AptarGroup, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Aptar Group's 2019 third quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Introducing today's conference call is 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 is are Stephan Tonda, 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. AFTAR undertakes no obligation to update the forward-looking information contained therein. I'd now like to turn the conference call over to Stephan.

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 four 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, pre-filled 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 healthcare 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 five, 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 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 improve performance in the market post-launch. Now, shifting topics, as shown on slide six, we have announced new segment leadership appointments. Marc Prieur will assume leadership of our beauty and home segment, as Alden Schaefer will be taking on a new leadership role overseeing strategic projects and commercial excellence initiatives. And Hedy clearly will succeed Mark as President of APTA Food and Beverage. Hedy previously led the food and beverage business in Europe, and most recently led the beauty and home segment also in Europe. All new responsibilities take effect December 1st, with a thorough handover activity going well into the new year. The pace of activity in APTA has picked up considerably over the past years, We are investigating several strategic projects that require more executive level attention and oversight that Alden is uniquely suited to provide. We are fortunate to draw upon our deep talent base and Mark's extensive operational leadership experience, combined with his passion for innovative, sustainable solutions, make him an ideal leader to take beauty and home segments to new heights. Hedy has broad international experience, having led our European sales and operations for both food and beverage and beauty and 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 seven, 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 healthcare business and the injectables division. I'm also pleased to share that our active blister packaging solution developed by Aphter 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 a proprietary active 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 BiDOS nasal device. Bryn is currently conducting clinical trial in its epinephrine nasal spray. using a portable device capable of delivering two therapeutic doses of epinephrine, replacing the need to carry two epinephrine autoinjectors. I want to stress that this has not yet been approved by the FDA, but BRIN 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 and home segment and to slide eight, 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 underabsorbed 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 49% equity interest in BTY, a leading Chinese manufacturer of high-quality decorative metal components, metal plastic sub-assemblies, and complete color cosmetic packaging solutions for the beauty industry. This transaction meets our disciplined investment approach of partnering with leading recognize 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 Shando 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 haircut products for love, beauty, and planet. Moving now to slide nine, our food and 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 reductions in our beverage sales in China. We also are passing through lower resin costs to our customers, creating an additional headwind on food and beverage top line. This segment continues to benefit from conversion opportunities, especially in condiments, where you'll see several products moving from the traditional formants to inverted pouches with our dispensing system. One example is the newly launched squeezed guacamole by Yucatan, which features our custom pouch fitment with pull ring and our flip-flip closure with simply squeezed 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 and beverage, offsetting some softness in beauty and home. We are also pleased that we announced new product conversion stories, new strategic partnerships, and the first FDA approval for our active blister packaging solution. 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, Stefan, 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 and home segment, course sales decreased 1%, primarily due to the significant weakness in demand from the personal care market compared to a year ago. Beauty and homes 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 skincare 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 and 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 and beverages adjusted EBITDA margin reached 18% due to productivity improvements and lower resin costs. Looking at each market, core sales to the food market increased 3% due to strong sales of our products used on granular, powder, sauce 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 93 cents. Prior year comparable earnings per share totaled 97 cents. 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 a 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 74 to 80 cents 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 Stefan. 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 two times levered. At this time, Stefan will provide a few comments before we move to Q&A. 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 is weakness in some of our markets or regions. We posted 5% core sales growth through the first nine 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 three 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 PCY. 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 and 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 will 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.

As a reminder, ladies and gentlemen, to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. In the interest of time and fairness to all participants, please limit yourself to two questions and one follow-up. Then you can come back into the queue if you have more questions, as time allows. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Daniel Rizzo from Jefferies. Your line is open.

Good morning, guys. How are you? Good morning, Dan.

All right.

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

When you look at how our customers – Our mix of customers is changing as 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.

And maybe I could add just a couple other small points. You know, 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, you know, really dealing with the patient onboarding, They have great, you know, 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.

All right. Thank you for the color. And then you mentioned that you were looking 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, yeah, in just terms of percentages or how we should think about it going forward.

Well, you know, 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.

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

In terms of clinical trials, I don't have with me whether it's phase two or phase three.

But thank you very much.

Thank you. Our next question or comment comes from the line of John Krieger from William Blair. Your line is open.

Hi, thanks very much. 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?

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

Okay, great. Thanks. And then maybe just digging into the slide five 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?

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

Great. Thank you.

Thank you. Our next question or comment comes from the line of Gabi Hajdu from Wells Fargo Securities. Your line is open.

Good morning. I was 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, EBTA 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.

Sure. Yeah, 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, you know, 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'll be slightly dilutive, penny or two, 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.

So I would add, though, that the service business itself is a 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 farmer houses, and therefore they have a need for these services. So we see this as a good growth opportunity.

Understood, Stefan. 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 standalone basis?

No, as you see in slide five, we got the space pretty nicely filled out. I'm not ruling out anything, but I think we have a pretty big part of what we need.

Okay. And as a follow-up in the food and beverage 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 things – 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?

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

Okay. Thank you.

Thank you. Our next question or comment comes from the line of Jason Rogers from Great Lakes Review. Your line is open.

Yeah, 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?

Sure. So it's roughly about two-thirds 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. And I think prescription is about half of our pharma growth.

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, because it's so strong, could potentially fall below that?

You know, it's hard to say. I mean, we've been surprised on the upside before. I mean, it's going to be, you know, 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.

You have really multiple trends happening at the same time. On the one hand, allergy continues to be an expanding category. I'm not an expert, but everything I read is the warming climate certainly increases the allergen load in the environment, and for whatever reason, all of us become more prone to allergies year-round. Certainly, I'm one of the best examples around allergies. And so that is a growth driver, and that affects more and more parts of the world that can afford eligible medications that will continue to grow. Overlaid on top of that, we had this conversion in the U.S. where more and more went over the counter with broader distribution, including clubs, stores, e-commerce. We think that has kind of run its course, but to pick apart those two 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. Some quarters it's going to be at the low end and some quarters it's going to be mid-range. We don't have a crystal ball like that.

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

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 the competitive market.

Okay. Thank you. Thank you. Our next question or comment comes from the line of Mark Wildey from VMO Capital Markets. Your line is open.

Good morning, Stefan. Good morning, Bob.

Good morning, Mark. Good morning.

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?

In short, absolutely. I mean, we've pretty much in almost uniform quarters 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 – or additional to the personal care weakness that we pointed out before. Now, historically, these stocking movements have gone on two to three quarters. We started already seeing that in quarter three. We certainly see it in full force in quarter four. Now, 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 and home business. But it's certainly not that quarter four is another steady state picture.

And, Stefan, does that tend to hit prestige harder than, say, mass market, or is it pretty much across the board?

Actually, prestige is the one part of the market of luxury, the one part of the market that's still doing well. It's really the broader prestige message that's being impacted here.

Okay. 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.

Sure. So you're really talking about a union hope transformation. And just as a backdrop, as a reminder for everybody, we set out to do – Three things one is to reaccelerate the top line which notwithstanding what we just discussed was actually quite successful by after several years of flatter declining sales We're able to reaccelerate the top line grow above market regain some share and 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 sites and a couple sites in the U.S. And then the third one is headcount reduction and SG&E streamlining all the corporate support functions. That is quite a bit also in Europe. including the installation of a 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 weeks ago, with a looks back 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 a New York pothole like we're doing now, you have huge unabsorbed fixed costs, which is eating up those gains. Nevertheless, we're executing and performing much better. Now, looking at the advanced scenario, of course, we're 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 overtime, subcontracting work where it makes sense to variabilize costs. Actually, doing the opposite in other cases, insourcing. to leverage our own fixed costs and, of course, further working on purchasing. Now, 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 weakness there, and we will continue to look whether we need to make additional structural changes. I think that's probably as much as I can cover.

Okay, very good. I'll turn it over.

Thank you. Our next question or comment comes from the line of Adam Josephson from KeyBank. Your line is open. Thanks. Good morning, everyone.

Good morning, Adam. Stephan or Bob, Stephan, I think you just commented that you don't think 4Q is a steady state situation in terms of the guidance, just given the beauty in home customer destocking. I know you said you expect it to last into 1Q, 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 non-recurring situation?

Yeah, Adam, it's hard to tweeze that apart. Clearly, you know, we would expect the segment to grow in the 3% to 6% range. We certainly expect it to decline in quarter four. 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, in particular in hair care, that need a closer look. But overall, the beauty side of it, I remain very bullish about, this de-stocking notwithstanding.

Sure. Just two others. One also on beauty in homes. You talked at length about the restructuring, Stefan, 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?

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

And just one last one, again, on beauty and home. So the restructuring was intended, you know, focused primarily on beauty and 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 changed now as opposed to, I don't know, two quarters ago or two quarters from now?

Sure, I would say we're about halfway through and obviously some of that has been eaten up with the current demand picture. Alan 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 Mark brings those experiences and skills. And frankly, we need Alden elsewhere on some topics that need attention and that leverage his commercial excellence expertise more.

Thanks, Stephan.

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

Hey, guys. Good morning. I guess following up on, you know, the last few questions on beauty and home and personal care in particular for North America, you know, that category seems particularly weak, you know, just relative to what your customers have been saying over the last couple of weeks as they reported earnings. You know, 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 for North America.

Hi, John Trump. Yeah, let me... provide a bit more transparency. Certainly, some of our customers are growing with Campbell, and frankly, we're growing with them, but others are not, and I think we highlighted previously that, in particular, one product launch that was 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 their product, and so

Ladies and gentlemen, please stand by. Speak a line, drop a line. We'll get them connected, reconnected. Please hold. Okay, you're reconnected. Let me put Mr. Gonchum back up. Yes, please, and everybody.

Okay. Sorry, Gonchum, where did we lose you?

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

Right, yeah, our line dropped. Bob was adding something.

Yeah, I was saying that if I'm not mistaken, I think some of the customer 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.

Okay, that's helpful. And then just in terms of pharma, you know, the strategy in terms of broadening out your relevance, how much of this is customer pool driven and 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 five as you kind of build out your service capabilities, et cetera?

Yeah, 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 two opportunities. One is just participate in that higher service revenue, but two, also increase the odds of our devices being in a successful launch at the back end. 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 then benefit from the success through the device sales. And in between, there are also milestone payments that we refer to, exclusivity payments, 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 five.

Okay, thanks. And just one final one maybe for Bob. You know, 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 substantial. Is this a new baseline for tax rate going forward, or is 2019 sort of an anomaly? Thanks.

Yeah, sure. Good question, Gancham. So, you know, when the tax reform act came out, we had mentioned that, you know, 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 of the U.S., and you know, the tax changes were 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 increased tax deductibility on that. So our normal run rate, absent any of those discrete items and and tax benefits from stock option exercises is more in that 30% to 32% range. Got it.

Thanks so much.

Thank you. Our next question or comment comes from the line of George Stephos from BOA Merrill Lynch. Your line is open.

Hi, guys. This is Molly Baum, sitting for George. He had a conflicting conference call today. The first question I wanted to ask is, You guys talked a lot about sustainability at your capital markets day. So in the beverage space in particular, I wanted to ask if you'd 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. Thank you.

Yeah, hi. I'm Molly. Thanks for the question. I would say 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 PureCycle 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 their 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 one 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 one-time use to products that can be reused. And we are engaged in many of those projects.

Got it. Thank you for the additional details. My second question. you know, goes back to the Noble acquisition and just really pharma services more broadly. Really the question is how much further, you know, do you want to expand the business? And then, you know, if you look at slide five, you know, what stages along the, I guess, product lifecycle do you see, you know, gaps that you could potentially fill through further bolt-on acquisitions? Thank you.

Yeah, 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 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 list the synergies, which are mainly top line synergies. And yeah, we may add to that down the road, but we're quite happy with what we have here.

Got it. Thanks again.

Thank you. Our next question or comment comes from the line of Debbie Jones from Deutsche Bank. Your line is open.

Hi. Good morning. Thanks for taking my question. My first question, you highlighted the role I think that was created for Eldon here, and so there were some things he needed to do. I was wondering if you could just talk about that a bit, what kind of strategic projects, if possible, and at the very least kind of the commercial excellence focus that he's going to be having.

Yeah, I mean, by the very nature, strategic projects are not something that – We can't 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, you know, Alan's towering strength is in commercial excellence, and certainly the rest of the company can benefit more from his guidance there.

Okay. Sorry, my line was 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.

Yeah, I mean, Debbie, the working capital, we've picked it up a little bit just based on where we finished 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 receivable side. So all in all, it was a good quarter from from working capital and the businesses are refocused on this topic. And like I said, we've made some good progress. We've still got some work left in front of us.

Okay, great. Thank you. I'll turn it over.

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

Great, thanks. 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 the near term or stay at current levels?

Yeah, on the first question, you are right. That is 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 US 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 quarters, then the other part of the portfolio, you will see that impact the margin.

Bob is nodding. Yeah. No, I would say also 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 – what's covering that margin and impacting that margin.

Okay, and then also, we just talked about CSP performance in the quarter. Any progress on how it's performing with some of the newer applications?

Sure. So it's actually been doing quite well. So we've lapsed the one-year anniversary. And, you know, like for like on the one 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. Stevan mentioned the active 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 Stefan mentioned also will contain a CSP vial as well to protect 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 development to CSP and see a lot more on the horizon.

Very helpful.

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

Thanks, everyone, for taking my follow-ups. Bob, would you mind just talking about the cadence of sales, sales growth through the quarter to the extent there was a notable slowdown toward the end of the quarter because of the beauty in home inventory, destocking, and then Relatedly, how would you compare this customer destocking you're seeing to previous cycles, whether 08, 09, 2010 when you saw the bounce back? Can you just talk about how this feels compared to those previous periods in that regard?

Sure. So I don't have the figures in front of me in terms of month to month, but typically in normal cycles, 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 Stefan mentioned, can last anywhere between two and three quarters. Looking back at 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 2009 on the beauty side. But then in the back half of the year, personal care was the first to come out of that 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.

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 two issues?

Well, personal care is really a mix of end-user demand and change also in usage pattern. 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 a sudden, hey, we're spooked and we're going to run our inventories down. Sure.

Thanks, Stefan.

Thank you. We have time for one more final question. Our last question is from Salvatore Tiano from Vertical Research Partners. Your line is open.

Hi. Good morning, Stefan and Bob. 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 the meaningful change in your volume trends besides what you already discussed about the short-term implications in farm and duty and home or margins. How should we think about next year's earnings and cash flow?

Yeah. Hi, Salvatore. We really don't give guidance at this stage for 20. We just give the Q4 guidance. We stand by our long-term targets for the three segments. I think clearly we are entering the year in a destocking mode with the challenges we've discussed in the beauty and 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.

Yeah, and I'll touch on your question on free cash flow. I mean, as Stefan said, we're very early – not early, but we haven't finished our complete review of the capital requirements for next year. And certainly, you know, that will be scrubbed and reviewed. and it 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.

Great. Thank you very much.

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

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