Aptargroup Inc (ATR) 2016 Q3 法說會逐字稿

Thank you for standing by. Welcome to AptarGroup's 2016 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 DellaMaria, Vice President Investor Relations. Please go ahead, sir.

Thank you and welcome, everyone. Participating on the call today are Steve Hagge, President and Chief Executive Officer and Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Steve will begin our call with a brief overview of our quarterly performance. Bob will then discuss a few financial details and we will open it up for questions.

Information that will be discussed on today's call include some forward-looking comments. Actual results or outcomes could differ from those projected or contained in the forward-looking statements. Please refer to AptarGroup's SEC filings to review factors that could cause actual results to differ materially from those projected or contained in the forward-looking statements. We will post a replay of this conference call on our website and AptarGroup under takes no obligation to update the related forward-looking information. I would now like to turn the conference call over to Steve.

Thanks, Matt and good morning everyone. Before we review our quarterly results I would like to briefly comment on the CEO succession process. As many of you know I previously announced my intention to retire from AptarGroup. We expect to announce my successor in November and my resignation date will be sufficiently flexible to accommodate a smooth transition.

Now, turning to our third quarter results. Yesterday despite challenges in certain markets during the quarter we were able to grow our top line and deliver strong profitability. We reported third quarter sales growth of 1%, and EBITDA margin of 21%.

Our Beauty + Home segment faced sluggish demand in each region other than Latin America which continued to generate good growth for us. The softness in the other regions was across each end-market served by this segment. Certain customers are cautious and consequently implementing inventory reduction programs that have affected short-term demand. It seems to be a combination of week consumer spending in our markets and key customers finding it difficult to grow their own market shares. We are effectively managing costs and focusing on high growth potential areas such as facial skin care, color cosmetics and the home care market.

We expect this growth to be driven by trends such as the rise of eCommerce which will continue to generate demand for innovative packaging solutions. I would also like to mention that the integration of Mega Airless continues to go as planned and this business performed well in the quarter. We participated in several fragrance launches in the quarter including global launches for David Beckham's new fragrance, Louis Vuitton's travel size perfume set.

Our Twist & Lock and Bag-On-Valve technologies are now found on new Sun Care and insect repellant products in North America. Johnson and Johnson is using our airless system on a men's facial care line in China and we're also supplying pumps for their new liquid baby soap in Latin America. Finally, in Europe our airless pump is featured on a new premium professional hair care product.

Turning to our pharma segment which had another good quarter with increased core sales due primarily to strong custom tooling and product sales to the consumer healthcare market. The custom tooling sales increase is related to the eye care category and we're very excited to see the additional growth opportunities in this application field, especially in the United States. Sales to the prescription drug market increased slightly as demand for our nasal spray systems for allergy treatments was compared to the prior year's exceptionally strong level.

Sales to the injectables market declined over the prior year due to the timing of certain validations related to our new capacity in France. We see that as a temporary postponement of certain orders until the fourth quarter. The fundamentals in the injectables markets continue to remain solid. Our capacity expansion at our Congers, NY facility to better serve our customers in the US injectables market is going well and is on track. Several new prescription products were introduced in the quarter including a generic version of nays next in Europe using our nasal spray pumps.

Several new prescription products were introduced in the quarter including a generic version of Nasonex in Europe using our nasal spray pumps. In consumer healthcare we continue to see our ophthalmic squeeze dispenser, a new eye care product, introductions in Europe and in Latin America. Also, in the United States our aerosol valve is featured on an athlete's foot treatment from (inaudible). Now turning to our Food + Beverage segment. As we anticipated a significant decrease in sales to the beverage market principally in China made the third quarter quite challenging.

The beverage business in China had been very strong until recently as a major customer appears to be facing end market weakness and in addition is exploring a second source of supply. We believe the long-term outlook, however, for the food and beverage markets in Asia continues to be quite promising as there is a growing trend towards better nutrition and newer products are being developed by a have our customers with differentiating packaging solutions.

Globally sales to the food market increased over the prior year due to increased demand in the baby food, dairy and condiment categories. But this growth was not enough to offset the weakness in the beverage market. This quarter we helped customers introduce innovative food products into the North America region such as the new inverted squeezable hummus space spreads with our snap-top closure and a new line of vegetable sauces with our pour spout closure.

In beverage our sports closures were featured on several bottle water launches in Latin America including Gatorade's active water brand and our sports closure with a press button and simply squeeze valve is found on a new line of Robina Juice's in the UK. Now as we look ahead to the fourth quarter, we don't anticipate any significant changes in the macroeconomic conditions where the cautious stance is taken by several of our key customers that we saw in the third quarter.

We expect our beauty and personal care business to remain challenged, especially in our two main regions, the US and Europe. The fourth quarter is traditionally one of our softer quarters in general and as we have seen in recent past, demand from the beverage market has a tendency to be seasonally low heading into the winter months in the Northern Hemisphere. We do expect our pharma segment to continue to grow as we anticipate steady growth in the consumer healthcare and injectables market.

We will navigate these pockets of short-term market weaknesses as we have done in the past with a focus on cost containment, operational alignment with our customers' volumes and continued research and development in high return projects. At this time I will turn it over to Bob who will review some of the details behind our recent financial results.

Thank you, Steve and good morning everyone. I will cover a few details and then we will turn it over for questions. I'll start with comments on our Beauty + Home segment's performance. Reported sales decreased 2%. This included a negative impact from foreign currency translation of approximately 1% and the positive contribution from the Mega Airless acquisition which we completed earlier in the year of approximately 5%. Therefore, core sales decreased 6% primarily due to weak demand across each end market and lower custom tooling sales compared to the prior year.

Softer consumer spending caused certain customers to tightly manage inventories and delay orders. When we look at profitability despite the challenges to the top-line growth our Beauty + Home segment achieved and EBITDA margin of approximately 15% in the quarter and this was a slight improvement over the prior year due in part to the contribution of Mega Airless as well as our continued focus on cost containment.

Looking at sales growth by market on a constant currency basis sales to the beauty market increased 2% mainly due to the contribution from Mega Airless that was partially offset by lower custom tooling sales. Sales to the personal care market increased 1% due to the contribution from Mega Airless.

Sales for the home care market decreased 17% from the prior year mainly due to soft demand. Our pharma segment had another good quarter with reported sales growth of 9% due to a strong increase in custom tooling sales and increased product sales to the consumer healthcare market. Mega Airless contributed 1% of the sales growth, but this was offset by a negative 1% impact from currency translation effects. Therefore, the core sales growth equaled the reported sales growth of 9%.

Segment EBITDA margin was 34% compared to 35% in the prior year. Looking at sales growth by market on a constant currency basis sales to the prescription market increased 1%. Demand for our nasal spray systems for allergy treatments was even with the prior year's strong level while demand from other treatment categories was mixed.

Sales to the consumer healthcare market increased 41% and this is mostly due to the increase in custom tooling sales I previously mentioned, growth in the overall business and the inclusion of Mega Airless. Excluding Mega Airless and the custom tooling sales product sales to the consumer healthcare market grew 12% on increased sales of our nasal pumps for decongestants, opthalmic squeeze dispensers and nasal saline spray systems.

Lastly, sales to the injection market decreased 6%. As Steve mentioned, this decrease is related to the timing of the completion of certain customer validations of our new capacity in Europe that caused some shipments to move into the fourth quarter.

As we expected our Food + Beverage segment faced challenges in the beverage market which more than offset growth in the food market and reported sales for the segment declined 8%.

Changes in currency translation rates accounted for 2% of the decrease. Therefore, core sales declined 6%. Despite the decline in sales the segment achieved a strong EBITDA margin of 20% on cost containment efforts and this compared to 21% in the prior year. Looking at each market on a constant currency basis sales to the food market increased 8% on increased custom tooling sales and increased sales to the baby food, dairy and condiment categories. Sales to the beverage market decreased 20% primarily due to decline in sales to the beverage market in China.

We generated record quarterly free cash flow being defined as cash flow from operations less capital expenditures of approximately $83 million, Primarily related to strong operating cash flow, changes in working capital and lower capital expenditures. This compares to approximately $45 million in the prior year. Capital expenditures were approximately $35 million in the quarter, a decrease compared to $46 million in the prior year.

Looking at our balance sheet capitalization at quarter end on a gross basis debt-to-capital was approximately 42% while on a net basis it was approximately 27% and we are a little over one times levered compared to our trailing 12-month EBITDA. We repurchased approximately 463,000 shares in the quarter and this brings the year-to-date repurchase share total to approximately 1.1 million shares.

Because of our strong balance sheet and excellent cash flow generation we are able to return value to shareholders and remain in a position to take advantage of strategic M&A opportunities as they present themselves. We announced last week that we increased our quarterly dividend by 7%. 2016 is our 23rd consecutive year of paying an increased dividend.

We also announced that our Board approved a new share repurchase authorization of up to $350 million in share repurchases. For the full year 2016 we expect depreciation and amortization to be approximately $155 million and that our capital expenditures will be approximately $140 million. Also, we expect our effective tax rate for the fourth quarter to be in the range of 29% to 30%. At this time Steve and I would be glad to answer any of your questions.

(Operator Instructions). Our first question comes from the line of Mr. Mark Wilde from BMO Capital. Your line is open.

Steve, it sounds like we may hear you on one more conference call.

Yes that's probably a likely guess at this point, Mark.

Good news from our side. Listen, I wondered if you guys could just talk about the strength in Latin America because most of the other packagers have been giving us different messages this quarter?

Yes, Mark. I guess what we have seen is again I think this is a comparison to last year. We saw some softness in Latin America as we went through 2015 and we have been pretty strong going through the first three quarters and again it's across both fragrance cosmetic for us as well as pharma and food which have been growing nicely from a relatively small base. That being said, I think this is one of the things as we look out to the fourth quarter, some of the size of the growth we have in Latin America and in particular Brazil we expect to start to slow down. While we're still anticipating growth we're not looking at growth at the same level, Mark, in the fourth.

Okay. Then if we kind of turn to the place was much softer the Chinese beverage situation, can you just talk about sort of how volume kind of trended as we moved through the third quarter and then what you have seen in October? And then also, maybe to talk about this issue of a customer adding a second supplier? Or moving to a second supplier?

Sure, Mark. Again, let's come back and take a look at this. This is one of our larger customers in our beverage market in China. It deals in what I call a child's isotonic type drink, it's a sugary drink for children that they're selling to. Our market information has been that the whole market category, our customer and one other make up the majority of that market are seeing some market softness.

So that's what our customer has been telling us in the quarter and some inventory. The other thing our market intelligence is saying given the size of our business with the customer they have been looking to add a second source. We don't think that had a major impact on the third, but it is something we will see for their side was more risk mitigation going into the future. When we look at the business it tends to be is he seasonal so our business as we got into September was starting to soften and we expect a relatively soft fourth quarter. We tend to see that business in China pick up in the first quarter which is more traditional.

Okay. Then the last question for me is can you just talk about any resin impact in the third quarter and what you're thinking about in terms of resin impact in the fourth quarter?

Yes. Resin impact for us in the third was relatively minor so we didn't see too much movement in that but again going into the fourth we're seeing, and again we're going to be looking now at US and Europe, probably 3% to 5% over last year's level, 2015's level and also an increase from the fourth. And you couple that with also some increases we are seeing in other raw materials that's going to have a short-term negative impact on our profitability until we get those things passed through. So, it's not a huge increase, but it's enough to affect short-term profitability a bit.

Would you or Bob kind of quantify that just in terms of pennies a share or whatever?

Looking at the fourth there's too many assumptions, Mark. I mean I can't give you an exact number but we have factored some of that cost increase into our estimates.

Okay. Great. I'll turn it over. Good luck in the fourth quarter and into next year.

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

So kind of putting the declines in your non-pharma businesses in perspective they seem to be recession type declines. You called out inventory correction. Maybe start off by just giving us some color first off what gives you comfort on that in terms of inventory correction? And second, how did demand play our during the quarter? Was there a big drop towards the end of the quarter in any particular region?

Now are you talking just pharma or are you talking across all of Aptar.

All of Aptar.

Okay. Well, let me come back and deal a little bit with kind of where as all of Aptar we actually came into the quarter, July for us was a really soft quarter. Softer than we had initially anticipated. That had a big impact on Beauty + Home. After July we actually saw business from overall Aptar increase as we got into August and September both of which exceeded the prior year numbers. So we started soft and then started to pick back up.

If you looked at our customers, and again it was inventory issue whether you look at Procter & Gamble, Unilever and frankly even GSK has announced that they're tightening inventory in terms of cash flow. So we have seen that kind of across all of our various sectors. What gives us confidence is as we start to take a look at their new product introductions as we go out to 2017, and then I think there's a lot of new activity that will be 2017 based.

Okay. And then just kind of staying on that same theme. Assets did change hands during the quarter with Procter & Gamble and Coty on their beauty business. Did you do you think that had a material impact on your order pattern in the quarter as well?

You know, I think it had an impact. How much that is hard for us to do because certainly as that business was transitioning Procter was not as focused on it. We think as we get into, again, this goes back into late into 2016 but more into 2017. Coty is certainly going to start to focus more on that business even than where Procter was for the last year. So we see that as an advantage for Aptar. We're major suppliers to both Procter and to Coty and I think we're going to be continuing to add our new technologies to their new product innovation model.

Okay. Thanks so much. I'll turn it over.

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

Steve, I was wondering how excited you are about the Cubs run to the World Series this year?

Adam, I was afraid you were going to bring that up and as a Cardinals fan we have he to wait every hundred years for this so I'm going to give the Cubs their due, it can't happen again for another hundred years.

So, Steve, back to what Ghansham was asking about, you talked about the customers delaying projects, cutting back on promos, de-stocking to get to you mentioned Glaxo, P and G, Unilever. Does this remind you all of what you experienced in 2007, 2008 and if not what is the difference?

I think the cautiousness is a little similar to 2007 or 2008 where there's a bit of concern from our customers on their growth. I mean if you look at P and G or Unilever their growth has been somewhat anemic over the last couple years. The big difference here from 2007 or 2008 is the financial side.

All of our customers are in a much better financial position and certainly the liquidity markets that they're seeing on the outside. So you don't sense that there's a pending doom and gloom that we saw back in 2007 or 2008. But there are certain similarities where they're certainly conserving a lot of stuff and trying to get ready for what might not be a robust market from a consumer standpoint.

Do you think they have reason to think that? I mean why would they have reason to think that?

I think it goes back to their sales on a total basis. Again if I look at Procter they're up 1% to 2% and some categories they're down. Unilever mentioned that they're up. A majority of what they're up is actually in pricing in terms of their product.

Right.

GSK is coming be back and had a major effort one of the first we've seen where they're taking inventory out of the chain. So it's not just one of the customers. There tends to be a broader base that they're conserving cash.

Sure. Bob, just also on our the core sales issue. If you excluded impact of lower raws that you have had over the last couple years can you tell us what your core sales growth would have been both this quarter and over the past couple years? And how that compares to your recently revised long-term core sales growth target of, I believe it was 4% to 6%?

Are you talking about the resin impact going back?

Exactly. So if it weren't for lower resin obviously your core sales growth would have been a bit better over the last couple years, right?

Yes. You know, it impacts probably more our Food + Beverage segment. So for example this quarter it was about 1% negative on the top line, but I don't have the figures in front of me, Adam, but I mean I don't remember it being any more than 1% to 2% in any one particular quarter on the top line.

But I think also, Adam, goes back to that if you exclude resin our pharma would have been pretty much within our target range. Food + Beverage over the last couple of years would have also been in the target range for sales growth. We would have been maybe a point below on Beauty + Home if I go back for a couple years. At least on the revised projections we gave at Analyst Day.

So that's what gives you confidence that this revised long-term core sales growth target is reasonable because if you excludes the resin impact you would have been at least close to that target in your segments?

Yes and I think the other side that from ours it's also a positive despite what has been a challenging quarter in terms of sales growth for both Food + Beverage and Beauty + Home our profitability side continues to be strong and that's something I'm really encouraged about which gives us a lot of optimism as we look going forward.

Thanks, Steve and Bob, just one more for you on the CapEx. I think you guided to 140 down from 155 last quarter. If memory serves. I assume that's entirely related to the sales weakness you're seeing?

Not exactly. I mean it's just more again fine tuning as we come into the end of the year. I mean certainly as we continue our integration of mega you know as we had mentioned back in April, we're going to avoid certain CapEx that we had already planned in 2016 on some airless expansion. So I mean now that we're in there and we're looking at it we're able to better take a look at what our capital needs are for the remainder of the year. So I wouldn't tie it so much to demand. It's really more just fine tuning.

Thanks a lot shall Bob. Best of luck.

Sure. Thanks.

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

Yes. Thanks for all the details. I guess first question I had so beverage volume was down 20% and that was driven by Asia, correct?

Yes. That is coming out of Asia, that's correct.

If I extract Asia what was the rest of your beverage business doing in the quarter? Up a little, up a lot, down a little, down a lot? And then I seem to remember from the last conference call that you weren't terribly worried about share position as far as the beverage volume issue you pointed out last quarter, but now you are losing some share. So I just want to understand a little bit more in terms of what's happening in that region with that product?

So, George, let me take the first one on the beverage. So we were down in the US in beverage in the quarter roughly about 11%. We were up slightly in Europe and we were up very strongly in Latin America and that's not surprising based on the fact that as you we have said in the past committed additional resources in that market and we're pretty active on a lot of projects. So US down, Europe and Latin America up and then Asia down.

And again to the other point on terms of the competitive side, our market intelligence came back on our Asia customer in the quarter that they were looking given the size of the business that we had as a second source. We're going to still maintain the majority of that business. That's our anticipation. But if you look around the world we have actually been increasing share as opposed to decreasing share so it tends to be a much more Asia specific issue.

Okay. So in the US being down 11% can you remind why that's the case? Because at least some of your peers clearly they're not exactly analogs have shown better performance in their businesses that are driven by single serve beverage. So what's so unique about your 11% down and/or what's driving it I should say in US beverage?

You know, George it's hard to say. We're present in sew many different areas. One area that may not track exactly what you're trying to compare us to is in so water enhancements and the flavorings which we saw a pretty strong ramp-up in the past and now we have seen somewhat of a flattening to a declining market. So that could be part of that.

Again it's not any one product. We also get into certain seasonality. Our coffee creamer business tends to be stronger as we get into the falls and the winter months as we come out of the summer months. So I don't think that there's nothing that we have seen as lost to competition or anything on that side. It was more just timing of where our orders were at.

Okay. Two more and I'll turn it over just to be fair. First one, Steve, a year ago and throughout this year you have been optimistic on new product launches, the new product pipeline. Obviously, Aptar does a great job on that, but getting it ultimately commercialized and your customers using it seams like it's been a little bit more of a challenge this year at least in terms of the overall volume growth. Agree or disagree with that and tell us why we should be encouraged looking out to 2017 when we're basically hearing the same thing we heard over the last several quarters and yet volumes have been relatively challenged?

You know, it's a good question, George, and I think if you came back, first of all we have to split these in terms of where our markets are. So if you looked at our pharma business the projects we're on, and again I'm very encouraged by the tooling sales that we had in the quarter coming back in the ophthalmic area which opening up a lot of opportunities for us. So when I start look at pharma there's those projects I see coming on, the timing of when they come may be an issue. I can tell you in Food + Beverage outside of the Asia side those projects we're still pretty optimistic and ones that I'm look at are more 2017. Where I think the challenge has been and where you rightfully so bringing up has been in Beauty + Home . We have been getting a lot of projects but they have been smaller in nature than what we had originally anticipated.

And I think that's somewhat of the concern of our customers is not doing a lot of major introductions. But when I look at the project portfolio and Bob and I just sat through some budget meetings over the last week, there's still a lot of optimism certainly within Europe and the US and we'll be going through budget meetings in Latin America over the next week or so. There's still a lot of optimism, but I understand your question particularly on Beauty + Home over the last year. We're still seeing a lot of project activity, though.

Okay. My last one and I'll make it a two-parter and in sequence so you can get off, finish answering it. One, when you have gone through these de-stocking periods and this has come up in the past we're already one quarter into it barring recession my experience is that usually it takes a couple of quarters which would mean we maybe have one more quarter of de-stocking but hopefully, first quarter is on a better trajectory. I recognize you don't guide more than one quarter ahead.

Frame that however you feel like framing it. And then in France was there something that you missed in terms of commitments in terms of why customers didn't take product from you that we should be concerned about or why should we not be concerned about the delay? Thanks, guys.

Okay. Let me deal with the first one. The de-stocking side again will be different by market, but I think you're right, George. When we have seen that it tends to be one to two quarters. So we have actually anticipated that part of the guidance we're giving for the fourth quarter is that there's not a strong rebound to that. Typically in the past we have seen that rebound after we get out three to six months. So going into your point I would anticipate that the first quarter we start to see a bit of a rebound.

In terms of France I want to put this in context. That has to do with our injectables market. We've been expanding our injectables capacity and as we have been doing that we have to go through validations with customers. What we had was timing of validations getting done at the end the of the quarter that didn't get done as soon as we would have liked. That is more not a loss of business, but that's a push of business from the third quarter into the fourth quarter and so we're, again, positive about the growth we're seeing in the fourth.

Thank you, Steve.

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

Yes. Good morning. Steve, good to have you around and good luck with the World Series.

Thanks, I think.

First question is on the consumer health business. You noted the sales were up 12% in the quarter which, you know pharma is the gift that keeps giving. I just didn't know where that compares to the rest of the year. Is the year-to-date double-digits as well and do you think you can sustain in that part of the pharma business? Something on the top line that approaches double-digits in the future years?

Yes. I think, Chip, if you looked at it consumer healthcare, this is the strength of Aptar is that we play in a lot of markets even within each of our segments. So if you look back a little bit consumer healthcare was actually pretty soft relatively flat to down a percent or so in 2016. We looked at that.

In had to do with Eastern Europe, Russia. That started to come back. We're doing that with Russian customers and western customers shipping in. So our target is still to be in that upper single digit growth and again if you look on a year-to-date basis I think we're up 5% ex-tooling on product sales for consumer health. So 12 is certainly a good ramp-up. By we're optimistic on that going out going not only to the fourth quarter but into 2017 and 2018.

Okay. Okay. That's good. And I guess the second question I had is as you look back from a big picture perspective, it looks like with your guidance for the fourth quarter which means we can figure the year, if you kind of look back it looks like the EPS growth rate has been about 3% since 2011 and even if you go back to 2007, it's a little over 5%, and if you were just a pharma division it would have been lights out. I know that. It looks like obviously the other two have not really grown as fast. Well, I'm really thinking Beauty + Home and I think as we look out what are your thoughts? You think that this slowdown from what Aptar used to deliver, in prior decades? You think that's the potential is to kind of get back onto maybe not that fast but a faster growth ramp than what we have seen? Or do you think something is structurally different?

I don't think it's as much structurally and I think what we have done over that period even with Beauty + Home we have supplemented some of that organic growth with acquisition growth that is righting our product. The mega acquisition we it this year is doing as well or even better in terms of financially than we originally anticipated.

So the other side that I think it's important is when I start to look at products being developed. So part of that pharma growth is products that have been developed in our other segments and I still think that is a huge strength within Aptar that helps trigger that. I'm still optimistic about future growth in our Beauty + Home and our Food + Beverage segments and I think it's a real positive that we have the diversification.

So I mean we're going to see more of a not as big of a growth. I think last third quarter if you look back, Chip, we were up almost 14% in product sales and Rx. We're going to be I think in the third quarter we're probably up 1% to 2%. So the good news is that got filled in by CHC. So our Consumer Healthcare business. So I think that's the real value that we see going forward. So I don't see a big change in terms of what we have done in the past to deliver that in the future.

Okay. And then maybe I missed something, but I think I heard you all say that the CapEx for this year would come in at 140 and is that lower than what you had previously guided to or was my model too high? And secondly directionally which way do you think CapEx goes next year?

Chip, no, you're right. We guided about $10 million lower than what we had said previously. So we moved it down from 150 down to 140 and right now it's too early. As Steve said, we're only now just getting into the budgets for 2017. So we don't have a real look at yet where 2017 CapEx is going to be.

Okay. Thanks.

Thank you. Our next question or comment comes from the line of Mr. Philip Ng from Jeffries. Your line is open.

Hey, guys. Underlying demand was pretty strong in pharma but margins were at least a touch slight versus our models. Was that largely due to the tooling sales dynamic or anything we need to be mindful of and had you should we think about margins going forwards at least fourth quarter?

First of all I think we're really encouraged because while it is a bit lower than what it was the previous quarter on the margin side but you're exactly right. The tooling sales which were pretty significant in the quarter always carry a lower margin profile than our product sales. So overall we would anticipate still staying well within the range that we have given at the Analyst Day for the pharma operating margins.

Okay. That's helpful. And I guess just going back to the de-stocking by customers how are your inventory levels implicit in your 4Q guide? Are you assuming you're going to be drawing down some inventory here and is that baked in as a potential drag for the fourth quarter? And do you have view on how inventory levels are at your customer post fourth quarter?

That's a tough one for us to deal with. I think we're finding is that and it goes back to what I answered earlier these de-stocking tends to take one to two quarters for us. So I would anticipate that as we get into the first part of the year we're going to be lapping some of the de-stocking side. If you looked at our business inventory is always an area we try to manage to, but I don't think our inventory move is going to have a major play in terms of earnings in the fourth quarter for us.

Okay. Just one last one for Bob. You guys obviously announced a pretty sizable buy back program in the quarter. Can you talk about how we should think about the pacing going forwards and would you look at more opportunistic if there's a dislocation in your stock? Thanks and good luck in the quarter.

Sure. Something that we look at on a regular basis with our Board. I mean if you look back historically I mean we bought back this year about 1.1 million shares to-date. Prior to that excluding the ASR we did in 2014 it was slightly higher about 2 million. So we'll take all the market conditions into account, what we see on the short-term horizon but I think you will see a pretty consistent open market buy back approach and then barring any short-term thing is on the horizon we would consider something a little bit larger like with did in 2014, but that's something that we look at on a regular basis.

Thank you or next question or comment oncologist from Debbie Jones from Deutsche Bank. Your line is open.

Hi. Good morning. I wanted to go back to the guidance you gave (inaudible) you did $0.67 a year ago. So I'm just wondering if the kind of think about it the right way. If pharma growth contribution from Mega Airless are positive and is this all going to be completely offset by volume declines in beauty or is there something more or is the resin not more material?

Well, I think you have got a couple things going back into that. As you come back certainly you're going to get our normal seasonality in terms of the beverage business, which brings us back down. So but on a comparable basis it was also low last year. So we're not anticipating strong recovery as we said in the outlook. The other side, though, to years resin is going to be an impact and I think the one thing I want to resin and other raw materials and there's generally some short-term issues until we get caught up with that.

The other area as I opened up a little bit is Latin America has been very strong for us, Debbie and as we have seen and we have seen other competitors that market hasn't been as buoyant for others in the end-market. So we're not as much growth down there as we had in the last past. And the other area I think I would want to underscore is that unfortunately we did have a fire that we had to deal with that we announced a quarter ago. Our estimates and you can see it was about a penny impact in the third quarter. Our estimates do not include any timing issues of recovery on insurance for the fire.

Okay. That's helpful. And then on (inaudible) the qualifications can you give us a sense of how you think that might impact the fourth quarter once that starts to roll through?

Well, it's going to be positive. We would expect year-on-year growth in the quarter from the injectables market. We don't get into that kind of granularity but we would expect year-on-year growth.

Okay. Great. I'll turn it over.

Thank you. Our next question or comment comes from the line of Chris Manuel from Wells Fargo. Your line is open.

A couple of questions I wanted to kind of follow up on or maybe approach from a little different direction. In your prepared remarks, Steve, you referenced that customers weren't growing market share as fast as maybe you had hoped. If I kind of think of the sort of the hallmarks or the pillars of what Aptar has been able to is it's traditionally been able to go in and grow new categories where you are putting dispensing systems or conversion oriented stuff and it's not traditionally been about your particular customers growing market share.

I guess that at your Analyst Day you laid out long-term target that were very similar to where they have been for past years still kind of mid-single-digit organic growth, but does this sort of signal that perhaps maybe there aren't as many categories that you're trying to go into or how would you have us think about where your white space is or just are opportunity for new product expansion or new category expansion is going forward?

You know that's a good question, Chris because I also in my prepared remarks, that's kind of on a macro basis. But we are seeing growth for example in Beauty + Home and facial skin care. You go into the pharma the ophthalmic market for us is growing significantly we're seeing new applications coming be back in terms of food and a beverage so, you know, those markets I still you're right we're going to end up still having certain fields that we're going to grow in, but I can't come back and ignore macro standpoint of P&Gs of those type of customers are flattening.

A lot of those bigger growth opportunities are going to affect us. And we are gaining incremental business on a lot of those smaller market, but in the overall market is slow it has an impact on our overall sales.

All right. Another follow-up kind of along is these lines. Are you seeing some of the new products and things that you're launching more cannibalizing existing stuff that you have today? Meaning the next-generation or next-generation or do you still see considerable amount of whitespace? I think about walk up and down the aisles of a grocery store and still seeing a lot of screw on, screw off caps or sample sizes when you would look at personal care products. Other things of that nature that don't that are still in my mind a lot of whitespace for dispensing systems.

Yes. I would say it goes back to your second. We still see quite a bit of whitespace. Certainly some of the products that we come out with will enhance other products that we're already on, but I would still say the majority of what we have got are new areas. Again going back to skin care or facial care or color cosmetics, ophthalmic. Those are all growth areas in terms of products that we haven't been on in the past.

That's helpful. One question on your new pharma capacity in the injectables and that piece. It sounds like just a little bit of a timing hiccup of getting some qualifications done. Have you been building a pretty healthy inventory or I shouldn't say inventory or back log there are projects and might we or might we not see the same thing as you get the capacity same sort of qualification issues up in Congers? Or is that a segment that looks if you have been a little bit behind here recently that's a growing segment? We saw that in west results as well. Is that a piece that you can kind of still grow at mid-single-digits?

We think we're very optimistic on the injectable market and so what we saw here is more of a one quarter timing issue rather than a long-term trend. So we continue to be very optimistic about the injectable market. And certainly there's always going to be challenges as you validate new facilities. So I can't tell you that won't ever happen again, but I I'm very comfortable that once we get everything done we'll see an acceleration of the growth because the market is growing frankly.

Thank you. And best wishes. Just one comment for Bob. Go Tribe.

That's terrible.

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

Maybe starting out putting the beverage customer in China the point you mentioned earlier, Steve, how are you feeling generally about kind of your market share positions the level of kind of competition that you're seeing in various segments and are there any other customers where you may have represent a significant enough portion of their business that there could be a consideration of dual sourcing?

Yes. I'm just trying think going back, John. China, that was our biggest single source customer. Certainly we have got significant share on some. And it happens to be more in our food beverage business than it does our Beauty + Home. And in pharma we are also single source, but there's less opportunities to come back and second source so have to that. So I would say again in thinking about it I don't see a major risk in the short-term. There's always an issue as we would look out longer-term.

Okay. And with respect to de-stocking is the inventory de-stocking that we talked about did that really begin in earnest I guess in the third quarter did you notice any of it earlier in the year and is that kind of thing more pronounced in certain parts of your business or certain geographies? I'm thinking maybe some geographies where there's kind of two step distribution on the potential for more inventory in the channel.

I mean we certainly see it a little bit in some of the markets at the end of the second quarter. So if you looked it at the de-stocking we started it to see that a bit in Asia and in the beverage market. When you came back, I think Beauty + Home as our customers have talked about it. And then in the pharma GSK actually announced that they were going to be doing some inventory reduction plans as they got into August and September. So I think it's going to be region to region and product line to our product line for us, but I think it's tended to be more third quarter, fourth quarter, but we started to see a little bit of it in the second.

That's helpful. Last one for me is if some of these trends persist a little bit longer than anticipated, I mean you talked about this kind of the strong cost containment efforts and clearly that's helped you maintain very strong profitability. Can you talk a little bit about your ability to contain costs and what those kind of efforts are focused on as you look ahead over the next couple of quarters? Thank you.

Well, I mean what we take a look at is our whole let's call it our overhead structure in terms of what we have in terms of cost containment. That's something we try to focus on all the time. We're also taking a look at the productivity of our products, how we can improve that to make sure we can as cost-effective from a product costing standpoint.

Again, I would say that I'm really pleased with how the third quarter came out in terms of overall profitability, but I can assure you this is an area that is getting a lot of focus for is you. We want to be very competitive from a cost standpoint and it's critical for us to be successful as we go long-term.

Actually, one quick follow-up if I might. On the pricing and the kind of the input or resin cost dynamic, can you remind me what's the lag time or the timing differential between you incurring some additional costs in the P&L and being able to kind of pass those through from a pricing perspective?

Yes. I think on the resin side and again it's going to be dependent around the world. Tends to be anywhere from 30 to 90 days on the pass-through. When you get to a, let's call it aluminum or some of the other costs, that's a little bit longer out because we ended up basketing that with other materials so that tends to be probably anywhere from four to five months out when we would generally get those passed through.

Great. Thanks. Go Cubs.

Thank you. Our next question or comment comes from the line of Brian Rafin from Morgan.

I joined a little late so pardon me if I have a duplicative question. Steve, could you comment a little bit about through the third quarter Christmas sales kind of in the beauty and care business like perfumes and that type of thing, what are you seeing? What's been kind of your sense of the build-up because a lot of the national retail federation have been very punk on what they see the Christmas growing. And then if you could segment out in the perfume and cosmetics area whether you are seeing any trends differences between kind of the lower end commodity and then the higher end premium side?

You know, Brian, I think when we came back just to give a little bit of reference here our customers again I think are cautious about the Christmas season. I don't think they are negative, but they're more cautious. The good news for us is and I think this has a little bit to do with the third. We had fragrance sales for us or beauty sales as we call them grown about 12% in the second quarter. So we think there was kind of a push-back into the second quarter for the Christmas season and so I think they're filling. So again we're not seeing any negative coming out, but we're not seeing overall bullish. I do think you're seeing probably prestige doing probably a bit better than what we're seeing on the mass side.

Okay. Okay. And then from the standpoint as you look at your digit actuating dispensing system, the technologies, when you look at China or you look at South America, Latin America, how proactive are they at being kind of lead edge kind of first adopters relative to transformational closures and caps and pump type technology versus say more of a European or an American market?

I think Latin America and again this would be somewhat dependent on the market. Certainly in beauty and home they tend to be if not first adopters right at the top of everybody adopting. That's very strong market for them. Asia tends to be a little bit more of a follower. But that's also starting to change because what we found our growth in Asia historically has been with the multi-national and we're now seeing a significant part of growth for us coming at that first tier Chinese national business. So and they are looking for new technologies.

Okay.

Our technology should play well into that.

Yes. Okay. And then your sense, Steve, what is your sense on kind of a going from 2016 to 2017? We have been getting certainly some warnings across conference calls about slowing markets and weakness and trepidation and that. How are you seeing in your earliest kind of forward how are you seeing the container packaging side for you guys going into 2017?

I think we have been prudent as we look at 2014. We're going through the budget now into 2017 and, again, I think we are hoping to see growth, but I think we're prudent going into the end of the year. So it's a little bit early to start commenting on what 2017 looks at, Brian.

Okay. And kind of of the pacing what are you seeing on new customer projects and that type of thing? Are you seeing any changes from the standpoint of things being delayed or sizes of launches or is there anything that you can say as we are here late in 2016?

I think the number much projects we're working on continues to be very high for across all of our market segments. What we have seen is probably a bit more delay in some of the projects coming back out and that's probably been more in the Beauty + Home side. There's been more delay in some of that than what we had originally anticipated. But overall the number of projects and the amount of innovation that our customers are looking for we're still very positive about.

Yes. And then just one final one, Steve, on the (inaudible) acquisition. In the whole injectables area are you seeing the drive from the standpoint of growing market share in kind of established legacy injectable markets or are you seeing much like you do in some of the other cap closure and pump areas where you're actually bring injectable delivery systems to completely different drug delivery systems that maybe haven't used injectables in the past?

I think in this area given that we're one of the smaller players and growing in there market we're seeing more second sourcing opportunities. West is still the largest player in this market and we have adapted some new technologies that will help us grow the business. So it tends not to be just adapting to brand new markets here as we do in some of the others, but we are working within Biologics and our new products coming back to deal with growth in the whole injectable category.

All right. Thanks, guys. Appreciate it.

Thank you.

Thank you. We have one follow-up question from the line of George Staphos from Bank of America. Your line is open.

Hi, guys. Two questions for you. Thanks for taking them. First if you were in our seat and I recognize it's hard to give an average but please give it a shot here. What do you think you're incremental margin might be either in total for the business or by segment? If we hold foreign exchange and input costs flat? And then the second question I had specifically for Bob, when you do look at buy back, Bob, and I know you said it's going to be relatively steady unless there's a dislocation, but do you typically look at intrinsic value for your share in terms of when you would be accelerating or decelerating buy back, or do you look at an earnings yield or just any thoughts that you can share there would be helpful? Thanks, guys and good luck in the quarter.

You know, I'll try to take a little bit on the incremental. Our cost of sales if I take a look on a consolidated basis for Aptar is around 35% is after you takeout cost of goods sold from the selling side. So it's about a 35% gross. I would say if you take a look at that as we add we're probably getting 40% to 45% dropping down because a lot of those are going to be fixed costs. Again, that's a broad average, George so that's the best I can I can give you on the short-term.

So in theory you're doing I don't know 5 to 10 percentage points better on the incremental than your average segment margin? I'm not trying to be too descriptive.

I am giving you at the gross margin. But I would also say that would assume then that should basically drop to the bottom because SG&A is not going to, that won't move up.

Yes.

So that shall that's roughly what we would be looking at.

Okay. Thanks for that.

And then George on the buy back really it's more a reflection of use of cash in the balance sheet and as we said before M&A transactions are really one of our top two uses of cash. So if you remember back in 2014 we were very under levered but going back to the time period we were also looking at some things that we felt from actionable at the time.

When we determined that there wasn't anything on the authority term horizon actionable that's when we pulled the trigger on the ASR. So I think it's more reflection to things obviously we can't talk about, but things we see from a shareholder value perspective looking forward. If there's an actionable deal that makes sense to us strategically like a mega or Stelmi, I don't think you'll see us going out and do anything absent of anything like that. That's the one lever we have to kind of remain within our minimum targeted balance sheet capitalization.

Okay. Thank you very much, guys.

You're welcome.

Thank you. We have a follow-up question from the line of Chris Manuel from Wells Fargo. Your line is open.

Just one last question from the Cleveland contingency.

No. We shouldn't take this call.

No worry. It's been a long time since we have had a baseball title here, too. But with respect to just the insurance stuff so you were off a million four or so this quarter. Is your anticipation you made some comments earlier about it might still be bumpy here. Is your anticipation that this gets recovered? Is there anything that might it still be a negative this quarter or do you get it covered have recovered this quarter? How are you thinking about that?

Chris, it's purely a timing matter. So if you look back to the fire we had in Brazil, we're going to have quarters where the costs or the business interruption side of the business exceed the reimbursements from the insurance company, but we're fully covered for business interruption and all the fire damage and repair to rebuild the facility. So we're going to have some quarters where it will be a negative and there will be some quarters where it will be a positive, but in the end net/net when everything is done we shouldn't see any negative impacting as related to the fire. To it's purely a timing matter.

Okay. What is the sort of ETA, if you will, of when everything is back to normal there when you get, I'm assuming you're rebuilding the facility and that type of stuff?

Yes. We're in the process of starting to rebuild coming up now. We're anticipating that that's going to take us in the middle to the end of the second into the third quarter of next year before we get the facility backup. So there's still quite a bit of lead time going out for that.

Thank you. I'm showing no additional audio questions in the queue at this time. I would like to turn the call back over to management for any closing remarks.

This concludes our call today and I would like to thank everyone for joining us. Thank you.

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