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Edited Transcript of ATR earnings conference call or presentation 1-Nov-19 1:00pm GMT

Q3 2019 Aptargroup Inc Earnings Call

CRYSTAL LAKE Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Aptargroup Inc earnings conference call or presentation Friday, November 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew DellaMaria

AptarGroup, Inc. - Senior VP of IR & Communications

* Robert W. Kuhn

AptarGroup, Inc. - Executive VP, CFO & Secretary

* Stephan B. Tanda

AptarGroup, Inc. - President, CEO & Director

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Daniel Dalton Rizzo

Jefferies LLC, Research Division - Equity Analyst

* Deborah Anne Jones

Deutsche Bank AG, Research Division - Director

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Ghansham Panjabi

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jason Andrew Rodgers

Great Lakes Review - VP

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Molly Rose Baum

BofA Merrill Lynch, Research Division - Research Analyst

* Neel Kumar

Morgan Stanley, Research Division - Equity Analyst

* Salvator Tiano

Vertical Research Partners, LLC - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2019 Third Quarter Conference call. (Operator Instructions) Introducing today's conference call is Mr. Matt DellaMaria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

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Matthew DellaMaria, AptarGroup, Inc. - Senior VP of IR & Communications [2]

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Thank you, Howard, and welcome, everyone. Participating on our call today are Stephan Tanda, President and Chief Executive Officer; and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. You can find a copy of our press release as well as the slide presentation that summarizes our results on our website. We will also post a replay of this conference call on our website. Lastly, 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 those projected or contained in the forward-looking statements. Aptar undertakes no obligation to update the forward-looking information contained therein. I'd now like to turn the conference call over to Stephan.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [3]

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Thank you, Matt, and good morning, everyone, and thanks for joining us. Yesterday, we reported core sales growth of 4% and adjusted EBITDA growth of 9% for the third quarter.

Before I go into the quarterly segment results in more detail, let me start by sharing an update on our most recent acquisition of Noble and the announced segment leadership appointments. Then I will speak to each of the segments before turning it over to Bob for some more details. You can refer to Slide 4 of the presentation that is featured on our website.

As we announced in our press release, we have acquired Noble International, a leader in drug delivery training devices, including auto injectors, prefilled syringes, on-body and respiratory devices and patient onboarding programs. Noble's training devices, which mimic the feel, activation forces and functions of the actual drug delivery device are designed to reduce error and increase device familiarity, both are key to ultimately improving health care adherence and outcomes, especially in settings where patients self-administer the treatment. This acquisition is another step in our strategy to build out our pharma service business serving this attractive and rapidly growing market.

On next slide, 5, you can see how we are expanding our offering from drug delivery devices and components to being a full-service provider for our customers from product development through the post-launch stage. Our pharma clients who increasingly are smaller innovative companies procure more and more of these services to increase the likelihood of success of their innovations, to shorten the time to launch and to do improved performance in the market post launch.

Now shifting topics, as shown on Slide 6, we have announced new segment leadership appointments. Marc Prieur will assume leadership of our Beauty + Home segment as Eldon Schaffer will be taking on a new leadership role overseeing strategic projects and commercial excellence initiatives. And Heidi Tlili will succeed Marc as President of Aptar Food + Beverage. Heidi previously led the Food + Beverage business in Europe and most recently led the Beauty + Home segment also in Europe. All new responsibilities take effect December 1 with a thorough handover activity going well into the new year.

The pace of activity in Aptar has picked up considerably over the past years. We are investing in several strategic projects that require more executive level attention and oversight that Eldon is uniquely suited to provide. We are fortunate to draw upon our deep talent base and Marc's extensive operational leadership experience, combined with his passion for innovative, sustainable solutions, make him an ideal leader to take Beauty + Home segment to new heights. Heidi has brought international experience having led our European sales and operation for both Food + Beverage and Beauty + Home segments. He has successfully implemented transformation initiatives in both segments and his knowledge of emerging high-growth markets, including the Middle East and Africa, will be very important for our strategy execution going forward.

Now turning to Slide 7. I will share a summary of our pharma segment, which had another outstanding quarter. We continue to benefit from strong sales momentum in the allergic rhinitis and central nervous system categories. The allergy category, which is a significant part of our pharma business, has really outperformed when you look back over the past 12 to 18 months, primarily due to the huge success of the branded treatments being now sold over-the-counter in significant quantities. We believe we are in the later stages of the tremendous expansion we have seen in this category in the U.S., and we expect growth to normalize in the near term.

That being said, we are in the earlier stages of what we believe is the growth trajectory of our central nervous system devices, although this is a smaller part of our pharma segment today. We also saw broad-based increased demand across our other pharma applications, including our consumer health care business and the Injectables division. I'm also pleased to share that our Activ-Blister packaging solution developed by Aptar CSP Technologies for oral solid dose drug delivery was recently approved by the U.S. Food and Drug Administration for an HIV prevention medicine. This represents the first FDA approval for our proprietary Activ-Blister system, which protects and contributes to the stability of oral solid dose drugs with a solution that is fully integrated into the blister package. The system can be customized specifically for the drug development -- drug developer's formulation, offers a broad spectrum of protection, including moisture absorption, oxygen and/or odor scavenging.

In other pharma news, we have also entered into an agreement with Bryn Pharma, a privately held pharma company, for the development of a nasal spray version of epinephrine using our Bidose nasal device. Bryn has currently conducted clinical trial in its epinephrine nasal spray using our portable device capable of delivering 2 therapeutic doses of epinephrine, replacing the need to carry 2 epinephrine auto injectors. I want to stress that this has not yet been approved by the FDA, but Bryn has announced our partnership and we see this as yet another key example of converting the delivery of existing medicines to the nasal drug delivery route.

Now turning to our Beauty + Home segment and to Slide 8. As we saw in the previous quarter, this segment faced considerable challenges from weaker demand from the personal care market. At the same time, sales to the beauty and home care markets grew nicely, with strong demand from prestige fragrance and skin care customers and broad-based increased demand in the home care market. Our transformation progress, however, was offset by under-absorbed fixed costs and underutilized facilities due to the weak demand in personal care.

Looking at the column to the right, as previously announced, we have taken an important step in our strategy to gain scale in the fast-growing Chinese beauty market. We have signed an agreement to acquire a 49% equity interest in BTY, a leading Chinese manufacturer of high-quality decorative metal components, metal plastic subassemblies and complete color cosmetic packaging solutions for the beauty industry. This transaction meets our disciplined investment approach of partnering with leading recognized players with innovative technology and know-how and includes an option to raise our stake in future years.

I'm also excited about an interesting product innovation in China, the first launch of our facial skin care dual dispenser that features a separate airless booster cartridge. Our device called Neomix is featured on a dual serum facial skin care product for the fast-growing local premium brand Chando by Jala. On the topic of sustainable solutions, as shown on the far right, our colored closure, which is made from 100% post-consumer recycled resin is featured on a line of haircare products for Love, Beauty and Planet.

Moving now to Slide 9. Our Food + Beverage segment grew core sales as increased demand for our dispensing closures for food products overcame weaker demand for beverage closures, which is reflecting some general seasonality and additional reduction in our beverage sales in China. We also are passing through lower resin cost to our customers, creating an additional headwind on Food + Beverage top line. This segment continues to benefit from conversion opportunities, especially in condiments where you'll see several products moving from the traditional formats to invert the pouches with our dispensing system. One example is the newly launched Squeeze guacamole by Yucatan, which features our custom pouch fitment with pull ring and our flip lid closure with SimpliSqueeze valve for cleaner, more precise application in an inverted pouch format.

The same closure and valve combination is also featured on the new inverted pouch of Chico Honey. Both products can now be found here in the U.S., and we are very optimistic that this trend towards squeezable pouches will open up even more opportunities for food products that were not previously dispensed in this format.

In summary, we have had a good quarter overall with top line gains in pharma and Food + Beverage, offsetting some softness in Beauty + Home. We are also pleased that we announced new product conversion stories, new strategic partnerships and the first FDA approval for our active listed packaging solution.

With that, I will now turn it over to Bob, who's going to walk through some of the financial details that impacted the quarter. Bob?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [4]

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Thank you, Stephan, and good morning, everyone. I'll briefly walk through some of the details concerning our third quarter results. If you are following the slides we published with the press release, you can refer to Slide 10.

We reported sales growth of 5% that was comprised of core sales growth of 4%, with a positive impact from acquisitions of 4% and a negative impact from currency rates of 3%. Our pharma segment achieved a core sales growth of 13% and an adjusted EBITDA margin of 36%. The strong sales volumes, particularly in the prescription division drove margins to the high end of our long-term range. Core sales to the prescription market increased 17%, driven by increased demand for our innovative drug delivery systems for allergic rhinitis, central nervous system treatments and asthma. Core sales to the consumer healthcare market increased 3% due to increased demand for our products used on nasal saline and eye care treatments. Lastly, core sales to the injectables market increased 12% due to increased demand for our plungers and stoppers.

Turning to our Beauty + Home segment. Core sales decreased 1%, primarily due to the significant weakness in demand from the personal care market compared to a year ago. Beauty + Home's adjusted EBITDA margin of 13% was slightly above the prior year level. The positive effects of our transformation efforts and lower raw material costs were offset by the negative effects related to the decrease in volumes.

Looking at sales growth by market on a core basis, core sales to the beauty market increased 5% due to strong growth in skin care and fragrance products, primarily driven by the China luxury market and travel retail. Core sales to the personal care market decreased 8% due to the weak demand that I previously mentioned that was across most of our major applications, including body care and hair care products. Political and economic uncertainties are causing our customers to be cautious and reduce their inventory levels. Core sales to the home care market increased 4% due to higher sales across a variety of categories.

Looking at the business from a regional perspective, the core sales increases we saw in Europe and Asia were not enough to offset the 9% decline in North America or the 7% decline in Latin America.

Looking at our Food + Beverage segment, core sales increased 2% in the quarter. This includes the negative impact from passing on lower raw material costs, which negatively affected the growth by 2%. Food + Beverage's adjusted EBITDA margin reached 18% due to productivity improvements and lower resin costs.

Looking at each market. Core sales to food market increased 3% due to strong sales of our products used on granular, powder, soft and condiment applications. Core sales to the beverage market increased 1%, primarily due to increased custom tooling sales. Increased demand in the bottled water and dairy categories was offset by decreases in functional drink application sales in China and Europe.

Turning to Slide 11. With an effective tax rate of 31%, third quarter adjusted earnings per share totaled $0.93. Prior year comparable earnings per share totaled $0.97. I would also like to remind you that in the prior year third quarter, we had certain discrete tax benefits, and our effective tax rate on adjusted earnings was 24%. We also grew adjusted EBITDA by 9% in the quarter and expanded our overall adjusted EBITDA margin to approximately 21%.

Slides 12 and 13 cover our good year-to-date performance and highlight our 5% core sales growth and 7% adjusted earnings per share growth.

Slide 14 refers to our outlook. We are expecting earnings per share for the fourth quarter to be in the range of $0.74 to $0.80 per share using an expected tax rate range of 30% to 32%.

I have a few other details to share, and then I will hand it back to Stephan. As shown on Slide 15, in the quarter, cash flow from operations was strong and totaled approximately $159 million. Capital expenditures were approximately $62 million and, therefore, our free cash flow was approximately $97 million compared to approximately $2 million a year ago. Higher earnings and working capital improvements led to the improvements in free cash flow. This brings our year-to-date free cash flow to $194 million compared to $64 million a year ago.

Looking at our balance sheet capitalization. On a gross basis, debt-to-capital was approximately 43%, while on a net basis it was approximately 37%, and we remain less than 2x levered.

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

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [5]

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Thanks, Bob. In closing, I'd like to leave you with a few key takeaways, as also shown on Slide 16. The diversity of our portfolio continues to allow us to grow even if there's weakness in some of our markets or regions. We posted 5% core sales growth through the first 9 months of the year with double-digit adjusted EBITDA growth. We continue to innovate vigorously and had several new dispensing, drug delivery and active packaging product launches this year. We're building out our pharma service offerings with 3 acquisitions to date that are greatly enhancing the value we bring to our customers. We continue to add capabilities and scale in Asia to better serve the more rapidly growing markets there, especially for our beauty business with the addition of our new partnership with BTY. While we are positioning the company for long-term growth, we are also facing some near-term challenges. As we look to the fourth quarter, we anticipate that the above normal growth we have seen in parts of our pharma business will revert to a more normalized growth rate. Several Beauty + Home customers have indicated that they are reducing inventory levels in reaction to uncertainty around the impact of political and economic developments and consumer demand for their products.

In closing, we are managing this business for the long term, and we'll continue to focus on our customers and consumers and provide tangible value for many of the world's leading brands. We will bring to life dispensing solutions that transform and enhance everyday users experience around the world.

With that, I would like to open it up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Daniel Rizzo from Jefferies.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [2]

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Just with the Noble acquisition, are there any synergies? Or does it just kind of expand the product platform?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [3]

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When you look at how our customers, our mix of customers is changing, it's the new product development, especially in biotech are increasingly done by smaller customers. So these smaller customers require services to get their products to market faster, deal with all the FDA approvals, and that provides an additional revenue opportunity for us. And of course, we also benefit from the increased device sale as the product is launched. So it is really a synergistic effect with everything we do. We provide these services, I think, almost exclusively when one of our devices or injectable delivery solution is involved at the tail end.

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [4]

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And maybe I could add just a couple other small points. Typically, the sales cycle for Noble is later on in the process. And if you look at where we get involved with our customers on the device, it's very early on. So clearly, we can provide a window of opportunities to Noble much sooner on pipeline projects than they've seen in the past. I think the other important thing is since they are really dealing with the patient on-boarding, they have great patient feedback on what patients like and dislike about various devices. And we think that that's a benefit for us moving forward in developing some new pharmaceutical device applications.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [5]

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All right. And then you mentioned that you were looking for towards like more normal growth in allergies. I was wondering how we should think about what that means in terms of -- I don't know, yes, just in terms of percentages. Or how we should think about it going forward?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [6]

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Well, we've been clear that our long-term growth rate for the pharma business is in the 6% to 10% range. This business, in particular, has been well above that. So it will revert back to that kind of range.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [7]

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Okay. And then finally, you mentioned -- the aforementioned nasal spray. What phase is that in, in terms of -- with the FDA? In terms of...

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [8]

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It's still in clinical trials. I don't have with me whether it's Phase II or Phase III.

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Operator [9]

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Our next question or comment comes from the line of John Kreger from William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [10]

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Just to expand on the question about normalization within the pharma business. From your perspective, is that a new longer-term trend or just something that you think will be realized in Q4?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [11]

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Well, the long-term trend is 6% to 10%. Now we've been for, I think, almost 18 months well above that in the teens for that particular segment, and 6% to 10% is much more reasonable. And we see that materializing.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [12]

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Okay, great. And then maybe just digging into the Slide 5 that you walked us through during the prepared remarks. How much of your pharma business currently would be for commercialized products versus products that are in clinical trials or earlier stages of development?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [13]

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Yes. By far, the vast majority is in commercialized products, I realize, because most of our revenue is from device revenue. So the quantity of devices used to clinical trials compared to the commercial is much lower. Now having said that, we have for quite some time provided services through an express unit for the nasal delivery route. And now with Noble and Nanopharm and Gateway, we all can also offer services for the injectable side of the house and, as Bob already mentioned, for the patient on-boarding, the human factor side.

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Operator [14]

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Our next question or comment comes from the line of Gabe Hajde from Wells Fargo Securities.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [15]

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We're going to try to revisit Noble a little bit. Unless I missed it, I didn't see much in the way in terms of, I guess, financial profile. Is there any way to give us a perspective as to what you might expect from, I guess, EBITDA contribution or even revenue? I mean what I saw, it looked like revenue might be around $20 million, although it looked a little choppy. So hoping you can help us in that regard?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [16]

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Sure. Yes, Gabe, you're spot on in that $20 million estimate that you've got, and it is a bit choppy. It's very highly dependent on new device introductions into the market. And from an EBITDA perspective, we're not going to comment specifically on that. I will tell you from an EPS perspective, it's not going to have an impact on the fourth quarter results. It will be slightly dilutive $0.01 or $0.02 in 2020, and then we would expect it to ramp up 2021 and beyond. So this is really a growth platform for us, and we see some nice upside in the near future.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [17]

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So I would add, though, that the service business itself is the high-growth part of the pharma segment, especially given that more and more of the clients requiring those services are smaller. They're not the big pharma houses and, therefore, they have the need for these services. So we see this as a good growth opportunity.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [18]

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Understood, Stephan. Is it something that you have to maybe go out and acquire another business to offer another product or service? Or is this something that can, I guess, grow at the rates that you expect on a stand-alone basis?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [19]

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No. As you see In Slide 5, we got this space pretty nicely filled out. And not ruling out anything, but I think we have a pretty big part of what we need.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]

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Okay. And as a follow-up, in the Food and bev segment. Can you comment at all about -- you mentioned, I think, in prepared remarks, the China

beverage issue coming back to haunt you a little bit on Thanks -- or excuse me, on Halloween. Is that something you have any visibility in terms of -- is it more of a dual source issue, how long it might persist?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [21]

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I think you characterized it well. I'm not sure that I can add anything to it. This customer growth never gave us perfect visibility. It is now more of a -- a little bit but still an impact. It's not comparable to the impact we had in prior years.

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Operator [22]

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Our next question or comment comes from the line of Jason Rodgers from Great Lakes Review.

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Jason Andrew Rodgers, Great Lakes Review - VP [23]

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Yes. Just in the pharma segment, can you give us a better idea of what percent of your revenues in the prescription area are generated from the allergy side versus central nervous and other areas?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [24]

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Sure. So it's roughly about 2/3 of the prescription division's revenues are generated from allergy-related products, and then about less than 10% of the prescription division sales are coming today for central nervous system.

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [25]

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And I think prescription is about half of our pharma business.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [26]

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Correct.

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Jason Andrew Rodgers, Great Lakes Review - VP [27]

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And would you expect the allergy side to come in somewhere in line with your long-term pharma growth rates? Or is that an area that's -- because it's so strong, could potentially fall below that?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [28]

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It's hard to say. I mean we've been surprised on the upside before. I mean it's going to be highly dependent on any new product entries into this category and growth geographically as well. But certainly, it's going to taper off more closer to the long-term target.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [29]

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Really multiple trends happening at the same time. On the one hand, allergy continues to be an expanding category through -- I'm not an expert, but everything I read is the warming climate certainly increases the allergen loads in the environment. And for whatever reason, all of us become more prone to allergies year-round. Certainly, I'm one of the best (inaudible) around allergies. And so that is a growth driver and is -- that affects more and more parts of the world that can afford allergy medications that will continue to grow. On overlays on top of that, we had this conversion in the U.S., where more and more went over-the-counter with broader distribution, including club stores, e-commerce. We think that has kind of run its course. But to pick apart those 2 trends is not easy. But certainly, we see a slowdown from the mid-teen rates to something that's more reasonable, at the 6% to 10% range. And yes, in some quarters, it's going to be at the low end. In some quarters, it's going to be mid-range. We don't have a crystal ball like that.

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Jason Andrew Rodgers, Great Lakes Review - VP [30]

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And there's nothing to do with like a new competitor or any situation like that, correct?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [31]

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Not really. I mean certainly, we have competition. I mean our market share is high but not 100%, and there will always be some competitive activities in a competitive market.

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Operator [32]

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Our next question or comment comes from the line of Mark Wilde from BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [33]

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I wanted to just dig in on the fourth quarter outlook. You talked about beauty and home customers destocking. I'm curious, is this a separate and more recent phenomenon than the sort of third quarter weakness that you pointed out in personal care?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [34]

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In short, absolutely. I mean we pretty much in almost uniform chorus, get that back from not only our personal care customers but also our beauty customers that their degree of uncertainty about demand is ratcheted up and they are throttling back their inventories quite a bit. So that is different than the personal care weakness that we are -- additional to the personal care weaknesses that we pointed out before. Now historically, these destocking movements have gone on 2 to 3 quarters. We started already seeing that in quarter 3. We certainly see it in full force in quarter 4. If history is any guide, probably will be with us part of Q1. And as Bob pointed out, we saw a particular weakness in North America and in Latin America, which is a big part of our Beauty + Home business but it's certainly not that quarter 4 is in a steady-state picture here.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [35]

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And, Stephan, does that tend to hit Prestige harder than, say, mass market? Or is it pretty much across the board?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [36]

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Actually, Prestige is the 1 part of the market of -- luxury is the 1 part of the market that's still doing well. It's really the broader Prestige Masstige that's being impacted here.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [37]

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Okay. Though the other question I had is just can you update us on sort of your cost reduction efforts, the efforts to kind of improve manufacturing excellence? And I think you've even been looking at kind of footprint over in Europe having some conversations with works councils. So if I can get kind of an update on that side of things?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [38]

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Sure. So you're really talking about our Beauty + Home transformation. And just as a backdrop, as a reminder for everybody, we set out to do 3 things: One is to reaccelerate the top line, which, notwithstanding what we just discussed, was actually quite successful by -- after several years of flat to declining sales. We're able to reaccelerate the top line, grow above market. We gained some share and a much stronger commercial excellence activity, sales activities and so on. The second part is to address our underperforming sites where we had operational issues, the custom beauty sites in France, anodizing site and a couple sites in the U.S. And then the third one is headcount reduction and SG&A, streamlining all the corporate support functions. That is quite a bit also in Europe, including the installation of the shared service center, which requires all work council approval also in France. And that is a longer drawn out process. Now we are executing and have been successful in doing what we set out to do.

I'm actually -- just a couple of weeks ago, was at [Lutzbach] in Monaco, very heartened by the feedback we're getting from customers about our increased service levels, our proactiveness, the filling of the pipeline is good. Also, our sites are performing much better and we are successfully addressing most of the trouble spots. Now having said that, if your revenue hits New York parcel like we're doing now, you have future unabsorbed fixed cost, which is eating up those gains. Nevertheless, we are executing and performing much better. Now looking at the demand scenario, of course, we are taking additional measures in the short term. Anything you can imagine, reducing people who have temporary contracts, which we have quite a few in Europe, eliminating over time, subcontracting work where it makes sense to variablize costs actually doing the opposite. In other cases, in-sourcing, to leverage our own fixed cost. And of course, further working on purchasing. Now if -- we're also looking at scenarios to further streamline our footprint. Some of those we've already discussed. We also recently announced that -- internally, that we are consolidating facilities in Argentina based on the business there. And we will continue to look whether we need to make additional structural changes. This probably as much as I can cover.

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Operator [39]

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Our next question or comment comes from the line of Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [40]

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Stephan or Bob, Stephan, I think you just commented that you don't think Q4 is a steady-state situation in terms of the guidance, just given the Beauty + Home customer destocking. Can -- I know you said it would -- you would expect it to last into Q1. But can you give us a sense of how much of a hit you're expecting from this destocking to the extent, again, you consider it kind of a nonrecurring situation?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [41]

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Yes, Adam. It's hard to tweeze that apart. Clearly, we would expect this segment to grow in the 3% to 6% range. We certainly expect it to decline in quarter 4. Actually, the underlying beauty business and all the trends we see in beauty continue to look very favorable. Personal Care is a larger challenge. I think there we see some trends of the changes in usage patterns, particularly in hair care, that need a closer look. But overall, the beauty side of it, I remain very bullish about, this destocking notwithstanding.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [42]

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Sure. Just 2 others. One on -- also on Beauty + Home. So you talked at length about the restructurings, Stephan, just now. Do you think there's any relationship between this restructuring program you're doing and the sales weakness you're seeing in that segment to the extent reducing employees might be having an impact on your core sales there?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [43]

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None whatsoever. In fact, customers are as happy as they've been since certainly, I've been here. And the pipeline still looks good, so I don't see any relationships there.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [44]

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And just 1 last one, again, on Beauty + Home. So the restructuring was intended, was focused primarily on Beauty + Home and you had that $80 million EBITDA target. Now you're changing the leadership of that segment. Can you just update us on kind of where you are in terms of the $80 million of EBITDA, incremental EBITDA to which you guided by the end of next year and why the leadership change now as opposed to, I don't know, 2 quarters ago or 2 quarters from now?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [45]

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Sure. I would say we're about halfway through. And obviously, some of that has been eaten up with the current demand picture. Eldon has done a good job in particular on the front end of the business. We feel that a very good team, now a different mix of skills and experience, is required. And certainly, Marc brings those experiences and skills. And frankly, we need Eldon elsewhere on some topics that need attention and that leverage his commercial excellence expertise more.

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Operator [46]

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Our next question or comment comes from the line of Ghansham Panjabi from Baird.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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I guess following up on the last 2 questions on Beauty + Home and Personal Care, in particular, for North America, that category seems particularly weak just relative to what your customers have been saying over the last couple of weeks as they reported earnings. Can you just give us some more color as to what's going on there? I mean that's a pretty significant number in terms of a 9% decline from North America.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [48]

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Yes, let me provide a bit more transparency. Certainly, some of our customers (inaudible) and frankly, we are growing with them, but others are not. And I think we highlighted previously that, in particular, one product launch -- that pretty big last year. The sell-through is actually not great. And I think J&J has been public about their disappointment in the performance of the product in

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Operator [49]

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Ladies and gentlemen, please stand by. Speaker line dropped. We'll get connect -- reconnect. Please hold.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [50]

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Sorry, Ghansham, where did we lose you?

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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I think you mentioned J&J and the disappointment with that product, and then I couldn't hear anything after that.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [52]

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Right. Yes. Our line dropped. Bob was adding something.

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [53]

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Yes, I was saying that, if I'm not mistaken, I think some of the customer announces -- announcements were talking more about their core sales gains were coming from pricing than volume. And obviously, we're going to be very volume-dependent. So that's also part of the equation.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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Okay, that's helpful. And then just in terms of pharma, the strategy in terms of broadening out your relevance, how much of this is customer pull-driven? And also, can you just give us a sense as to the profit pools of the various nodes that you sort of highlighted on Slide 5 as you kind of build out your service capabilities, et cetera?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [55]

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Yes. I mean clearly, today, the vast majority of our revenue is downstream. The service part of it is more rapidly growing and profitability, frankly, is very good. So certainly, in line with pharma profitability. And we see that -- really 2 opportunities. One is to participate in that higher service revenue, but two, also increase the odds of our devices being in a successful launch at the back end. So -- and the strength of the pharma model is that, unlike in some other markets, we actually can charge for the services, good money and at the same time the benefit from the success through the device sales. And in between, there are also milestone payments that we refer to, exclusivity payment, these kind of things along the pipeline. So it's really building out the ecosystem and dipping more into the whole profit pool of the whole chain that we show there on Slide 5.

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Ghansham Panjabi, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [56]

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And just one final one, maybe for Bob. Just in terms of the tax rate, you guys are one of the few companies that we follow that's seen a year-over-year increase in the tax rate, especially one that's a substantial. Is this a new baseline for tax rate going forward? Or is 2019 sort of an anomaly?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [57]

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Yes, sure. Good question, Ghansham. So when the tax format came out, we had mentioned that about 70% of our business is outside of the U.S. So we've got a little bit more of a disproportionate share of our business outside the U.S. and the tax changes meant to really bring more of that manufacturing to the U.S. Our fluctuation in the past and our lower tax rate has been predominantly from option exercises and the tax -- the increased tax deductibility on that. So our normal run rate absent any of those discrete items and tax benefits from stock option exercises is more in that 30% to 32% range.

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Operator [58]

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Our next question or comment comes from the line of George Staphos from BOA Merrill Lynch.

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Molly Rose Baum, BofA Merrill Lynch, Research Division - Research Analyst [59]

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This is Molly Baum sitting in for George. He had a conflicting conference call today. The first question I wanted to ask, you talked a lot about sustainability at your Capital Markets Day. So in the better space, in particular, I wanted to ask if you've seen any impact be it positive or negative from this increased focus we've seen on sustainability. And then just in general, if you've seen any impact or see opportunities or risks in any of the other segments and categories.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [60]

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I would say the -- we have gotten very high marks from customers for our proactive engagement with the topic and not just in words but also in deeds. As you know, our participation in the Loop pilot and also being on the Board of Loop, our investment in pure cycle to help bring about food grade polypropylene 100% recycled. And we start to see more projects in the pipeline with higher or 100% PCR content and customers are really wanting to get the hands-on those products. Recently, I also saw a very good interview from the CEO of Coke who said, "Look, this is not about getting rid of plastics. This is about making 1 of the lowest carbon footprint products, fully recyclable and taking advantage of it because the carbon footprint of plastic is, of course, much lower than that of glass and aluminum." So it's really customers engaging with us on how to solve this issue, which is primarily a waste issue in Asian countries who don't have good waste management situations, and then it ends up in the ocean and gave rise to this whole topic. And as we engage with customers and also at the more senior levels, we get more projects and certainly, you will see some shifts, I'm sure, from things that are more multiple material to unique material to make them more recyclable. You may see shifts of products that are onetime use to products that can be reused, and we are engaged in many of those projects.

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Molly Rose Baum, BofA Merrill Lynch, Research Division - Research Analyst [61]

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Got it. And my second question goes back to the Noble acquisition and just really pharma services more broadly. Really, the question is, how much further do you want to expand the business? And then if you look at Slide 5, do you -- are -- what stages along the, I guess, product life cycle do you see gaps that you could potentially fill through further bolt-on acquisitions?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [62]

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Yes, let me not speculate here. Of course, it is an active M&A environment, but we're quite happy with how we filled out this slide, if you want, if you saw our internal strategy slides from a couple of years ago, very happy with the progress. These things also go in stages. We need to digest what we have. These are all successful business in their own right. But we, of course, want to lift the synergies, which are mainly top line synergies. And yes, we may add to that down the road, but we're quite happy with what we have here.

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Operator [63]

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Our next question or comment comes from the line of Debbie Jones from Deutsche Bank.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [64]

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My first question is, you highlighted the role, I think, that was created for Eldon here. And so there are some things you needed to do. I was wondering if you could just talk about that a bit, what kind of strategic projects, if possible? And the very least, the kind of the commercial excellence focus that he's going to be having?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [65]

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Yes. I mean by the very nature, strategic projects are not something that we can talk publicly about, but I think you have noticed maybe over the last few years that our level of activity has increased, and we're not done in terms of positioning the company and future proofing the company in the right areas. So there are quite a few projects that need more attention. And Eldon's towering strength is in commercial excellence, and certainly, the rest of the company can benefit more from his guidance there.

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Deborah Anne Jones, Deutsche Bank AG, Research Division - Director [66]

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Okay. I'm sorry, my line is cutting in and out during the call, and I'm not sure if anyone asked about the -- kind of the uptick in CapEx that you were calling for and just kind of the working cap move that Bob highlighted earlier. I was just wondering if we could get some more color on that.

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [67]

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Yes. I mean, Debbie, the working capital, we've picked it up a little bit, just based on where we finished Q2 -- Q3 actuals on capital. I don't think there's really much to read into that. On the working capital, we are starting to see some benefits of some extending of payment terms with our suppliers. We've made some progress in the inventory area as well, but we still have a long way to go. And we haven't seen any real further degradation on the receivables side. So all in all, it was a good quarter from working capital, and the businesses are refocused on this topic. And like I said, we still got -- while we've made some good progress, we've still got some work left in front of us.

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Operator [68]

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Our next question or comment comes from the line of Neel Kumar from Morgan Stanley.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [69]

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Great. In terms of the growth normalization in pharma, is that mainly just limited to the OTC allergy market? Or is it also impacting the prescription allergy market? And then also, margins have been trending towards the higher end of your target range as well. Can you maybe just talk about whether you expect margins to normalize in near term or stay at current levels?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [70]

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Yes. On the first question, you are right that it's primarily about the OTC market. I need to handicap that a little bit because OTC in one country might be prescription in another country. But given the dominance of the U.S. here, I think your comment is right. The margin is really largely dependent also on the mix of businesses. So we've been very open that our injectable business has a lower margin than the average. So if our injectable business grows faster for a couple of quarters than the other part of the portfolio, you will see that impact the margin. Bob?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [71]

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Yes. No, I would say, also, you guys, you can throw active packaging into that mix as well. I mean it's closer to the injectable margin, and that's also been performing very, very well. So I think in the past, we've come off a very robust prescription growth in the pharma business overall. So the mix tempering -- the mix is really what's tempering that margin and impacting that margin.

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Neel Kumar, Morgan Stanley, Research Division - Equity Analyst [72]

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Okay. And then also just -- just talking about CSP performance in the quarter, any progress on how it's performing with some of the newer applications?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [73]

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Sure. So it's actually been doing quite well. So we've lapped the 1-year anniversary. And like-for-like on the 1 month. In September, we were up mid-teens in terms of growth, which is good. So I would say it's performing as we had expected. We're starting to gain some new traction on some new application. Stephan mentioned the Activ-Blister project, and we have some others in the pipeline. We're starting to see more activity jointly with our legacy business, the application on the epinephrine that Stephan mentioned also will contain a CSP vial as well to protect the integrity of the package. So we are starting to see some synergies from both the device and the secondary packaging side of things. So we're very pleased with the developments of CSP and see a lot more on the horizon.

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Operator [74]

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Our next question or comment comes from the line of Adam Josephson from KeyBanc.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [75]

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Bob, would you mind just talking about the cadence of sales growth through the quarter, to the extent there was a notable slowdown toward the end of the quarter and then because of the Beauty + Home inventory destocking? And then relatedly, how would you compare this customer destocking you're seeing to previous cycles, whether '08, '09, '10, 2010, when you saw the bounce back? Can you just talk about how this feels compared to those previous periods in that regard?

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [76]

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Sure. So I don't have the figures in front of me in terms of month-to-month. But typically, in normal cycle, September tends to be one of our stronger months, and we didn't really see that this time. So that's one indication, if you want to look at the month-to-month progress throughout the quarter. I would say, at least from my experience and from what I've seen, this is very normal. Typically, we've seen, for whatever reason, personal care oftentimes be first into a slowdown economic cycle. And then typically the first out, as Stephan mentioned, can last anywhere between 2 and 3 quarters. Looking back in '08, '09, we first saw the dip in the fourth quarter in personal care. And then we started to see it in the first quarter of '09 on the beauty side. But then in the back half of the year, personal care was the first to come out of this cycle, followed by beauty. So I would say it's very typical for us. I can't explain why that phenomenon is there, but it's definitely something that seems normal.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [77]

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I appreciate that. And just back to, I think, Mark's question earlier about how the personal care weakness you called out last quarter was different than this, can you just again help me understand the difference between the 2 issues?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [78]

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Well, personal care, it's really a mix of end-user demand and change also in usage pattern. And I mentioned the hair care and grooming, shifts of, one example, more dry shampoo being used by millennials. And the particular exposure we have to the J&J product with the launch not repeating and the product not doing as well. That is different than the beauty customers all of sudden, "Hey, we're spooked, and we're going to run our inventories down."

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Operator [79]

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Our last question is from Salvator Tiano from Vertical Research Partners.

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Salvator Tiano, Vertical Research Partners, LLC - VP [80]

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So just to talk a little bit about 2020, if you can provide some early moving pieces that you see with regard to CapEx direction and a meaningful change in your volume trends besides what you already discussed about the short-term implications in Pharma and Beauty + Home or margins. How should we think about next year's earnings and cash flow?

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [81]

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We really don't give guidance at this stage for '20. We just gave the Q4 guidance. We stand by our long-term targets for the 3 segments. I think clearly, we are entering the year in a destocking mode with the challenges we've discussed in the Beauty + Home side. And we'll have to see how long into the year that takes. And I think beyond that, we really can't give you 2020 guidance at this stage.

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Robert W. Kuhn, AptarGroup, Inc. - Executive VP, CFO & Secretary [82]

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Yes, and I'll touch on your question on free cash flow. I mean it's the month that we're very early -- not early, but we haven't finished our complete review of the capital requirements for next year. And certainly, that will be scrubbed and reviewed and will be highly dependent on projects that are in the pipeline and ready to execute. We are going to continue to focus on working capital improvements. So that's certainly going to be an area of focus in 2020 as well. And that's about really all I can give you from a cash flow guidance perspective.

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Stephan B. Tanda, AptarGroup, Inc. - President, CEO & Director [83]

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Thank you, everybody. Thanks for joining us, and we look forward to seeing you on the road.

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Operator [84]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.