AptarGroup, Inc.

Thank you for your patience. The Aptars 2022 first quarter conference call is going to be starting in around one minute's time. Thank you for standing by. Thank you. Ladies and gentlemen, thank you for standing by. Welcome to ACT-R's 2022 first quarter conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Introducing today's conference call is Mr. Matt Della Maria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Thank you. Hello, everyone. Thanks for being with us today. Joining me on today's call are Stephan Tanda, President and CEO, and Bob Kuhn, Executive Vice President and CFO. Our press release and accompanying slide deck have been posted to 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 the 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, and I hope you're doing well. Turning to slide three, as highlighted in our press release, we reported very good performance in the first quarter with core and reported sales growth in each of our segments, resulting in total reported sales for AFTAR increasing 9% and core sales increasing 13%. Before I cover our segment results, I would like to spend a few moments talking about our continued resiliency as a company during this uncertain economic environment where we face pandemic uncertainties, rising inflation, supply chain issues in China. To briefly comment on the latter two subjects, the invasion and ongoing war in Ukraine, and our hearts in solidarity go out to everyone who is unfairly caught up in the midst of the tragic events unfolding. Outbreaks and lockdowns in China, we are focused on the health and safety of our employees, and we are updating our COVID-19 protocols where needed. While only a few of our facilities have been closed thus far, we are closely monitoring the impact on consumer consumption levels and demand patterns. Neither the war in Ukraine nor China have had a significant direct impact on our first quarter results. However, we are seeing indirect effects, including soaring emissions in both regions. We will continue to monitor the evolving situation as necessary to serve patients, consumers, and customers to the best of our abilities.

share in the quarter that we're in the middle of our previously issued guidance, which Bob will briefly touch on.

Turning to our first segment, the chief double-digit core sales growth, with growth in each market, growth in the active material science market, along with increased demand in consumer health care and injectables, were strong contributors to our results. Demand also began to recover for our drug delivery devices for allergic rhinitis treatments in the prescription market. I'm also pleased to share that our elastomeric component capacity expansion in France is progressing nicely. Beauty and home segments increased demand from the beauty and personal care markets and price initiatives related to input cost recovery contributed to double-digit core sales growth. As I said earlier this month, We celebrated with customers and employees the out-of-shelf completion of our new facility in Orionna, France, where we are investing in a new state-of-the-art prestige custom beauty site, which will be operational by the spring of 2023. With this initiative, we are consolidating five legacy operations into a new and dynamic facility, which further asserts our leadership as the driving force behind customizable, luxury solutions with food and beverage, we also achieved double-digit core sales growth on top of a very strong prior year. The growth was driven by increased demand and price initiatives to recover rising raw material and other input costs. Turning to sustainability, we were pleased to announce progress in testing and transforming FuelCycle Technologies ultra-pure recycled polypropylene. Working with PureCycle, we have recently converted prototype material from the PureCycle feedstock evaluation unit into multiple colors of hinged closures, a technically demanding application, with performances similar to conventional resin for food, beverage, and cosmetic applications. This type of industry collaboration, which started with PureCycle, is essential to achieve a more circular economy where plastic is reused and recycled. Now 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. In consumer health care, our airless system for dermal, which is based on airless technology used on many of our beauty and home facial skin care products, is the dispensing solution for a facial acne cream by Galderma called Twinio in the U.S. In the eye care market in India, CIPLA has launched Brimocom, used to treat glaucoma with our ophthalmic squeeze dispenser. Turning to the prescription market, the FDA approved Viatris and Candivir's Braina, a generic version of Budesonide and Formotorol, an inhaled medication used for the maintenance treatment of asthma and chronic obstructive pulmonary disease using an optometrist dose valve. And our nasal spray pumps are the dispensing solutions for both the Ventus and Monarch Spring allergic rhinitis medications in Brazil. Finally, our elastomeric components are featured on several animal care antibiotics in Mexico and in animal care sedatives in the U.S. Turning to slide five in Beauty and Home. In the European prestige fragrance market, Aftos spray pumps are the dispensing solution for the launch of several new fragrances by brands such as Chloe, Guerlain, La Perla, Valentino, and more. In China, our pump is featured on a perfume called Scent Library. In addition, a well-known beauty retailer is featuring our airless pump made from post-consumer recycled resin on its line of facial skincare masks. Next, our unique combination between a dropper and a bottle for a precise and clean application with SimpliSqueeze Flow Control Valve The flow control technology often found in our food and beverage dispensing solutions, along with some pharma applications, is providing a soft and accurate drop dispensing for two new skincare products in Europe. And finally, our Fusion PKG Beauty business is providing a customized package for MAC Cosmetics Skincare Renewal Emulsion product. In food and beverage, APTA continues to see success with inward enclosures featuring our SimpliSqueeze flow control technology, which has recently launched in a new range of flavored honey spreads by Kraft Heinz in the U.S. In addition, with this flow control technology, we have entered into new businesses in China with a leading oyster sauce and ketchup brand. Also in the honey market, we partnered with Jacarra, Brazil, to convert their former glass with metal cap for its Mel de Cacao honey to an inverted closure with simply squeezed flow control valves. This is yet another example of how we partner with our customers to differentiate the product and provide added convenience to the end consumer. Finally, in the beverage market, our sports cap is the dispensing system for H2-only purified drinking water in Europe. With that, I will now turn it over to Bob, who will share some additional comments on our first quarter results. Bob.

Thank you, Stefan, and good morning, everyone. I would like to summarize the quarter starting on slide six. where you can see our reported and core sales results. When we neutralized currencies and acquisitions, we grew core sales solidly by 13%. About 8% was coming from increased demand, with the remainder coming from price initiatives across the majority of our markets, which I will detail in a minute. As shown on slide 7, we achieved adjusted earnings per share of 96 cents and adjusted EBITDA of $156 million. Adjusted earnings included currency translation headwinds, a net negative inflation impact of approximately $4 million, a reserve against the note receivable of approximately $1.5 million, and startup costs related to our last American component capacity expansion of approximately $2 million. We also continue to face ongoing supply chain disruptions primarily in the U.S. Prior years adjusted earnings per share reflect a lower tax rate, and if we would have equalized the tax and currency rates, our adjusted earnings per share would have increased 7%. If we isolate net price cost effect, including the margin compression impact from passing on the higher costs, our consolidated adjusted EBITDA margin of roughly 18.5% would have been approximately 150 basis points higher. Turning to some of the details by segment, our farmer segment's core sales increased 13%, with approximately 11% coming from strong demand and 2% coming from price adjustments related to inflation cost recovery. Pharma's adjusted EBITDA margin of 34% included customary startup costs related to our elastomeric component capacity expansion and the impact of the notes receivable reserve. Looking at sales in each pharma market, core sales to the prescription market increased 3%, primarily due to the recovery in demand for nasal devices for allergic rhinitis treatments. Core sales to the consumer healthcare market increased 13% on strong demand for nasal decongestant, nasal saline, and dermal devices. It was again a solid quarter for solutions for vaccines and other injectable medicines, with core sales increasing 7%, primarily due to strong demand for our elastomeric components used with biologics and vaccines. Our active material science solution market had a very strong quarter, with core sales increasing 58%, on strong demand across a variety of applications, led by our active film technology that enhances the integrity of at-home COVID-19 tests. In addition to the strong active film growth linked to COVID-19 diagnostic tests, the remainder of the business is also putting up strong core growth numbers, including vials for probiotics and diabetes-related diagnostics. Turning to our beauty and home segment, core sales increased 10% over the prior year first quarter, with 6% of the growth coming from price adjustments related to inflation cost recovery. The segments adjusted EBITDA margin was 11% in the quarter and slightly higher than the prior year and included the net negative inflation effect of approximately $5 million. Had we not had this net negative, including the margin compression effect of passing through higher costs, EBITDA margins would have been approximately 200 basis points higher. In addition, we also had approximately $2 million from the significant labor shortage and supply chain disruptions, primarily in the U.S. Looking at each beauty and home market, core sales to the beauty market increased 16% due to strong demand across all beauty applications, led by the fragrance market, especially the prestige market in Europe. Core sales to the personal care market increased 8% due to increased demand for hair care and sun care dispensing systems. Core sales to the home care market decreased 9%, primarily due to a reduction in demand for surface cleaning products. Turning to our food and beverage segment, core sales grew strongly in the quarter, increasing 18%. In addition to volume growth, pricing adjustments related to inflation cost recovery also contributed and accounted for approximately 12% of the segment's core sales growth in the quarter. This segment's adjusted EBITDA margin was 14% in the quarter. We continue to pass through rising costs, and therefore the margin compression effect on passing through higher costs on EBITDA was approximately 300 basis points. Looking at each market, core sales to the food market increased 18% due to price adjustments and continued steady demand for food service trays and dispensing closures for a variety of home food staples. Core sales through the beverage market increased 16% due to price adjustments and recovering demand for premium bottled water dispensing closures. Cash flow from operations totaled $92 million for the quarter, up $20 million from the prior year, primarily due to improvements in working capital. Moving now to slide eight, which summarizes our outlook for the second quarter, as Stefan covered, we are expecting some of the momentum we saw in Q1 to continue. Currency exchange rates have recently reflected a strengthening U.S. dollar, and we anticipate that we will face ongoing currency headwinds in the near term, as well as supply chain and inflationary pressures. The euro rate for the prior year's second quarter was 121, and our guidance for the coming second quarter is assuming a 107 euro rate. We have said that roughly for every one cent move in the euro rate, that equates to approximately two cents per share for the full year. So for the coming quarter, we could be looking at approximately a $0.05 to $0.06 currency drag on earnings compared to the prior year. Based on recently published economic and currency forecasts, we could also potentially be looking at similar headwinds in Q3 and Q4. We expect our second quarter adjusted earnings per share to be in the range of $0.92 to $1.02 per share using an estimated tax rate range of 27% to 29%. you may recall that the prior year's second quarter effective tax rate was 25%. The midpoint of our guidance range represents an 18% increase over the prior year's second quarter adjusted earnings per share when currency translation effects and tax rates are neutralized. Looking to our current estimate for depreciation and amortization, we expect $240 to $250 million for the current year. For capital expenditures net of any government grants, we expect between $300 and $330 million, which includes $109 million net for our three important growth projects that we discussed during our previous earnings call. In closing, we continue to have a strong balance sheet with a leverage ratio of 1.8, 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 140,000 shares of common stock in the first quarter for approximately $16 million, leaving $184 million authorized for common stock repurchases at the end of the first quarter. At this time, Stefan will provide a few closing comments before we move to Q&A. Thanks, Bob.

In closing on slide nine, looking ahead to the second quarter, We expect the broad-based momentum we experienced in the first quarter to continue with growth in each segment, including strong growth of our prescription drug device business, which will help compensate for lower demand for at-home COVID-19 tests. The war in Ukraine and the COVID-19 outbreak and lockdowns in China are expected to have some impact on our business in the respective regions, though the near-term visibility for both in these situations is expected to remain highly uncertain and fluid for the next several quarters. Nevertheless, the near-term overall business outlook is solid, with strong demand and a high focus on mitigating inflation, supply chain challenges, and prudent cost and margin management going forward. With that, I would like to open up the call for your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. In the interest of time and fairness to all participants, please limit yourself to two questions and then rejoin back in the queue if you have more questions as time allows. Our first question comes from George Stathuis of Bank of America. So please go ahead. Your line is open.

I'll use my first question on margin, and particularly in food and beverage, you had very strong core growth. Obviously, I think you said pricing and pass-through was 12%. of that, but that still suggests that you had 6% or so volume growth. Yet the incremental margin, so the profit change relative to the revenue change,

was negative.

Can you talk about what was driving that performance? I recognize there was pass-through effects and so on, and how you can turn food and beverage into much more predictable grower of earnings and margin guys on a going forward basis. And then I had a follow-on.

Sure. Hey, George, I'll take that one. Part of it, you know, the biggest reason, obviously, is the heavily But in addition to that, the growth in the quarter was primarily coming from some of our lower margin food service trade business as well as some compression.

And going forward. And just so looking forward, how do you toll grower earnings? Yeah, I do a follow-up on that. Look, the condiment business is a very important part of the business for us, and clearly North America is in a situation for quarter one.

Other than that, I think the season keeps chugging along, and you have to quote you, it's a predictable grow of earnings.

Okay. I'll come back to another point. And then just can you talk a little bit, and thanks for that, can you talk a little bit about some of the one-off items in the quarter? There was the note receivable on the venture. There was 1.1 million miscellaneous net on P&L. Can you talk about what was in those items? Thank you. I'll turn it over there.

Yeah, let me take the venturing and then Bob holds up on the other one. As you know, we have a mentoring program to complement our early-stage R&D, and this is related to a mentoring investment where the business did not work out quite as well as we hoped, and it's being sold, and we still have a note to this venture, and we just wrote that down to be prudent. Overall, our venturing portfolio is actually performing very well and has enabled significant pipeline growth. We talked later maybe about fuel cycle technologies and others, but this is one where we needed to write down that note.

Yeah, and, George, on the miscellaneous net, it was an expense of about $1.1 million, comparable really to last year at about $1 million. The majority of what goes through that line is going to be FX losses in the quarter, and so that's where that would show. And then you obviously can see the rest of it in the P&L, but most of that miscellaneous net is going to be FX.

Okay. Thank you, Bob. Thanks, Stefan. I'll turn it over.

Thank you. The next question comes from Gonjim Panjabi from Baird. So please go ahead when you're ready.

Great. Thank you. This is actually Matt Krieger sitting in for Gonjim. Good morning, everyone, and happy Friday. I was hoping that you could give us a real-time sense of how your business is being impacted by the following three factors. So one, the ongoing war in Ukraine and its impact on the operating environment in Europe. Two, the China COVID lockdowns. And then three, at least aside from those lockdowns, the dynamic of growing and improving consumer mobility across the other regions across the globe.

Sure. Let me kick off and Bob, please jump in. So the war in Ukraine, next to the tremendous tragedy it is, impacted three segments differently. Just as a reminder for everyone, before the war we had roughly a 60 million business in Russia. Roughly half of that produced locally, the other half imported. And we continue to operate the facility in Vladimir to support primarily essential customers and products in the pharma space, basic nutrition, especially infant nutrition and other essential products. And clearly, the Vandy's Pharma has not been impacted. Anecdotally, I can tell you that some customers in Ukraine have restarted. Essential food products have also not been impacted. Beauty at home has, of course, been a bit more impacted. Now, what we do not know, and it's almost impossible to know, what is the indirect impact? Products we sell in the West that would have gone to Russia. Clearly, you've seen many of our operating in-country .

Nobody, including ourselves, is .

Having said that, demand in Western Europe is rebounding so strongly that whatever we use on the back end in Russia, it's hard to decipher.

So that indirect impact is not as big as we once feared.

And that's what you also see, solid growth numbers, and we expect it to continue. The much bigger impact of all this is the inflation impact, especially when we analyze energy. We buy a lot of aluminum.

It has a heavy energy component. Transportation. Most of our customers do not have locked in some of their energy costs.

The war in Ukraine. The second point for China, clearly the lockdown has an impact on economic activity. So far, most of our facilities have been spared. We had some shutdowns for a couple of days here and there. Construction projects have been halted here and there, but everything's Resuming, having said that, with consumers being locked down and some of our customers not operating, clearly demand has been impacted in April, and the big uncertainty for us is what's going to happen in May and June for the balance of the quarter, and ultimately what will be the impact on overall demand. Just as a reminder, About 10%, 11% of our revenue is in Asia, roughly 6% of that is in China. And certainly, if we have a significant drop for a quarter, that will have an impact on us.

Now, what was the third one? The dynamic improvement around mobility. Yeah, so clearly in the U.S., in Europe, in Europe,

Things are booming, for the lack of a better word, and we see that in Asia, what we just discussed, but given the overall weighting of our business, this is probably the most time we're happy that China is larger for us. The impact of the recovery in Europe and between Europe and the U.S. and in the U.S. is a much bigger impact on us than the headwinds in China.

Great. That's super helpful and excellent detail. I promise just one part to my last question here. When do you think it's realistic to expect price cost across your business to turn positive for 2022? And do you need to implement incremental pricing actions to get there? Or are we simply waiting for already implemented pricing and contractual pricing to roll through the P&L?

Yeah, it's very hard to give you a date certain here. Of course, we continue to lay in new price increases depending on the business. We're on wave five or wave six. And they're not getting easier, of course, the cost keeps rolling in. And especially since we don't know when the inflationary increases, especially in Europe, will stop, it's very hard to give you a date certain when this will be behind us. I'm looking above whether you can add anything here.

Yeah, I mean, it is very difficult to project it. I would tell you that at the beginning of the year, we would not have anticipated the net 5 million negative that I talked about in my opening remarks. So, you know, the war in Ukraine has added a whole new element, as Stefan has mentioned, on the energy prices and then the indirect ripple effect that rolls through all the all the different substrates and everything that we buy so it's really difficult we we are you know as stefan said being very diligent in passing on now You know, it's cumulative, and those pricing increases are taking hold, but we're really at the mercy of where the costs go from here, right? While we saw some resin abatement in Q1 in North America and an increase in Europe, we thought that resin was kind of on its way down. only to see now that resin is starting to trend higher again in both North America and Europe. So it's a very fluid situation, as we said, and it's more dependent, I guess, on where the costs go from here.

That's very helpful. That's it for me. Thank you very much.

Thank you. The next question is from Mark. Rudy of BMO Capital Markets. Please go ahead. Your line is now open.

Good morning, Stefan.

Good morning, Bob, Matt. Hey, Mark. Mark, I wondered just to start off, if you could give us any sense just of sort of activity levels across the business in April.

Yeah, look, we really don't speak about individual months within the quarter. I gave you some sense that we see an impact in China from the lockdown. You will not be surprised. But in general, our guidance for the quarter is based, of course, what we see throughout the quarter. And And just to repeat, we see a very good momentum across the business. We see the prescription drug business accelerating. We had some tough counts in emergency treatments in RKN in quarter one, and those counts will be much easier in quarter two. So we see good growth in prescription rolling in. Consumer health care continues to do very well, injectables, as well as the computer. we see good momentum.

Okay. And then for my follow-on, I want to go to geopolitics and geopolitical risks.

Just given what's going on with Russia and the Ukraine, I'm just curious how this may have affected your thinking around the pace of growth in China. And we've had China, you know, acting fairly aggressively in the South China Sea and around Taiwan. So I'd like to get some sense of how you think about this and whether it's had any impact on your thinking.

Well, I think what we are guided for, first and foremost, is really by consumer and end-use and patient demand, and that's driven by demographics. And certainly the demographics are not changing. It's one of the most stable trends. despite the political rhetoric that you have and animosities you have, which we all can understand, business goes on. And at the local level, provincial level, governments are extremely supportive of investment and engagement. And I don't think we can turn your back on that. one of the biggest growth drivers for the coming decades. Now, we're not naive and ignorant of stakeholder nervousness around that, but I think when you look at the U.S.-China relationship, there is tremendous codependency and self-interest of everybody to keep the business moving, right?

Okay, thanks, Stefan. I'll turn it over.

Thank you, Mark. The next question comes from Carl White of Deutsche Bank. Your line is open, Carl.

Hey, good morning. Thanks for taking the question. On pharma, I just wanted to update on the stocking issue you had in prescription. It seems like it's largely behind you based on the commentary and the outlook. Is that what you're seeing as well? And then As you go forward, do you have good visibility for prescription getting back to the high-tool digits or even possibly double-digit core sales growth given the inflation that you're seeing?

Yeah, certainly the stocking seems to be behind us, and maybe there is some catch-up of demand as we get into quarters with it. easy comparison would not be surprised if we start touching the double digit for quarter or two. So overall, that outlook seems very solid. If you allow me, sorry, coming back to Mark's point on China, I wanted to make one additional point. Clearly, we are living in a very different world today than we were three, four years ago. We are all very cognizant that we were And all our business was growing up and when everything was starting to converge, globalization, convergence of trends and so on. And it's a much more complex world with many more non-tariff barriers, political issues. Having said that, it's a lot easier for a global company to navigate that that has always had a philosophy of local for local with strong local leadership. than it is for small and local competitors. So while we see, of course, the headwinds from some of the rhetoric, we also see fewer threats from local competitors kind of becoming too aggressive in some of our other markets. And we also see customer behavior changing where customers were Maybe buying from overseas for low-cost only, saying, hey, I'd rather buy now from you in the region. Can you see that capacity in the U.S. or Europe? Because I no longer want to buy only for low-cost reasons. And, you know, the supply chain is long. Response times are long. The carbon footprint of transportation is long-selling. The more complex world is not a negative for us. It's actually in the long run a positive for us. So sorry to add that on.

No, I appreciate that. I want to, sticking with the prescription, though, on the active materials, I think you said core sales were up 58%. But then in the press release, you talked about, you know, potentially slowing sales of at-home COVID tests as those begin to decline. How should we think about that going forward in terms of, Is there any way to quantify maybe the benefit that at-home COVID test had for you to core sales growth over the past year, and maybe what kind of headwind that could present here going forward if that demand reverses?

I would mainly look at this as a relay race in the at-home COVID test, so kind of having the baton in maybe quarter four and especially quarter one, and now prescription has picked up the baton, but it should smoothen out the overall for the polymer growth?

Yeah, I would just add, Kyle, it's been super lumpy, right? We started to see at-home COVID test kits demand in Q2 of last year. And as Stefan said, again, in Q4, not much in Q3. And then, you know, we see a big, we forecasted a very big growth in Q1. Right now, we're just not assuming that that's going to continue. We're going to wait and see where the demand is. Obviously, you know, there's a lot of discussions and philosophies around testing, and certainly the government doesn't want to get caught off guard with lack of test kits again. You know, that's partly the reason why we received that grant to make sure that we had enough capacity to should be needed, but I think it's just going to be very lumpy going forward. But as Stephon said, you know, the resurgence in the prescription side should make up for any decline, comparatively speaking, with the COVID test kits.

Got it. Thank you. I'll turn it over.

Thank you, Carl. We now have Adams. Josephson from KeyBank Capital Markets. So please go ahead when you're ready. Your line is open.

Thank you, operator. Good morning, everyone. Hope you're well. Just one, Stefan or Bob, one question on your second quarter guidance. So on the one hand, you're talking about broad-based momentum, seeing this momentum in April, so you're off to a good start in the quarter. On the other hand, your range is correct me if I'm wrong, two cents wider than it normally is. Normally there's an eight cent range. Now there's a 10 cent range and you're talking about a highly uncertain environment, not only for this quarter, but for subsequent quarter. So can you just help me square those two things as it relates to your confidence level in the second quarter and why the wider range if you have all this momentum in April and perhaps even into May?

Yeah, look, as Bob mentioned, if you just list foreign currency, the euro is dropping significantly. You have the inflationary impact of Ukraine. The It isn't so much demand that we worry about as, you know, a massive spike in energy. You saw the cutoff to Poland and Ukraine. You have a cutoff to Germany. Energy costs are through the roof. And it happens very fast, including then anything we buy. And then you have the China situation. We have no crystal ball for what's going to happen in May and June. Our head of China, our head of Asia, it took her an extra month to go back to China at the end of February when she was here in January. because there were no flights, and since then, she has been locked down. So it's just, and one, we have people sleeping in the plant. So if that continues for another two months, that will have an impact. So that's on the down. On the up is everything we talked about. We see prescription accelerating. We see good demand in Europe and in the U.S. We still have supply chain issues in the U.S., but they are abating. So that's why the broader range. But, yeah, overall, you read it right. We're confident. And, you know, at the midpoint, it's an 18% earnings growth, so nothing to sneeze at, with uncertainty both on the up and on the down.

I appreciate that. Savannah, and back to the China question, I know when you came in, China was a big focus area for you, and you thought there were tremendous growth opportunities there. And you fast-forward to today. I know you talked about reshoring to some extent. Your customers are looking to reshore to some extent. But you fast-forward to today with the increased tensions between China and the West and obviously the lockdowns, the fact that China's population growth last year, I believe, was the slowest in six decades. It's a rapidly aging population, so I wouldn't think there are the same growth opportunities there that there used to be. How, if at all, has your perspective on China and the growth opportunities there changed, Stefan, from the time you took over to now?

I'm trying to see whether I have additional things to say.

The aging, including the Chinese consumer basket, is over-indexed by 2x the American or European consumer basket. The duty is very important, continues to be very important, and that has not changed. Food, healthy food for aging population is extremely important. And the numbers are just significant. Now, there was always also a more defensive view, you know, occupy the space before you give too much food to competitors. Maybe that defensive view is a little less pronounced. It gives us a bit more time to develop our position. But anyone who bets against Asia and China from a growth perspective, I think it's not prudent. But you got advantages. And I think we're growing steadily. I'm very happy with the moves we've made. Yes, this quarter, next quarter, it may be crazy. We're not as big. But the following quarters, we will be back. And let's not forget that we've been in lockdown for 18 months. So, yeah, China chose a different strategy. And so they are now in lockdown.

Thanks so much, Stefan.

The next question is from Angel Castillo of Morgan Stanley. So your line is open, Angel.

Hi, good morning. This is actually Sebastian of Arizona for Angel. I just wanted to kind of get a little more color. Of course, sales to Beautymark increased 16%, and just kind of hear where your expectations were coming into the quarter and just how we should think about how that market works out through the balance of the year. Seems like the impact of European consumer and research to COVID in China would impact this segment in particular. Any color on kind of demand resilience would be super helpful there.

Yeah, overall demand has certainly been strong and we expect that to continue. It did surprise us a tad on the upside. March was very strong. And that allowed us to offset some of the headwinds we talked about, the 1.5 million reserve, the FX headwinds, and still be kind of in the middle of the range of the guidance we gave. So with the caveat of the China lockdown, I think that we see demand continuing.

Gotcha. Thank you. That's helpful. Just a quick one. I'll turn it over. Regarding the capacity expansion for customer components, do you expect to have any startup costs in the second quarter?

Yeah, the startup costs that we're experiencing in the Latin America division are expected to, you know, we're going to continue to incur those. Remember, this is a kind of multi-year ramp-up, so, you know, they'll be getting less over time, but we do expect to continue to incur some of those startup costs for the remainder of the year.

Thank you. Very helpful.

Thank you. We now have Justin Lin of William Blair. Please go ahead when you're ready, Justin.

Hi, good morning. Thanks for taking my question. I want to focus on the pharma segment here. Regarding your prescription business, is there any key product conversion opportunities coming up? You know, for example, converting injectable to nasal in the short term?

Yeah, thanks, Justin. A big part of the prescription growth is all about conversion, whether it's naloxone that's been converted from the injected to the nasal, whether it's some of the other emergency treatments, Spravato and so on, or the allergic rhinitis business going from oral to nasal delivery. So that is what's filling the pipeline. We cannot talk about any individual projects unless customers reveal that. Growth in the injectable business is really driven by biologics growth, by vaccine growth. And the migration from the large multi-dose vials to single-dose vials and pre-filled syringe, you can call that conversion if you like. But clearly, that injectable unit is all about the power of biotech coming into the pharma space in a major way.

being ready uh with uh strong products to fulfill that demand got it and i'm glad you mentioned that um in terms of you know injectables how how is the quarter in terms of um your order book you know understand that it's not a big part of your business currently but are you still seeing covid orders coming through and uh What about non-COVID biologics? Thank you.

Yeah, we continue to see good order, good order both developing, both in vaccine and biologics. And again, as I mentioned earlier, what we see is kind of people focusing on the next generation vaccine, kind of the annual vaccine, maybe a combination vaccine with the flu. And converting that or migrating it from the multi-dose vial to single-dose and pre-filled syringe, which will only help us and more favor our premium-coated products.

Okay, I understood. And just the last one for me, I promise. Do you have any early read on your client's view of the code and food season coming for this fall? You know, will this be a normal upcoming season for prescription and consumer health? Or I guess that's another way, you know, where do you think we are, you know, versus pre-pandemic normal?

Well, I'm not sure that I can give you a crystal ball, but clearly this is a normal, maybe strong cold and flu season. You hear and see colleagues around you getting, quote, normal colds and flus as opposed to COVID. You see it in our consumer healthcare business, which is pulling very strongly. And you would think that people who go through that experience better will not get that flu shot. So that's probably as much crickable gazing I can do.

And maybe I could add that, you know, with this kind variants of Omicron, it has much more cold and flu-like symptoms. And so you have people treating it like they would a normal cold and flu anyway. So you kind of have a convergence of the two as well. It's, you know, runny nose, sore throat, those types of things. So that's also, you know, kind of now melding together.

That's super helpful. Thank you very much.

Thank you, Justin. We now have Daniel Rizzo of Jefferies. So please go ahead when you're ready.

Hi. Thanks for squeezing me in, guys. I was just wondering if and when costs do roll over, how sticky are your prices? How much price concessions do you have to make in a inflationary environment?

Yeah, I mean, the thing that we'll hold off is what is contractual, which is mainly raw material on the polymer side. Everything else is negotiated prices, and we'll do our darnedest to hold on to those things. And by and large, you know, we have differentiated products, and we should be able to hold on to that.

And if things keep going higher, could we see some demand destruction or continuous, I guess, mixed degradation, just given consumers pushing back? I guess, is that something that's happened in the past where you've seen demand destruction amongst your products? I mean, obviously, I would think mostly outside of pharma. Yeah.

I would say historically in the past you have certain tradeoffs, right? So you may see smaller packaging, right, which is a positive for us, right, more units sold. You may see a shift to private label, less expensive products. We serve that market as well. So, you know, I would say that, you know, past historical tradeoffs, you know, pressures on the consumer have been met with different choices. And that's the beauty, I think, of where we play. We play across the whole spectrum, right? We serve prestige fragrance as well as nasties fragrance. We serve private label on personal care as well as branded. So, you know, those are the types of historical patterns that you've seen.

I mean, what I will say is COVID has certainly been a significant net negative for us, including missing a year of demand for cough and cold and allergic rhinitis. But a generic recession, if there is such a thing, we should fare fairly well and have done in the past. All right.

Thank you very much.

Thank you. We now have Gabe Hodge from Wells Fargo Security. So please go ahead, Gabe. Your line is open.

Good morning, Stephane and Bob. Hope you're well. Not to be an against believer or try to revisit the price-cost situation, Bob, I just put some numbers around it. I want to say you were $27 million behind on price cost from 2021. I think I heard $5, so now we're at $32. I appreciate the treadmill seems to be just getting turned up and it's going faster. But the expectation would be you get that back at some point. And maybe it's 2023 when kind of margin or price cost restoration happens. So first, can you confirm those numbers, too? Is there a risk that some of it gets lost in translation, so similar to what the prior question was, that you don't get it all back?

So, yeah, your numbers are pretty close. I had, you know, between $27 million and $28 million for last year and roughly $5 million for this year. So your numbers are pretty spot-on to what we're tracking, too. Is there a risk we don't catch up? It's really hard to say. The further on that you go, you know, everything kind of blends together. But, I mean, we have put out multiple price increases, right? So, you know, those have to kick in and cumulatively. Like I said, it's really more on what happens on the cost side. I'm convinced that the pricing that we've pushed through, should be sufficient for what we've seen in the past what i can't foresee or foreshadow is how much more it's going to keep increasing and how much more price increases we'll have to push through it so whether it takes to 23 or whether we'll catch up at 22 is is really difficult for us to to put a target out there nope understood um and then one

I guess quick housekeeping question. Corporate was a little bit elevated this quarter, and I want to say the 1.5 million references in the pharma segment, I'm assuming it was directly in there. So is there anything that we should be mindful of kind of forecasting going forward or that occurred this quarter?

Sure. So, yeah, Q1 is a little bit higher than what I would kind of project going forward. I would probably target more in that $15 to $16 million range for corporate. Like we've seen in the past, some of our equity awards, the accounting rules change when people hit certain substantive vesting thresholds, meaning that awards which normally might have been expense over the three-year LPI period get expensed immediately. So you've got a little bit more of an increase in Q1. You've also got, comparatively speaking, a higher accrual level for SPI due to the improvement in the business compared to the prior year, and you've got a little bit more on the professional fees. You know, run rate, you know, Q1 will be now historically a couple million higher than the other quarters. So I would target more in the 15 to 16 million range. Thank you very much.

Good luck, guys. Thanks, Gabe.

Thank you, Gabe. We now have a follow-up question from George Staffos of Bank of America. So please go ahead. Your line is open.

Thanks very much. Hi, guys. Thanks for taking the follow-on. It's late in the call, so I'll ask these in parallel. First, it seemed like, Stefan, from the new product discussion, that there's a bit more momentum, more interest in SimpliSqueeze. Was that a fair assessment, or is it just coincidental in terms of what you're seeing now in terms of the pipeline? And if it is a little bit more traction, you're seeing in simple squeeze, is there a margin implication across your business? Is that better or worse for you mix-wise, if you can talk to that? And then a lot of questions, obviously, on margins, on price costs, and so on. And you talked about the momentum that you're seeing across your businesses, and you ultimately think you'll be able to get the pricing that you need. Pharma aside, food and beverage, beauty and home have still been sort of lagging on margin. We'll assume a lot of that is just the price cost. Is there anything you have left to do that you don't already have contemplated in the transformation of beauty and home or any of your other projects? manufacturing plant that could improve your cost side. So forgetting direct margin, forgetting about resin, is there anything left that you need to do to improve your margin traction in beauty and home and food and beverage from an op standpoint? Thanks, guys, and good luck in the quarter.

Thanks, George. So, yes, on Simply Squeeze, I would say we certainly see it also moving to pharma, into beauty and home. And whenever the valve is in there, that is a positive for margin. So now a reminder, no single product launch moves the needle. But if I just pick one from last quarter, the new dishwasher, products by a major company that starts with a P and then a G is a game changer, you know, and that certainly bodes well. On beauty and home and food and beverage, from that order, we're never done. I think I mentioned in the last few, we have some additional ideas what we do there. We are not quite at 19 levels volume-wise. Clearly, volume is good. That's great, but we're not done on the margin side. Clearly, we have margin compression with the That's true, but that's not making us rest. So, yes, there are additional ideas, and the teams are busy with that. And when we can discuss it, we will. But we remain committed to get there.

Thank you very much.

Thank you. As we have no further questions, I'd like to hand it back to Stefan to close.

Thank you. Thanks for joining us, and we look forward to see you on the road, including virtual anything person.

Thank you. That will conclude today's conference call. Please have a lovely day. You may now disconnect your line.