AptarGroup, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to APTA's 2021 fourth quarter conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. Introducing today's conference call is Mr. Matt Della Maria, Senior Vice President, Investor Relations and Communications. Please go ahead.

Thank you. Hello, everyone, and thanks for being with us today. Joining me on today's call are Stephan Kanda, 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.

We appreciate you joining us today. I hope that you're doing well. Before we close in 2021, I would like to take a moment to recognize our teams for overcoming all of the challenges presented throughout yet another year of the pandemic. We are resilient in delivering on our promises to patients, consumers, and our customers across the many markets we serve, despite pandemic uncertainties, rising inflation, supply chain issues, and labor shortages. We have kept our manufacturing sites operating, and we are successfully passing on cost increases as we navigate this extraordinary inflationary period. Turning now to slide three, the commitment of our teams was instrumental in enabling us to deliver top-line growth across all of our segments for the full year. Our total reported sales increased 10%, and on a comparative basis, core sales increased 7%. Our farmer segments finished the year with positive core top-line growth. Despite the decline in sales to the prescription drug market that has been temporarily impacted by pandemic-related destocking in the industry, The steady strong demand for elastomeric components for injected medicines and active material solutions, as well as a recovery in the latter part of the year in the consumer healthcare market, resulted in the top-line improvement for the year and margins within our long-term target range. During the past 12 months, we took important steps to further strengthen the competitive position of our pharma segment and support our long-term growth. First, we began investing to expand our capacity to produce premium-coated elastomeric components, and we have been awarded a €13 million grant from the French government to support our component expansion plans in Europe. Second, we acquired 80% of Weihai Hanyu Medical Products, a leading Chinese manufacturer of elastomeric and plastic components, serving the fast-growing and second largest pharmaceutical market in the world. Given the ongoing pandemic development and our growing pipeline since our last capital market day, we are adding another $60 million to our capital investment plan to increase capacity in the U.S. and Europe for components to injectable medications, bringing the new total for this accelerated expansion plan to $180 million. Third, we have been gaining solid traction with our active material solutions, which have proved very successful For example, in protecting the integrity of certain at-home COVID-19 tests. In addition to growing that business nicely, we were awarded a contract from the U.S. government with $19 million in funding to expand our capacity in the U.S. for our active film technology. Fourth, we are laying the foundation for our future digital health solutions with the completion of our acquisition of Volantis, a pioneer in digital therapeutics. And lastly, we have begun to expand our pharma capacity in Asia. In 2021, we broke ground on a new facility in Suzhou, China, to optimize our footprint and bring all our existing operations in the Suzhou area under one roof. This investment includes state-of-the-art machinery and automation for all three of our segments, with more than half of the investment dedicated to the pharma segment. Earlier this year, we broke ground on a new pharma production facility in Mumbai to further increase our local manufacturing capacity, including the addition of molding capabilities to offer more innovative product solutions to pharma customers in Southeast Asia. We remain optimistic about current and future growth in the beauty, personal care, and home care market and remain an investment in YAT, a Chinese online influencer and skin care company, to collaborate on solutions for the growing and attractive skin care market. We continue to develop more integrated local supply chains to lower lead times and faster market launches, leveraging the insights from our Fusion PCG acquisition. With beauty volume still lagging behind 2019 levels due to successive COVID variants and the dramatic global supply chain disruptions and labor issues, especially in the U.S., the profitability of this business has not yet achieved our target margin range despite the restructuring completed to date. We remain confident in reaching the target margin range in due course and are increasing our focus on SG&A, cost containment, footprint optimization, and product innovation. Our food and beverage segments continue to grow with strong demand from the food market and recovering demand towards the end of the year in the beverage market. Margins were compressed this year by the impact of the significant resident cost pass-through we have been diligently managing. On the sustainability front, we are recognized in many countries for our efforts towards becoming an ever more sustainable, inclusive, and diverse company. We're number one on Forbes' 2021 Green Growth 50 list and a top 10 company on both Forbes' 2021 Global Female-Friendly Company list and Newsweek's America's Most Responsible Companies for 2022. Echavates has just awarded us the coveted top 1% platinum rating for our sustainability achievement in the areas of environment, labor, and human rights, ethics, and sustainable performance. And APSA has also recently been named the supplier engagement leader by TDP, a global leader in environmental impact disclosure. To conclude our 2021 highlights, our balance sheet remains in excellent condition. We are well positioned to continue to invest in growth opportunities, including strategic M&A opportunities, while we deploy capital to enhance shareholder returns. I'm happy to report that in 2021, we returned around $100 million in cash dividends to shareholders, and this was our 28th consecutive year of paying increased annual dividends. We were also active in our share repurchase program, deploying $78 million to repurchase over 600,000 shares, and we expect to be in the market with further repurchases over time. Now I will brief a comment on our quarter four results as shown in slide four. Before turning it over to Bob, we will go into a bit more detail. As you saw in our press release, we reported strong top line growth of 9%, with core sales growth of 10%. This increase was particularly notable as it reflects strong contributions from each of our segments. Our pharma segments continued to see strong demands for solutions for vaccines and other injected medicines, and a return to a more normal cough and cold season resulted in increased demands for nasal drug delivery devices and other dispensing solutions in the consumer healthcare market. We have been very pleased with the performance of our active materials group across a variety of applications, including protective vials for our diagnostic diabetes test strips and probiotics. And we are supplying our active film technology for at-home COVID-19 antigen test kits. And collectively, this has resulted in a 50 by 0% increase in core CLG over a year for our active materials groups in the fourth quarter. We are also pleased to see demand for our nasal system used to treat allergic rhinitis and pulmonary systems for asthma and COPD conditions have returned to levels on par with the prior year's Q4. However, as previously mentioned, the comparison to the prior year fourth quarter included a significant and outsized ordering flux for devices used for central nervous system treatment. Pharmimagine remained within our target range and was comparable to the prior year fourth quarter. Our beauty and home segment generated strong sales growth with a rebounding demand for fragrance and skincare solutions for the beauty market and increased demand for dispensers for hair care and body care products. Pricing contributed to the majority of the core sales growth in the quarter. Turning to food and beverage, this segment reported double-digit core sales growth with approximately 60% of the growth coming from price adjustments to pass-through, resin, and other cost increases. The remaining growth was driven by a strong demand for dispensing closures in both the food and beverage markets. Our beauty-in-home and food and beverage margins continue to reflect the extraordinary inflationary environment and related pass-through effects as well as supply chain challenges. Now I would like to highlight a few recent launches by testing and using our technologies in the next few slides, starting with our pharma segment on slide 5. Tadavis, formerly Perigo's generic prescription pharmaceutical business, has announced the launch of a generic version of a leading nasal spray for the treatment of migraine headaches with our Unidose nasal device. Teva announced the launch of the first U.S. generic version of Naloxone hydrochloride in a nasal spray form using our Unidose nasal device, and Sandoz is also using our Unidose device for their generic Naloxone hydrochloride nasal spray. Glenmark's Ryaltris recently received new drug application approval by the U.S. FDA for the treatment of allergic rhinitis with our multi-dose natal device. We recently announced a new digital solution called Hero TractorSense. It transforms a standard needed dose inhaler into a smart connected device, allowing patients to track usage and promote adherence to their pre-sprite therapy and ultimately improve the outcome. Finally, our active film technology is also enhancing the diagnostic capability of in-bios at-home antigen COVID-19 test kits. On slide 6, in Beauty and Home, we were selected to produce a custom inverted closure with our self-stealing flow control valve for the global launch of a new inverted dish soap package by a leading PPG company. This is a perfect example of how Apgar creates value by helping our clients drive the conversion of a major retail category through breakthrough innovation that enhances the consumer experience and through disciplined execution in key markets around the world. And we are very pleased to announce that our fully recyclable monomaterial pump was chosen by Unilever for their leading skincare brand, Dermalogica Facial Cleansers. Our Fusion PKG Beauty Lab is providing a line of nine beauty products for the brand Cosmicology. In food and beverage, in the Chinese nutrition market, Juno Labao is featuring our bi-injected closures for two of its children's powdered milk plants. And the new launch for sauces and condiments in Latin America, Zabor de Chef, features our new lightweight closure with flow-controlled dispensing system. With that, I will now turn it over to Bob, who will provide additional comments on our fourth quarter results. Bob?

Thank you, Stefan, and good morning, everyone. Just to summarize the quarter, on slide seven, you can see our reported results, and when we neutralized currencies and acquisitions, we grew core sales solidly by 10%. About 4% is coming from price, and the remainder of the growth from strong broad-based demand across the majority of our markets, which I will detail in a minute. As shown on slide 8, we achieved adjusted earnings per share of $0.93 and adjusted EBITDA of $154 million. Adjusted earnings included the negative effects of currency translation rates and the net negative inflation impact of approximately $5 million. Our consolidated adjusted EBITDA margin of roughly 19% would have been approximately 170 basis points higher without the net price cost effect, including the margin compression impact from passing on the higher costs. Turning to some of the details by segment, our pharma segment's core sales increased 8%, with approximately 2% coming from price. Pharma's adjusted EBITDA margin, including about 100 basis points of headwind due to the price pass-through effect on margins, was approximately 33%, which was even with the prior year's fourth quarter margin. Looking at sales in each pharma market, core sales to the prescription market decreased 7%. Although we saw some positive order trends for nasal and pulmonary devices for allergy and asthma treatments, we had a difficult comparison to the prior year fourth quarter when we experienced a significant level of demand for devices used with central nervous system treatments. The net was a decline in quarterly sales to the prescription market. Core sales to the consumer healthcare market increased 14%, and this growth was across a variety of categories, led by solutions for nasal decongestants used to treat cough and cold symptoms. It was again a solid quarter for solutions for vaccines and other injectable medicines, with core sales increasing 19%, primarily due to continued strong demand for our components used with vaccines for COVID-19 and influenza. Our active material science solutions market had a very strong quarter with core sales increasing 50% on strong demand across a variety of applications led by our active film technology that enhances the integrity of in-home COVID-19 test kits. Turning to our beauty in home segment, core sales increased 7% over the prior year fourth quarter with the majority or 6% of the growth coming from price initiatives. This segment's adjusted EBITDA margin was 11% in the quarter, seeing disruptions in the U.S. Had we not had these net negatives, including the margin of higher costs, EBITDA margins would have been approximately 250 basis points higher. Looking at each beauty and home market, Core sales to the beauty market increased 11% due to price adjustments and increased demand for our dispensing solutions for prestige fragrance and facial skin care. Core sales to the personal care market increased 6% due to price adjustments and increased demand for hair care and sun care solutions. Core sales to the home care market decreased 10% due to our solutions for air care and surface cleaners supplied to this market. turning to our food and beverage segment, which grew strongly in the quarter with core sales rising 28%. In addition to strong double-digit volume growth, pricing adjustments also contributed in a counterbalance of the segment's core sales growth in the quarter. This segment's adjusted EBITDA margin was 14% in the quarter and below-lag negative inflation effect of approximately $3 million. Had we not had this net price cost negative impact, we did not have the margin compression effect of passing through higher costs, EBITDA margins would have been over 500 basis points higher. Looking at each market, core sales to the food market increased 25% due to price adjustments across a variety of applications, led by closure solutions for condiments and dairy food products. Core sales to the beverage market increased 41% due to price adjustments, easier comparisons, and a continued rebound in sale of closures for bottled water and functional drinks. Slides 9 and 10 highlight our annual performance, and we achieved 7% core sales growth, and our adjusted earnings per share were $3.88, up 4% compared to $3.74 a year ago, including comparable exchange rates. Cash flow from operations totaled $363 million for the year, down approximately $200 million from the prior year, primarily due to an increase in working capital that was the result of our sales growth, including the effects of price increases on our accounts receivable and higher inventory costs. Moving to slide 11, which summarizes our outlook for the first quarter, as Stefan covered, we are expecting some of the momentum we saw in quarter four to continue. While we will likely face ongoing supply chain and inflation pressures in the near term, some raw materials are expected to trend lower from today's levels, such as resin, while other metals. I want to remind everyone that we have approximately $0.02 per share per quarter headwind from our recent acquisition of Volontis. We are also anticipating that currencies will remain a headwind compared to the prior year. For example, the euro rate for the prior year first quarter was 121, and our guidance for the coming first quarter is assuming a 114 euro rate. We have said that roughly for every one cent move in the euro rate, that equates to roughly two cents per share for the full year. So for the coming quarter, we are looking at approximately a three-cent currency drag on earnings compared to the prior year. All things considered, we expect our first quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs, and changes in the unrealized fair value of equity investments, to be in the range of $0.92 to $1 per share. The estimated tax rate range for the first quarter is 27% to 29%. As shown on slide 12, our depreciation and amortization estimate for 2022 is $245 to $255 million. Our 2022 capital expenditures net of government grants will be in the range of $300 to $330 million, which includes $109 million net for our three important growth projects that we have shared previously. These growth projects include $55 million net of our government grants to increase our capacity for components for injectable medications in France and the U.S., $31 million for our new facility in Suzhou, China, that will optimize our footprint and brings all our existing operations in the Suzhou area under one roof, and $23 million to optimize our footprint and create a center of excellence in France for our highly valued decorative capabilities for the beauty market. In closing, we continue to have a strong balance sheet with a leverage ratio of 1.84, 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 total $25 million in the quarter, we repurchased approximately 395,000 shares of Cummins stock in the fourth quarter for $49.7 million. During the 12 months of 2021, we repurchased approximately 615,000 shares of common stock for $78.1 million, leaving approximately $200 million authorized for common stock repurchases at the end of the fourth quarter. At this time, Stefan will be providing a few closing comments before we move to Q&A.

Thank you, Bob. In closing, on Flight 13, we are pleased with our ability to deliver solid results while navigating the impact to our operations and end markets from the surge of various COVID-19 variants, considerable supply chain and labor challenges, and significant inflationary pressures. Aftar is well positioned for continued growth and improved margins beyond the current pandemic and economic environment. We will continue to seek out market opportunities and strategic partnerships that will contribute to our success in the new era. Looking ahead to the first quarter, we anticipate total growth in our pharma segment with growth in each division. The prescription division is expected to report growth in the allergy category, as the destocking appears to be ending across most accounts, though we may still face a tough comparison in the central nervous system category. Other areas of our pharma segment are expected to continue to do well, especially active material solutions where demand for at-home COVID-19 antigen tests should remain strong in the near term. Our beauty business continues to recover, although we have not yet returned to 2019 volumes. Our beverage business is also seeing signs of recovery. Other COVID-19 variants may impact the pace of these recoveries and supply chain disruptions, I expect it to continue in the near term, impacting our business primarily in the U.S., and in some cases impacting certain customers in both beauty and home and food and beverage. However, we are optimistic that the general momentum towards the post-pandemic recovery will not be derailed, even if it is a bit bumpy. In parallel, we will continue to contain costs, improve efficiencies, and plan to increase prices to offset the effects of rising input costs. Our products are in the hands of millions of people every single day, and we have built a strong reputation in high-growth areas that we will continue to build upon for the future. Our customers recognize us as a true innovation leader who has shaped the drug delivery and consumer product dispensing industries. and at the same time we continue to advance our mission of becoming a proactive leader in sustainability our businesses have a very clear competitive advantage i'm very proud of all that our people have accomplished in the fourth quarter and full year of 2021 with that i would like to open the call up for your questions thank you if you would like to ask a question that will be star followed by one on your telephone keypad from

If you change your mind, that will be staff followed by two. 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. We will be taking our first question today from George Stafos of Bank of America Merrill Lynch. George, please go ahead.

Thanks very much. Good morning, everybody. Good day. Thanks for all the details, guys. My two questions, first on food and beverage and then a good morning or good day, and then the second on beauty and home. For food and beverage, it was great to see the core growth that you posted, recognizing a lot of that was passed through. The operating leverage, you know, so the growth in EBIT, relative to that core growth was not where we would have expected it. I think earnings were down quarter on quarter. Can you talk a bit about what was going on there? Was the operation and the leverage where you had expected it? For beauty and home, you talked about some additional focus points in terms of SG&A and cost reduction, and we appreciate the point. Can you give us a bit more detail there? You know, recognizing there are no guarantees in life, if we do have a reopening, if we do have growth that's on trend line, when do you expect Beauty and Home to be back to the 15% margin that you've targeted? Thank you.

That's the one thing I can think.

Yeah, I'll take that. Jumping on the first one.

Okay, so I'll take the first one. George, on the food and beverage growth, yeah, so we have about 40% of the increase or the 28% increase coming from volume. So it's really, if you take the 60% of that growth being purely just a one-for-one pass-through, right that's that's a big impact on it plus we estimate that we have we're behind the curve on the food beverage side by about three million dollars on the net pass-through versus cost increase so those two items the the one for one pass-through as well as the net negative of three million we're estimating is about 500 basis points so neutralizing for that we would be you know closer to that 18 and a half 19 percent margin range.

Yeah. Then on beauty unknown, uh, look, the clearly with Delta and Omicron, uh, the volume recovery is, um, certainly delayed. Uh, we still below 2019, uh, volume levels. And we take, uh, cognizant of that. We approached it initially that this would be like any other recession. that we would continue things in low idle mode and wait for the volume recovery. I think what we're trying to signal here, we may lean in more on the cost side here, given that the volume recoveries are still uneven. Now, from a geographic point of view, the shifts around, we're actually quite encouraged with the volume recoveries in Europe and in China. While Latin America is clearly not in a good place at the moment, and Brazil, which is very important for our must-eat fragrance, business is declining. And the net-net means that the volumes are not where we want them to be. The other big factor, and that's why we call it out, is, of course, the North America labor and supply chain crisis. train wreck, for lack of a better word, that in an outsized manner hits the Midwestern plants of beauty and home. So we need to have those things behind us. I cannot give you a date certain, but what we want to see is that we remain committed to the target range and work through these issues as we get through the North America labor and supply chain issues, which are significant and will remain with us at least for the next one to two quarters, as it is not only us, but our customers, our suppliers, and require significant work to work through. On the other hand, we see that the map picture brightening, the reopening, as you mentioned, we expect travel to resume at least between Europe and the U.S. So, Working through those issues, we remain committed to the target range.

Stephan, thank you for that. And, Bob, just a point of clarification. I'll turn it over. So operations in food and beverage were, as expected, no hiccups there. It's just being behind on the curve. And, Stephan, can you give us a little pencil on paper in terms of what additional cost reduction efforts you had mentioned as part of my question you think you might be able to get out of Beauty Home this year or next year? Thank you, guys. I'll turn it over.

Yeah, we're not at the point where we can discuss this, recognize that Europe will be focused on that, and there clearly are other parties that need to be part of the discussion.

Thank you.

Thank you, George. We'll be taking our next question from Guncham Pandrobi of Robert Baird. Please go ahead.

Hi, good morning. This is actually Matt Krieger sitting in Fregantium. Thanks for taking my questions. I guess I just wanted to start with maybe if you could provide some added details on the budgeted volume outlook for each of your segments, with a particular emphasis on maybe the sequential progression in the pharma business given the prescription recovery, and then also maybe some details on what beauty and home could look like given the kind of sequential recovery that we're expecting or hoping for there.

We don't really guide for the full year or disclose our budget, John. Having said that, we enter 22 with a lot of optimism. Clearly, the prescription division has regained its footing, and we expect growth not only for this quarter but for the year. And the growth dynamics in the other units of pharma look very good. Obviously, we expect growth in the other two units as well, but we don't guide beyond the current quarter. And what we said for quarter one is that all three segments, we expect all three segments to grow and even more within pharma, that's all the units in pharma we expect to grow.

Great, that's helpful. I guess I'll follow up with one there. Maybe if you could touch on any unusual, complicated items that we should keep in mind for 2022 modeling from a volume perspective. And then my second question is, can you just provide an update on uh what level of new product introductions uh we're likely to see in 2022 versus the prior couple of years at the at the customer level and if you're concerned at all about any demand degradation um from the significant price increases that you and your customers are are thus passing through um to the to the end consumer just any thoughts there would be great yeah sure so in terms of uh

The one I already mentioned is the CNS business, notably Narcan, tends to be lumpy. And whenever you compare quarter versus quarter a year ago, that lumpiness can move around. And all I can say is, unfortunately, the demand continues to grow because the epidemic continues to worsen. And every Narcan nasal spray that is in the market is sold by us. But that will continue to be lumpy. The other one that we called out is clearly the at-home COVID testing business depends very much on how the pandemic evolves, how testing discipline evolves. So we don't really look at that beyond quarter one at this stage. The rest of the business we see continuing to grow very nicely. We called out the recovery in allergy and pulmonary. The consumer healthcare business continues to grow nicely, as does the injectable business. On your question, in general, we see good engagement by customers. We see good engagement on the tooling side, where customers are more willing to invest in their own custom tooling if you want. And certainly from a win rate point of view, we are end of the year very optimistic. We called out some of the launches earlier. And I just would reiterate that new dish soap by a major CPG player is just a classic example of category conversion that we have done many times before from condiments to infant nutrition. the dish soap category moving. So those are good signs. And also in the rest of Union Home, we see good pickup and optimism with customers with the regional color I gave you earlier, Brazil and Latin America kind of being a bit behind, and North America really just going through this supply chain situation. So in North America, it's not a demand issue. There's plenty of demand. It's the whole supply chain being able to fulfill that demand situation. including also the food and beverage, to be honest, for quarter one. Those of you who have been to retail outlets regularly may have noticed that shelves are empty, often even half the store is empty. So the North American supply chain issues need to be overcome, will be overcome, and thankfully our pharma business is pulling very strongly to allow us to give you the guidance that we gave.

Great, thank you.

Thank you. Our next question will be coming from Mark Wilde of BMO Capital Markets. Mark, over to you.

Thanks. Good morning, Stefan. Good morning, Bob. Good morning, Mark. Stephan, I wonder if you could just help us a little more with the beauty business. You said you're not back to 19 levels, but if we called 19 100, where would we be at right now, and what does the trajectory look like in recent months?

So we're probably around 90%, and certainly the trajectory is going up. with significant regional differences, again, very positive about the progress in Europe, very positive about the growth in China, declining in Latin America in the recent quarter, and North America dealing with the issues that we've laid out. Okay.

And then, Bob, just on the sort of price cost, can you give us a sense of, you know, where you're at across the portfolio right now in terms of the price cost and what you anticipate there as we move through 22? Sure. So we are catching up. And again, I think looking forward into the first quarter, we are anticipating us to be slightly positive on that net price cost. Now, again, I I'd caution you that there's a lot of assumptions that go into that. We are starting to see some resident abatement in North America. Europe is still relatively stable. There are some people who think it should be trending lower in the next couple of quarters, but we haven't really seen that yet. The big unknown for us looking forward is going to be the increase in the metal pricing. We've seen some pretty significant increases recently in tin plate, aluminum in particular. So we're keeping an eye on that. So I would say, you know, our assumption is that we should be catching up going into the first quarter and flipping to a slight positive. But we'll have to see what happens, you know, as we weather through this metal price increase. Okay. That's helpful. I'll turn it over. Thank you.

Thank you, Mark. Our next question will be coming from Kyle White of Deutsche Bank. Kyle, please go ahead.

Hey, good morning. Thanks for taking the question. On the active materials solution, quite a large increase there. I assume you're seeing a decent-sized increase here in the first quarter as well. Is this just a two-quarter event of outsized volume just given the government supplying at-home COVID tests, or do you expect continued strength throughout the year in that business?

It's really all of the above. That business is developing very well. And, you know, test strips for diabetes, the vials for those test strips are doing very well. Probiotics is doing well. But clearly, and that's why we call it out, at-home COVID tests contribute significantly in quarter four and quarter one. And beyond that, it is hard to say now. Having said that... There is also a significant halo effect as this technology has been proven out, including with the grant from the U.S. government to the magnitude of $19 million. So the pipeline is filling with projects that are derived from that recognition that this is a technology that can be useful in many areas, protect sensors, protect test kits, as well as protect food items. So we certainly see this as a growth business, a strong growth business that was a wonderful acquisition and will continue to drive growth. But to your point on the home test kit, that certainly will not go on forever with respect to COVID, but we see a good pipeline with other test kits and so on.

Got it. And then, Bob, can you just talk about your M&A pipeline and how attractive it is from an evaluation and technology standpoint? And then how do those returns look relative to just buying back your stock given current levels? Looks like you purchased $50 million this quarter. How should we think about the level and activity of your repurchases going forward?

Sure. We don't typically comment, Kyle, specifically on any M&A in the pipeline. I would say It still is fairly active. Pricing is still fairly robust. But in general, I would say that we're going to look at potential targets, but we're going to be remaining kind of disciplined in the approach and in what we do. So there's really not much to speak of there. As far as share repurchases, yeah, we were active in the market in the fourth quarter. We would expect to be active in the first quarter, but we have a little bit smaller open window to do that in. But nothing unusual, nothing extraordinary. I mean, we're really coming out from when we had kind of put a hiatus early on in the pandemic from not buying back our shares. Now we're a little bit more confident in the future and where things are going. So we'll be active.

Got it. Sounds good. I'll turn it over.

Thank you, Kyle. Our next question will be coming from John Crader of William Blair & Company. John, the line is yours.

Hi, thanks very much. Stefan, could you give us your latest thoughts on destocking that has held back growth in the pharma segment? Are we done with that? And have you guys made any changes to maybe have more clarity on where those stocking levels are headed?

Yes, so the way we see it, we are largely done with the destocking in the prescription business. The vast majority of customers are back to normal order patterns. Now, of course, new variants and masking and so on may crimp that, but... each successive year and seems to have less of an impact. So we see that has run its course. Of course, I continue to remind everybody of the lumpiness of the CNS business. In consumer health care, I think it's well behind us. You saw its strong growth in quarter four with a normal or strong cough and cold season. Of course, this episode has sharpened us to track very carefully all the statistics that are available to us, as well as other trade information, to be sure that we can identify significant dislocations. It's never perfect. As you know, e-commerce, cloth stores are not being tracked. Statistics outside of Western Europe and North America are hard to come by. But despite those caveats, I think our ability to gauge things has improved through this episode, no doubt about it.

Great, thanks. That's helpful. A follow-up, can you talk a little bit about the digital health investments you guys have made, like Volantis? How does that fit into the broader pharma strategy, and what bucket will those revenues from those type of deals fall into within pharma?

Yes. Along with our acquisitions and buildup of our service businesses, Digital health, you can look at in two areas. One is those are attractive businesses in their own right. Service is obviously contributing. Digital health is a startup-type business. In addition to that, they are, of course, very synergistic and deepen the most around our device business because they allow us to engage with customers in more sophisticated ways earlier in the pipeline of drug development and then the devices being basically locked in for life. Now, digital health itself, as you know, are companion therapies for actual drugs with the algorithm approved by regulatory bodies, whether FDA, EMA, or in the non-regulated markets, more of a direct-to-consumer type setup. and we see this as a very interesting business creates a lot of customer interest that will also and is deepening our relationships on the on the device side now digital health itself we of course had some legacy activities that we built up over the years and now in addition to volantis that may create revenues this year to combine business of about $15 to $20 million, but it is an investment. Let's be clear about that. That will take about two to three pennies per quarter while it is in the startup and growth space, but we see this as a significant add-on and with dedicated leadership that will drive that business. Sounds good. Thank you.

Thank you, John. We're now moving over to Adam Josephson of KeyBank Capital Markets. Adam, over to you.

Thanks. Good morning, everyone. Hope you're well. Stefan or Bob, just one follow-up to John's question about pharma. So the margins fell quite a bit in the first three quarters just with the stocking and the lower prescription sales. Perhaps, Bob, can you just talk about now that the situation seems back to normal, if an expectation should be that you can get to margins in that segment more comparable to what you experienced from 2018 to 2020, or is there anything else going on that we ought to be aware of? Sure. So structurally, I would say that we're seeing no degradation in the pharma various divisions. The one thing that does change, and we had called this out before, With our investments in digital health that we've made, those are expected to be $0.02 to $0.03 dilutive per quarter. So that is having a little bit of a drag going forward. That's the one difference that I would say looking forward. But generally, everything else looks fine, no degradation in the other areas. In fact, as we continue to grow and become more efficient, we do see some slight increases. I would point out or highlight. I appreciate that, Bob. And also on the margin topic, I think George asked this question of Stefan about getting back to 15% EBITDA margins and beating home. It sounds like from your comments, given the situation in Latin America, given the supply chain and labor situation in North America, there's still constraints on your ability to get to those 15% margins at least this year. So when do you think is a reasonable expectation for when you might be able to reach that target, if not this year?

Devon, you're on the way. With the supply chain issues that are significantly quantified for you in quarter four, and we expect the same kind of magnitude in quarter one, I doubt we will be fully out by quarter two. So certainly expect to resume significant progress on the margin side in the second half of the year, assuming nothing new happens. And then the cost focus that I referred to at the beginning of the call will also have more impact. So I'm not going to be... Giving you a date certain, but clearly all shoulders are on the wheel to get us there. And you should see significant progress in the second half once we get North America behind us and into next year.

Stefan, thank you. And Bob, just one on working cap, if you don't mind. Can you help? Forgive me if you talked about it earlier, but what was the drag last year? Was it more severe than what you're expecting, just given the supply chain, inflation? et cetera. And then what is your expectation this year? In other words, how much better do you think your free cash flow performance could be as a result of working capital? Um, yeah, so I'm working capital. It was, it was primarily driven by a couple of things. One is obviously the, the increase in, in, in revenue that we've seen, right. The, the 10% core core growth, um, And that's added to the receivables. So there's obviously some pricing that's in there that's influencing those receivables. So first point on receivables is we're not really seeing a degradation at all in day sales or anything or any issues around collectability. So I really don't have any concerns there. The inventory side, I guess, maybe surprised me a little bit. But looking back, there's probably about half of that increase in inventory that's coming from just purely the inflationary costs. And I think you've probably heard that from some of our peers as well. We've also been probably a little bit more prudent on, you know, with all the supply chain disruptions within the volume recovery, making sure that we get adequate stock on hand to be able to deliver customers. And then don't forget to we closed down earlier this year, some of our East Coast facilities. And anytime you do that, you do build inventory in advance. as you're consolidating those operations. So it's a little bit of combination. So looking forward, I think our focus needs to be around inventory. And hopefully, as the raw materials abate a little bit, and I did highlight metal, we've got to keep an eye on it as well. I'm hoping that we can make some good strides there. But hopefully the growth that we're going to see in 2022, we just need to keep an eye on collections and everything else, which I said earlier is not an issue at this time. Thanks so much, Bob.

Thank you, Adam. We'll be taking our next question from Gabe Hadja of Wells Fargo Securities. Gabe, over to you.

Gentlemen, good morning. Thanks for taking the question. just um bob if you can talk a little bit i think you said uh expanding the injectable investment from 120 to 160 uh but i think 2022 kind of stayed the same at 55 million i'm assuming most of that hits in 2023 um and then question number two relatedly you know can you give us a sense for you know whether it's in terms of payback or kind of returns what you expect out of that project and then maybe timing as to when we could see contribution.

Sure. So, yeah, the numbers that we gave, I think we're closer to one, I think we're around 180. But we do have a grant in there. The reason why the number didn't change in terms of the the cash number for next year partially because of that grant that we received um from the french government that was about about 15 million dollars um so yeah there will be some that will um roll over into 2023 in terms of payback i mean clearly it's going to be a a profitable project we you know we typically don't comment specifically on on various expansion projects but remember here we're not just expanding capacity for capacity sake we're also expanding capacity around our higher value-added coded offerings. So we see the growth, as Stefan had mentioned in the past, continuing in the future for injectable components. And then on top of that, we'll now have a higher value-added offering as well. Really leads to a very good return on that. Now, When will it come? Some of it will start coming online later in 2023, and then we'll see the ramp up from there. And then I'm sorry, what was your second question then?

Sorry, let me just add to Bob. Of course, it meant later in 2022 and then more to come in 2023. And it isn't really one single project. It's several projects. several phases, and maybe it's good to recall that this process has a basic material forming stage that we often refer to as mixing. Then comes the formation of the product or molding, and then comes the finishing and coating. And we do not all of these steps at all locations, and we add capacity to various part of those steps, both in the US and in Europe. And as Bob said, significantly expanding the premium product capability. And this is really a result of what we talked to before. We've seen the recognition of what we can deliver grow amongst our customers, and the pipeline keeps filling up. So that's why we accelerate the overall investment program to the number, to the $180 million number. Sorry, Gabe, go ahead.

No, that's it.

Great. Thank you.

Thank you, Gabe. We'll be taking our next question from Angel Castillo of Morgan Stanley. Angel, please go ahead.

Hi, thanks, and good morning. Just wanted to follow up on inventory and destocking. Maybe on the flip side of everything, how are you seeing your customers across segments, particularly in pharma, In terms of their behavior going forward, you know, where are inventory levels today and where do you kind of see them, you know, moving as we kind of go into 22 and 23? And are people holding on to more safety stock? Do we need to do a little bit of restocking after this? You know, like we have more normal, whether it's cold and flu season over this period and next year. So just more color as to how you're seeing kind of the underlying dynamic that would be helpful.

Yeah, in general, I think at this stage, it very much depends on the region when we answer this question. I think in Europe, of course, we also have issues, but it is much more muted, and we see normal order patterns and decent supply chain performance. The caveat, of course, is anything that comes in or goes to Asia is delayed multiple X of what it used to be, both in time and, of course, also in cost. But that's pretty much on track. In the U.S., farming is doing reasonably well from a supply chain point of view. And I think what we're seeing is a normal stocking level's return. We do not see pipeline builds or anything like that. And then in the consumer-facing businesses, it's hand-to-mouth combat, to mix the metaphors, to get things to us, from us to customers. Customer factories have the exact same issues. There seem to be some regional differences. The Midwest is more affected than the South. The U.S. is really a difficult period, and it will take some time for all that to unwind, and I could not begin to give you inventory effects here. Clearly, we are having safety stocks, and sometimes we're waiting for one part to be able to make a customer assembly run. I think that Asia, it's mainly in region for region that's running well. Anything we ship to Asia, same issue with the supply lines and costs. And thankfully, our overall operation strategy has always been in region for region. So the U.S. malaise is contained to the U.S. for the most part.

Understood. Thank you. And then in terms of metals, aluminum and what you mentioned, can you just talk a little bit, not just about the pricing dynamic, but maybe on the availability or supply and how comfortable you are with just that side of the equation.

Yeah, there are really two factors to that. One is European energy cost is increasing rapidly. So if you want, for us, in terms of pricing pass-through, we have a rotation from passing through the polymer cost to now having to pass through energy cost. And then aluminum, of course, is by far the most energy-intensive metal that we use, and we see significant increases in aluminum. Availability is also an issue, but it pales in terms of words of the pricing. So the teams are very active in passing on that higher aluminum cost. Especially for prestige, there's really no alternative for aluminum. We also use it in pharma, as you know. So it's important that we pass it on. But the availability so far has been more or less okay.

Very helpful. Thank you, John.

Thank you, Angel. We'll be taking our final question from George Stafos of Bank of America Merrill Lynch. George, go ahead.

Thanks very much. I guess the first question I had related, I guess, to Gabe's question, can you talk at all about how the incremental investment in injectables will affect what you're doing at Congress? And then on pharma, bigger picture I guess question slide 5 talk to some of your customers recent approvals and launches you know the generic versions of Naloxone hydrochloride and that's helpful is there a way to help us understand how that pipeline of new products in pharma compares versus average versus two years ago in terms of what's coming out now that you should get a benefit from and relatedly The pipeline that we can't see, the products that your customers have in the approval process that haven't been approved yet in pharma, is there a way to say, okay, that is 10% above average versus prior years 5% below? Any way to size what that opportunity looks like in the stuff that we can't see just yet? Thank you, guys, and good luck in the quarter.

Thanks, George. In general, we are... very satisfied and bullish about the pharma pipeline so let me let me say that we have a policy of not disclosing what's in the pipeline for for competitive reasons and confidentiality reasons in a until it's launched or if a customer chooses to disclose uh what they're working on and with who they're working in the development process then obviously we share that as well the pipeline is tracked from all the stages, the phase transfers, as it progresses across all of the different businesses. And that gives us the confidence, one, to reconfirm our long-term target that the capital market stays as we have done, as well as, you know, put money where our mouth is and, you know, our shareholders' money and invest like we do for the injectables division, but also active materials. And as I said, pharma in China and in India, just to mention those that we call out. In terms of your other question, yes, clearly Congress will be expanded significantly. Again, for competitive reasons, let me not get into what exactly, but it is part of the overall investment program, and hopefully when we have the next capital markets day, we can take some of you there as this facility is expanded significantly in Congress. I think that's about all I can say, George.

All right, understood, Stefan. Thank you. Have a good day and good luck in the quarter.

Thank you. I think that concludes the call. Thanks for joining us today, and we look forward to talk to you on the road, real and virtually.

This concludes today's call. Thank you all for joining. Have a great rest of your day. You may now disconnect from the call.