Q3 2022 Aptargroup Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to <unk> 2022 third 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 Ms. Mary Cathetus 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 Santander, President and CEO , and Bob Kuhn Executive Vice President and CFO .
Our press release and accompanying slide deck has been posted to our website, where we will also post a replay of this call as is our practice 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 and now.
I would like to turn the conference call over to Stephane.
Thank you Mary and good morning, everyone. We appreciate you joining us on our call today.
On slide three I am happy to report that seemingly worsening economic backdrop. After achieved core sales growth of 9% and delivered adjusted EPS of <unk> 95 per share, which is the midpoint of our previously guidance range.
The majority of the growth in the quarter was driven by our pharma segment.
Later on in our call about Q&A, our CFO will provide additional details on the quarter.
I would like to cover a few key items now.
Our adjusted earnings per share includes a previously announced onetime inflation payment made to certain European employees to decrease to approximately <unk> sure.
Our industry, leading pharma segment grew across all end markets with prescription and consumer health care and actually the materials being particularly strong.
We were pleased to announce that our investments in digital health are beginning to bear fruit.
As we recently entered into a contract with a major European pharmaceutical company.
This is another validation of our strategy and our capabilities in this exciting field.
Beauty <unk> home achieved strong growth in Europe , especially in prestige fragrance.
Fuel in part by restaurant travel retail.
In addition, pandemic related lockdowns in China affected parts of the business.
Core sales in food and beverage were flat due to difficult comparisons with the prior year period.
And were impacted by softening consumer demand in North America, which is causing certain customers to work through inventory levels.
Our pricing initiatives to recover increased costs resulted in a net positive inflation impact in the quarter.
However, we are still facing a variety of rising costs.
Even though resin prices decrease other costs are on the rise, including LNG, primarily in Europe , and labor and transportation around the world.
Currency headwinds continued to be significant, especially for our pharma segment.
While we remain focused on pricing initiatives with customers. We are also diligently scrutinizing and managing our costs.
Now turning to slide four I want to highlight an announcement made earlier this month by our newest division within pharma Apcar digital health.
This division entered into a contract with Keith The group and International Research focused biopharmaceutical and health care company to bring to market a disease management platform for asthma and COPD.
Our digital health platforms, combining mobile and web applications connected drug delivery systems.
Patient Onboarding.
Training and advanced analytic services.
To actively empower patients and create the positive treatment journey.
Bringing together health care software and device expertise is unique to <unk>.
Over several years, we have made a number of bolt on acquisitions to expand our pharmaceutical services and digital offerings, the largest of which was we'll lumped as a pioneer in digital therapeutics.
We acquired <unk> in the second quarter of 2021 for approximately $100 million.
This was a significant step in building our foundation in the SaaS growing digital health care space.
If we haven't learned anything from the pandemic. It is that advancement in healthcare are rapidly accelerating and things like remote patient engagement and patient monitoring.
Whether for clinical trials or real world treatments will be a big part of our future.
Turning to slide five in addition to our investment in digital health care solutions.
We have also increased our offerings in pharmaceutical services.
This is part of our long term strategy to build an even stronger position.
Our leading delivery devices.
Our recent acquisition of later Phase design group and the capabilities of ergonomic product design and human factors engineering.
Meaning how people think how they feel behaves and respond when using devices and systems.
More than half of all drugs being developed today are developed by small to midsize biotech labs or universities. What we affectionately term is two people in the molecule. These early developers have limited experience with the long regulatory approval process and the growth they will face.
And bringing a new drug to market. It can take anywhere from five years to 12 years or more for a new drug to come to market. If the journey successful.
Our portfolio of services allows us to partner with healthcare companies earlier in the drug development process.
Strategic capabilities further enable us also to deliver on our pharma segment's growth and margin targets.
Our state of compound annual growth rate target for pharma is 6% to 10% and while the pandemic interrupted the consistency of our trajectory.
It is important to note that the segment achieved an annual compounded rate of 8% over the previous decade.
Turning to slide six we create value by leveraging technology platforms across our three business segments.
On the slide you can see some examples of recent launches on the market, including innovative and sustainable solutions.
And our food and beverage segment, our straight technology is being used to dispense oranges and salad dressings on.
Our nasal spray system with child resistant features was chosen for children's Afrin no grip the congestion.
And the beauty market.
Same spray technology for fragrances featured on perfume brands, including Eastern alone Galena and Calvin Klein in Europe .
Along with the both the carrier group in Latin America.
Let me also briefly highlight a sustainable solution that has been very successful in the quarter.
Ward, winning fully recyclable mono materials pump called future.
It is featured on several products ranging from Hans So two lotions to cleansers.
These are only a few examples of some of the new applications brought to market during the quarter.
On slide seven I want to briefly comment on the strength of our balance sheet and our capital allocation.
As you know after has historically maintained a strong and relatively conservative balance sheet.
This approach has certainly served our customers and shareholders well during challenging economic times.
More recently, we have focused our investments in the business and M&A towards our high margin fast growing pharma segment.
Dividends and share repurchases are also part of our balanced capital allocation strategy and for the first nine months of 2022, we returned approximately $147 million to shareholders.
Before handing over to Bob I, just want to mention as previously announced we were very pleased to welcome metro or Colo.
Our board of directors in September .
As the CEO .
And medical Technology company.
He brings a breadth of experience in medical devices as well as the proven track record of driving product innovation profitability and continued improvement in procedures enterprises like Danaher and Dupont with.
With that I will now turn it over to Bob who will share detailed comments on our quarterly results Rob over to you.
Thank you Stefan and good morning, everyone.
Starting on slide eight I would like to summarize the quarter.
Our reported sales increased 1% and this included currency translation headwinds of approximately 8%.
Therefore core sales grew 9% primarily due to the strong volume growth in our pharma segment.
As shown on slide nine we reported adjusted earnings per share of <unk> 95.
As a 12% increase over prior year adjusted EPS, when we neutralized the currency headwinds we are facing.
The year over year improvement was driven by increased earnings in our pharma segment, despite the currency headwinds.
We achieved adjusted EBITDA of $154 million, which includes foreign currency headwinds of approximately $13 million and the previously announced onetime inflationary payments made to certain European employees that totaled approximately $5 million.
Our reported net income and EPS includes a tax charge of $7 2 million related to a legal entity reorganization.
Without the charge our reported tax rate would have been approximately 28%.
This tax charge has been excluded from adjusted EPS.
Slides 10, and 11 cover our year to date performance with core sales growth of 11% and adjusted earnings per share growth of 5%, including comparable exchange rates.
Year to date cash flow from operations was $306 million.
Free cash flow doubled from the prior year level to $97 million.
Turning to some of the details by segment for the quarter, our pharma segments core sales increased 20%.
Approximately 16% of the growth came from increased volumes.
The remainder of the increase was due to higher tooling sales and price adjustments.
Sales were up across all markets led by strong results in prescription and consumer health care and active materials.
Looking at sales in each pharma market prescription core sales increased 17% primarily due to the continued recovery in demand for allergic rhinitis and as with treatments with a continued steady demand for emergency medicine devices.
Consumer healthcare core sales increased 26% on strong demand for nasal decongestants, and saline winches as greater consumer mobility contributed to more common elements, including colds and influenza.
Consumers also turned to some of the same treatment to alleviate symptoms of COVID-19.
Our elastomer solutions for the Injectables market grew core sales, 5%, primarily due to higher volumes for biologics and vaccines.
Turning to our active materials science solutions core sales grew 33% with tooling accounting for 21% of the 33% growth.
The remaining double digit core product sales growth came from an increase in demand across a variety of applications, including solutions for probiotics and oral solid dose medications.
Pharmacy, adjusted EBITDA margin was 31%, which included the onetime inflationary wage payment to certain employees in Europe of approximately $2 $2 million.
Margins in the quarter were also affected by inflationary costs that are being pass through on a one for one basis as well as higher tooling sales, which traditionally carry lower margins.
Our beauty and home segments core sales increased 4%.
Similarly on price adjustments related to inflation cost recovery, however, overall volumes decreased by 3%.
Europe strong growth, especially in fragrance was offset by declines in other regions, especially in North America due to lingering supply chain issues and softening demand.
Sales were also affected by periodic lockdowns in China, which remain ongoing.
Looking at each beauty and home market.
Beauty market core sales increased 6%, primarily due to increased sales in the prestige fragrance and color cosmetic categories.
Personal care core sales increased 5%, primarily due to increased sales in the hair care and Sun care dispensing systems.
Homecare core sales decreased 6% due to lower sales in the household cleaner and laundry care categories.
This segment's adjusted EBITDA margin for the quarter was 12% and this included the onetime inflationary wage payment to certain employees in Europe of approximately $1 9 million.
The food and beverage segment was up against the difficult comparison to a strong prior year and core sales were more or less in line with the prior year.
Product volume declines were partially offset by higher custom tooling sales pricing.
Pricing had an immaterial impact as inflationary cost pass throughs were offset by the passing through of lower resin costs.
Looking at each market food core sales increased 7%.
Of which truly increased 9%.
The decline in dispensing closures was partially offset by strong growth in our foodservice market, which includes food trays.
Beverage core sales decreased 16%.
Of which lower tooling sales accounted for 14% of the decrease.
Excluding the impact of tooling sales product sales decreased slightly.
The segment's adjusted EBITDA margin was 14%.
Lower food closure volumes and higher tooling sales in the quarter had a negative impact on margins.
Moving to slide 12, which summarizes our outlook for the fourth quarter, we expect currency headwinds to persist.
Reflecting the continued strengthening of the U S dollar.
With the majority of our sales coming from outside of the U S. The stronger U S dollar negatively impacts the translation of our foreign results.
Euro rate for the prior year Q4 was $1 14, and our guidance for the coming fourth quarter is assuming the 98 euro rate.
As a reminder, we have said that roughly for every one penny move in the euro rate. This equates to approximately <unk> <unk> per share for the full year.
So for the coming quarter, we could be looking at approximately an 8% currency drag on earnings compared to the prior year.
Considering the currency headwinds and the uncertainties, we are facing as outlined by the fund we expect our fourth quarter adjusted earnings per share to be in the range of 73 to 83 per share.
Which includes approximately <unk> <unk> per share impact due to the startup and ERP implementation costs related to our Injectables Division.
Additionally, the strong fourth quarter 2021 sales of our active film for at home COVID-19 antigen test will not repeat this guidance assumes an estimated tax rate range of 28% to 30%.
For the year 2022, we currently estimate depreciation and amortization to be between $230 million to $240 million.
Capital expenditures net of any government grants to be between 303 hundred $20 million.
Even though our practices to provide earnings per share guidance for the upcoming quarter I would like to mentioned that should the U S dollar and euro remain at parity for the first half of 2023, we would expect a headwind of approximately <unk> 10.
In closing our balance sheet is in excellent condition and our current leverage ratio was one eight.
At this time Stefan will provide a few closing comments before we move to Q&A.
Thanks, Bob in closing on Slide 12, we now turn to our outlook for the fourth quarter, which has even more moving parts than normal.
Our prescription drug consumer healthcare and Injectables business I expect it to continue to grow at more normalized levels.
As Bob mentioned, our active materials businesses up against the difficult comparison to the prior year. When we had significant orders for our active film used with at home COVID-19 antigen tests.
As you will recall this business was recorded in the fourth quarter of 2021 and to an even greater extent in the first quarter of 2022. So we will have a difficult comparison in both of these quarters.
Additionally, the startup.
And ERP implementation costs for our injectable division that will impact EPS in the fourth quarter will also have some effect on our quarter one earnings.
We are facing a number of uncertainties as the macroeconomic backdrop continues to deteriorate and the euro and other currencies remained weak against the dollar.
And the North American consumer packaged good markets in particular are decelerating the breathtaking rate.
For beauty <unk> home it is mixed with a certain sector seeing stronger demand such as prestige fragrance, while others such as personal care.
Starting to see a softening in demand regionally.
Strength in the fourth quarter is expected to come from Europe , and Latin America with weakness in North America and Asia continuing.
Our food and beverage segment will be up against difficult comparisons versus Q4 2021. Additionally.
Additionally, certain customers had a buildup of inventory after a long period of supply chain issues, and we see a softening in demand.
Due to the slowing north American demand in the food beverage and personal care markets. We have taken actions by periodically shutting down certain U S facilities.
That have lower capacity utilization.
This is quite a change from just the previous quarter.
Rising cost of LNG has been covered extensively in earnings, especially in Europe for <unk> utilities as a percentage of our cost of goods sold is typically been in the mid single digits, while they represent a smaller portion of our overall costs.
Energy prices in Europe .
Largest manufacturing footprint.
Increased dramatically we.
We have every intention of continuing to push for price increases and has instituted energy surcharges, including for manufacturing processes that have higher energy costs like metal and organization.
As an essential business. We are confident we are able to source energy and has obtained volume guarantees with the remainder of 2022 and for all of 2023.
To weather the potential storm ahead, we remained focused on selective and disciplined capital allocation as well as maintaining the strength of our balance sheet.
Alcohol that is well developed at <unk>.
And now I will open the call up to your questions.
Thank you Mr. Tonda, and we will now begin the Q&A session.
If you'd like to ask a question. Please press star one on your telephone keypad, if you'd like to remove that question. You May Press Star two as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question 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 <unk>.
<unk> allows.
Our first question today comes from the line of George Staphos with Bank of America. Mr. Staphos. Your line is now open.
Hi, everyone.
Thanks for the details.
I wanted to peer back into the some of the headwinds you noted stephane to start the year.
A bit more granularity you can provide I know it's difficult at this juncture to project when things Mike.
Change or reaccelerate, but how does this how does the current environment compare to past recessions that you've seen.
Question number one.
Question number two we recognize that you are now taking action to.
Shut down operations.
Color on a rolling basis, where you don't have the utilization.
Is it not time, perhaps to take even more.
Aggressive action within beauty and home in particular and food and beverage Ware.
The operations performance frankly, havent been I don't think where you would have expected margin wise for for a number of years.
And how do you use this bad news in terms of the environment to catalyze more aggressive action, which is what you should be doing in this kind of period. Thank you guys.
Yes.
Good morning, George.
I'm not sure that that gave me give you a comparable environment.
In my 30 years, I've never seen a deceleration and whiplash from one quarter to the next like this one.
So it just depends.
Back up a little bit.
I think at the beginning of the summer we were still trying to find labor.
Under staffed 10, 15 and 20%.
We finally catch up with our staffing.
Get our lead times down and then.
Retailers and customers.
Kind of slammed the brakes I think.
While I don't have.
Perfect analytics.
The whole supply chain, especially in the U S.
<unk> is being.
Plugged up people have taken safety, so okay ordering what they could get in.
Are waking up to the headlines.
Impending recession and.
Try to get the inventories down before the year end.
Fully dressed for the party, having labor here so clearly.
For Ya.
On the coverage in North America.
I've certainly seen.
No.
Even within that there's some regional differences in particular I know.
Yes.
Beauty plant.
<unk>.
Some products, we don't have enough supply.
Hey, Andy throughout the European authorities.
No.
We can get at night.
Right Okay.
And clearly we've seen the softening of the food market of people.
Away from home eating more eating out and.
I mean inventory actions already by customers earlier.
So it will probably be the affecting the third quarter of softness so we would expect that to come out.
Sundar personal care is usually an early indicator that we're heading into.
Economic slowdown and that probably has a couple a couple of quarters, but Chris.
Crystal ball.
Certainly we didn't see the timing of refresh coming.
One of the reasons why we only guide for the quarter.
On your question about more aggressive action to clearly we are.
Turning over.
More things and more rocks and thinking and considering.
What you're talking about.
This is not the time or place to discuss it.
Alright, we'll turn it over a fair enough I will come back. Thank you.
Thank you Mr Staphos.
The next question is from the line of Kyle White with Deutsche Bank.
Your line is now open.
Hey, good morning, Thanks for taking the question looking forward to the <unk> guidance. I think you said there was a <unk> <unk> headwind related to startup costs and ERP implementation in pharma.
Two questions on this just how much startup costs have you incurred this year in pharma in total.
Please go away next year, and then what should we expect from the ERP implementation in terms of will it be a headwind going into the first half of 2023 as well.
Sure.
Reminder, we are deploying.
Deploying unprecedented capital.
To increase capacity in our injectable division to the tune of $180 million.
Good chunk of that goes into Europe .
It could be.
The U S and the capacity brought online in increments.
And then one three.
A tremendous brought online to be.
Operated product produced in shared with customers they.
They need to do the validation and then you get revenue, but 12 months to 18 months after that.
We started up the equipment because basically you have.
Drag on the results while you would have.
What's that.
Is it typical pharma.
So what we told you about.
A couple of million dollars a quarter.
That is a bit more than that.
Yes.
Certainly throughout this year and into next year.
It will be the case I think we will mechanically complete all of this.
Maybe next year and then again the revenue we will revenue lag on that.
18 months later.
The ERP is about price.
For quarter, four and quarter one and.
It's really.
It would be a belt and suspenders because.
This is <unk>.
Grades from one version to the next to really bring this business.
From a non S&P environment right.
Clearly needed to make sure we are ready for scale.
And the last point I want to make.
The capacity increase but even more important.
Dramatic mix enrichment, because most of the investment goes into the code a premium product.
Sales is much much higher prices.
On the product.
No. That's helpful. And then just on price cost can you just give us an update on where you were from a price cost standpoint, this quarter as a company and what is embedded for your <unk> guidance on that front.
Sure I can take that one so we slipped slightly positive and.
In the quarter.
A little bit more than what we did in Q2.
It's difficult to forecast because of the demand picture obviously.
It will all depend on where the volumes shake out, but we would expect a positive.
To accelerate a little bit into the fourth quarter now as far as margins are concerned it wasn't significant enough segment by segment.
Material in terms of margin expansion, but it is it is it.
It is flipping a little bit more positive.
But.
Yes, still point out that we're still catching up from.
The net $30 million that we were behind in 2021.
Got it thank you I'll turn it over.
Thank you Mr <unk>.
The next question comes from the line of Adam Josephson with Keybanc Adam Your line is now open.
Thanks, a lot good morning, everyone hope you're well Bob one for you and then one for Stefan Bob just back to the <unk> guidance. So to bridge from <unk> to <unk> 95 to the midpoint of <unk> 78, I know you talked about the <unk> of startup in ERP costs, some of which will well.
Occur thereafter, and then FX will be a little bit worse sequentially, maybe a couple of cents tax rate a little bit higher.
But that would get me from call. It 95.
Sure.
Perhaps high Eighty's. So I'm just trying to bridge the <unk> guidance to the <unk> guidance and think about if that for Q <unk>.
Earnings as a reasonable run rate to assume thereafter, or if there is any particular seasonality or any one time items in there.
Other than that five which is kind of one time, but not exactly as you mentioned earlier.
Sure.
Obviously, it's a lot yes, no I understand what you're saying.
It has a lot of puts and takes right. So I guess the first thing.
If you want to call it a one off going to Q3 Q4 as well.
We did have higher tooling sales in total in Q3, and what we're anticipating in Q4, so that add another couple of pennies on that but after that it's really a regional demand picture story Stephane alluded too so in both the.
Eating at home and food and beverage for North America, we're seeing a worsening situation or at least as we see it for Q4 from a demand perspective so.
It's a question of under absorbed overhead and.
In the region.
We're also seeing a slightly deteriorating situation on our beverage business in Latin America in Q4 again, as we mentioned we're up against a little bit more difficult comps that you are seeing in some cases on some of our sports business.
Paid down to <unk>.
Roth cap so.
For me.
We obviously sketch out what it is.
Region by region, but primarily it is that the North American volume story is it indicative of what to expect going forward, it's all going to really hinge on the recovery in the North American market.
I appreciate that and Relatedly and this I guess for you as defined there've been so many mixed signals so some of that.
With American CPG companies have been saying look we're raising prices by a lot and frankly the demand elasticity has if anything you've been more muted than what we feared in other words demand has held up pretty well from their perspective, given the magnitude of the price increases.
On the other hand things.
Things like box demand rapidly deteriorated beverage can demand rapidly deteriorated. So we're seeing all kinds of mixed signals in North America and in CPG land. So.
Can you just kind of highlight exactly what you're seeing and whether it's in line with what your customers have been reporting or it's different just any better perspective on exactly what's going on would be helpful.
Yes.
Hi.
Again I come back to what it is it's an area I agree with you.
At the end.
Consumer demand is falling off the cliff.
The best I can explain it as a supply chain whiplash.
We have been.
Hi, constrained at lead times, starting out with three quarters, and then starting to reduce them and of course, we were not alone.
Competitive.
So everybody can have the best day.
Could you kind of get what they need it and build up inventories and I think.
I don't know.
We're able to finally get the labor, we need it back to a normal level.
We are not alone so all over them.
I can get this done what I need.
Let's see what I have in my warehouse and what I expect consumer demand to be down the road.
<unk>.
Customers responded.
So what retailers are telling them slamming the brakes.
Regulatory down before the end of the year.
Because of the recession is coming.
So that's why I called Whiplashed with lesser I haven't seen before.
Stefan just.
Yeah.
Taking it all the amazing to me when you look.
In Europe beauty.
Segment is up double digits. So it is it is.
A very regionalized story.
Part of this amount of course, we know it is not ending up in Europe .
By American tourists in Paris.
The China chip here. So there is also for us.
Particular regional dislocation of where we have the factories without it being test and where the demand is.
Okay.
No I appreciate it just wondering is there anything do you think it might have to do less retailer not retailers, but the CPG company just wanting to get their inventories down by fiscal year end, such that Theyre working capital looks better or I'm, just trying to understand why they would have left their inventory to sell high to begin with.
<unk>.
Because they couldn't get what they wanted.
Probably double play I'm speculating now.
But.
That's one thing that I've seen repeated throughout the ages when.
When you are tight.
And you can satisfy customer demand.
Placed orders more orders.
Base orders earlier, so that they can go and use it.
Get it.
And to do that with everybody.
Joe.
They realize they can supply and relocating.
Per quarter or two while we work off of our safety stock.
That is not an unusual phenomenon.
When you combine that with all the recession talk.
And the fact that year end is coming I think you are.
Suspicion sure.
A lot of this at year end.
Management.
Yeah, no. Thank you Stefan.
Thank you Mr Josephson.
The next question is from the line of Ghansham Panjabi with Baird Ghansham. Your line is now open.
Thank you good morning, everybody.
I guess Stefan on your comments on pharma and sort of normalization in volume they know theres a lot going on between the various sub segments in there, but what do you think is a reasonable sort of normalized rate for 2000 22023 at this point and maybe you could just kind of tied into the new product pipeline in this segment.
Clearly you have longer lead times in many of these products.
Sure.
We feel very confident about it because of that.
Top line growth.
The order book continues to be very strong.
Canadian prescription and consumer health care.
People expect that heavy flu season.
Omnicom was still around so.
Strong.
Order book to.
New business injectable, we have very good pipeline growth.
As the premium the premium capacity.
Validated.
As being so.
Right.
Product line with biologics.
Depending on the huge spike in vaccines.
Normal growth.
And the activity of the business is doing very well of course, we won't have the enormous pop from Vietnam Covid testing that we have.
Quarter, one last year.
Alright, it's growing this year.
So that will create a bit.
Great.
Comparison.
One area, where we continue to have limited visibility.
With your treatment, especially narcan.
Dominion.
Very strong generic players come onto the market, who we supply of course as well.
Everybody is using that as a currency.
There.
So.
At the same time.
Other than archaean outcome.
Sure.
The nearing of past exploration date, so it's unclear how people will handle that.
When the 345 years old or redo their stuff so.
First of all on where.
We said before it's a lumpy business with.
Nuclear distribution growth, it's proving very strongly.
Yes.
Got it and then for my second question, maybe for Bob on <unk>.
2023 guidance.
Stand that you only guide one quarter out.
A lot of your peers have talked about below the line sort of headwinds interest expense and also FX can you give us a sense as to what FX would be as a headwind.
If rates hold at this point.
Annual EPS basis, 23 versus <unk> 22, and whatever else you can share in terms of interest expense et cetera.
Sure.
So again these are obviously based on assumption of parity right. So we model out the first quarter you talked so as I mentioned in my prepared remarks.
Eight Q4, then we get to Q1, we're looking at roughly 6% with respect decreasing a little bit as we get into Q2, roughly three three and a half cent.
And then that in Q3 and Q4, we're right at or close to parity anyway. So.
We wouldn't expect anything there.
On the interest expense side.
We're looking at Q4 to Q4, we're actually going to have a 4%.
Headwind and higher interest expense now for US I think it's important to note that that's coming from the execution of our inaugural offering that we did earlier this year prior to the increase in rate. So if you remember.
We locked in at three 6%. So if you look at our total leverage we're at about one eight times, we're about 94% six 6% variable.
It's slightly higher than the average 3% interest rate so.
That's that's how the.
Interest affects us.
Very good thank you.
Thank you for your question.
Next question's from the line of Mark <unk> with BMO capital markets Mark You May proceed.
Thanks, Good morning, Stefan and good morning, Bob So the first question in.
I'm curious Stephane, if you can put any more color about this.
Drop off in demand that you've called breathtaking.
Want to preface by saying back in early <unk>, I remember sitting down with Bob and your predecessor, Steve Hagge, and Steve saying there are customers, we haven't heard from in like five months is it.
That magnitude right now or.
Is there any way to just help us put a little more color around the drop off in demand.
Yeah.
You were here.
Method.
Look.
Okay.
It's a very regional dislocation and it has a lot to do with Covid.
And the general way.
The U S are responding to COVID-19.
And do.
All situation where.
You remember we shut down the plant.
The quarter before Covid.
Sure.
Right.
More serious action.
If that demand.
Other plants and of course, we get tripped up by Covid in executing that.
That's exacerbated with over.
Our labor shortages.
So we just caught up with that so next to the general.
Huge supply chain disruptions disruption and labor disruption that youll recall we.
We had an exacerbated picture of that.
That led to.
Coming to do it.
Juncture, where we just put up with.
So they may have dropped off and leading to some of the coverage.
And that will be for.
Sure. So 2019, obviously was more of a financial crisis and the concern over liquidity and whereas this one is.
It's very well documented it's more pandemic related in that.
The whipsaw that deposit talking about nine.
A lot of our customers were concerned that due to the lack of liquidity some of their supply base with disappears. So obviously, the gravitation towards app tire and its strong financial balance sheet.
What led to those customers, saying, Hey, we were willing to know lockup on more longer term contracts. Because we know you have staying power. This is a little bit different I mean, I don't see that same effect, that's probably more based around supply.
Maintenance products than it is around.
Financial strength.
Okay and then just for my follow up Stefan I'm, just curious over in Europe .
Clearly you've not only got a war going on in the EAC, you've got these big increases in energy costs.
Are you seeing any signs that this is starting to really cut into consumer behavior over in Europe , because there have definitely been some hints of this over the last few days from some of the other packages that have reported.
Yes.
Look when we report Europe sales, we report what we make in Europe .
I mean that is sold in Europe .
Again.
We.
About 30% of our product in the aggregate and up in Asia.
A good part of European Beauty sales are now going back into travel retail either.
For Americans, who has been in Europe or.
Duty free travel retail.
Our European sales another reflection of consumer demand in Europe .
Number one.
Number two.
For a lot of different reasons.
Labor flexibility.
Government policy housing market.
Recession.
He has volatility in Europe as they are here most people right.
We are not affected by it.
Without the effects like U S consumer is.
They tend to be more muted.
So I'm actually quite proud of what the team has done.
In terms of the performance of our European business.
And on top of that pending up with additional efficiency and cost reduction measures.
<unk>.
To disappear.
You didn't have the kind of whiplash and supply chain.
Because of the different COVID-19 policies of the U S. It's just a very different situation.
Exactly.
We are facing labor increases as of January three.
Thought about it.
B the treatment.
The usual.
In negotiations right now.
And of course energy will go up.
It would be.
Every intention of passing that on.
Price increases scheduled in January 1st.
And some of our customers actually benefited from the weaker euro.
It's all a area so.
Yeah.
That demand.
Electricity to higher prices for them or it might be lower I think it's easier to pass on price increases, but certainly the entertainment imaging.
And English environment with our.
People go into consumer so.
But is it fair to them.
Okay. That's helpful. Thanks, Steve and good luck in the fourth quarter.
Thanks.
Thank you Mark.
The next question is from the line of Ann How Castile, It's Morgan Stanley on how your line is now open.
Hi, Thanks for taking my question.
I just wanted to dive a little bit deeper into the apartment or expectations that we've been talking about it a lot of the headwinds, but I was hoping you could talk to us or whether that what your expectations are for the fourth quarter, particularly.
Shannon consumer health, obviously, both Terry robustness in the third quarter as we think about the fourth quarter what are your core sales growth expectations.
So could you kind of break breakout how much of that you think is maybe some restocking customer said maybe destock.
Much more now with.
And that being a lot stronger how much of that is getting back to normal course is just underlying demand.
Yes.
I mentioned.
Strong order book across.
Our consumer healthcare.
We don't really hear from customer or at sea.
Inventory buildup certainly we ended.
Last year with very low.
Inventories I think we are now at.
Normal normal inventories.
Isolated case here or there.
Customer.
Inventory, but not.
We don't see inventory building those two areas that will make the action or not the exception with caveat that to make the.
<unk> story for us very hard.
To gauge.
The quarter to quarter order pattern.
Because of the non traditional.
Supply chain and distribution channels here.
Good.
Great.
Order intake for Injectables.
It will be needed.
On the bottom line with the long term growth that we talked about.
Active material business also performing well, yes, with the growth that will have a tough comparison.
Given the at home coffee last year.
When you add it all up we're still comfortable with the 10%.
Even for a quarter with so many puts and takes.
Got it that's helpful and then particularly in the beauty <unk> home.
As you think about some of that can you kind of outlined on Europe rates, maybe holding off again.
Acknowledging that it is difficult to kind of parse out what the consumer.
Or what consumers actually kind of representative of that but as you think about the fourth quarter. What is kind of baked into your assumptions are you assuming there is still some.
Just kind of persistent perhaps prestige demand continuing or do you have more kind of conservative assumptions that this what kind of drop off in the fourth quarter.
Yes.
I've been at <unk>.
<unk>.
In October .
They are our largest accounts.
This week, and we keep probing that and on the fragrance side, they want more and more and more so I don't see.
That softening certainly not in the quarter.
But.
What we said at the top of the call.
With less than the U S.
Even in the U S. The difference is some of the beauty stuff.
Prestige beauty is.
Cannot supply enough with the other stuff.
Yes.
We need to furlough.
I think the one thing I can say with certainty.
You go through any airport, whether in Europe or in the U S. It's crazy so clearly travel retail.
Factors of engine, but only half the picture because clearly the Chinese consumer is not.
Traveling and what has been covered there with travel retail the Hainan Island.
Those will be muted because.
Those are booked out for.
Couple of weeks with daily Western travel retail is back or anything so.
I appreciate it.
Thank you Mr. Castile.
The next question is from the line of Gabe <unk> with Wells Fargo.
Mr. <unk> your line is open.
Stefan Barb Mary good morning.
<unk>.
Maybe I don't I don't want to read too much into this but you mentioned the tax charge as it relates to the legal entity reorganization.
<unk>.
I don't I don't want to misinterpret this as being sort of a corporate modernization, but just curious if this was something that's been on.
The docket for a while in terms of you guys looking at in evaluating and wanting to do.
Inhibiting you from doing something strategically.
Maybe here in the U S or elsewhere, maybe in Europe .
From executing serious if any color on that.
Sure Dave I can take that one no I mean, it's part of.
Ongoing efforts always to simplify your legal structure legal organization and obviously as a tax law change in various jurisdictions and we're always looking for the most efficient legal structure, particularly when youre looking at repatriating dividends from outside the U S. So, yes, I wouldn't look too.
Far into it unfortunately, sometimes when when you're executing on some of the entity.
Legal entity restructuring they do trigger taxes.
Because the ownership changed of that of that.
That entity, but I wouldn't look any further into that it's more of a long term.
And to look at our at our overall efficient.
Legal structure.
Thanks, Bob and then you called out on our press release that.
That growth in Europe again.
I think stephane as well in terms of.
Fragrance customers.
And leading home doing actually pretty well on the demand side.
And I think last quarter, Bob you mentioned Europe profitability actually being kind of at that 15% threshold that you're looking for and being home. It's really the U S. That's been lagging.
I guess confirm that if you will and then it sounds like labor issues have been resolved.
So maybe outside of underutilized capacity.
Our lower demand is there anything that you see infrastructure that would prohibit you from getting the 15%.
<unk> target them and building homes or is it only hurts upon say more work to do.
And just not not the time to talk about it.
Yes, So first I think your summary is great.
I.
Can't confirm that.
And I would put it this way.
Ralph blood sweat and tears too.
Reservations to get European plants, operating humming again, the commercial front and working.
I'm delighted that is networking.
And even though it's been awhile interrupted by Covid, there was kind of the rough cut.
There is some further fine tuning to do.
It needs to be done carefully gingerly.
Keeping in mind that European.
Industrial relations are different than in the U S where you can just go in and do stuff.
Right.
Not done in defense with I'm very proud of what the team has accomplished.
Coming up with new ideas.
It's a pity that.
Over in Europe , with the workshops with this week.
U S was pulling in.
Doug.
It is in the workshop.
Okay last one if I could squeeze it in sorry, guys just yet a large.
Injectable producer.
Port yesterday, and talked a little bit for lack of a better term a hangover from the vaccine.
Given I guess that you guys didn't necessarily participate as largely.
Do you envision something like that happening for you or just as it sits today.
The best visibility on the inventory front.
Anticipate something like that happening for you on.
On the injectable side.
Thank you.
Yes.
If we could talk about just kidding.
Okay.
You bet.
We had some benefit from Covid.
Business, but it was mainly.
People that religion about flu shots.
And.
We get some supply position.
Vaccines here and there, but it was not.
And that is for some other people.
The biggest benefit of Covid for injectable business, we basically were validated.
Technique technologically.
Equivalent player.
And get adopted with new project in the biologics and vaccines space.
So that they can send out some time ago and many others like that.
But we havent announced that in the note.
So again, we feel strong about our order pipeline and project pipeline to make this investment in coated product, but I would not anticipate.
Cope with hangover.
Thank you guys. Good luck.
Yeah.
Thank you Mr. Haley thank you.
We have a follow up from Mr. Staphos with bank of America.
Your line is now open Sir.
Thanks, very much hi, guys can you hear me, okay. So Stefan I wanted to come back to.
Food and beverage in particular, and you mentioned that understandably youre customers are now trying to destock quickly after that ordered a fair amount.
A year ago.
Volumes are very very strong and despite sort of questions about G is that a sustainable growth rate or not the view that your customers are sharing in the company. After was sharing was that.
We think its a return to more consumption at home. We think this is a.
Reasonably sustainable.
Obviously, it wasn't and we're going through a destocking period as you sit back and look at the last 18 months.
What changes do you have to make perhaps in terms of how your <unk>.
You serve your customers food and beverage, maybe even beauty and home in terms of how much you allow them to order ahead.
I've covered <unk> gone back to late 19, nineties, I can't remember a period where.
Food and beverage and beauty and home have have.
Sure resisted any kind of improvement and I recognize there are macro challenges, but it seems like.
Maybe on that front on what you are providing your customers you could be tightening up there. So what are you doing on the sales side, there to improve and get better data and analytics that youre not in a position where you're sort of.
Going through a period right now and then Relatedly.
The rebuttal could be well George we're in a competitive market if we didn't offer.
The volume to our customers or our competitor would so can you talk to the competitive dynamic that youre seeing in food and beverage and also within beauty and home and how you are taking steps to improve your mode over the next number of years, thanks, guys and good luck in the quarter.
Yes.
Okay.
<unk>.
<unk> good question.
So a couple of things one is I gave you. Some examples of what we're doing with UDR home, especially when we were.
Sure.
Supply is.
Streamlining FTE being hey, we may.
<unk> 'twenty shaded black for your company.
We have three.
Because we can't keep making penetrate with black.
It is.
A strong effort.
And.
Sometimes they want to go else because they want to and other shape.
There'll be it.
That is certainly going on so let's say.
Between product line rationalization.
The other thing that I think it's maybe in the long run a much more important is sustainability.
So having a product as a mono materials that are recyclable, where the cabinet.
To the volatile.
The.
No no material lotion pump that I mentioned in my.
Opening remarks.
Highly desirable so.
Streamlining yes.
Nation in innovation sustainability for me those are the.
<unk>.
And I guess to fund.
Beef sales force and with the volume you allow your customers to order. So if they are not over ordering in that you have better sort of analytics and visibility into your business.
That's where I was going with the question in particular.
Yes.
When you're.
Uhm supply.
Supply constraint.
Automatically allocating customers.
Certainly we have prioritized.
Global key accounts with Rockdale strategic relationship over smaller accounts.
Well there on the allocation and shortchange everybody.
To some extent.
Mhm.
I'm not sure it can elaborate more than that George.
Okay George.
I think I know, where youre going with that.
The reality is.
A lot of times the actual consumer data comes out several months afterwards, right. So I think we're doing a better job from a market intelligence perspective, but there is still a lag to that so it would be virtually impossible for customer came to us and said hey, we need.
X million units from you and you say why we don't think you do.
We're only going to sell you.
Right.
We're not going to turn away that volume right. Even if we think they don't need it like we have no idea.
Their supply chain and what they have in their warehouses or how they are perceiving the broader distribution outlet. So.
I appreciate the frustration around what are we doing to manage that but the reality is if a customer wants.
Certain amount on an order we're going to use in that order if we can supply.
Yes.
I understand Bob.
Ultimately, though.
The business relative to your other businesses, but I'll leave it there.
We wish you a good performance for the fourth quarter and we'll see you in a few months thanks guys.
Thank you Mr Staphos.
Our last question today comes from the line of Adam Josephson with Keybanc Mr. Joseph.
Thanks, very much for taking my follow ups, just one kind of follow up to George's question, which is when you look at the long term margin targets for the segments MPD enormous 15% to 17 I think the five year the trailing five year average will have been.
12th food and beverage somewhat similar story do you think you have the right.
Foot print if you will for the demand levels and everything else that you're experiencing do you think those long term targets are still actually achievable in.
How is that informing how much you're investing in these businesses given that again for years, you've been you've had real difficulty achieving those long term targets.
Yes, so look at fully appreciate the question.
It's something we are very busy with.
And I will not go into all the.
Repeating why we are where we are clearly we had a pandemic.
All of that.
But rene.
<unk> committed to that.
We have a series of.
Measures in mind to get us there.
And.
Clearly.
The capital allocation has dramatically shifted away from these businesses if you like towards the pharma business and that's both in Capex and M&A dollars.
To make sure that.
Return money to shareholders.
Yes, certainly nothing we're done here.
Our our stretch.
And we remain committed to those targets.
And maybe one other point Adam on capital.
We recognize that it is a changing landscape right.
So we're leaning in heavily into more automation and I would I would call it more flexible manufacturing right.
Mirrors past.
Geared towards very large runs right. So we are investing more heavily into more flexible work styles and things like that that will enable us to better adapt to the volatile demand market that we've seen so.
Think we're making the investments.
The right places and things that ultimately are are more conducive to the environment that we're operating in.
Yes, no I appreciate it and just one last one Bob or is it just when we think about kind of a normalized sales or demand level. It's so hard to know what it is because if your customers were in effect over ordering.
In previous quarters.
And now they're making up for it by under ordering it's hard to know what's normal.
As with previous quarter earnings levels normal that's fourth quarter normal.
Any kind of context, you could give me in terms of.
What what normal even is in terms of extrapolating from your fourth quarter guidance for the earnings you had in previous quarters in terms of what represents kind of a sustainable demand level. If you will.
I don't think we have better insight for you than our long term target on the top.
Line those are of course more on a volume basis, so inflationary price increases.
Sure.
If you want on top of that.
Beyond that we've looked at.
Transpire through the last three years.
I'm not smart enough.
I appreciate it stephane thank you.
Okay.
Alright, Alright, I think that we can conclude our call looking forward to have the discussion during the quarter.
Like Florida. Thank you.
That concludes <unk> 2022 third quarter conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
[noise].