Aptargroup Inc (ATR) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2017 Second Quarter Conference Call. (Operator Instructions) Introducing today's conference call is Mr. Matt DellaMaria, Vice President, Investor Relations. Please go ahead, sir.

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

Information that will be discussed on today's call includes 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. AptarGroup undertakes no obligation to update the forward-looking information contained therein.

I would now like to turn the conference call over to Stephan.

Thanks, Matt, and good morning, everyone. Yesterday, we reported our second quarter results, including core sales growth of 1%. A very important element of our business model is the diversity across our 8 different markets. Solid core growth in our Pharma and Food + Beverage segments offset the decline in our Beauty + Home segment. On an EBITDA basis, while our overall margin was at 20% of sales, on an absolute basis, we were below prior year's strong results, mainly due to decreases in business in certain markets and higher raw material costs. Our earnings per share improved over the prior year, primarily due to certain discrete tax benefits recognized in the quarter that offset the negative operating items. Bob will go into more detail on the specifics impacting our bottom line in a few moments.

While we have anticipated certain headwinds coming into the quarter for our Beauty + Home segment, our performance in a number of our key markets such as fragrance and hair care were below our expectations. The markets in Brazil remain quite fragile due to the tough economy situation. However, we are growing our business in the surrounding Andean region and also in Mexico. Furthermore, in line with several of our large CPG customers, we are facing softer demand in our more established markets.

In addition, this quarter, we experienced operational challenges at the European facility that produces decorative components sold to the beauty market. And this, along with higher raw material costs, negatively impacted the segment's profitability. The operational issues are isolated to this one facility and we are taking action, but expect it will take several months before we are fully back on track.

I can say that we all have a clear sense of urgency and focus on returning Beauty + Home to sustainable, profitable growth. We are building a better understanding of the issues and have taken determined actions on several fronts, including people and operations across the Beauty + Home footprint. For example, we're in the process of recruiting a new regional leader for North America and the head of sales in North America. We've appointed a business development leader for the Asian region outside of China, and we will continue to strengthen our leadership bench throughout Asia.

We have started to implement a commercial excellence program focused on strengthening our sales and marketing capability, and we intend to roll this out across each region. Based on the initial success in Beauty + Home, we will be extending the program to other segments over time. We have also initiated a targeted effort to raise efficiencies at some of our Beauty + Home facilities.

We're not in a position today to discuss this in greater detail, but we will provide an update at our Analyst Day on September 7, which will be webcast via our website. These initiatives will take some time to generate meaningful results. In the meantime, we remain fully committed to our customers and our markets. There are a number of very attractive long-term growth opportunities, and we plan to actively participate in this growth, particularly in facial skin care, color cosmetics, and in high-growth economies where we are underrepresented today. We will continue to bring affordable innovation and solutions to the market.

For example, in the past quarter, we helped AVON, L'Occitane and O Boticário launch several new fragrances. Our Airless serum dropper was also featured on new skincare serums in Latin America. And in addition, we have helped customers such as Estée Lauder and Shiseido to launch new makeup products in North America, featuring our custom and soft actuation cosmetic pumps.

Now turning to our Pharma segment. It was another very strong quarter, with core sales increasing across each end market. We saw strong demand from the consumer health care segment and participated in new eye care launches for Bayer and for the Abbott-owned company, Laboratorios Synthesis, featuring our Ophthalmic Squeeze Dispenser.

In the prescription market, our nasal spray pump was featured on the generic version of Nasonex in Canada, and our cost-effective Twister dry powder inhaler, which was introduced China in 2015, has entered the market now in India for the first time with an asthma and COPD medication. We continue to validate our recently added capacity in Congers, New York with our customers in the U.S. injectables market. We expect to begin commercially supplying from this facility by the end of the year.

In addition, we are progressing in our partnership with Kali Care to develop real-time medication management technology using digital monitoring systems and with Propeller Health to develop a fully integrated connected metered dose inhaler. These investments and partnerships are part of our long-term strategic vision for the segment.

Our Food + Beverage segment also delivered a good quarter, with core sales growth across each end market. In the beverage market, we saw strong demand for our sports closures featured on bottled water, and we participated on new launches in Europe, Brazil and China. We are experiencing lower volumes relatively to a year ago through a single, specific large beverage customer in China. We expect this to continue until the end of the year when we begin to lap the situation.

We also continue to see opportunities in Asia, including the infant nutrition market. Our flip top closure with a built-in scoop was featured on Yili's brand for infant formula for the Chinese market. Also in the food market, our closures with our flow-controlling SimpliSqueeze valves are featured on a new line of salad dressings by Hidden Valley. Finally, as announced in May, we have partnered with GualapackGroup, a leader in premade spouted pouches, to bring a premade no-spill pouch -- no-spill spouted pouch solution to the European market. This confirms our long-term commitment to bring additional convenience to consumers and new innovative solutions to our customer.

As we look to the third quarter, our Beauty + Home segment is expected to continue to face headwinds in North America and Brazil. In addition, we now anticipate some risk with our business in China due to the recent record heat wave near Shanghai that is resulting in energy restrictions and in some cases, outages. This impacted our facilities and also certain supplier facilities. It is a bit early to estimate the effect, but we are watching the situation closely.

The business pipeline in our Pharma segment remains rock-solid. Also, it will likely be difficult to report -- although it will likely be difficult to report year-on-year growth due to some significant custom tooling sales that occurred in the prior year third quarter. We anticipate that our Food + Beverage segment will continue to grow over the prior year as we further leverage our capabilities and technologies across different categories.

Even though we face certain near-term challenges, we are optimistic about our long-term growth opportunities across each business segment. We remain dedicated to executing our growth strategy, investing for the future and helping our customers to grow their businesses with our innovative dispensing solutions.

At this time, I will turn it over to Bob, who will review some of our financial details.

Thank you, Stephan, and good morning, everyone. I'll briefly cover a few details, and then we will turn it over for questions.

In looking at how our business segments performed in the quarter, I'll start with our Beauty + Home segment. As you saw in our press release, core sales, keeping currencies constant, decreased 4%. The majority of the decrease was related to the operational issues at our decorative component facility and challenges in Brazil. Looking at sales growth by market on a constant currency basis, core sales to the beauty market decreased 4%. This was mostly due to the decreases in sales of decorative components. Core sales to the personal care market decreased 3%, due to softness in demand for our pumps and closures used with hair care and body care products. And core sales to the home care market decreased 10% from the prior year as sales of insect repellent due to the Zika virus in the prior year quarter did not repeat this quarter.

When we look at profitability, I will be referring to EBITDA margins. And in the quarter, our Beauty + Home segment achieved an EBITDA margin of 14%, which is below the prior year's margin of 16%. Margins were negatively impacted by higher material costs, including about $2 million related to the timing of resin cost pass-throughs and about $1 million related to higher metal component costs. It's important to note that resin costs increased in Europe sequentially from Q1 and remain materially higher than a year ago.

Our Pharma segment had an excellent quarter, achieving core sales growth of 8% and an EBITDA margin of 35%. Core sales to the prescription market increased 4%, primarily due to increased demand for our metered dose inhalers for asthma and COPD and our nasal spray devices for central nervous system treatments. Core sales to the consumer health care market increased 16%, driven by strong demand for spray systems for decongestants and nasal saline rinses and increased demand for our Ophthalmic Squeeze Dispenser. And finally, core sales to the injectables market increased 8%.

It was also a very good quarter for our Food + Beverage segment, where core sales increased 7%. Our EBITDA margin decreased from 22% a year ago to 20%, primarily due to higher resin costs; higher professional fees, each about $0.5 million negative impact; and the mix of the business compared to the prior year.

Looking at each market. Core sales to the food market increased 10%, primarily due to strong demand for closures for condiments and granular foods. And core sales to the beverage market increased 5%, primarily due to strong demand for our closures used on bottled water. Cash flow from operations in the quarter was approximately $111 million. Capital expenditures were approximately $32 million, and our free cash flow was approximately $79 million compared to $40 million a year ago. The primary reason for the increase in cash flow relates to improvements in working capital.

Looking at our balance sheet capitalization. On a gross basis, debt to capital was approximately 37%, while on a net basis, it is approximately 25%. And we remain slightly under 1x levered compared to our trailing 12-month adjusted EBITDA. As part of our strategy to improve the balance sheet capitalization of our operations in Europe and to take advantage of the favorable interest rate environment there, subsequent to the end of the quarter, we borrowed approximately $800 million in euro-denominated debt and repatriated an additional $750 million in cash to the U.S. The decision to execute this borrowing and repatriation was taken in the second quarter, and this triggered a tax liability, which was offset by deductible losses related to foreign currency exchange contracts that were put in place related to the repatriation. The net effect of both these tax items was a tax benefit of approximately $0.05 in the quarter.

An additional tax benefit that we recognized in the quarter related to stock-based compensation, and this has to do with the new accounting principle around stock option exercises. We spoke about this item in the first quarter and the difficulties around forecasting the impact as there are several variables that cannot be predicted. One is the share price, and another is the volume of employee stock option exercises.

When we developed our second quarter guidance, we had anticipated based on historical exercise volumes that we would likely incur a $0.02 tax benefit, and this was included in our guidance range. In reality, the share price movement in the quarter and the level of exercises, we recognized a $0.09 tax benefit. For the full year 2017, we currently expect depreciation and amortization to be approximately $150 million to $155 million and that our capital expenditures will also be in this range. Lastly, we expect our effective tax rate for the second half of the year to be in the range of 26.5% to 28.5%, which includes an estimate of $0.02 for the potential tax benefit related to stock-based compensation accounting method.

At this time, Stephan and I would be glad to an answer any of your questions.

(Operator Instructions) Our first question or comment comes from the line of Mark Wilde from BMO Capital Markets.

I wondered, Bob, if you can just talk a little bit about that repatriation of cash, the $750 million, what you're targeting that for.

Well, I mean, the essence behind the repatriation really was we've been striving to better balance our asset base and liabilities in Europe, which, as you know, is our largest region in terms of asset base. And with the interest rate environment as it was in Europe, historically low interest rate. And also since cash is generated out of Europe, we weren't earning any interest on the cash that was parked over in Europe. So we took the decision to raise debt at these historically low rates and repatriate the existing cash as well as the additional borrowed money back to the U.S. So at this time, it was really done more for a better balance sheet capitalization of our operations in Europe. And at this moment, we really don't have any immediate need for that. But it ultimately gives us flexibility to redeploy that cash, should we need to. It'll add about net $1 million of additional interest expense each quarter going forward. But again, we felt that, that was worth the price of the flexibility and ultimately, to get back to the balance sheet capitalization that we've been trying to achieve.

Okay, that's helpful. And if I could just for -- as a follow-on, I wondered if you could put a little more color on -- around what's going on in both Brazil and in China.

Well, let me jump in here, Mark. Brazil really has seen next to the normal volatility, quite some political turmoil. As you know, with the question around whether Lula is a candidate for the next election and Temer being on a lot of pressure, which has not helped to get consumer confidence going. So our business is down significantly in Brazil. Fortunately, the rest of Latin America is actually up quite a bit. When you talk to folks in Brazil, they're actually quite optimistic. Next to the fact that Brazilians are always optimistic, I do sense that with the election coming, and it looks like it goes the right way. But as we know from other countries, polling can be deceiving. But certainly, I feel optimism there. But that doesn't take anything away from -- that Q2 has been quite disappointing. When it comes from China, look, this is really -- just the last week, we had a record heat wave in Shanghai, and power was curtailed to -- due to the high need for air conditioning. And our plant has -- had to be shut down for several days. Our supplier plants had to be shut down for several days. That put quite some strain, particularly on the income and supply chain. So even if we can catch up with our own plans, we are not clear on the supply chain. So we just wanted to flag this, and we will watch it closely as it -- the quarter unfolds.

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

This is actually Matt Krueger sitting in for Ghansham. I was wondering if you could provide some added detail on your long-term growth expectations by segment. And then maybe expand on how you can kind of catch up to those long-term expectations in any underperforming segments, maybe Beauty + Home.

Yes. Look, these long-term growth expectations have been set by the company based on a very thorough strategic planning process. The macro trends that underline those are all in effect. Just to key them off, rising population, the higher standards of living, urbanization rates going up dramatically and then, of course, an aging population. So do not expect that we're going to revise those targets in September. Clearly, we are -- with the portfolio we have, I think I've said before, we should be in a mid-single-digit top line growth with the portfolio we have. Now having said that, clearly, we are not happy with the top line growth in Beauty + Home. Quarter 1 looked a little bit better. And clearly, quarter 2, we had some factors, particularly with the decorative facility in France, that took a bite out of top line growth and also, of course, at the bottom line. This is a specialty facility that really addresses the premium high-end markets for beauty, and it's a project-based business. The plant was running at close to capacity. And we have to say, in hindsight -- of course, with the benefit of hindsight, the team underestimated what it would take for a new product launch, which kind of brought the whole facility to its knees and had a knock-on effect to some of the other customer projects. Those issues are addressable. We've added resources. We've established a task force, but it will take some time to work through those issues until we get back to a performance that is acceptable to us. So that I will kind of see as an isolated but significant development that will be with us for a few months. Looking further out, clearly, the beauty market is -- in the Western part -- Beauty + Home market in the Western part is challenged in the traditional retail channels. Our large CPG customers are struggling to create volume. On the other hand, we have a good and frankly, improving pipeline of customer projects. We see the first positive signs from the commercial excellence program that we've kicked off in North America. And of course, you have new consumers entering the categories in the high-growth economies. Particularly also, the luxury market in China is growing quite a bit. So again, I think this problem is solvable, and we certainly have our sleeves rolled up and working hard at that.

That's very helpful. And then can you provide some added detail on the margin decline in the Pharma segment just in terms of what drove the decline? And then how long do you expect lower year-over-year margins to persist?

Well, I mean, as a reminder and speaking to the long-term targets, our long-term EBITDA margin target is 32% to 36% for the Pharma segment. So while it was down 1% compared to last year, we've been at the upper end of that range for some time. Having said that, this quarter, the mix of the business, stronger injectable business, all 3 divisions were up in the quarter. Injectable and CHC were up stronger than Rx. So mix was a part of it. And then you also have some start-up costs on the validation of the U.S. injectable business that we've spoken about.

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

Stephan, just one on the leadership changes in North American Beauty + Home. You talked about recruiting a new regional leader and a new head of sales, if I heard you correctly. Correct me if I'm wrong. But before you got there, there were fairly recent leadership changes in Beauty + Home in North America as well. So can you just kind of help us with precisely what the recent leadership changes have been and now what additional is happening?

Sure. I think there was a change made, I'm looking at Bob, probably 3 years ago.

A couple years ago.

Yes. So I think at that time, the focus was really on raising profitability of the North America segment, which actually was accomplished. Now kind of in the next phase, we really need to get growth going again. And we really felt we needed a higher level of expertise and execution on customer engagement in the sales force. So that's really what led to the change. So independent of the leadership transition, we've implemented a project in the U.S., as you know, around commercial excellence, which focuses particularly on creating transparency of the customer project pipeline and of course, also in the execution on the performance of the commercial leadership, the sales force. And that is in full swing. Now with that also, we want to bring a new leader on board, both for the overall business in North America as well as for the sales force. And those searches are pretty far advanced. I think that's the long and short of it.

So just to be clear, the person you brought in a couple years ago is now going to be replaced?

Yes.

Okay. Bob, just I'm going to move around a little bit here. D&A and the CapEx guidance coming down by a few million, what's behind that?

Honestly, it's a little bit of some projects that are at the end of their depreciable lives. And as we get closer to the back half of the year, we take another midyear review of open capital projects and what's out there. So we try to reassess the timing of when those expenses are going to hit, and it's really nothing more than a reassessment of midyear, where we're at and where we expect to finish with the cash related to those investments.

Okay. Bob, also on the raw material costs. So you mentioned I think $2 million of resin pass-through drags and then $1 million of higher metal in the quarter. So there's a $3 million hit from raw materials, and you're talking about resin costs in Europe being remaining materially higher than a year ago. Can we just talk about what your -- just help us with what's going on with metal costs, resin in Europe and resin in North America and what you're thinking the impact will be in 3Q from all that and perhaps beyond, just to give us any sense of what's going on there.

Sure. So the $3 million you -- as you correctly stated, that relates only to the Beauty + Home segment. We had about another $0.5 million increase in raw material costs in the Food + Beverage side for second quarter as well. So total for Aptar is about $3.5 million. So if we look at what resin has done sequentially Q1 to Q2, while it did come down in the U.S. about 7%, it went actually up 7% in Europe. And due to the weighting of our business being stronger in Europe, obviously, that has a bigger impact on our Beauty + Home business there in Europe. If we look to year-over-year, both the U.S. and Europe are up over the second quarter last year. U.S. is up about 5%, but Europe is actually up over 20% compared to last year. So as we look out in Q3 on a sequential basis, we are seeing resin coming down in the U.S. about 1%. And it looks like Europe, for the time being, is expected to go down essentially the 7% that they went up in the second quarter. But nevertheless, they're still up significantly year-on-year. As far as metal, I don't have any specific comments. It's just been a general, gradual increase, nothing that I can point to that's volatile or anything at this time.

And just based on what you said about Europe resin, would you expect a comparable raw material drag year-on-year in 3Q as you experienced in 2Q?

I mean, compared to Q3, yes. I mean, it'll be -- it's less than it is -- I'm sorry, it's higher cost than it was last year, but not to the magnitude that we've seen in Q2.

In terms of the year-over-year change?

Right.

Okay, okay. So a bit less (inaudible)...

Yes, it depends on where your reference point is if you're comparing Q3 to Q3 or Q3 to Q2.

Right, I got it. I'm just talking about the magnitude of the year-over-year drags, 2Q '17 versus 2Q '16 and then 3Q '17 versus 3Q '16.

Yes. It'll be less than what we experienced in Q2. That was what we're anticipating.

Yes. Just a couple others. Stephan, how would you characterize your discussions with customers these days? And are you -- what kind of caution are you seeing about the macro in North America, Brazil elsewhere? And are you seeing any destocking?

To start with the last question, not really. And of course, conversations with customers are very much dependent on their context. But overall, I would say it's good. We have a rock-solid, attractive pipeline in Pharma. We see good project -- new project activity in Food + Beverage, particularly in water, in infant nutrition but also in condiments. You saw in my earlier remarks. In Beauty + Home, I have to say, we see some first signs that the efforts in North America are bearing fruit with the pickup in discussions for new projects. So that pipeline is refilling. On a macro level, of course, continue to have the volume challenges of, particularly the Western CPG customers, particularly in traditional retail channels. But we also see some good growth from independent brands and of course, the rise of consumer spending in the high-growth economies. Latin America, we talked about Brazil. It's really a tale of 2 worlds. Brazil, having significant challenges, and there is still some cautiousness for this year with some optimism for next year, particularly with the upcoming election. Outside of Brazil, actually, Argentina, Colombia, Mexico are doing quite well. In general, I would say that the need for innovation is also coming back and well recognized. This -- also with the large CPG companies, I mean, they realize that the playbook of just cost out and zero-based budgeting and the race to the bottom has its end. And in the end, if you're a brander player, you need to stand out through innovation. And clearly, that is an area we can help. But we can also help on the cost reduction with light-weighting, higher cavity counts. Just a couple weeks ago, we turned over a large contract just by increasing cavity count and increasing productivity. So innovation is still the core of what we bring to our clients.

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

I was wondering about what percentage of sales in the Beauty + Home segment are generated from China.

I mean, overall, it's pretty much close to the overall average. It's about 7% of the overall Beauty + Home sales.

And do you think, at this point, you're maintaining share in the Beauty + Home segment? Or is competition becoming more of a factor? And did you lose any business from the issues that you had in the plant in France?

Yes. I think if you step back a little bit over the last few quarters or last few years, I think there's no denying that we've lost some share. I mean, part of what we're doing here in the improvement efforts is to make sure we're getting back on the front foot in terms of competing for business, getting the new project pipeline filled. And that is to gain some of that business back. Clearly, when you're not executing and not meeting customers' delivery expectations, that has some consequences. I don't think -- speaking particularly about the French decoration facility. I don't think that's irreparable, but we will have to kind of go hand-in-hand to repair these situations.

And then finally, you may have touched on this, but you had strong core growth in the Pharma segment. Why did that not translate into better leverage for -- on the margin side?

I mean, you got a mix, as I explained earlier, Jason, on the injectables being up 8% and consumer health care being up 16%. And prescription which, as you know, brings a slightly higher margin, was only up 4%. So you got that, plus you've got some of the start-up and validation costs of the new elastomer expansion in Congers that we mentioned.

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

I guess the first question I had, Stephan, you said as far as China goes, you're -- and specific to Beauty + Home, you're watching it and I guess, you'll -- as a company, you'll report back next quarter in terms of what effect there might have been from the power outages. Is there a figure that you -- recognizing it's hard to call, that you've embedded in guidance in terms of what impact you expect from that development?

No. It's really too early to tell. So I mean, if it stays at the 3 days, then I think we'll have a black eye and move on. But we also wanted to put you on notice, if we have another heat wave rolling through, it will start to become significant, yes.

Okay, that's fair. Appreciate that. And then in France, if you can talk about again what the impact of that operational issue was. And if I could get a little bit more color in terms of how you're sort of remediating there, whether you had to add additional equipment or people, that'd be helpful. And then lastly, for my third question, back to China. This beverage issue has been a lingering one. I seem to remember it being discussed on the second quarter call last year. It now, hopefully, has lapped by fourth quarter this year. Recognizing you're talking about customers, et cetera, what makes you most comfortable that it should be lapped by the end of this year?

Okay, talking about France first. The main activity is really to bring additional resources from other facilities and additional capability in terms of people to the plant to work through planning, production, scheduling, raising yields, lowering scrap rate so that the plant can operate at the levels it is designed for and should be able to operate on. I've been in the manufacturing game all my life. If you have a facility that runs pretty close at capacity and it kinds of get a knock in the stomach, it takes some time to settle it all out. Imminently a solvable issue. We're bringing in the right capability to it. Clearly, we haven't planned for that. In hindsight, that was not the best way of going forward, but it is what it is. And now we're addressing it, and we have our sleeves rolled up to address it.

And George, just on the impact, it was -- I just want to add that it was about half of the decrease in the Beauty + Home sales in the quarter.

All right. From a profit standpoint, can you relay -- or should we just assume an average margin on that revenue?

Yes. I would assume an average margin, yes.

And on the China situation, I think we're becoming increasingly transparent on that. Just to also give you a feeling to ring fence it, actually, our beverage business is doing gangbusters when you exclude this one account. As I tell my people, when you exclude the things that don't work, it always looks great. But I want to give you guys a transparency that it is one account that decided to double source. Not knowing a bit what the capacities available are gives us the expectation that this will lap at the end of the year with all the qualifications around that.

Our next question or comment comes from the line of Chip Dillon from Vertical.

The question has to do -- Bob, I had a question about the repatriation. I know that when you look at the broader marketplace, people are sort of sitting on their edges of their seat, hoping there's some kind of corporate tax reform that would involve a tax holiday. And it seems like you guys are moving earlier. Is that because -- I mean, when you look at what the euro's done and the fact that it's down, that maybe you have some translation losses that have -- I think that's what you were sort of suggesting, that might be offsetting the taxability of bringing that money back and therefore, in your case, it's just kind of a moot point because, again, because the cash you've had over there has kind of lost some value in dollar terms. Is that fair?

Well, I mean, Chip, indirectly, it's close to that, but it's a very complicated topic. So our decision to borrow money in Europe and repatriate that back to the U.S. was irrespective of any pending tax legislation. So you are correct in that when we took the decision, the dollar strengthening against the euro put us in a situation that our tax impact on repatriation would be less than it has been historically. That, combined with other factors that you mentioned, which is essentially the cash we had over there earning nothing in Europe and the low borrowing rates I alluded to, made sense to bring that cash back now, and then, obviously, pay the tax on the repatriation. Offsetting that was us locking in at the time we took the decision to hedge the amount that we were going to bring back. Since that time, the euro has re-strengthened, and that essentially led to the loss on the hedge, which gave us the additional tax benefit.

Okay, that's helpful. And then, I guess, the next question is, I know the last 2 sort of significant deals, I sort of remember being Stelmi and then Mega Airless. As you look out in the next couple of years and -- where would we likely see an M&A move at Aptar? And I know that -- take, for example, the Stelmi deal. I remember, when you all bought them, there was sort of this expectation that because maybe the business you were buying wasn't quite as super high-end as what the Pharma business was, it still nonetheless seems to have not created any diminishing -- diminishment in your margins. And I just didn't know if, therefore, because of your ability to assimilate businesses that maybe stand-alone aren't generating the same returns but seem to improve when you buy them. If there's more out there and if it's likely to be in Pharma or just as equally likely to be in the other 2 segments.

Well, maybe let me start, and then, Bob, please build. I mean, first of all, we are active in 8 different markets, and we look for opportunity across the portfolio. And pretty much for opportunity, as you described, every deal you want to do is you look at how can we as the new owner create more value and therefore, make -- have it make sense both for the seller and the buyer. So there is no predisposed bias for one sector versus the other. As you can imagine, if you go to straight auction, assets in the pharma space can't be hedged for enormous prices. And therefore, the value creation on top of that is very limited unless you have a very special situation like we had with Stelmi. But if we find value-creating opportunities in other of our 8 markets, we will act on those also. The M&A pipeline and the M&A environment is obviously active with -- where equity valuations are, but that also makes it a little harder if you're a disciplined acquirer to find those opportunities that will create value.

Yes. The only thing I would add, Chip, is you were spot on when it relates to the Stelmi transaction. I think our Pharma team did an exceptional job in integrating that with the legacy Pharma business and really, since that time, have significantly upgraded the quality of the offerings that we have, the productivity, the value-added features that are now part of the product portfolio. And we're able to improve margins, as Stephan said. Back then, I think we paid little bit less than 10x EBITDA for Stelmi. And as Stephan alluded to, the environment has changed significantly since that time, which then makes finding these types of value-creation M&A deals in Pharma a little bit more difficult. But that doesn't mean that we're not looking in all areas.

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

The first question is around Pharma. I thought your comments in the release were to be a little bit more cautious. I realize you're trying to call out the difficult comp. Can you just get a little bit more granular? I believe there was some tooling in the year-ago period. But is there anything specifically new that is preventing you from seeing the historical growth rates that you -- or more recent growth rates that you've seen?

I mean, on the historical and future, certainly, no sign of concern in the Pharma business. The pipeline is rock-solid. It keeps building. The team is executing. So I think what we really want to highlight is the comparable in the short term.

Yes. And Debbie, just as a reminder, Q3 last year was when we had announced significant tooling sales of about $11 million in our consumer health care business. And then I don't believe at that time we could mention the project, but you now know that that's related to the U.S. Allergan project for the Ophthalmic Squeeze Dispenser. So that was a sizable, one-time type of tooling impact, and that's a little bit what we're calling out.

Okay. And then the growth in Food + Bev, how much of that was just related to -- I think you mentioned the benefit in China with the heat wave. I imagine that's flowing through there. Could you just comment on that? And I just have one quick question on guidance.

Okay. On the heat wave, that actually happened earlier this week, so that would not be in our results. And we certainly bank on that when we gave guidance for Q3. But, clearly, if you have a good summer in general, that's always good for the beverage business. I just want to come back on the Pharma point because, I mean, we all are very happy with the Stelmi deal. We just talked about that. But recognize, we are starting up the Congers facility. So until we -- that is fully operational, we will have the start-up costs, which is also part of the Q3 guidance.

Okay. And just quickly, just with the kind of variability with the stock-based comp accounting. In your guidance, is there any consideration of providing a different type of guidance going forward for us just given that seems to cause some variability in our estimates?

No. It's -- Debbie, it's virtually impossible to predict. I mean, I think sitting back a quarter ago this time, I don't think any of us had expected all the packaging stocks to move up like they did in the quarter, and that, obviously, encouraged employees to exercise option in that quarter. So what we planned to do was kind of look at it on a historical average and give you essentially a 2% tax range guidance going forward. And then I think I mentioned that we're putting in -- baked in that tax rate guidance is essentially $0.02 positive coming from that. But honestly, it could be 0 next quarter. It could be $0.08. A lot is going to depend on what happens.

I mean, on the road, we've been trying to be quite explicit about this effect because, like you all, I find it not easy and maybe not helpful if you really only look at EPS. Because you really have to forecast the stock price, you have to forecast exercise activity of employees. And frankly, you guys are probably better in that game than we are. We are focused on running the company here.

Our next question or comment comes from the line of Chris Manuel from Wells Fargo.

Just a couple questions. One, kind of a follow-up on the Pharma piece just so I understand it right. Did I hear you correctly, that tooling last year was $17 million in the quarter in the Pharma piece? And that ex -- if we make the adjustment for the tooling piece out and make it a more normalized, I don't know, $8-or-so million a quarter, that you would still -- your anticipation is that business is still growing?

I don't have the exact figure of the Q3 Pharma tooling sales. But it was the specific tooling item I called out and that we called out. It was about $11 million in Q3 last year.

Okay. I was looking back to my notes and I think I had like $17 million or something with the total tooling or the change last year but...

It's possible. I mean, we ran about $5 million this quarter, so yes, $17 million in total. The exceptional item that we're calling out is the $11 million on top of the normal tooling sales that we would have.

Okay. So I guess where I'm going with this is you're calling out -- that item is going to make growth difficult. So absent the tooling, is there any reason to expect that growth won't still be present?

No. I mean, we're expecting product sales growth in Q3.

Okay, that's helpful. That's what I was looking for. The second, Stephan, as you kind of look over the portfolio, appreciating I think -- thinking back, it's probably been about 10 years since you bought some of this metal decorative capability. I think it was a piece over in France. Are there other areas in the portfolio where perhaps -- as now you've got to know the operations over the past 6 months or so, that you would say are potentially short on capacity, where -- so you don't have issues or problems like this in the future that you want to potentially build so you don't sink and stay ahead of the curve? How do you feel about capacity across some of your key technologies?

Chris, I just want to jump in for a second. I'll let Stephan comment. I think what's important to note about the decorative business, as Stephan pointed out, it's different than our normal molding, assembly, high-speed, high-volume type activity. It is truly a job shop-type operation with custom decorative, very creative special projects. So it's less a question of equipment capacity. It's more equipment or the capabilities and the complexity of the projects and the technologies that we have. So as Stephan said, even though you could be running fine one time, you get a very complex project that requires a lot more attention to that particular project and it detracts from some of your base business. So very different than our core business in terms of capacities. I mean, we constantly look at capacity utilization across the business. And I think we do a pretty good job of anticipating where we need to add capacities.

Yes. There's really nothing to add here. Of course, the question behind your question is, "Okay, what's going to bite you next?" But no, ahead of time, it's not going to bite us. Having said this, this is not -- this is quite an attractive area in the high premium end of the beauty world. So that's why it has such an impact if we're not executing on it. So and it gets the corresponding attention.

No. That really was the crux of the question is where else might you need something. So I appreciate now that it's a little different process. With respect to the start-up at Congers, is that still kind of in a start-up mode and that it's being expensed? Or when does that kind of flip? And what all stuff will you be doing there besides -- I know you're doing washing and finishing. Are you also going to be do any coatings or things of that nature up there?

So yes, I mean, the -- all the start-up expenses are being expensed, Chris. Yes, I mean, obviously, we had to staff up. We had to hire quality people, technical people, which, obviously, have very different profiles than our base business. We're doing line trials. Stephan and the board and management visited there this month. And in fact, there's a whole team already geared up running line trials and things like that. All of that cost is without any sales.

As a patient who gets their drugs injected intravenously, you will be very happy to understand how much and how thorough the qualification of these things are. I mean, it is many months of quality data, quality verification by the clients, by the FDA. So -- but there's nothing out of the ordinary. It's just part of being in the Pharma business.

Yes. And specifically, Chris, to your question on coatings and things, that's done really at the front end of the process, the mixing and the extruding side. You're correct in saying that we're washing and drying the components and packaging them. But the coating side would be done back in France.

Our next question or comment comes from the line of Brian Rafn from Morgan Dempsey.

Stephan, you mentioned a little -- I caught it very early in your announcement. You said that the -- I think you said the fragrance markets were kind of below your expectations. The weakness -- obviously, you talked about the decorative problems in France. Is the weakness in end market and the mass market volume side? Or is it on the upscale prestige side?

Well, clearly in this quarter, the upscale prestige overshadowed everything else, given this hiccup at the decorating facility. That's really what I was referring to.

Yes. I mean, the prestige -- the actual fragrance pumps in prestige were pretty stable. And -- but we were down on mass pumps which, again, is not related at all to the decorative side that we've talked about.

Yes, got you. Is it a little early to look at expectations for Christmas orders in the fragrance side? Is that maybe more a better third quarter comment?

Exactly. I think we sharpened our pencil to give you guys the best view on quarter 3. Let us give you quarter 4 when we get there.

Okay, all right. Bob, you've mentioned once in the past with the death of the mall, there's not a day that goes by that some retailer is getting a tombstone. You had talked about the -- kind of the opportunity for caps and closures with kind of this Internet retail. You can't send stuff in a box, where a bottle of detergent opens and spills all over somebody's shirt or a book. Any development there? Any ongoing -- as brick-and-mortar kind of dies, what's your sense of new projects in that Internet area?

Yes. I mean, I think across really all our segments, we're seeing increased activity through the e-commerce channel and providing opportunities for using our sealing technologies and locking-type actuators and things like that. Nothing I can specifically speak to right now. But it's definitely something that is becoming much more talked about when we're visiting customers. And certainly, we're actively promoting all the features that we have and learning about all the challenges that our customers are facing in this channel.

Yes. With operations all over the world, I'm going to ask (inaudible) you kind of look at capacity utilization, you look at the overtime shifts you're running, if you looked at the spectrum between the high and low, maybe Pharmaceutic on one side, Beauty + Home on another side and then by geography, what would be the area of your kind of lowest capacity utilization? And what would be the boundary on the highest side?

It's hard. I think, Brian, as we've spoken before, our capacity is very much linked on a product line basis as the assembly equipment tends to be very product line-specific. I would say with the decrease in volume that we've been experiencing in the U.S. over the past couple years, I think our capacity is probably lower in the U.S. We've done everything we can to reduce headcount commensurate with the new volumes. But certainly, I think we're very well situated for any increase in activity to absorb that capacity. I think Europe is generally overall decent shape. And I don't really see any big holes or any bottlenecks at this point. I think it's something that we're comfortable with going forward.

As you know, we've talked about this previously. The only facility we have on the books that we talked about is the Guangzhou facility in China that will open in 2018.

We have a follow-up question from the line of Mark Wilde from BMO Capital Markets.

Stephan, I wondered -- you mentioned last quarter this sales and marketing realignment. You were going to focus more on prospect targeting, new business development. I think you mentioned a little bit of this earlier, but can you just update us on that process?

Yes. Look, the -- like in every other -- in every function, whether it's Bob's function or HR function, sales and marketing also has ways of doing things better or not as good. And when you come in from the outside, one of the benefits is you kind of bring a different view and maybe a calibration of what excellence looks like. So within all the things that need to happen in sales and marketing, clearly, particularly with our growth rate challenge, we are making sure that we have very good transparency and accountability for what is the new project pipeline, what is the new project discussion with customers that we create accountability for project conversion and the project execution. And like in every business, what gets measured gets done. So just providing this accountability and the leadership that then follows up results in people getting back on the front foot with customers. Sometimes, you get thrown out the front door, you come in the back door. It's just a matter of being more mindful around how you go about sales and marketing. And in a more competitive environment, it's important that you do that well.

Our next question or comment is a follow-up from the line of George Staphos.

One last one here. And maybe this is a question better asked on the Analyst Day. But Stephan, if we think about the company, you talked about trying to get on the front foot in terms of growth, and you felt very good about the new product pipeline, specifically in Pharma and Food + Beverage and even Beauty + Home. That's improving. And so that would -- that mix, I would think, would be a benefit to margin. On the other hand, you mentioned that, no doubt, you've lost some market share and you have to regain some momentum, and those would -- those initiatives would tend to depress margin. So as you think about the margin profile for Aptar over the next number of years, do you think the new product pipeline can offset the downward tendency that would naturally exist for any company as it tries to regain market share and fight off competition?

Thank you. Excellent question. Of course, there's a third element that comes into the mix, which is innovation, which we haven't talked about. You focused quite a bit that we make sure that your new introduction have higher profitability to offset the fate that you are quite right to describe. That's the nature of every business. So we'll talk about that more in future interactions. But clearly, we're also fine-tuning our innovation efforts to make sure we continue to stay ahead of the fate and that we maintain our overall profitability. I would just reiterate that there is nothing here that is not eminently addressable. We have clearly tried to be transparent with the issues that have crept up in the quarter 2. We've got our sleeves rolled up and have a sense of urgency to address them. Overall, there's a very good future for the company. We are becoming more customer-centric with a greater focus on region empowerment and building the pipeline. We will aggressively fight back in the Beauty + Home business, getting back on the front foot and taking advantage of growth areas like color cosmetics and facial skincare and e-commerce. We have ample growth opportunities in Food + Beverage and feel very, very good about our Pharma pipeline and already invest today for what will drive revenue 5 to 10 years from now.

Our final question or comment comes -- is a follow-up from the line of Adam Josephson from KeyBanc.

Just one more longer-term question. I know your goal coming in was to accelerate the company's top line growth, and I know it's very early days along those lines. But just when we look at what continues to happen in Beauty + Home with the weak macro conditions, competitive market conditions, those pressures have been -- have existed for 3, 4 years and they don't appear to be going away. So can you just help us understand what exactly, you envision, will be different under your leadership that didn't exist before? Because it seems like you're dealing with the exact same problems that your predecessor did.

Yes, look, let me not contrast but simply say what are the things that we are focused on. And I think we talked about them, very clear, accountability and transparency for new customer projects -- clear focus on new customer projects and that driving growth one regional business unit at a time if you want some more empowerment in the regions. I talked before about -- that we got to be where the growth is, of course, in the profitable segment. That also means more in the high-growth economies. And a clear aggressiveness to make sure we don't yield ground and maintain share. I understand the concern about profitability. But of course, that's the job description. You've got to come with innovation, you got to work the cost side of it to make sure you -- with that share aggressiveness you maintain your profitability. When you come in from the outside, you bring different expectations and calibrations. That also means that you bring -- when you raise expectations, you need to bring additional capability to the task. We've been quite clear about some of the additional people we've brought to the game, whether it's new business development in Asia, whether it's leadership in North America. There are a number of other leadership changes that are more internal that we haven't talked about. So it's also just bringing the right resources to the task at hand. And with that, every improvement effort takes a period of time. I'm not going to give you a deadline, but I certainly haven't done anything like this that hasn't taken at least 12 to 18 months to bear a significant fruit. With that...

Ladies and gentlemen, that concludes our Q&A session. I'd like to turn the conference over to Mr. Tanda for any closing remarks.

Yes. Thanks very much for joining us. I think we had a very good discussion, and see you all in September.

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