AptarGroup, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Aptard Group's 2019 second quarter conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. Introducing today's conference call is Mr. Matt Della Maria, Senior Vice President, Investor Relations and Communications. Please go ahead, sir.

Thank you, Howard, and welcome, everyone. Participating on our call today are Stefan 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 file that summarizes our results on our website. We will also post a replay of this conference call on our website. And 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. After undertakes no obligation to update the forward looking information contained therein. I would now like to turn the conference call over to Stefan.

Thanks Matt and good morning everyone. Thank you for joining us. As you saw yesterday, we reported good second quarter results with consolidated core sales growth of 4% and solid double digit earnings growth. Turning to slide four of the deck, our pharma segment continued to benefit from strong sales momentum in the allergic rhinitis and central nervous system categories. We also saw a broad-based increased demand across our other pharma applications, including our consumer healthcare and injectables division. I'm also pleased that we closed on two acquisitions of leading pharmaceutical service companies, namely Nanopharm and Gateway Analytical. It is our strategy to expand our pharma service offerings that support pharmaceutical customers for both small and large molecules to help them accelerate and de-risk their complex product developments. Both acquisitions bring value-added and differentiated analytical, testing, and development services for all stages of drug development and commercialization. The expanded services platform will enable Aptar to collaborate earlier with customers to support their drug formulations and delivery requirements as they face increasingly competitive markets and increasingly demanding regulators. In addition to the two acquisitions, we had another interesting pharma-related announcement just last week. The US Food and Drug Administration approved a unidose powder system for a drug which is intended to treat severe hypoglycemia in people with diabetes. This marks the first FDA approval of a prescription drug using Aptar's patented unidose powder system and is Aptar's first combination of a drug delivery device with a solution from Aptar CSP Technologies as the device is protected by an active polymer container. This is also the first needle-free rescue treatment for severe hypoglycemia. Delivering the drug intranasally replaces the often difficult-to-assemble injectable kits, which require a multi-step, time-consuming process of mixing powder and liquid. This launches another validation of nasal delivery as an attractive, non-invasive way to administer life-changing and life-saving treatments. Turning now to slide five in our beauty and health segment. We are comparing to a very strong second quarter last year, which included a significant amount of custom tooling sales and a pipeline fill for customers' global launch in the personal care market, both of which did, of course, not repeat. We continue to make good progress on our transformation initiatives, including the operational improvements at some of our manufacturing facilities that are part of our three-year phased approach, and we look to make further progress throughout the remainder of the year and all of next year. Looking at the product on the right, we continue to help our customers bring innovative solutions to market and in the quarter, Monat Studio One introduced the hairspray that features our twist-to-lock actuator with a patented nozzle that allows for two dispensing settings. In addition, the locking technology is designed to provide protection during e-commerce shipping. Moving on to slide six, our food and beverage segment had a strong quarter with increased demand for our dispensing closures, particularly in the food market. The segment continues to benefit from conversion opportunities, especially for condiments and dairy products. Some of you may also have read the recent article in the Washington Post that highlighted the differentiating benefits of the StentCap inverted flexible pouch solution enabled by our pouch fitment and dispensing closure with our Simply Squeeze valve. If you missed it, just Google Aptar Washington Post to find the article. Also, Aptar was selected by Nestle to develop a dispensing closure for the first Kramer launch under their Starbucks brand partnership. This custom dispensing pour spout featuring a unique press to open and close design provides strong visual appeal, shelf differentiation, and added convenience for the Starbucks consumers. Finally, our infant formula closure with a built-in scoop is featured on a line of organic infant formula by Yi Li, the large dairy in China. So, in summary, a good quarter overall with top line gains in pharma and food and beverage offsetting some softness in personal care, with strong earnings growth, and several new interesting product introductions. With that, I will now turn it over to Bob, who is going to walk through some of the financial details that impacted the quarter.

Bob? Thank you, Stephan, and good morning, everyone. I'll briefly walk through some of the details concerning our second quarter results. If you are following the slides we published with the press release, you can refer to slide seven. We reported sales growth of 5% that was comprised of core sales growth of 4%, with a positive impact from acquisitions of 6% and a negative impact from currency rates of 5%. Reported earnings per share increased 30%, mainly due to the higher amount of transformation costs incurred in the prior year. As you saw in our press release, our pharma segment achieved a core sales growth of 10% 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 15%, primarily due to increased demand for our nasal spray systems used with allergy and central nervous system treatments. Core sales to the consumer healthcare market increased 4%, driven primarily by increased demand for our systems used with ophthalmic and nasal saline products. Lastly, core sales to the injectables market increased 6%, as we continue to bring additional molding capacity online to resolve certain production bottlenecks. Turning to our beauty and home segment, core sales, excluding acquisitions, and keeping currencies constant decreased 3%, primarily due to lower custom tooling sales compared to a year ago. When we look at profitability, our beauty and home segment had an adjusted EBITDA margin of 14%. Margins were favorably impacted by lower raw material costs and our transformation efforts. Looking at sales growth by market on a core basis, core sales to the beauty market increased 4%, mainly due to strong growth across all categories in Europe. Core sales to the personal care market decreased 11%, more than half of which was due to lower custom tooling sales, Difficult comparisons due to pipeline filling in the prior year for customers' global launch and some softness in the U.S. market. Core sales to the home care market increased 5% due to increased demand across a variety of categories, primarily air fresheners and insecticide sprays. Looking at our food and beverage segment, core sales increased 10% in the quarter and and this segment had an adjusted EBITDA margin of 18%, which was even with the prior year. Looking at each market, core sales to the food market increased 17% due to increased sales of our dispensing closures for sauces and condiments, as well as granular foods and dairy products. Core sales to the beverage market increased 1%, primarily due to increased custom tooling sales compared to a year ago, which offset weak demand across most categories, and in particular in Europe, where we believe the weather conditions in the spring impacted our demand. Turning to slide eight, comparable adjusted earnings per share totaled $1.15 and rose 10% compared to the $1.05 adjusted earnings per share in the prior year. We also grew adjusted EBITDA by 14% in the quarter, with each segment reporting increases in adjusted EBITDA, despite foreign currency headwinds. We expanded our overall adjusted EBITDA margin to approximately 22%. Slides 9 and 10 cover our good year-to-date performance and highlight our 5% core sales growth and 13% adjusted earnings per share growth. Slide 11 refers to our outlook. We are expecting earnings per share in the third quarter to be in the range of 91 to 97 cents per share, using an expected tax rate range of 30 to 32%. Our tax rate for the third quarter guidance includes an estimate of the impact of a recently enacted corporate tax rate increase in France. I'd also like to point out that last year's third quarter adjusted tax rate was 24%, so there is a significant difference in the year-over-year comparison due to the tax rate differential. Also, we are up against currency headwinds and are using a 1.12 euro rate in our guidance, which compares to 1.16 euro rate in Q3 of 2018. I have a few other details to share, and then I will turn it back over to Stefan. In the quarter, cash flow from operations was approximately $144 million. Capital expenditures were approximately $73 million. And our free cash flow was approximately $70 million compared to $52 million a year ago. Looking at our balance sheet capitalization, on a gross basis, debt to capital was approximately 45%, while on a net basis, it was approximately 38%. and we remain less than two times levered. At this time, Stefan will provide a few comments before we move to Q&A. Thank you, Bob.

In closing, I'd like to leave you with a few key takeaways as shown on slide 12. We saw 5% core sales growth through the first half of the year with double-digit earnings growth. This was driven by our pharma and food and beverage segments, which had an excellent year-on-year core sales growth Beauty and home sales were even with the prior year despite some challenges. We had improved profitability across each segment. Looking to the third quarter, we anticipate core product sales growth across each segment. Pharma is expected to continue the positive momentum seen in the first half of the year, and while we anticipate product growth in our beauty and home segment, some personal care customers foresee weaker volumes in the near term, and we expect lower custom tooling sales compared to a year ago. In closing, we will continue to bring value to our customers and their consumers by continually introducing innovations that convert non-dispensing packaging into innovative product dispensing systems. To change with the times and to create innovative technologies which drive the future of dispensing and drug delivery systems has always been our key to success. With that, I would like to open it up for your questions.

Thank you very much. Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-on. Then come back into the queue if you have more questions as time allows. Again, to ask a question at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Gabe Hodgie from Wells Fargo. Your line is open.

Good morning, gentlemen. Thanks for taking the question. I think, Bob, you mentioned that the personal care weakness had been isolated a little bit to the U.S., but the forward look comment was that you expected it to persist. So I was curious if that expanded by geography at all or if it's still mostly isolated to the U.S., And then I had one other question.

Sure. So, yeah, the reference to the U.S. was really primarily for the Q2. The other regions weren't necessarily robust. And so there is a certain element of caution in our Q3 guidance. That's basically about it.

Okay. And then can you – I've missed a couple minutes of the first part of the – so I apologize if you guys – But the CSP acquisition, can you talk at all how it's performing relative to sort of maybe, I don't know, acquisition expectations, et cetera?

Sure. So, we're very pleased with the performance of CSP and the integration that we've accomplished thus far with our legacy after operations. They continue to exceed where our top-line sales forecasts are. They're double digits in Q2. Again, they're performing above our accretion expectations on a quarterly basis. They were about $0.03 accretive in both Q1 and Q2, and so we maintain our $0.10 per share accretion target on an annualized basis. And as Stefan mentioned, you know, we're excited about the first joint product that is going to be out on the market very shortly in the nasal unidose powder. I think it shows what the technology inside a CSP can do in comparison with our legacy products. So we're actively promoting that. that as well as CSP's core business, which is in diabetes vial containers and the like. And we're very hopeful in the future that some of the material science technology they have also has some potential beyond just today pharma and food and beverage, but potentially also some possibilities within the beauty and home segment.

Thank you.

Thank you. Our next question or comment comes from the line of Daniel Rizzo from Jefferies. Your line is open.

Good morning. You mentioned the personal care softness expected less in the third quarter. There have been other companies that kind of served that market expecting it to continue to the end of the year and potentially into 2020. I was wondering if that's something you would care to comment on, if you have any visibility into that.

Thanks, Daniel. Look, the visibility there is really somewhat limited. We had some last minute cancellations at the end of Q2 or slash deferrals. So clearly there is some anticipation in the supply chain that things will be soft. We give you quarterly guidance, so our visibility is really to the quarter. These are products we use every day. There is some share shift in the market between different companies. You may have read about that. So there's a lot going on right now, but we are confident that this will return to growth in the longer term as you have those products in your home and so does everybody else on the call.

Okay, thanks. And then you mentioned that there was softness in Europe in the spring because I think of wet weather or unfavorable weather conditions. I was wondering if there's a catch-up with that in the third quarter.

Yeah, it's a bit too early to tell, but certainly the weather has gotten a lot warmer, especially in Europe, and that should bode well for the beverage business. We also see some more isolated developments. The Middle East had some regulatory changes, so that might counteract that. It's too early to see, but certainly the weather has shifted.

Okay. Thank you very much.

Thank you. Our next question or comment comes from the line of George Staffels from Bank of America. Your line is open.

Thanks very much. Hi, guys. Good morning. Great quarter. Thanks for taking my question. I jumped on the call a little bit late, so you might have already mentioned this, and apologies in advance if you have. When we look at the commentary on personal care, are you seeing, and you're not alone here, are you seeing any of the volume softness bleeding into more competitive pressure from your peers in the sector, or you're not really seeing that? And then, kind of a related question, and ultimately this is our forecast, not yours, but margins were a little bit off from what we had been modeling. You had much stronger growth than we were looking for. Were there any other things in your mix, aside from tooling, that was notable in the quarter for the segments that we should be aware of as we model going forward?

Yeah, and let me comment on the first one, and then Bob can maybe catch the second one. We don't really see a shift in competitive behavior with our peers and competitors. Of course, we all see that some of the assets are changing hands, but those are not new entrants. Those are just new owners. Within our customers, we do see some share shifts. but that ultimately has nothing to do with the end demand. I don't know whether you were on just a couple minutes ago, but certainly we see softness in quarter three in the personal care sector, both in the U.S. and Europe, but ultimately these are broadly used products. Demand will return.

George, I can take the... your comment on the margin. So for us, you know, we weren't all that surprised. I'm not sure exactly if your comment was focused on a particular segment or whether it was on a consolidated basis. But one thing to keep in mind, if it was pharma-related, it still is at the upper end of the range at 36%. understanding that CSP has a slightly lower margin profile on pharma, so it's going to have a little bit of a dilutive effect on that. Beauty and Home, in spite of some lower core sales, granted most of it being in tooling where we don't have the same margin profile, still was up to 14%, and then food and beverage was relatively flat with last year. I'm not sure if there was one particular one that we were off from your model on.

No, it was more pharma and food and beverage, but it sounded like your margins in the quarter were as you had expected, plus or minus, there was always variances, but it was as you expected and there were no significant items that you would call out here on the call.

No, that's correct, George.

Okay. And then my additional question I'll turn it over. To the extent that you haven't commented already, What are you seeing in terms of Asian luxury good demand and how that might be filtering into your expectations for the second half, either better or worse? Thank you, guys. I'll turn it over.

Thanks. Well, the short story is that we don't really see an impact on the luxury end of our products because we see continued good growth now European sales, which end up in luxury fragrances and skin care in Asia. I think the longer story is that all this trade tension does have or did have a significant impact on consumer confidence in China. I think that's fair to say. And as all of you, we follow the fact that big-ticket items, cars, large electronics, and so on, Those markets have contracted, but we haven't seen it in personal products like fragrances and skin care or travel retail. That's actually been strong, and we continue to see that. The last point I would make, sales that we make in China for China, there we do see a softness, but I think that has much more to do with the fact that multilevel marketers really got hammered by the Chinese government that was safety and healthcare with some nutritional supplements. That brought the wrath of the Chinese government on multi-level marketers. That's a significant customer set for us. There's a lot of churn in China from multi-level marketers to indie brands to e-commerce startups. and it's hard to see who's going to catch the business. In the end, the business is still growing, but we see a lot of churn on who supplies the business.

Thank you very much, Stephan. Thank you, Bob.

Thank you. Our next question or comment comes from the line of Adam Josephson from KeyBank. Your line is open.

Stephan, Bob, and Matt, good morning, and congrats on a good quarter, as usual. Thank you. Bob, just one question on guidance, and then Stefan, I've got one or two on being home. Bob, just regarding the 3Q guidance, it implies about a 20 cent sequential decline, which is a little more than normal, but the tax rates are skewing things a bit because the tax rate was lower in 2Q, higher in 3Q. So if you adjust for that, it's a more normal sequential decline. Would you say there's anything unusual in your 3Q guidance just in light of that? Or I don't think there is. I just wanted to make sure.

No, I mean, you know, if you try to piece it together, I mean, I think you hit on some of the major points. So, obviously, a couple pennies is coming from the higher tax rate guidance that we put out there. Our share count is increasing as we haven't been repurchasing as many shares as we have in the past. That's about a penny. Our corporate expenses are running a little bit higher, that's two to three cents, and that's our continued investment, not only at the senior level, but in the regions and some of our excellent centers. The FX is probably about two cents, comparatively, and again, we see the dollar strengthening again today. So it's nothing in particular, it's a lot of little things that all kind of add up to the guidance.

Yep, that makes total sense, Bob. And one on restructuring for either Stefan or Bob. So it's been going on for a year and a half. You, I remember, got it to $80 million of cumulative savings, most of which, correct me if I'm wrong, were to come in Beauty and Home. Beauty and Home EBITDA is up $16 million in the last year and a half since the program started, compared to that savings target of $80. So I'm just wondering if if the restructuring program is as you expect it to be, or if beauty in a home has been just more difficult than you imagined it would be, such that the $80 million of savings will be more difficult to come by than perhaps you thought when you announced the program?

Let me take that one. I think fundamentally we are halfway through a three-year transformation. And just as a reminder for everybody, year one was really focused on top line. And quarter to nonwithstanding, we're very happy with the top line development. We feel good about the pipeline, the definition of the pipeline. And, of course, things happen, but we can react and have a good grapple on the top line. The second year, which is the middle of the year which we're in, is all about operational improvements. We feel good about some of the operational improvements we've made at our decorative site. The analyzing site in Annecy has come back strong. We have still further to go. And then several sites, and then the third year is all around further finding footprint, reducing headcount, particularly in SG&A in Europe and in some of the support functions. Those things are being discussed with Works Council. As you know, we have 5,000 people in France. These processes take time, but they're all slotted in. So overall, we are on track. I feel good about the transformation. Remember, the 80 million was a gross number, and it was an EBITDA improvement number, not all savings. That was a top-line growth. But we feel good about the transformation. It is designed to get us comfortably back into our EBITDA margin range of 15% to 17% for beauty and home. So we expanded to 14% now from 13%. So overall, I feel good about it, and we're on track. You always have challenges, but the organization has become much, much quicker to react and much more skilled to attack issues as they arise. So you also can see that the muscles have been built up.

Thanks, Stefan. And just one last one on that same sort of topic. Under your predecessor, the pharma segment thrived. and BD and Home would just have just occasional slip-ups, either market-related or otherwise, and it just seems like a more difficult business to manage, and it's a more competitive business. Would you say that's changed fundamentally under your leadership? I mean, it just seems like it's still been much more difficult to manage than has pharma since you took over. Correct me if you think otherwise.

Well, I wouldn't say. pin it on predecessors and current leaders, but clearly the transformation has turned what was nine quarters of declining or flat sales into seven quarters of growing sales. So that is fundamentally the result of a fundamentally different approach in addition, of course, a good macroeconomic development. But to your larger question, The consumer facing businesses, food and beverage and beauty and home are fundamentally different animals in terms of their rhythm, their cadence. You're talking of a constant customer project churn. That's why it's so important that in our commercial efforts we track customer projects, customer win rates on a weekly basis, take corrective actions. That's the nature of any consumer facing business. And we have a much better handle on the customer project pipeline, conversion rates, and so on. It's just becoming better at executing against that business. Now, the pharma business is a much more long-cycle business. So whatever we put in the pipeline, we harvest five, six, seven, eight years down the road. We commented several times that some of the great success stories, the seeds were sown 10 years ago, so it's a much longer cycle business. What connects the two is, of course, that the product technology is, in many instances, the same. Just you do it in the clean room under all the pharma quality systems and so on, and you execute towards different quality standards. And therefore, we can leverage across everything around operational excellence, enterprise systems, and so on. as well as talent. So you will see that the leaders often move from one business to another because the fundamental operations logic is the same even though the commercial business development logic has a very different timeline.

Thank you, Stefan.

Thank you. Our next question or comment comes from the line of Gancham Punjabi from Baird. Your line is open.

Hey, guys. Good morning. Good morning. I guess first off, going back to 2Q, you know, can you disaggregate, Bob, for us volumes versus price across the three segments? I'm just trying to get a sense as to how any pricing component from previous resin fluctuations, et cetera, flowed through in the quarter specifically.

Yeah. So, I mean, specifically talking about, you know, resin in terms of sales growth, it was on a consolidated basis about 1% positive on the resident pass-throughs, positive on the beauty and home side, negative on the food and beverage side. Relating to the volumes, I mean, I think we had some weaker volumes in beauty and home, which were offset by some pricing that we've implemented as part of the transformation. And then the other segments were primarily volume-related in terms of the growth in both food and beverage and pharma.

Okay, understood. And then, you know, on the 3Q guidance and the tax rate being higher partly because of the French tax increase and it being retroactive, should we assume that 4Q will be lower sequentially than 3Q just given the retroactive nature that's impacting 3Q? I'm just trying to think about the tax rate 4Q onwards.

Yeah, no, that's a good call. I mean, it should be lower because we've got the catch-up, which is essentially a couple pennies in Q1 and Q2 that's going to have to be booked along with Q3. So, yeah, I mean... We've been saying that our tax rate is somewhere between 29 and 31 on an annualized basis, so it'll move up slightly, but definitely less than where our Q3 tax rate guidance is.

Okay, and then just one final one. I think in your prepared comments, you called out personal care being down 11% year-over-year. Half of it was lower tooling sales. You had a tough comp from pipeline fill and then the U.S. being softer. Can you just give us more insight as to how exactly the U.S. business in terms of personal care progressed during the second quarter? And then just thinking more broadly, I mean, you have a lot of complexities, right? You have Brexit, which will occur. You know, Europe has slowed. China looks like on a slowing trajectory. And the U.S., the jury's out as to, you know, how the consumer is going to progress as we head into the holiday season. But just more broadly, what are your customers sort of indicating as it relates to the upcoming holiday shopping period, et cetera?

Overall, Gantrup, I would say we feel good about the new project pipeline we have. Of course, pharma is going very well, and we do not see that fundamentally changing. but also food and beverage and beauty and home has good new customer project pipeline. You're pointing out clearly, yes, the economy is slowing. Now, that has some impact on this personal care business, as we discussed, but I don't see strong signs of a slowdown in what we hear from customers.

And then particularly, Gansha, maybe on a And it's going to tie in with the comments that we've mentioned already. You know, the U.S. was down not only in personal care but also in beauty in Q2. Europe, while it was up, was primarily related to the growth in the beauty side of the business. Personal care was actually down a little bit in Europe. And then in the other two regions, Latin America, we were down slightly, and that was kind of a mix between personal care being flat and beauty and home care being down. And then in Asia, for the reasons that Stefano mentioned previously, we were down in all markets. The one exception is that tooling in Asia weighed negatively on the personal care. Actual volumes in Asia of products were actually up slightly.

The one add I would make is Brazil is certainly doing a little bit worse than what we would have expected. The rest of Latin America is better, but Brazil is not where it should be.

Understood. Thanks so much.

Thank you. Our next question or comment comes from the line of Neil Kumar from Morgan Stanley. Your line is open.

Hi. Good morning. Morning, Neil. I was curious if you could just discuss what level of growth you've seen in your T&S applications. And then approximately what percentage of the farmer portfolio does T&S represent now, and how large do you think it can get?

Thanks, Neil. The short answer is we don't really give guidance on that detail. I know you've done a lot of work in this area. We really only give the breakdown by RX, meaning prescription, consumer health care, and injectables. And Bob mentioned the growth rates. I think it's also nice if injectables come back to a nice 6% growth rate, but we don't break it down further into the subcategories.

Okay. And I think in your outlook, you mentioned that you expect pharma to continue to pause its momentum. seen in the first half of the year. Can we take that to mean that pharma core growth should continue at the higher end of your 6% to 10% range in the second half of the year?

Yeah, we're very comfortable with our ranges that we put out there and the 6% to 10% for pharma.

Okay. And then just lastly in food and beverage, I was just curious, you know, what type of impact do you see over the next few quarters from the pharma beverage closure launch?

It is an exciting launch. It's an interesting new technology, but please keep in mind that any single launch, any single product doesn't move the needle. We have hundreds and thousands of products, and if they start a trend and get rolling and get multiple followers, like, for example, with the flexible stand-up pouch, then it starts to move the needle, but any single launch will not move the needle.

Thanks. Thank you. Our next question or comment comes from the line of Chip Dillon from Vertical Research. Your line is open.

Hi. This is for Chip. Thanks for taking my question. Firstly, I wanted to ask about your recent acquisitions in pharma. Can you elaborate a little bit on how they'll impact your financials? If there's going to be any small revenue boost or if it's more on margin and helping you maintain a very strong pharma growth rate, that'll be the first question.

Yeah, one is we're very excited about both. They're quite a bit different in size. They are both profitable and will contribute or are already contributing to our results So those are not research projects. Those are profitable businesses that are supporting the pharma financials. But more importantly, it is really a strategic play to strengthen and build out further our services. As you know, for many years we had small pharma services businesses that helped particularly in the nasal delivery. Gateway Analytical in particular also has a strong service offering around injectables testing, and NanoPharm really helps in the early stages of drug development, again, supporting our inhalation and nasal delivery. And that will allow us just to add more project into the pipeline, support customers better. In the pharma world, more and more you see smaller startups so-called two people with one molecule, companies getting to the act and they need everything they can possibly source from service providers to get through the regulatory process, to get samples, to support them in the clinical trial setting. Of course, we charge for those services. That's their business model. At the same time, of course, the device that we then deliver is part of the drug master file and guarantees decades of business afterwards. So that's really the model. And since many of these early-stage pipeline projects are smaller companies, not the large pharma companies, they need these services, and that drives the business.

Perfect. Thank you very much. And just building a little bit on pharma and the previous question, you did mention you're very comfortable with that 6% to 10% rate. And generally, you've been on the higher end for quite some time now. What would it take you for that 6% to 10% to change to be perhaps revised higher? And do you have any visibility towards 2020 with regard to volume in pharma?

Again, we stand by our targets for all three segments, by the way, not just for pharma. We see no reason to change them, and we said previously that we don't expect double-digit growth rates in pharma forever, and more getting back into that range. We certainly had a number of tailwinds, but we also don't see any headwinds coming.

Okay, understood. Just changing a little bit segments, I guess in food and beverage, your margin did indeed decline from a year ago, and I'm wondering, were there any specific calls that led that? Because volumes were pretty good, and I think you mentioned you had a benefit from tooling sales that customarily helped the margin. So it was a little bit surprising for us to see the percentage margin being lower.

So, I mean, I can give you a couple things. It's primarily mix on the product sales. And also, actually, you know, food and beverage had stronger tooling sales, which traditionally bring lower margins, not higher margins. So that would, you know, that would negatively impact the food and beverage margin in the quarter.

I mean, sorry I can't resist to add on here. Of course, we are accountable and deliver every quarter and give you a lot of transparency, but after it's really a long-term growth story, you will have moving parts every single quarter. We just talked about the pharma business is very solid, but remember in quarter one, the injectables didn't grow, but quarter two, we're back to growth. Food and beverage, beverage volumes, the second half of last year, we're Not that great now. We have a well-growing food and beverage business again. So it's not a single quarter, but when you look at the long-term compounding story with a good pipeline and the transformation, we feel good about the further growth prospects of the business.

Great. Thank you very much.

Thank you. Our next question or comment comes from the line of Edlaine Rodriguez from UBS, your line is open.

Thank you. Good morning, guys. Good morning. So are you seeing or expect to see any impacts from the environmental backlash against plastics? That's one. And related to that, there seems to be a trend towards larger closures maybe instead of multiple smaller ones for single-use products. Is that good or bad for you?

Excellent question on sustainability. Actually, this is a net positive for us. When you think about it, most brand owners, if not all of them, have made some kind of commitment that they will increase the rate of recycled content or the recyclability of their products. They need partners like Aptar to make that happen. We have more customer projects around how to help them meet those commitments. We, on previous calls, talked about, for example, FlipLid, which allows to replace the disposable cap on water bottles with one that stays with the cap. We have products with up to 100% post-consumer recycled content. We participate in pilots like Loop, where we are on top of reusable containers and discuss making products that can be reused also from the dispensing system. We are looking at partnering with people who can make food-grade propylene that's recycled. So many activities going on. The industry is going on. And we'll have to continue to go through an innovation push to meet those commitments they've made and progress more towards a circular economy. And ultimately, that drives customer projects, and that's our lifeblood to continue to innovate and help customers meet their commitments. And we are really agnostic whether we are on top of a plastic container or aluminum container or glass container or a carton, for that matter, or a flexible pouch. In the end, the stuff still needs to come out in a consumer-friendly, convenient way, and we can make that recyclable, 100% recycling content, or even reusable, depending on what the customer and the consumer experience demands.

Okay, thank you.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our next question or comment comes from the line of Kyle White from Deutsche Bank. Your line is open.

Thank you, Morgan. Thanks for taking my question. I know we touched a lot a little bit on the volume targets in pharma in terms of the long-term targets that you have set out there, but I'm also curious in terms of the margin targets that you have. It's been about five quarters now where you're at the high end or above this target, and I know you have an analyst day coming up in a month or so here. where you typically kind of update these targets. But just curious if there's anything specific that maybe gives you pause in terms of raising this margin target for the long term?

No, not really. But, again, let's not discuss the analyst, David. I don't see any reason at this stage to change the target. It is a very long-term business. You need to continue to reinvest in the business. We talked in earlier calls that we're building a whole group around connected devices. We're building up a services business capability. So if you don't invest in this business and reinvest in this business, you will not drive the growth engine. So, therefore, we feel comfortable with the range that we've got out there.

Yeah, and I would add that, as we've said in the past, The margin is highly dependent on the mix by division, and so we've been benefiting in recent quarters from very strong growth in the RX division. We see good opportunities really across all four of the divisions now, including the active packaging division of CSP. So, you know, that margin profile is going to have a flow depending on where the growth is coming from, you know, divisions.

Understood. And then, Bob, on M&A, just how would you characterize the kind of M&A pipeline that you see right now, and what exactly – how would you also characterize the valuations that you're seeing out there?

I would say not much change. It still is pretty active out there. We continue to monitor the market. I don't see any big change either up or down in the valuations at this stage, but – You know, it's something that we try to stay close to, but I don't see any significant paradigm shifts either way from where it's been previously.

Yeah, you have seen us pursue an active M&A agenda, made smaller deals like Revol and the smaller pharma acquisitions, made bigger deals like CSP. We continue to look at a lot of deals, but remain disciplined. We're walking away from several Many more deals than you see us announcing after doing some serious work, and in the end, we're a disciplined acquirer.

Thank you, and good luck in the quarter.

Thanks. Thank you.

Thank you. Our next question or comment comes from the line of Anosha Shah from BMO Capital. Your line is open.

Hi. Good morning.

Morning, Anosha.

Good. My first question is in your outlook this year CapEx is quite a bit higher than DNA and can you give us a sense of where that capital is going and also do you expect it to remain at an elevated level for the next couple of years?

I can take that one. It's increased from some of our historical levels. About half of the CapEx that we have in there is coming from both new product introductions as well as capacity increases. I think we talked about on some previous calls that we were getting a little bit capacity constrained in some of our pharma product lines due to the strong growth that we've been experiencing. and the growth that's in the forecast. So we've had to reinvest a little bit in capacity. And then our focus around innovation has been positive. We also have the 55 million that of capital that was part of the transformation plan that we've spent roughly about half of to date. And then, of course, you've got to add in the CapEx for the CSP acquisition as we invest in some of those new deals. And then maybe your other question going forward. You know, I – I would imagine we're still going through the budget for next year, but we're expecting capital to be kind of flat moving out from here. But again, I don't see that as a negative. Our best investments that we make are investments in ourselves, and as long as we continue to see profitable innovations on the horizon, I think that's a great use of our capital.

Right. And then switching over to the tax rate, I know it's going to be elevated because of this French tax rate change. Any sense of what the tax rate should be in 2020, and will it remain well above the mid-20s?

Well, I'll tell you what. If you can tell me where our share price will be in 2020, I can tell you whether it will trend up or down. You know, the biggest variable right now in volatility in our tax rate still comes from stock option exercises. Even though we've moved to issuing restricted shares and away from issuing stock options, we do have several years left out there that are remaining to vest. And obviously, this quarter Q2 was a good example of that. As we reach all-time highs in the share price, we tend to see an uptick in option exercises, by definition will drive down the tax rate. So the other big unknown out there is what are the governments gonna be doing in terms of trying to raise revenues, right? I mean, this French tax retroactive increase, while it was on our radar six, nine months ago, we were expecting decreases in the French tax rate. So I would say all else being equal, We would expect the tax rate next year to be kind of in that 29% to 31% range, plus or minus any one-offs that may occur.

Okay, thank you.

Thank you. We have a follow-up question from the line of Chip Dillon from Vertical Research. Your line is open.

Yeah, hi guys. I have a couple of questions a little bit on buybacks and the share count. Firstly, you mentioned you haven't done as many buybacks. Can you update us a little bit how much have you allocated towards buybacks this year, if any?

You know, we don't necessarily look at it on an allocation basis, right? I mean, we look at everything, you know, kind of holistically, and, you know, we did a couple deals already this year on the pharma side. We look out on the horizon. What does our CapEx look like? We've raised the dividend again, you know, earlier. So, I mean, we look at it kind of from a holistic approach, and, you know, we don't really target, you know, an amount to buy back. We try not to lock into something, but I would say that we probably will see the share count gradually increase like we've seen so far. That's about all I can really tell you.

And yeah, just building a little bit on that, was there anything unusual in the quarter with regard to sharations? I think it was a pretty big bump on the basic share count sequentially. So were there any specific actions, incentives? And you mentioned kind of a change in the incentive structure away from options. Does this mean we would see, for example, more basic, higher increase in basic share count, but kind of a gap between basic and diluted share count? I think historically around three million shares is going to narrow.

It's hard to say. As I mentioned earlier, we had a very strong quarter in option exercises, and we repurchased only about 34,000 shares in the quarter, so that really is the primary reason for the share count increase. Yeah, I mean, the dilution calculation is also highly dependent on the share price and and I haven't really run what that looks like going forward.

Okay, perfect. Thank you very much.

Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Tanda for any closing remarks.

Great. Thank you. Thanks to everybody for joining us. We look forward to seeing you on the road. Enjoy the rest of the summer.

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

Everyone have a wonderful day.