kind of automate further or, you know, as we think about kind of restructuring on that?

No, I wouldn't call it restructuring. I think this is just normal productivity investments. You look at the economic return of every investment, what is the – headcount savings you're going to be able to create with the investment you're doing due to business case?

Yeah, I mean, I think in our restructuring transformation, we talked about a little over $50 million that we invested specifically in the automation and automating the factories. And, you know, that ranges from anything from material handling to final packaging and shipping and things like that. And, you know, as technology improves and increases, we'll continue can be more efficient. I mean, that's part of our kind of annual DNA. Very helpful. Thank you.

Our next question is from the line of with Jeffrey.

Thank you for fitting me in, guys. You mentioned the tuning comparison being pre-tough in Q3. I was wondering if it's going to be, again, tough in Q4 or over the next couple quarters.

So, Daniel, I mean, tooling for us is, you know, if you actually were to look at it overall, you know, we were actually up slightly in total company-wide tooling. It always impacts one or more markets. So it happened to be a negative drag on pharma this time, but remember we mentioned that beverage was accounting for about 37% of their growth. So it was a positive there. Right now, and again, tooling is one of those things that's difficult to forecast. You're not exactly sure when production tooling is going to come online. But right now, we're not expecting, on a consolidated level, any significant differences with the prior year. And maybe the specific quality and activity of solutions, Bob, you can share.

We already pre-announced that, so to speak, last time that that was coming.

Yeah, yeah. So last year we were up 50-some percent in that country. really an exceptional two-link sale on the success of a pharma customer's flesh glucose monitoring system. So this was kind of the next evolution of their product range that obviously is a positive for us going forward. But those types of two-link events don't happen every quarter and certainly don't always happen every year either.

Okay. Thank you for the clarification. Labor and supply chain costs aside, if you look just at your raw materials, particularly polyethylene, polypropylene, things like that, I was wondering what your expectations are going forward with respect to your guidance. Are you expecting it to continue to rise and play catch-up or just kind of a plateau here or what?

So it's expected as of now to decrease slightly in North America and in Europe, but it'll still be at much higher rates than what we saw last year. So, yes, it's not increasing at the rate we've seen over the last several quarters. We're expected to kind of abate and potentially subside a little bit, but it'll still quarter on quarter, year on year comparison is going to be significantly higher than prior year.

Great. Thank you very much.

Next question is from the line of Salvatore Tiano with Seaport Research.

Yeah. Hi, everyone. Thanks for taking my questions. So, personally, a little bit going back to pharma and tooling, it seems to me like the mix of your business didn't become much worse in the third quarter from what we saw in the first half of the year. If the earnings decline accelerated a lot, I wonder if you can provide a little bit more details on why this happened and if you can put the finer print on the decline in the active solutions tooling sales and what was kind of the year-on-year impact on profitability.

Okay, so the mix is what we've been talking about really, Bellator, in previous quarters. I mean, that relates to the destocking factor around allergic rhinitis products and asthma CRPD-type products, and that's primarily in our RX division. We did have destocking in consumer health care earlier in the year around nasally congestion and cough and cold. We now are starting to see that improve, as Stefan had mentioned, Cold and flu season is back. Device sales are increasing, you know, on short-term horizon. We talked about recovery in the allergic rhinitis and asthma COPD, and a little bit of a tough comparison compared to the CNS in Q4. As for active materials, you know, I can't comment specifically. We don't make a lot of money on tooling sales in general, but it was about $12.5 million in total tooling revenue. for active material solutions last year in the third quarter. So, again, as I mentioned, that's a positive for us from the standpoint that that's going to lead to future product sales, which is really what we're focused on with our customers.

So, Salvatore, let me just zoom out to be hopefully helpful. So, again, as a reminder, our pharma reporting segment consists of four and they have different profitability, although we don't disclose it, but we give directional guidance. The most profitable one is prescription drug, and the big units there are allergic rhinitis, and the COPD pulmonary treatments with a nice growth engine being the central nervous system drug business. That's in prescription. Then comes consumer healthcare, likely less profitable, everything around cough and cold, nasal rinse, thermal treatments, ophthalmology. Then comes active material solutions in terms of profitability. And then comes the injectable business, which is still nicely profitable in the context of the overall company. And, of course, when injectable and active material grows a lot faster and prescription declines, you have a mixed effect, and that's really what has played out this year.

Okay, understood. And the other question is, if you can provide a bit more detail on the financial impact of the two recent acquisitions, especially, I think, volunteers in the public statements, they do have an operating loss, if I remember correctly. So, how should we think about the impact on your earnings from this?

Yeah, Bob can give some numbers, too. In general, Volantis is basically a R&D investment into the digital therapies and digital companions to all of our devices in the long run. So this is really an investment in the next generation platform. We have Volantis, as you know, it has been a popular company, still is. Now, thankfully, we've crossed the threshold, and we'll be able to squeeze the minorities out, but this is adding to our digital therapy capability. You can find in their public filings the evidence used to add, but for us, we think of this as a significant R&D effort that's still defrayed by a rising business. Then, if I pivot over to after a hang-you, that is very important, getting boots on the ground in China for the injectable medicine segment. Significant growth in that part of the world. So far, we served mainly with exclusively with imports from Europe for injectable medicine, and that is long-term not sustainable. And this is a nicely profitable business that will allow us to expand in that part of the world, building on the basis of after-hanging. In general, our overall M&A track record, I think, is very good. We talked about that in Capital Markets Day. Of course, CSB, which became the active material science business, as well as Fusion PKG, the two larger ones, doing very well. But also our venture investments are returning very nicely. So, I mean, Bob, you can give some numeric impact.

Sure, sure. So... In Q4, the HINGU and the Voluntas acquisition will probably be $0.02 to $0.03 dilutive, and that's pretty typical. You kind of got to work through some of the inventory write-ups and the like on the purchase accounting side. And then looking at 2022, it's going to be roughly $0.08 dilutive, primarily coming from the digital health investment. And, you know, I can't really give you a breakout what that is, but approving this as we move beyond 2022. Okay, perfect. That's great, Paolo. Thank you very much.

We're going to ask questions from the line of Justin Lamb with William Blair.

Hey, morning. Thank you for squeezing in. Just two quick ones for me.

I guess what's your expectation for the upcoming cold and flu season that's baked into your guidance? You mentioned this potential super cold in Europe.

So I guess does that mean you're expecting something similar to pre-pandemic norms or maybe still something lower?

Yeah, I think that the last couple of days, several of our pharma customers have had their earnings announcement. So I think reading their statements is probably as good an answer as I can give you. Clearly, whether it's the CDC, our customers, or anecdotal evidence from our colleagues in Europe, it looks like it's going to be a, quote, normal flu season, maybe even above normal. I don't want to speculate. And we clearly are going with optimism into the fourth quarter in our consumer health care business.

Okay. Just another one for me. You know, you talked about raising your prices and continuing to pass the cost down to your customers. But I guess I'm curious, what other measures do you have in place to navigate this environment if inflation and, you know, particularly supply chain and labor shortages continue for another year?

Three words, pricing, pricing, pricing. I mean, we are very vigilant in raising prices, ensuring that we pass on this higher cost. Yes, it is with a delay often. And we're getting better at that. I want to recognize our food and beverage business really has structurally changed how they do that. So during time of general inflationary increases, we pass them on. And to be honest, the Well, every price increase is tough. The environment is a lot more receptive because our customers just have it everywhere. So nobody's surprised when we walk in there and say, hey, guess what, we've got to do another one.

Yeah, and I would just add right now, I mean, you see a lot of reports out that consumers are accepting our customers' pass-throughs of higher cost. But, I mean, if you look at us historically, you know, we don't just serve the multinationals. We also serve a lot of the private label brands. And so, you know, that's something that we'll be keeping an eye out on. You could see a shift in business from branded products if prices get to the point that consumers want to save a few pennies. But typically for us, that doesn't mean any less sophistication around dispensing and use. And, you know, we're selling to the private labels, roughly what we're selling to the multinationals.

And, I mean, of course, I'm not implying that we're not doing all the other work that you would expect us to do around productivity, savings, automation, and so on. But the marketplace is at work, and we use all the tools that are available in the marketplace to attract and retain the right labor. It's just got a lot harder than it's been for a while. That's fair. Thank you so much.

You have a follow-up question from the line of George Staphos with Bank of America.

Hi, everyone. This is Cashin Keeler on behalf of George Staphos here. I was just wondering quickly if you could go through the charge related to PureCycle and just remind us on the background of the partnership there. Thanks.

Yeah, so PureCycle was an investment that we made a year ago or so that went public via a SPAC vehicle in the second quarter. So we saw initially in the quarter that they We had a huge gain of about, I think, $16, $17 million on the unrealized write-up of that investment. And now it was about a $9 million write-down. But net for the year on an unrealized basis, you know, we're still up about $6 million. Yeah.

And just as a reminder, a large part of our polymer use is polypropylene. And as our customers need to have more and more recycled content, what we need to have in the world is recycled polypropylene that is food grade so they can be in contact with foods, with medicines, with beauty treatments. And PureCycle is one of the few who have developed the technology. So this is one of the measuring investments that was very strategic for us to help them get off the ground, make sure that this technology sees the light of day. And thankfully, other people have seen the same potential, including some of our customers who have invested in that technology. No, they still have to build large-scale plans, but clearly the marketplace, the capital market is seeing the same potential. So it's just one example of the kind of mentoring investments we do early stage to make sure that we are at the leading edge of innovation without putting all our money into those things. But it's a good example of the technology that we need to be available in the marketplace. All right. With that, we're going to wrap it up. Appreciate all the questions. Again, we look with confidence into quarter four as these trends work themselves out. And we look forward to talking to you on the road.

And this concludes today's conference call. You may now disconnect.