AptarGroup - Q3 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you all for standing by. Welcome to Aptar's 2024 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 Mrs. Mary Skafidas, Senior Vice President, Investor Relations and Communications. Please go ahead.

Mary Skafidas (SVP of Investor Relations)

Good morning. Hello, everyone, and thanks for being with us today. Our speakers on the call today are Stephan Tanda, President and CEO, and Bob Kuhn, Executive Vice President and CFO. Also joining us on the call today is Vanessa Kanu, our CFO Designate. Our press release and accompanying slide deck have been posted on our website under the Investor Relations page. During this call, we will be discussing certain non-GAAP financial measures. These measures are reconciled to the most directly comparable GAAP financial measure, and the reconciliations are set forth in the press release. Please refer to the press release disseminated yesterday for reconciliations of non-GAAP measures to the most comparable GAAP measures discussed during the earnings call. As always, we will post a replay of this call on our website. I would now like to turn the conference call over to Stephan.

Stephan Tanda (CEO)

Thank you, Mary, and good morning, everyone. We appreciate you joining us on the call today. I will begin my remarks by highlighting our third quarter results. Later in the call, Bob Kuhn, our CFO, will provide additional details on key drivers for the quarter. Starting on slide three, for the third quarter, I am pleased to report that Aptar achieved core sales growth of 2% and delivered adjusted EPS of $1.49 per share, a 6% increase over the prior year's quarter. We grew adjusted EPS by 15% for the first nine months of the year and are well-positioned to grow adjusted EPS double digits for the full year. The positive results in the quarter were driven by strong operational improvements, ongoing demand for our pharma proprietary drug delivery systems, growing pharma royalty revenues, and increased demand for our food closures technologies.

This quarter, Aptar's adjusted EBITDA margin was at the top end of our long-term range at 23%. While our pharma segment has consistently performed within its long-term target range for both core sales and adjusted EBITDA margins, closures joins pharma this quarter with core sales of 4% and adjusted EBITDA margins of 17%. The Closures segment returned to its core sales long-term target range was driven by increased demand around the world, a focus on converting end markets to higher value dispensing closures, and the reinvigoration of innovation globally, altogether delivering improved top-line sales. The segment's increased margins were also driven by a consistent focus on reducing costs, including the recent plant closing in France, a steady improvement in plant utilization, up about 10% over the past 18 months, and an ongoing focus on efficiency.

Now, turning back to our pharma segment, we continue to see good demand for proprietary drug delivery systems, especially for allergy sprays, central nervous system and emergency medicines, with 12% core sales growth in the quarter, following the 15% core sales growth in the third quarter of 2023. Pharma delivered adjusted EBITDA margins at the high end of the long-term target range due to sales of higher-value products and increasing royalty revenues. Royalties are a newer, steadily growing revenue stream that may perhaps cause some lumpiness down the road. We believe the growing revenue stream from royalties is a testament to the value of the regulatory expertise and services that we offer to our customers, especially in the early stages of the drug development process. Some smaller clients, often startup ventures, choose to award Aptar royalties on final product sales in lieu of service fees.

In the quarter, we also had a number of exciting developments for our pharma business. As a reminder, one of the first nasally delivered emergency medicines approved by the FDA was Narcan or naloxone, using Aptar's Unidose device. About a year ago, this medicine was approved by the FDA for over-the-counter distribution to try to stem the tide of opioid deaths in the U.S. And recently, the Centers for Disease Control and Prevention released preliminary data showing that drug overdose deaths fell by almost 13% in the last 12 months. We are extremely encouraged by this significant drop in drug overdose deaths. Additionally, in August, the FDA and European Commission approved another important nasally delivered emergency medicine, neffy and EURneffy. Nasally delivered epinephrine is now available on the market.

We have been working on this project for about six years, and it capitalizes on our delivery system, proven FDA-required reliability of 99.999% for emergency medications. This reliability is backed by some thirty years of field data, which is essential when you are dealing with the dosing and dispensing of life-saving medications. As we have said, when a new medication is launched, it generally takes a few years to hit a steady sales trajectory. Over time, we believe we will see nasally delivered epinephrine become an exciting new application. Over the last few years, we have focused our capital allocation toward organic growth for our pharma business, but we are always exploring potential acquisitions that can strengthen our market position and deepen our moat.

So recently, we acquired all technology assets from the proprietary portfolio of SipNose, a company focused on intranasal delivery platforms for local, systemic, and central nervous system indications. All growth areas for Aptar pharma. This transaction offers additional intellectual property to fit a wide range of therapies and offers the opportunity to precisely target areas of the nasal cavity to enable enhanced systemic, local, or even direct nose-to-brain delivery. Acquiring the IP assets of SipNose expands our patent product portfolio and supports new product development to further supplement intranasal delivery applications and R&D innovation platforms. Two weeks ago, our board of directors visited our new state-of-the-art injectables facility in Granville, in Normandy, in France, just as some of our newly installed, highly automated manufacturing lines were being tested. We are bullish about the future of our injectables business.

The majority of new drugs that come on the market are in injectable format, and 50% of those are biologics. To meet this growing market need, our Normandy, France, and Congers, New York, facilities will be focused on higher value components and services, including PremiumFill and PremiumCoat, which are designed to optimize drug integrity and patient safety. Requirements for ready-to-use components, which are sterilized, are only increasing with the launch of Annex 1 in Europe in 2023. Looking ahead, we see a number of biologic projects filling our pipeline, including GLP-1 and blood factor drugs developed from blood derivatives. As an aside, we recently celebrated a capacity expansion at our Congers, New York, facility, a key step in our global expansion program, which supports growing proprietary drug delivery systems in our injectable business in North America.

The building extension enhances warehousing, clean room, and manufacturing capabilities and adds an additional nearly 30,000 sq ft of manufacturing footprint. I also want to touch on two exciting announcements from our Active Material Science division. Earlier this week, we announced that we were awarded a contract from the U.S. Federal Government to advance development of our ActivShield sterilization technology. This innovative solution sterilizes medical devices without the need for a power source, making it ideal for remote environments, military settings, and healthcare facilities with limited or no current sterilization capabilities. In September, we also announced that N-Sorb, a technology that mitigates nitrosamine impurities, has been accepted into the FDA's Emerging Technology Program, which helps promote the adoption of innovative approaches to pharmaceutical product design and manufacturing. Our ability to mitigate nitrosamine formation with Active Material Science introduces a critical quality control element designed to ensure patient safety.

We are eager to collaborate with the FDA to empower pharma brands with this innovative offering. Before I touch on recognitions and new innovations for quarter three, I want to provide an update as we recently closed on the previously announced JV with a pump manufacturer in China, acquiring a 40% stake. As a reminder, through this partnership, Aptar will have access to cost-effective pump manufacturing, faster go-to-market agility, and a more complete end-to-end local supply chain, all of which will further strengthen our competitiveness in the region and beyond. Additionally, we will have access to competitive mold and machine building capabilities that can be used globally and will provide us with high quality and lower cost capital investment alternatives. Finally, the partnership will also give us access to much-needed anodization capabilities used across our pharma and beauty segments. Now, turning to the recent recognitions received in the quarter.

Time named Aptar among the world's best companies of 2024. This great recognition reflects our steadfast commitment to employee satisfaction and transparency in environmental, social, and governance data reporting. We were also recently named to 3BL's ranking of the 100 Best Corporate Citizens. This ranking evaluates Russell 1000 companies based on 223 ESG factors across seven pillars. Now, switching to new launches and innovation, as shown on slide four. For our pharma segment, our nasal spray and bag-on-valve technology was featured on new nasal saline launches in the US, including one for the brand Sudafed. We have also entered into an exclusive collaboration agreement with Pulmotree to lead the development and promotion of their Kolibri Non-Propellant Liquid Inhaler platform. We are providing our robust support services and will be the main point of contact for customers. Now, turning to our beauty business.

Puig is featuring our prestige fragrance pump on its Paco Rabanne Lady Million fragrance in Europe. Our dispensing pumps are featured on TRESemmé hair care products by Unilever in Latin America and the Beiersdorf Eucerin brand cleansing gel in Europe. Finally, our NeoDropper technology for the controlled application of serums is featured with the Freda brand hair care product in Asia. In closures, we continue to bring innovation to store aisles with our solutions. Campbell launched its Pace taco sauces in an easy-squeeze inverted bottle using our closure with SimpliSqueeze valve. Kraft Heinz and IHOP teamed up to launch a syrup with our pour spout closure. In personal care, our new lightweight disc top is the dispensing solution for Paul Mitchell's Clean Beauty shampoo and conditioner. Now, I would like to turn the call over to Bob.

Bob Kuhn (EVP and CFO)

Thank you, Stephan, and good morning, everyone. Starting on slide five, I would like to summarize the quarter. Our reported and core sales increased 2% as currency and acquisition effects did not impact the quarter. Results for Q3 were driven by strong growth in pharma's proprietary drug delivery systems, as well as strong closure sales worldwide. As shown on slide six, we reported third quarter adjusted earnings per share of $1.49, which is a 6% increase over the prior year's adjusted EPS. During the quarter, we achieved adjusted EBITDA of $208 million, which increased from the prior year's third quarter by 8%, driven by expanding margins.

Free cash flow more than doubled to $255 million for the nine months ended September 30th, compared to $124 million in the prior year, due to improved profitability and strides we have made in better managing our working capital. Turning to the details by segment for the quarter, our pharma segment's core sales increased 7% due to volume growth, especially in our proprietary drug delivery systems and active material science solutions. Looking at sales in the pharma segment by end market, I will start by breaking out our proprietary drug delivery systems, which performed well in the quarter. Prescription core sales increased 20%, driven by strong sales of emergency medicine and central nervous system therapeutics, as well as allergy medications.

Core sales for consumer healthcare decreased 6% due to non-product revenue in the prior year that did not repeat in 2024. Injectables core sales decreased 12% over the prior year period. While revenue from elastomeric components was down slightly, the division faced a difficult comparison due to substantial service revenue from a customer's product launch in the prior year quarter that did not repeat. However, we continue to see demand for our higher-value elastomeric components, including those used for GLP-1 applications. For the first nine months of the year, sales of injectable components grew 13%. Core sales for our Active Material Science solutions improved in the quarter, growing 10%, with increased demand across a number of end markets, particularly probiotics.

Pharma's adjusted EBITDA margin was 36%, a one-point improvement from the prior year quarter, due to increased sales of higher-value products, increased royalties on customer sales, and ongoing efforts around operational improvements. Moving to beauty, this segment's core sales decreased 6% in the quarter, with approximately 4% of the decline attributed to lower tooling sales and 2% due to less favorable product mix. Prestige fragrance faced a difficult comparison this quarter, up against double-digit growth in the prior year period. Personal care and home care markets grew globally in the quarter, with North America showing modest volume growth across all beauty end markets. As we look closer at the beauty end market, which includes fragrance, facial skincare, and color cosmetics, core sales decreased by 14% in the quarter.

Overall, softer demand for prestige fragrance dispensing solutions after a period of substantial growth and lower tooling sales drove the decline. Core sales for the personal care market increased 5% due to demand for body lotions and hair care products, mainly in Europe and North America. Home care core sales increased 18%, driven by rebounding sales in North America, primarily for our products used on air care applications. Beauty's adjusted EBITDA margin for the quarter was approximately 13%, more than a half point improvement over the prior year period, even with lower core sales. Turning to the closure segment, core sales increased 4%, which is within the long-term target range, due to increased demand across each region.

When looking at sales by end market for closures, core sales to the food market increased 10%, driven by strong sales growth in Europe, North America, and Latin America for our products used on sauces and condiments. Beverage core sales increased 1%, with sales of our products used on functional sports drinks contributing positively to the results. Sales grew across all regions, with the exception of North America, which saw lower demand. Core sales for personal care closures decreased 3%. Growth in Latin America and Asia could not offset the decline in Europe for the quarter. In our fourth category, which includes beauty, home care, and healthcare, core sales decreased 3% due to large tooling sales in the prior year quarter. Product sales were up 10%, driven by growth in home care.

The segment's adjusted EBITDA margin was 17% for the quarter, a nearly two-point improvement compared to the prior year quarter. In the third quarter of 2024, we had capital expenditures of approximately $66 million, the majority being allocated to our pharma segment. Reported depreciation and amortization expense increased by almost $4 million over the prior year quarter to approximately $67 million or 7% of sales. Slides seven and eight cover our year-to-date performance and show a core sales increase of 3% and our adjusted earnings per share, which were $4.12, up 15% compared to $3.58 a year ago, including comparable exchange rates.

Moving to slide nine, which summarizes our outlook for the fourth quarter, we anticipate our growth to continue and expect fourth quarter adjusted earnings per share, excluding any restructuring expenses, acquisition costs, and changes in the unrealized fair value of equity investments, to be in the range of $1.22-$1.30 per share. The estimated tax rate range for the fourth quarter of 20%-22% includes a potential tax benefit as part of our ongoing tax planning, which more than offsets anticipated retroactive tax rate increases in France, with a comparable adjusted prior year effective tax rate of 24%. Based on the fourth quarter guidance, full year adjusted EPS will be in the range of $5.34-$5.42, a double-digit increase over full year 2023.

We currently estimate depreciation and amortization for 2024 to be between $260 million and $270 million. We expect our capital expenditures in 2024 to be between $280 million and $300 million, with the majority of capital allocated toward our pharma segment. In closing, we continue to have a strong balance sheet with a leverage ratio of approximately 1.1, which allows us to continue to invest in the business, pursue strategic opportunities, and continue to return value to shareholders in the form of dividends and repurchases. In addition to our cash dividend payments to shareholders, which totaled approximately $30 million in the quarter, we repurchased about 95,000 shares for approximately $14 million. Over the last five years, we have returned more than $780 million to shareholders through dividends and share repurchases.

At this time, Stephan will provide a few closing comments before we move to Q&A.

Stephan Tanda (CEO)

Thanks, Bob. Looking to the fourth quarter, we anticipate a solid finish to a strong year. The top line is expected to grow in the fourth quarter, even with some customers having indicated seasonal inventory rightsizing in the beauty and cough and cold end markets.mIn pharma, we expect continued growth across a number of end markets, especially for proprietary drug delivery systems for allergy, emergency medicines, and central nervous systems therapies. At the same time, we do see demand for cough and cold OTC remedies softening after a weak 2023, 2024 cold and flu season. On the other hand, initial indications from the Southern Hemisphere point to a stronger 2024, 2025 cold and flu season. The pharma segment will deliver solid double-digit adjusted EBITDA growth in 2024, due in part to sales of higher value products and royalties.

We anticipate 2025 to be another solid year for our pharma business. Our closure segment has returned to growth, and we expect it to finish the year strong, with healthy adjusted EBITDA margin improvements over the prior year. Beauty is battling a tough macro environment with progressive market recovery in North America, continued weakness in China, and facing very challenging comparisons after substantial growth of fragrance dispensing solutions in 2023. Innovation, cost mitigation, improved operational leverage, and accelerating efficiencies remain key priorities for our teams. Before we open the call for questions, I want to recognize that this will be Bob's last earnings call with Aptar as CFO, certainly not as a shareholder. Bob has decided to retire after 37 years with Aptar, 16 of those years as CFO.

Bob has become a trusted friend and colleague and has been a strategic partner in driving the overall growth of the company over the years. I would also like to officially welcome Vanessa Kanu, who has joined as CFO designate and will take on the role of CFO on January first. I'm really pleased to welcome Vanessa to the Aptar team. She brings with her tremendous experience as a CFO in financial reporting, global operations, and cost management that Aptar and our shareholders will benefit from greatly. Bob will stay in the CFO role through the end of the year, and then will be available as an advisor through 2025 to ensure a smooth transition.

Bob has always put what is best for Aptar above all else, and while he will be greatly missed, we are happy he will have a bit more time for himself and his family in this next phase of life. Congratulations, Bob, and welcome to the team, Vanessa. I'm glad that some of our shareholders and sell-side analysts had the opportunity to already meet Vanessa while touring our French beauty and pharma plants a few weeks ago. I look forward to introducing many more of you to her over the coming quarters. With that, I would like to open up the call for questions.

Operator (participant)

Thank you, Stephan. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. And please note, in the interest of time and fairness to all participants, please limit yourselves to three questions and then come back in the queue if you have more questions as time allows. And as a reminder, that is star followed by one to ask any questions today. We'll pause here briefly while questions are registered. We have the first question on the phone lines from George Staphos with Bank of America. You may proceed.

George Staphos (Managing Director)

Hi. Thanks, everyone. Good morning. I guess I'll start, Bob, and I'm sure everyone is going to say this, from the bottom of our heart, thank you for everything you've done to support our research of Aptar in the industry over the years. We really, really appreciate it, and we will miss you, and we welcome Vanessa. Thanks, Bob.

Bob Kuhn (EVP and CFO)

Thank you, George.

George Staphos (Managing Director)

I guess my first. Yeah, all of our baseball debates notwithstanding. I guess the first question I had for you, for the team, do you have, given the macro, holding everything else constant, recognizing comparisons are tough and China is weak, do you have the elements in place so that beauty, which is making progress, can be at 15% margin in 2025? What do you need to do? What needs to go right? Can you get there? Related question. How far off right now is China in beauty from normal, if there's a way to dimensionalize that? And then a follow on. Thank you.

Stephan Tanda (CEO)

Yeah. Thanks, George, and thanks for your nice words to, to Bob. Look, as you said, beauty is progressing. We had very strong fragrance launches, and, as we kind of, the dust settles from that, the pipeline fill probably was more than 2x what the sell-through was. So the comparisons in the fragrance is holding beauty back. At the same time, North America is coming back after a long period of negative sales growth. So, I've learned better, after many years than to paint myself in the corner, but, you know, if all regions fire, then, I'm quite confident that beauty will do well.

On China, it's not so much a matter of decline, it's a matter of not growing, not rebounding with vigor from COVID as frankly, the whole industry had expected. So and that depresses not only our Asia sales, but also our sales in Europe, as you know, because a lot of our beauty clients feel there and then sell their products to China. So it's a lack of growth, especially for Western clients. We actually see decent progress from our Chinese clients. This whole notion that you got to have a Western brand is gradually fading from the Chinese consumer. But the Chinese consumer is still staying much more on the sidelines than we would like.

I think there is some caution about the stimulus package, and as we all know, confidence is lost in a hurry and needs to be rebuilt over time, so it's not a decline, but it's a lack of bounce back from COVID, and that's really what needs to happen with China.

George Staphos (Managing Director)

Yeah. Stephan, and I recognize that maybe kind of a point of clarification on that question, then my follow on. So recognizing China beauty touches more than just China itself, obviously it affects your production around the world, and particularly in Europe. Is there a way to say, okay, your level of activity, as much as you can analyze, is at X right now related to China beauty demand, and it would be at X times some number or indexed in a normal environment? And then my follow on, is there a way to dimensionalize some of the inventory issues that you mentioned, you know, into fourth quarter for cough and cold? And I think you all set for beauty. Thank you.

Stephan Tanda (CEO)

Yeah. On the first question, I'm sure we can run some analysis and the folks do, but nothing that, you know, I would like to share here. Again, solid top line in the regions with continued productivity work is what the track that beauty is on. A lot of the productivity work that has been done will continue to drop to the bottom line next year, and we have additional ideas. On your second question, it's a little broader. Look, if I start with consumer healthcare, a lot of these consumer healthcare companies that spun out of big pharma start to behave more like packaged goods companies. They're much more sharp in their working capital management than the pharma companies they used to be part of.

I think so that plays an element. The second, I think, as people get ready for the 2024-2025 flu build, we're anticipating that this is more of a seasonal, more stringent working capital management approach. Certainly nothing like what we had back in 2021 or 2022. And I think with respect to beauty, it's the fragrance hangover of not having the sell-through as much as we had with the launches. Yeah.

George Staphos (Managing Director)

Okay, thank you. I'll turn it over.

Operator (participant)

Thank you, George. We now have Ghansham Panjabi with Baird. You may proceed.

Ghansham Panjabi (Senior Research Analyst)

Thank you, operator. Good morning, everybody. And yeah, Bob, I just want to echo George's comments as well. Congratulate you and your family on, obviously, a very successful career. You'll definitely be missed by all of us, and also best wishes to Vanessa in her new role as well. I guess, you know, first off, on the pharmaceutical side and, you know, the new products that you highlighted, is that a higher new product cadence than is typical, or is it just part of what underpins the, you know, aggregate growth of 7%-11% for that segment? And I guess I'm thinking more specifically about the outlook, for 2025.

Stephan Tanda (CEO)

I didn't quite phonetically hear what you said, but I mean, the headline is we are quite confident in the continued growth of the pharma segment within its target range, even though we had kind of excessive growth for a couple of years in some of the segments. But when we kind of pull up the nets for next year, there's no reason that we think we should be outside that range.

Bob Kuhn (EVP and CFO)

I would just maybe add Ghansham-

Ghansham Panjabi (Senior Research Analyst)

Okay, and then specific. Yep.

Bob Kuhn (EVP and CFO)

Sorry. I was just gonna say that as we continue to come out with our devices on new products, those continue to grow, and the categories that we're already in also continue to grow. So you get that kinda increase of the new therapies that we're on, as well as the continuing growth in some of our core, and in some of our core areas.

Ghansham Panjabi (Senior Research Analyst)

Yeah, so I guess that's the point. So would that point towards a higher portion of that 7%-11% range?

Bob Kuhn (EVP and CFO)

I don't think we're gonna be very specific about that at this point. We're still, you know, gonna-

Ghansham Panjabi (Senior Research Analyst)

It's your last call. It's your last call, you know?

Mary Skafidas (SVP of Investor Relations)

We're trying to get you on the last call.

Bob Kuhn (EVP and CFO)

Good try.

Ghansham Panjabi (Senior Research Analyst)

All right. I will let that go for now, and then also in terms of, you know, prestige fragrances and the volumes, you know, I understand the comps are difficult and so on and so forth, but you know, having covered the ingredients producers as well that make the molecules for the fragrances, I mean, they're still seeing decent growth there. Some of the major customers are also seeing, you know, moderation, but decent growth as well. So I'm wondering, what specifically are you seeing as it relates to weaknesses that seems to be a little bit more disproportionate to you?

Bob Kuhn (EVP and CFO)

Sure, I'll try to take that one, Ghansham. You're correct. I mean, the retail consumer sell-through is still positive, right? It was strong single digits last year, but remember, we were selling double-digit growth of our products, right? Now, we have no visibility into what the inventory channel looked like at that time. It continues to grow in 2024, but we're down, right? So what that's telling us is that the consumer hasn't walked away from the prestige fragrance side. It's just that it's a normal channel, I would say, destocking. And as we, you know, as we head into the holiday season and then quickly into Valentine's Day and Mother's Day, we'll be able to know better, you know, where the rebound is gonna come.

But we're still optimistic that it's gonna bounce back, that this is a short-term issue. So it's not that consumers are walking away from fragrance products. It continues to sell through.

Stephan Tanda (CEO)

Plus, I would say we are encouraged by our win rate, so there's certainly nothing there that concerns us with respect to share. Maybe the opposite, but certainly not the other way.

Ghansham Panjabi (Senior Research Analyst)

Okay. And then in terms of the $500 million, you know, share repurchase authorization, which is a pretty substantial number, is this sort of a new pivot towards, you know, maybe returning capital to shareholders more directly through share buybacks, or is it just an extension, as it relates to optionality for yourselves?

Stephan Tanda (CEO)

Sure. So, you know, the last authorization really dates back to pre-COVID. It was April of 2019, and you're right, at that time it was $350 million, but we were a much smaller company at a much lower share price, right? So I wouldn't say that the outsized $500 million is unusual or signals any change in, you know, in philosophy. I think it's just more in line with where the current share price is. Ideally, you know, we want to use that as our discretionary lever, with the low leverage that we have today at 1.1. And we'll use that to make sure that we don't go much lower than that, but at the same time, if there's actionable items that we can invest in, we can always pull back as well.

So I wouldn't think, you know, from your perspective, it signals anything different philosophically on what we're gonna do.

Ghansham Panjabi (Senior Research Analyst)

Okay. Very helpful. Congrats again, Bob.

Bob Kuhn (EVP and CFO)

Thank you, Ghansham. Appreciate it very much.

Operator (participant)

Thank you. Your next question comes from Daniel Rizzo with Jefferies. Your line's open.

Daniel Rizzo (Senior Research Analyst)

Hi, everyone, and thanks for taking my call, my question. Excuse me. You mentioned in the prepared remarks or in the release that it takes a couple of years, I think, for new products to kind of ramp. I was wondering if OTC Narcan is like that, too, where we still haven't hit the kind of run rate yet, or is it kind of a different product because of its unique use, where it's already kind of ramped up?

Stephan Tanda (CEO)

Look, it is almost impossible to answer, Dan, because every product is different. That we know for sure. But just to give a few data points. So take Spravato. Spravato, we thought, you know, was gonna be a huge blockbuster right out of the gate, I mean, saving lives, and it launched just before COVID, and it was a dud for a while. But you may have seen a Wall Street Journal article earlier the week. I mean, it's taking off like a rocket ship now, five years later, as doctors have gotten comfortable with it. Narcan, I don't think we're done at all. I'm really encouraged with the CDC data that opioid deaths are down for the first time ever. I think it was 12%-13%.

We're not claiming this is a one-to-one relationship with Narcan, but certainly, people say, "Hey, the broader availability of Narcan is one of the components to fight this scourge." And certainly we hear anecdotally that municipalities are even doubling down on distribution, making Narcan available, free vending machines and things like that. So I certainly don't think that has run its course, you know? And, you know, neffy, we'll see. We'll see. I think there's a good case for it. Certainly, our customer is very bullish on it, but, you know, it takes a few years for prescribers to get comfortable with the product, consumers to pick up on it.

As we always say, no single product changes the trajectory of Aptar, but collectively, we have built up quite a head of steam here.

Daniel Rizzo (Senior Research Analyst)

Thank you. That's helpful. And then you talked a little bit about cough and cold, about consumer, your customers kind of managing inventory a little bit differently than they used to, as has been spun out, but the rest was kind of garbled. Just in terms of just this winter, garbled in terms of what I heard because of my phone. Is the cough and cold season starting off slower than expected? I mean, is it, has just been mild winter being an issue yet, or is it too soon to say that, or how should we think about it?

Stephan Tanda (CEO)

Yeah, Dan, I try to enunciate better. So the point was that actually, no worries. I'm just joking. The point was that the 2023-2024 cough and cold season turned out to be a lighter one, and as people now do their balances, getting ready for the 2024-2025 cough and cold season, they have a bit more inventory than they would like. I think that's the long and short of it. Anecdotally, our customers tell us, who track this much more closely, that in the Southern Hemisphere, the cough and cold season is stronger, meaning worse for people, better for us, this year than it was last year. So for what that is worth, we think this is a year-end effect and not much more.

Daniel Rizzo (Senior Research Analyst)

For the record, it was my phone, not you, that was garbled.

Stephan Tanda (CEO)

No worries.

Daniel Rizzo (Senior Research Analyst)

But all right, and sorry, last question. What's the sales cycle for beauty products? How long does it take to get, like, a new product? I guess it kind of varies depending on what you're creating, but I was wondering, as you kind of take back North America, so to speak, is there a couple years kind of ramp time? And I'm just talking about from a revenue perspective.

Stephan Tanda (CEO)

Yeah, that really ranges as you can imagine. In China, it can be as quickly as four months. With Western clients, it's usually more like 18 to 36 months. With the indies in North America, it can be six to eight months, so that kind of gives you a distribution. We certainly continue to do well with indies in North America through our FusionPKG unit. And we certainly have all the capacity to react quickly to an uptick.

Daniel Rizzo (Senior Research Analyst)

All right. Thank you very much.

Operator (participant)

Thank you. We now have Matt Larew with William Blair. Your line's open.

Matt Larew (Equity Research Analyst)

Hi, good morning. I wanted to ask about injectables. Obviously, up, up year to date here, but down in the quarter. Obviously, other peers had talked about destocking, you'd referenced that it really hasn't been an issue for you. Just wanted to check to make sure that was still the case. And then, I guess, thinking about or maybe asking about when we can get back to perhaps a more regular cadence of growth in injectables, obviously in light of capacity coming online in Normandy and at Congers. Thanks.

Stephan Tanda (CEO)

Yes. So fundamentally, clearly, this is a little odd year given the comparisons versus last year, the ERP and so on, plus some of the destocking and more in the antithrombotic area. But fundamentally, the pipeline continues to build. We are quite bullish for next year. GLP-1 keeps growing, biologics projects keep coming in. So, without giving an outlook for 2025, certainly continue to see this business growing very nicely, high single digits, low double digits, in that range.

Matt Larew (Equity Research Analyst)

Okay. And then maybe just on profitability for the injectables side. Obviously, your nasal delivery business, much larger, more mature. You've recently added a lot of capacity for injectables. Could you give us a sense for sort of where you're seeing profitability right now and what the opportunity is for improvement there as you scale?

Stephan Tanda (CEO)

Yeah. So the general sequence, is, as you rightly say, our proprietary drug delivery systems are by far the most profitable, followed by active materials, and injectables kind of being when everything is steady state and good capacity utilization around in line with company profitability. So as that business grows, the profitability will continue to improve, but, if it grows much faster than the rest of the pharma portfolio, that will, put a little lid on the overall profitability.

Matt Larew (Equity Research Analyst)

Okay, thanks. I appreciate it. Bob, congrats.

Bob Kuhn (EVP and CFO)

Thanks, Matt. Appreciate it very much.

Operator (participant)

Your next question comes from Gabe Hajde with Wells Fargo. You may proceed.

Gabe Hajde (Equity Research Analyst)

Stephan, Bob, Mary, good morning. Echo all the kind words to you, Mr. Kuhn. Stephan, you said it, you guys are kind of a story of kind of singles and doubles. I noticed this Sudafed kind of nasal product that you highlighted as a new item this quarter. Can you talk about any? I guess, at least in meetings, sometimes you talk about Europeans more inclined to use nasal cleansing and things like that as part of their daily routine. Based on sort of your dialogue with the customer here, or I know it's sensitive, but just is that sort of their intention to maybe bring some of that type of behavior here with a branded product?

Just maybe, again, it's over the counter, is more accessible for consumers, and you might get a bigger pop initially from over the counter versus maybe something like Neti. Just trying to dimensionalize the opportunity there.

Stephan Tanda (CEO)

Yeah. I think the product I was referring to was the Sudafed nasal rinse. So that's just you know nice to have another strong U.S. brand on the nasal rinse. It's not a breakthrough innovation, but an additional adoption. On your larger point, though, it is true that historically, when it comes to decongestants, when it comes to allergy sprays, Europe was a bit more ahead with adoption of these nasal sprays, whereas the U.S. consumer was used to popping pills, and that gap is still there, but it's narrowing. We have high hopes for Haleon with its side actuated.

Nasal spray that they have launched with the Otrivin brand in Europe, and they will bring in the U.S. with a more U.S. brand that will make further inroads. But I think it's too early to call that in terms of P&L impact. And remember, Haleon is the spin out from GSK.

Gabe Hajde (Equity Research Analyst)

Okay, thank you for that. And then you mentioned kind of working on neffy for first two years, and I'm just gonna try to, you know, go get to Ghansham's question. You said good growth for 2025 pharma. But just, you know, as you look across, you know, the platform in pharma, and going to the presentation you guys provided in at the France site visit, I think, you know, weighted value of pipeline is still up 41%, which is pretty robust given a lot of the commercialization that you've had. So just, I know it's tough, but, you know, maybe from a stage gate perspective, projects that you're working on that you're excited about, maybe over the next two or three years that we could be hearing about or just how to think about, you know again, it just, I guess, gives you confidence in the 7%-11% growth.

How should we think about it?

Stephan Tanda (CEO)

Sure. And, thanks for referring to that. Indeed, the pipeline keeps filling, and if I walk through the pharma side of this, on the allergy side, more and more combination products where several active ingredients are combined with new launches. Then we've talked several times about the large increase in projects for central nervous systems, keying off of the success of Spravato and Narcan and, hypoglycemia, what was the, Baqsimi, and so on, and pain management, and there are many more of these types of programs in the pipeline. On the consumer healthcare, ophthalmic continues to go from strength to strength with our ophthalmic dispenser that allows for no preservation in the solution. We just talked about the new side actuation that we think will be a long-term growth driver for consumer healthcare, dermal, and so on.

We haven't mentioned it on this call, but as you know, within injectables, it's not just a volume story, it's also an upgrading of the product mix with much more high-value products, whether that's for GLP-1s, whether that's for biologics, whether it's in response to Annex 1 in Europe. So it's not only growing with the market, but mix enriching and therefore boosting the margins. Active Material, we mentioned, the contract with the FDA. I mean, that's a pipeline. Frankly, that's an early stage ideation, but clearly is another nod to the FDA recognizing the strengths of our Material Science. It goes back, if you remember, in during COVID, we were working on sterilizing masks when we didn't have enough masks. We got a government contract to that, and the FDA now also gives us an award for the, what was that?

Mary Skafidas (SVP of Investor Relations)

N-Sorb.

Stephan Tanda (CEO)

N-Sorb, yeah, and the nitrosamine mitigation. So, that just shows you there's a lot of technology under the hood that keeps feeding the pipeline. What I just talked about with sterilization and N-Sorb, those are very early stage. I'm not going to give you any timeline, but things would be extremely short, yeah. That's just the nature of the pharma business. It's a pipeline business. We keep filling the pipeline and great things come out of the pipeline.

Gabe Hajde (Equity Research Analyst)

Great. Thank you. And Bob, maybe one for you, just, so we can calibrate. I know Q1, you tend to have a little bit higher incentive comp, or I should say, stock-based comp expense flowing through. Is there anything else that we should be mindful of, when thinking about kind of the first half or the first quarter for 2025?

Bob Kuhn (EVP and CFO)

No, not that comes to mind, Gabe. You're right. With the substantive vesting, the rules that we have, we do have a higher stock comp expense in Q1, but, you know, now that I'm leaving, that should go down a little bit. It's old people like myself. But, no, nothing else really comes to mind, that's material. I'd have to really scrub through to see if there's anything unusual. I mean, to me, it's more the, you know, some of these transient destocking things, how quickly they rebound and, and, you know, how quickly they come back, but nothing else that I would mention.

Gabe Hajde (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you, Gabe. As a reminder, it is star followed by one, if you wish to ask any further questions. And we now have a follow-up from George Staphos with Bank of America. Please go ahead.

George Staphos (Managing Director)

Thanks so much. Follow-on question on pharma. When we were visiting you a few weeks ago, and then I think even on today's call, there was some reference to nasally delivered treatments targeting the brain, Stephan. And so I was wondering if there's a way to, again, recognizing it's not necessarily going to move next quarter, what that opportunity might look like? And if I misheard, please, you know, correct me where you're going with the trends there and what that revenue opportunity might look like, and does it come through your traditional devices? Does it come through powder? Any thoughts there that you can share would be great. Thank you, and good luck in the quarter.

Stephan Tanda (CEO)

Yeah. Thanks, George. We're maybe not too precise with our language, but it's basically any drug that you deliver through the nose for the purposes of crossing the blood barrier to the brain through the nasal cavities. So sometimes we refer to it as the central nervous system drug, sometimes we refer to it as direct to the brain delivery methods. This is extremely attractive for pharma clients for several reasons. One, often it's just a better delivery route. Two, it gives a lifecycle management opportunity to regain long periods of exclusivity from the FDA in repurposing old molecules. And many of the things we talked about, from naloxone to epinephrine, those are old molecules that have a new lease on life with a much better delivery method.

But of course, there are also new treatments that people are thinking about that can be more efficacious if they are delivered through the nasal cavity to the brain. That's why we're excited about that category of projects in our pipeline.

George Staphos (Managing Director)

Is there a way to, I'm guessing it's gonna be a reason why you think, you know, comfortably about the 7%-11% growth, but is there a way that that perhaps adds margin or incremental revenue beyond the trend line for pharma in the next three years? And then, separate, totally unrelated question. To the extent that you've been successful in recognizing it's a challenging topic, it's never a happy topic, about, you know, right-sizing your footprint, closing facilities where you've needed to, is there potentially more of that required to get to the margin that you need over the next couple of years in beauty, or not necessarily, you just need the markets to do what they would normally do? Thank you, and good luck again in the quarter.

Stephan Tanda (CEO)

Yeah, on the first question, look, we don't break down the pipeline by subcategory. I think, we've informed you that emergency medications are around 6% of our total revenue, 5% of total revenue for the company, and it's a rapidly growing area. That's number one. Number two, this is the sweet spot for us in terms of profitability, our proprietary drug delivery system. So if you have very good traction, not only in sales with things like Spravato and Narcan and so on, but also in the most profitable part of the portfolio. And by the way, we haven't talked more about it, but if you go back to my the press release and my remarks, that's also the area that's generating more and more royalty revenue.

So all of that certainly bodes well for the future. It's quite simple. If your most profitable segment is growing fast and has a strong pipeline, that will bode well. On the second part, we have more ideas, but I would not, and we'll execute them once they are to fruition, but I would not characterize them as a prerequisite to get to the fifteen. It's to more like to get beyond that.

George Staphos (Managing Director)

Understood. Thank you so much.

Operator (participant)

Thank you. I can confirm that does conclude today's Q&A session, and I would like to hand it back to Mr. Tanda for some final closing remarks.

Stephan Tanda (CEO)

Thank you. So let me end the call by zooming out. Quarter three was a very strong quarter. We are on track for a solid finish to the year, with good organic growth and double-digit EPS growth for the full year. As we discussed, we execute quite a number of productivity actions that will continue to fall to the bottom line into 2025 and beyond, and we also have additional ideas to use that productivity muscle or muscles that we have developed on an ongoing basis. And when you use those muscles, they trigger additional ideas and opportunities, especially in Europe and also in the U.S.

Now, several of you have remarked, you were able to look a little bit under the hood, so to speak, with the recent visits to some of our French and U.S. facilities, to judge the organization's capabilities and, the ability to increase the depth and width of our moats. So even in a slowing economy, we are confident, in the resilience of our portfolio. Of course, our pharma business is very strong. We are encouraged by the continuous filling of our pipeline, not only in pharma, but also in beauty and closures. Customers are engaging very positively with a more agile and a more competitive Aptar. Our customers recognize the innovations, the value we bring to their brands, and the drug developments from very early stage ideation to full-scale global deployment.

We are well-positioned with increasingly competitive regional footprints around the world, strengthened even further with the closing of the Shanghai facility in China, and last but not least, our strong balance sheet affords us the strategic flexibility to pursue optionality. As you know, we are fans of bite-sized bolt-on partnerships and acquisitions and have a track record of delivering on those, so all this bodes well, not only for quarter four, but twenty-five and beyond. One more time, a huge thanks to Bob and all the best. And Vanessa, Mary, and I look forward to discussing more with you on the road, and if we don't speak before, I wish you all the best for the holidays.

Operator (participant)

Thank you all for joining.

Mary Skafidas (SVP of Investor Relations)

Thank you, everyone.

Operator (participant)

Thank you. That concludes the Aptar 2024 Q3 results earnings call. Please enjoy the rest of your day, and you may now disconnect from the call.