Aptargroup Inc (ATR) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to AptarGroup's 2018 Third Quarter Conference Call. (Operator Instructions)

Introducing today's conference call is Mr. Matt DellaMaria, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Howard, and welcome, everyone. Participating on our call today are Stephan Tanda, President and Chief Executive Officer; Bob Kuhn, Executive Vice President, Chief Financial Officer and Secretary. Stephan will begin our call with a brief overview of the third quarter performance and our strategic priorities. Bob will then discuss a few financial details and turn it back over to Stephan before we 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 Aptar'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. Aptar undertakes no obligation to update the forward-looking information contained therein.

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

Thank you, Matt, and good morning, everyone, and thanks for joining us. We do have a slide deck to accompany our comments this morning, and that file is available on our website together with the conference call information.

On Slide 3, you can see the agenda for the call today. I will start with an overview of the third quarter and also reiterate our long-term strategic priorities. Then I will turn it over to Bob for more details on our recent performance.

As you saw yesterday, we reported another quarter of strong top line core growth. Sales growth was robust across each segment and geographic region. Profitability was negatively impacted by certain headwinds, including the impact of rising raw material costs and the typical delay in passing on these increased costs.

In addition to the challenging inflation we are facing, our Beauty + Home margin was also negatively impacted by adopting the now-required accounting approach for highly inflationary environments for operations in Argentina. We also experienced start-up costs at our anodizing facility, which was rebuilt after the fire 2 years ago and costs related to the ramping up of operations at the recently acquired Reboul company.

We are very pleased with the progress of the integration of Aptar's CSP Technologies and the performance of the business. The transformation of our Beauty + Home segment and corporate-wide support function continues to progress well. We are advancing the broad set of initiatives according to plan. And we are starting to see gradual improvement in Beauty + Home, and our team is working hard to improve agility and enhance our customer focus to better position this segment for long-term growth.

Our project pipeline have been very full -- quite full, so I will share only a few examples of some interesting innovations that we are bringing to the market. In each of the following slides, I will highlight just the first example then I will turn it over to Bob.

So turning to Slide 4 and our Beauty + Home segment, we collaborated with a third party which provides image recognition technology that allows consumer to digitally connect with our customers. Together, we created a new sampling package for the Paco Rabanne fragrance by Puig. Consumers can use their phone to scan the fragrance sample, connect with the brand, start a conversation, obtain information and then purchase it directly from their smartphone.

We believe the CPG and Pharma marketplaces will continue to evolve toward greater connectivity between brands and consumers and between many corporate practitioners and their patients. So Aptar will continue the research and invest in new ways to bring value to this evolving space.

Now moving to our Pharma segment on Slide 5, we recently announced the launch of PureHale, affordable and ready-to-use upper respiratory delivery system. This new technology distributes a continuous fine mist of saline solution that gently cleanses, moisturizes and soothes the upper respiratory tract. In combination with our customers' formulations, it could reduce irritations caused by coughs, colds, allergies and respiratory problems.

Looking at our Food + Beverage segment on Slide 6, we are marketing a new technology called Flip Lid, a consumer-friendly dispensing closure designed to promote post-use recycling. In contrast to the traditional flat bottle caps, Flip Lid remains attached to the bottle throughout its life cycle, making the closure more likely to be collected and recycled. This is just a sample of the new innovations that we are very excited to promote.

In addition to discussing our recent performance in new technologies and products, I would now like to take a few minutes to speak about our long-term strategic priorities. Those of you who have followed and invested in Aptar over a longer period know that we manage this business for the long-term.

Slide 7 gives you a nice summary of our strategic priorities. On the left side of the slide, you can see where we're coming from; and on the right side, where we're going to. At the bottom, you will see the underlying megatrends that are most relevant to our business and that we are paying close attention to. In the middle of the slide, you'll see our 5 strategic priorities, a map, if you will, showing the key elements that will take us from today to tomorrow. They are all equally important to our journey.

Our first strategic priority is a relentless focus on profitable organic growth. This focus on growth, driven by agile entrepreneurial business units, has contributed to our year-to-date core sales growth of 9%. While we increase our customer focus and grow in our traditional markets like Europe and the Americas, we are deploying additional resources to capture market share in areas that we believe offer excellent growth potential and where we are underrepresented today, such as Asia.

Xiangwei Gong has recently joined us as President of Aptar Asia and as a member of the Executive Committee. She is a highly experienced leader of B2B and B2C businesses. Based in Shanghai, Xiangwei will focus on accelerated business and organizational development across Asia, along with strengthening our external networks while building further on our strong presence and talent in India and China.

Next is talent and leadership. We are improving our capabilities at all levels. And where necessary, we are bringing in new talent from the outside to complement the experienced teams we have today. Shiela Vinczeller just joined Aptar as our Chief Human Resource Officer. She has a very strong track record of global talent management with a deep experience in diversity and inclusion, and a sharp focus on building effective teams. Sheila will focus on the development of talent including supporting, mentoring, recruiting and career planning, along with implementing programs to further enhance inclusion and diversity at Aptar.

Another priority is to achieve excellence in our core functions of innovation, operations and commercial activities. We aim to be best in class in creating new products and services in manufacturing and in sales and marketing. We have dedicated leaders championing each of these excellent pillars and drive progress across the enterprise to bring us closer to best in class in each discipline.

To achieve our goals, we are fully committed to a successful business transformation. We have laid out the 3-year road map in February, and we are well into our first year and on track to achieve incremental EBITDA of $80 million by the end of 2020.

Lastly, acquisitions and partnerships are part of our balanced capital allocation strategy. Aptar's disciplined acquisition approach is to acquire leading players with innovative technologies and know-how, where we can leverage the breadth of our commercial and manufacturing networks to accelerate growth in that business.

Over the past few years, we have welcomed several innovative companies to Aptar including Stelmi, Mega Airless, Reboul, and most recently, CSP Technologies. We have also expanded our partnership with Propeller Health and made a strategic equity investment in the company as announced earlier this year.

Each of these businesses have strengthened our company with their talented people, innovative cultures and intellectual property that drives our product development. Our 13,000 plus people are fully aligned with these strategic priorities, which clearly outline our focus as a company, and they are the principal drivers of our decisions and investments over the coming years.

With that summary, I will now turn it over to Bob.

Thank you, Stephan, and good morning, everyone. I'll start by sharing some of the details around our third quarter results. If you are following the slides that accompany our remarks, you can refer to Slide 8.

As you saw in yesterday's press release, we reported sales growth of 7% that was comprised of solid core sales growth of 7%, positive acquisition effects of 3%, and negative currency effects of 3%.

Beauty + Home core sales, keeping currencies constant, increased 5% and acquisitions added another 1%. When we look at profitability, our Beauty + Home segment's adjusted EBITDA margin was 12% and was negatively impacted by the headwinds that Stephan highlighted earlier.

Looking at our sales growth by market on a constant currency basis, core sales to the beauty market increased 6%, primarily driven by increased demand for our facial skincare dispensing solutions. Core sales to the personal care market increased also 6%, primarily due to increased sales of our hair care and body care products and increased tooling sales. Core sales to the home care market decreased 2% due to lower custom tooling sales.

Our Pharma segment achieved a core sales growth of 12% and acquisitions added another 5%. All 3 markets reported increased core sales over the prior year. Favorable product mix and production efficiencies coming from the high volumes in the quarter enabled our Pharma segment to achieve an adjusted EBITDA margin of 37%.

Core sales to the prescription market increased 15%, which was driven by increased demand for our innovative nasal drug delivery systems for allergy and central nervous system treatments, which offset lower custom tooling sales. Core sales to the consumer health care market increased 9% due to strong demand for our nasal saline and ophthalmic-related products. Lastly, core sales to the injectables market increased 7% primarily due to increased demand for vial stoppers and syringe plungers for pharmaceutical customers in North America and Asia.

Our Food + Beverage segment's core sales increased 4% and acquisitions added another 4%. This segment reported an adjusted EBITDA margin of 16%. The segment was also impacted by the timing of passing through rising raw material costs and the temporary closing of our Lincolnton, North Carolina facility due to the recent hurricane.

Looking at each market, core sales to the food market increased 14% due to strong sales of our infant nutrition products and higher custom tooling sales. Core sales to the beverage market decreased 8% due to lower custom tooling sales.

Comparable adjusted earnings per share, which excludes acquisition and restructuring costs in the current period, totaled $0.99 per share, and this compares to the prior year adjusted earnings per share, adjusted for comparable exchange rates, of $0.82. I'd like to mention that the prior year currency adjusted earnings per share would have been approximately $0.02 lower had our current tax rate been applied.

On Slide 10, you can see that our adjusted EBITDA for the third quarter rose 14%, and this is driven by the strong performance of our Pharma segment despite some of the headwinds outlined earlier that affected our Beauty + Home and Food + Beverage segments.

Turning to Slide 11 and our outlook. We are expecting earnings per share for the fourth quarter to be in the range of $0.81 to $0.86 per share using an expected tax rate range of 30% to 32%. The midrange of this guidance represents an 18% increase over the prior year adjusted earnings per share, had our current effective tax rate been applied to prior year adjusted earnings per share. Finally, the estimated range for capital expenditures for 2018 is between $190 million to $210 million, and our depreciation and amortization estimate for the year is $170 million.

I have a few other details to share, and then I will hand it back to Stephan. Cash flow from operations in the quarter was approximately $55 million, capital expenditures were approximately $54 million and our free cash flow was approximately $1 million compared to $62 million a year ago. The decrease in free cash flow is primarily due to a pension contribution of $20 million which was made in the quarter and our restructuring and acquisition costs, which negatively impacted reported net income by approximately $26 million.

Looking at our balance sheet capitalization, on a gross basis, debt to capital was approximately 49%, while on a net basis, it was approximately 43%. And we are 2x levered at the end of September compared to our trailing 12 months adjusted EBITDA.

At this time, Stephan will summarize the key takeaways from our remarks today.

Thank you, Bob. Indeed, I'd like to summarize our key takeaways as follows. We had another very solid quarter with strong top line growth. Our profitability in the quarter was good despite some brisk headwinds. Our balance sheet remains in healthy condition and we will continue to pursue a balanced capital allocation strategy.

As you look to the fourth quarter, we expect core growth across our segments even though we will compare with a very strong fourth quarter of last year. We expect inflationary headwinds to continue along with isolated weaker beverage volumes in China. As we address these transitory short-term challenges, we continue to manage this business for the long term. We are focused on our strategic priorities, which position us well for continued long-term profitable growth and value creation.

And with that, I would like to turn it over to your questions.

(Operator Instructions) Our first question or comment comes from the line of George Staphos from Bank of America Merrill Lynch.

I guess, the first question I had is related to that sampler package you discussed, I think for the Paco Rabanne fragrance. What kind of trial, what kind of order rate are your customers seeing with that type of technology, where the customer actually gets it and orders online? It's very interesting to us.

George, thanks for the question. Not sure that I can give you that detail. What we do know is that these samples are very, very popular with our customers and in high demand, contributing to the growth of the Beauty business. And clearly, the connectivity aspect is of high interest as the brands just tried to continue to strengthen their relationship with their consumers. So we've seen good growth with this and we will continue to fuel this part of the business.

Okay. Stephan, my last question kind of a multipart one. Again, I don't mean to pick on too many things because I thought, overall, it's again another really good quarter out of Aptar. But one, the tax guidance again is higher than what materialized in the last quarter, thoughts around that. The beverage closure business in Asia continues to have -- in China, some lingering issues, when does that get resolved? And injectables had a nice rebound off of 2Q in terms of volume, any thoughts around that?

George, I'll take the tax rate guidance. So maybe a little bit of look into how we develop the guidance and why maybe this quarter came in lower than what we had previously guided in July. So we start basically with our mix of our projected income in the quarter country-by-country, and we rough out essentially where we believe the tax rate should be. Generally, that's somewhere around 30%, 31%, 32%, depending on the mix of where you're at. We have the volatility quarter-to-quarter primarily coming from that change in accounting for the stock option exercises that were in the money. And so if you look at the third quarter, the significant decrease from our actual reported Q3 tax rate versus where we thought we were going to be was primarily driven to the volume of stock option exercises in the quarter, and that was also correlated to hitting an all-time record share price. Those things are virtually impossible for us to forecast going forward. So we try to give, I would say, a conservative estimate of where we think the actual rate should be, based on the mix of income earned. We did not put in a lot for Q4 because, typically, you would think with the slight pullback in the share price and as you approach year-end, people who are thinking of exercising oftentimes delay until January to avoid the tax consequences. So our logic to guiding to a higher tax rate is really guiding us back to more of a normalized tax rate with very little embedded in there on options.

That's very clear. That gives us at least guideposts to model it for ourselves.

Yes. On the China beverage, I'm afraid I cannot be as precise as Bob here. This is related to one single customer who -- where we have limited visibility, and we give you the best information we can. The general growth picture in China continues to be very strong not only in food, but also in beverage. But this one client provides us limited visibility and we call it as we see it and experience it. To your last point on injectables, we see -- clearly continue to see good growth in that market, and I think our growth is in line with the market growth.

Our next question or comment comes from Ghansham Panjabi from Baird.

This actually Matt Krueger sitting in for Ghansham. So first off, can you talk a little bit about what you are seeing in terms of demand across the emerging markets, along with how your customers appear to be handling inventories across these regions?

Yes. We have to separate a little bit demand for our invoicing as opposed to end-use demand. When you look at the premium and luxury end of the Beauty business, they see very strong demand. I was just last month in -- at the major trade fair in Monaco for this space, and all customers are extremely bullish about their demand picture, driven particularly by the Asian luxury consumer and by travel retail, and that continues to drive part of our Beauty business. The -- is there inventory buildup in the supply chain, you can, of course, be cautious about that. On the other hand, to be honest, the supply chain in that whole part of the business is pretty much under stress and people cannot keep up with demand. So I think that will put a dampener on the inventory build. We also saw some decent growth in Latin America as you saw. And hopefully, with the elections behind us, both in Mexico and Brazil, there seems to be calmer waters ahead. At least people have certainty now what the future government will look like.

Great. And then my second question is kind of looking forward to 2019 or even just the fourth quarter. What are you seeing or what are your expectations in terms of margin recovery across your Beauty + Home and Food + Beverage segments? And then can you talk a little bit about what type of volume outlook we should expect given the higher -- the more difficult comparisons and the higher growth that you saw across 2018, across each of your segments?

Yes. I think we're clearly committed to the guidance ranges that we've provided you for each segment. And we already signaled you for quarter 4, despite the fact that we're comparing to a quarter where we had double-digit growth rates, that we continue to see good growth. Clearly, the transformation in the Beauty + Home business as well as some of the corporate functions is progressing well, and we expect the margin improvement to come into those businesses. I know it's a mixed bag with the transitionary items. But if you add up some of the things that Bob mentioned, you see the beginning of some margin expansions in the Beauty + Home business, and we certainly will want to see that continue and expect that to continue.

That's helpful. And then, I guess, just following up. You would expect 2019 volumes to be in line with kind of the long-term targets that you laid out despite the comps?

Yes.

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

Bob, Stephan, just you talked about -- I think you classified most of the near-term drags as transitory. Can you just talk about those that you consider transitory and those that perhaps are not transitory?

Well, I think the one that we have limited visibility is, of course, the pace of raw material price increases. As you know, we have a lag there. Now the gap between the costs we experienced, what we pass on in quarter 3 was particularly high, but if raw material prices continue to go up, then that will stay with us. Now the start-up costs in Annecy and the anodizing facility in Reboul, those are clearly transitory. We also still continue to work hard on our decorative facility that we've made great progress wherein our customers are really very pleased with the on time and full performance, but the profitability needs to continue to go up. So I think that kind of gives you a feel that there are very specific situations that we're addressing. We don't start up an anodizing facility every quarter, and we don't acquire Reboul every quarter, so these things we will put behind us.

Sure. Stephan or Bob, just on the cost inflation. Can you talk about what impact it had on your EBIT or EBITDA in 3Q, what you're expecting in 4Q from the lags, et cetera. And just given that oil prices have been tanking in recent weeks, are you confident at all that these drags are going to moderate shortly after 4Q? Or any thoughts along those lines.

So Adam, in the third quarter, the raw material increase hit our Beauty + Home segment by about $4 million, and that would include resin and other raw material costs. And then in Food + Beverage, we estimated there was about $2 million cost inflation hitting the bottom line, all of that would be resin for Food + Beverage. And then, obviously, we've got significant inflationary pressures down in Latin America, primarily Argentina as well.

And you're expecting a comparable drag in 4Q, Bob, from raw material inflation in total?

It's tapering off. I mean, we're seeing a little bit more decrease and stabilization is kind of what we're seeing in the fourth quarter. But it's still a while to get through all the pass-throughs in all the regions and with all the customers.

And just on your CapEx guidance, correct me if I'm wrong, it went up by $25 million last quarter and then you took it right down by the same amount this quarter. So I'm just -- could you help me understand what's going on there?

Sure. So I think the most important thing to understand is coming out of Q2, we actually went back to the board and requested additional capital for some additional transformation projects that we want to initiate. And also due to the strong growth in the first half of the business, we come back with some additional capacity increases and things of such. So that was the cause for raising the guidance. I will tell you that the decrease in what we mentioned here, back down to pre-Q2 is not because we are pulling back on projects, it only relates to the timing of when we're spending the cash related to those projects. So typically, as we get into Q4 -- late Q3, early Q4, we get a more realistic view of the timing of when those cash flows are going to go out. I mean, most of that obviously is spent on the outside with third parties, so it was more the pullback based on where the cash flow is going to land at the end of the year, but we are not reducing or eliminating any projects that we asked the board to approve in July. So it's really a timing issue.

Our next question or comment comes from the line of Edlain Rodriguez from UBS.

In Beauty + Home, we saw a sharp deceleration in the core growth sequentially from 10% to 5%. Like what should we read into that? One. And then two, I mean, given that you're pushing prices to recover cost, I would've expected to see more upside on pricing in there. But what should we read into that?

Yes, I would not read too much into difference from quarter-to-quarter. Clearly, the comps are getting more demanding and we will get closer to our long-term guidance in terms of our growth rates for this business. But we -- as I mentioned earlier, we continue to see brisk demand from our customers. And yes, we are working very hard to pass on not only raw material pricing but also general inflationary increases, but I don't see that to have a major impact on the demand levels.

Okay. In the 7% core growth you reported for the company, like how much of that was volume versus pricing?

For overall? Oh, okay. Overall, on the core sales growth, about -- an estimate is about 2% of that 7% core growth was coming from price increases.

Okay, perfect. And finally, can you remind us again like what's the lag you have in raw materials? Like how much time do you have to recover those costs?

Yes, that's anywhere from 1 month to a quarter. And then, of course, in those cases where you have a quarter, it's a quarter lag at the beginning of the quarter. At the end of the -- by the end of the quarter, it's a 6 months lag. So it depends how you model that, but our agreements are anywhere between monthly and quarterly.

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

This Salvator Tiano sitting in for Chip. So my first question is actually on one of the other innovations you mentioned, the Flip Lid, the -- essentially the cap that's attached. And I was wondering it seems to come, I guess, at an opportune moment with the issues with single-use plastics in Europe. And it seems it would essentially solve the issue of detachable caps that the European Commission is now -- would like to have eliminated. So what is essentially the market opportunity there in Europe that you see? And how easy would it be for competitors to catch up to this innovation and perhaps you would not get the full credit for that eventually?

Yes, you're absolutely right on, that is one of the big propositions, is to eliminate the flat cap that you screw off and then throw away, and somehow it doesn't get into the recycling stream and then ends up in the ocean in the long run. So that's what the Flip Lid is designed to avoid. We certainly are a big proponent of fully recycling of plastics and offer also more and more products with post-consumer recycling content. Now we have some IP around this particular Flip Lid, but we have no illusions that this will be a competitive market. And there might be other solutions, I think it's too early to call out the winners, but we think we certainly have competitive solutions and have good customer interest.

Yes. I would also add that, like the majority of our other products on the surface -- and from a picture, it may look like a pretty simple thing to manufacture, but you can see the extremely low profile of the Flip Lid. And for us, we're always going to be looking to solve some of the issues that are out there, one of which is either it's accidentally opening prematurely when you don't want it, whether you're carrying it around or not. But to counterbalance that, you have the lift force which can't be over excessive either. So there will certainly be competition. We're going to always position ourselves from a quality perspective as the right product offering for -- to meet the consumers' needs.

Okay, perfect. And so my second question is actually on the raw material pass-throughs. And you talked a little bit of the 2% price you saw this quarter and the headwinds. But I was wondering why did it become a more noticeable issue this quarter? I think you've noted minor headwinds in the prior press releases, while pretty much everybody in the industry was having major headwinds. And now that it seems things are cooling off for many other users of plastic resins, it became the bigger headwind. So can you break down a little bit what happened, why the timing was different with Aptar versus its peers?

Well, I think the main reason is really what are the detailed mechanics of the agreements with each customer and what is the time lag. In our case, the scissor just opened particularly wide, so to speak, in quarter 3, and agreements for other people might be different. Again, over time, that evens out. But there's nothing special or anything different from prior years. Now the only other thing I would say is probably 1% of the 2% is raw material and the other 1% is general inflationary pricing, yes.

Perfect. And just as a follow-up, a little bit on the buyback situation. I think you normally buy back stock that's in excess of your dilution from stock options. And I was wondering, is the CSP acquisition changing that? And should we expect actually lower -- fewer buybacks for 2018?

So in the quarter, if you look at our balanced capital allocation approach, it's always been based on kind of 4 pillars, right, investing in our own business, in our core growth, dividends, share buybacks and acquisitions. So if you look at what happened in Q3, we raised the dividend $0.02 a quarter, so we increased that. We went back to the board for additional capital authorization to continue to reinvest in our business. And then, of course, we spent $0.5 billion on M&A. So based on that, we took a little bit of a pullback or did not repurchase any shares in the quarter. We'll continue to evaluate that on a balanced approach quarter-to-quarter as we move forward.

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

Just a couple of questions here. So you highlighted your geographic focus in the map, I don't think it's too surprising given your commentary before. But I wanted to understand, is there something about putting this up that you're going to be more aggressive in this approach in 2019? Could you talk about where the customer and end-market opportunity is, specifically in the high-growth economies that you mentioned? And then how much of this effort or how much of the sales growth you highlight for your 2022 target, 4% to 7% sales growth, how much of this approach on your geographic focus is dependent on success with the strategy?

Yes, let me unpack that a little bit. I mean, fundamentally, what we're doing is adding more capability in the region. We have strong people in India and in China, but the region is bigger than that. So Xiangwei is really responsible for the total region, making sure that India and China have the resources they need to grow, but also continue to build relationships and create opportunities for us across the region. The point was that we are managing for the long term and the demographics are inescapable that a lot of the growth is coming from that region and even more going forward. And as you've heard from us through the Beauty segment, already a lot of the demand that's driven -- now we deliver it to our beauty customers in France, but the end product ends up in Asia, and in travel retail in Asia and the Middle East -- is driven from that region and you just need over time to make sure that you have -- are well positioned to capture the demand also in the future. So I think that's a very prudent thing to do. We cannot really break it down for you, okay, what part of that is part of the 2022 because that will be developed over time, but we're quite confident in those targets.

Okay. Second question, just going back to the sustainability discussion. It's a little unclear to me where you're positioned in terms of having the ability to use recycled material and how that works from like functionality perspective with the products that you offer, and then how much your customers are kind of looking at it as part of their sustainability goals.

Yes. So clearly, there has been a shift in the interest level from our customers, where initially, they were mainly interested in what is our environmental footprint, how do we manage our operations. And if you haven't done so, please take a look at our Sustainability Report. That's very extensive. We're probably amongst the leaders in our industry about how we characterize and how we improve our footprint. Now they are becoming more and more interested in having post-consumer recycled content and making commitment around having recyclable products. So we have solutions that are based on partial or 100% post-consumer recycled content. We have solutions where we make the products 100% recyclable if they're not already. Most of our products are 100% recyclable, but in some cases, they have some metal components that we might be able to eliminate. So there's now more interest from customers, obviously particularly in Europe, and that allows us to have more innovation discussions, more innovation projects with customers. So overall, we think this is good for our business, this drives the right conversations. And every time there's a new project with customers, it allows us to show our value, which is differentiated solutions and, obviously, also our repricing opportunity. So this will be a dynamic space for years to come. We fully support the concept of 100% recycling or the circular economy, if you like. And we have solutions to offer, and we'll continue to develop additional solutions.

Okay. If I could just ask one more on CSP. I'm just curious how the integration is going and if there's any, a bit of a different approach now that you've had the asset for a few months now, and if you're still confident in your accretion target from the deal.

Yes. Thanks, Debbie, and I can answer that. We're extremely pleased with the acquisition. The integration started off fast and furious. In fact, we've had several working group sessions with our legacy Aptar folks and some of the key people within CSP. We did that with our Pharma group, we've done -- we're doing that this week with our Food + Beverage group. And we're actually highlighting some potential projects going forward into the future. So the goal here is to develop the pipeline for the future in addition to what CSP's core business is. We're also seeing some various interest from some of our cosmetic R&D people as well. We're even -- back to the PCR question that Stephan just answered, one of the issues that some customers are dealing with is, there are certain odor tainting, we're using post-consumer resin. And we've also moved that over to CSP to see what types of technology in active packaging they could have that could potentially neutralize or change some of those odor issues that are there. So honestly, it's growing terrific. I can only say good things about the excitement, the enthusiasm on both sides, and the collaboration, it's going as well as we can expect. And yes, we're confirming the $0.10 accretion into 2019 on an annualized basis.

Our next question or comment comes from the line of Mark Wilde from Bank of Montreal.

Is it possible, Stephan, to get a sense for what you're seeing in the M&A markets right now. And maybe you could give us a little bit of a sense of just general kind of target areas for you in terms of M&A?

Yes. It continues to be an active environment. And we ask, obviously for each of our segments, kind of the long list and the short list. We're building relationships with the targets, there's no change in that. And if an opportunity becomes actionable, then we are ready to engage, continue to progress down that path. But like with any M&A, it takes 2 to tango, you've got to come to a meeting of the minds on process and value. But we continue to see it as an important pillar of our growth plan.

Okay. And then on the CapEx, the sort of $200 million-ish this year, is it possible to get a sense of just where that's going in broad buckets, both geographically and by business line?

I don't have the breakout at my readiness here. But I would say typically from a segment perspective, it more or less mirrors the sales contribution with slightly less on the Beauty + Home side and slightly more on the Food + Beverage side. And then again I'd remind you, Mark, that we get a significant co-contribution from our pharmaceutical customers. So our actual CapEx in that is a little bit understated. From a regional basis, I think it probably matches fairly similarly to our footprint with a slight exception, we're spending a little bit more in Asia on our Guangzhou facility as we ready that for opening in 2019.

Last question from me is, Stephan, you've been in the chair for almost 2 years now, what's been your biggest surprise at Aptar?

After 2 years, there's not a big surprise. I think I've spoken to it before, very strong reputation in the industry with customers around our technical innovativeness, the ability to always come up with another iteration, with another different take on a gesture. Who would've known that there's 8 different ways to apply a fragrance. So we have a lot of innovative folks to come up with innovation. I would say that's one. Two, not surprised for those who've been with us for a long time as investors, there's a very strong culture that is focused on creating value for the long term, continuity, building talent. And yes, if you don't know the company coming in from the outside, that certainly has been a positive surprise. I think those would be kind of the 2 things I would highlight.

Our next question or comment comes from the line of Daniel Rizzo from Jefferies.

Just a quick question on M&A. You mentioned and have mentioned buying innovation leaders, kind of focusing on that. But I was wondering if you're willing and -- or seeing opportunity to buy companies that just expand your footprint, particularly in Asia? Is that something you would consider? Or it has to be some sort of technologically based acquisition?

Well, each situation is different. And certainly expanding footprint can be attractive. We actually looked at some of those opportunities, and in the end, the equation just didn't work out. But we're always looking for a good fit, and certainly adding footprint in Asia can be a very strong argument. The economics still need to work.

Okay. And then just to revisit, you mentioned the beverage volumes in China. You mentioned one large customer, I'm sorry if you said this, but is that customer destocking or are you walking away from sales? Or what did you say was really happening there?

Well, it's basically one large customer where we have limited visibility, which also implies that I can't really answer your other questions, what exactly -- but clearly, they've developed a second source. And it's a competitive game. And yes, this is the result.

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

Starting -- I guess, going to Slide 7 in the strategic priorities, if I'm interpreting this correctly, it's seeming that more focus on faster-growing economies combined with what seems to be an appetite for probably acquisitive growth in those regions. How do you sort of risk-adjust those investments with issues like you're seeing with your Chinese beverage customer? I mean, how do you think about that, Stephan?

Well, risk is very much correlated to closeness. So if you're a Chinese multinational expanding, the U.S. looks a highly risky venture, the reverse is also true. So I would temper the risk a little bit with how much you understand of the market and the situation. Believe me, we have U.S. customers who are just as demanding as this Chinese beverage customer or more. So this is not a Chinese situation, it's just a commercial situation. So we look at each situation, what is the attractiveness, what is the long-term growth opportunity and how can we best position ourselves for value creation. And again, as I mentioned, demand is there, look at our infant nutrition business that's growing very rapidly. Look at other companies, I might just mention Apple or General Motors, which just announced -- the demand is there, you need to position yourself the best way to capture the demand, and it's not a given that we can forever ship from Europe to meet that demand.

Okay. Bob, you affirmed the $0.10 accretion number, the D&A figure that's sort of embedded in there, is that the $22 million, $23 million range?

Yes, that's correct. That's right in the ballpark.

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

I got on a little late, could you talk a little bit about -- we're heading into the Christmas season, anything on the perfume, fragrance market? And then maybe break out any trends, projects, mass market versus maybe the prestige? And how do you see stockpiling for this Christmas season? There's been a lot of rhetoric about how this is supposed to be a blockbuster Christmas given the economy, so just any kind of overall macro comments.

Well, indeed we see strong demand. I mentioned earlier that most of our luxury premium beauty customers see brisk demand. There are pressures on the supply chain, meaning their ability, and frankly our ability, to keep up with that demand and bring online capacity. So certainly, that hasn't changed. We saw that throughout the year. Now also year-end, it's a little bit different between the West and the East as you know, with different holidays. So I wouldn't see any particular change here. I also want to highlight, we haven't talked much on this call, a very strong demand across our Pharma portfolio. Allergic rhinitis continues to grow, that it is more or less now a year-round allergy season. We see the CNS drugs, including also the -- unfortunately the opioid overdose antidote, continue to grow. And people put more focus on their respiratory health, so saline sprays. Ophthalmic is growing like gangbusters. The dermal space, and we talked earlier about injectables. So we see strong demand across our Pharma portfolio, good demand for Beauty + Home. And with the exception of this one customer we talked about, also a very solid demand in new projects in the Food + Beverage space.

Got you. Talk a little -- you mentioned a little bit about your Asian luxury customer. How culturally centric or specific are design differences from a consumer market maybe in Japan versus one, say, in maybe China or one that might be Singapore or some of the Pacific tigers? How segmented are those markets for specific different packaging solutions?

Yes. Obviously, there's a big difference between the luxury and "Western" customer who -- so let's say, an Estée Lauder or a Clarins who sells into China versus a Chinese or Korean company, they might address different segments. But in the end, you go through the different gestures of how to apply a skincare product or how to apply a fragrance and what customers most look at is innovation. So indeed, the gesture on how to apply a fragrance might be different in the Middle East than it might be in Paris, than it might be in Japan, but we have solutions for each of those different potential solutions. And then we work with customers, whether it's Western customers who sell into those markets or local customers who develop their portfolio. That's one of our strengths, knowing the local markets and then leveraging our global technology platforms to design products that meet that local preference.

Okay. And then are there any first-mover adopters that, Steve, that are -- where others would tend to be followers? Or are there always unique incubations by these different cultures? I'm just trying to think of how a trend might be copied in a dispensing solution from one geography to another? Or do they all have their own separate, separate incubations?

Well, I would say, you certainly have, in recent years, a bigger influence from smaller independent brands, and they tend to pop up often in different locations. So South Korea certainly has become much more important as a source of innovation and a trendsetter than it was in years past. Also in the U.S., it used to be New York, now the West Coast is much more important. So the trend-spotting and who is kind of kicking off a trend is, of course, a science and an art in itself. But that has shifted more and more to small and independent brands. And as you know, then the large CPG companies tend to buy up the more successful ones.

Got you. No, I appreciate it. And then, Bob, of the CapEx, any -- would there be any -- you kind of answered the breakout by geography or product line, would there be any bulk or any sizable projects that you can single out in that $200 million CapEx?

No. I mean, I don't have the breakout. But one thing in the total portfolio of capital and the increase from some of our previous years, we do have about $54 million that is linked to the transformation project. So from that, that's really accounting for the bump-up from, I would say, more of our historical levels of capital expenditures.

Our next question or comment is a follow-up from Mr. George Staphos from Bank of America Merrill Lynch.

Just a quick one here. During earnings season, one of the companies that we track in the industry talked a fair amount about what they're seeing in terms of deodorant packaging mix, and in particular, it seems to be growing in aluminum aerosols, at least from their vantage point. Now obviously, I think they're somewhat biased in that regard. But nonetheless, growing aluminum aerosol cans in some large emerging market, are you seeing that? And just generally, how is the dispensing market evolving relative to different container trends in that market?

Thanks, George. I mean, specifically relating to deodorant, obviously, it all kind of started in that aerosol-type format, and then we hit a little bit of a trend with the non-aerosolized spray. And then more -- I would say in the last 10 years, we got into more of roll-on or a stick-type culture. But again, this is going to vary region -- geographically region-by-region. So if you look down in Latin America, actually one of the strongest markets for aerosolized deodorant is down in Argentina. So to Stephan's earlier point, I mean, we have to have the local people on the ground to follow where those trends are. Certainly, in the last 10 years, you also saw a resurgence in the U.S. with products like -- fragrance-type products like Axe body sprays and things like that. So I mean, I don't know if we're seeing any seismic shift. But definitely, we keep track of what those trends are in each geography.

But if something moved from roll-on or stick, if that's been a trend, to aerosol spray, that would help you even though the traditional aerosol nozzle isn't necessarily your highest-margin business, would that be fair? So broadly, if that's happening, it's a positive relative to what's been a roll-on, stick trend.

Yes.

Our next question or comment is a follow-up from Mr. Adam Josephson from KeyBanc Capital.

Just 2 follow-ups. One, Stephan on the $80 million of incremental EBITDA to which you guided from your cost savings program, I know you were asked this on a previous call, but can you help us at all with the sequencing of those $80 million of savings next year versus '20, versus beyond?

As we discussed in February, basically, we have, as usual in these programs, the costs being almost leading. First, you get to make the investment and then the benefit towards the latter part of it. So it's going to affect -- it's phasing in already as we speak, you see some of the EBITDA benefit from the top line improvements, and the savings are phasing in, in coming quarters, coming year. And then by the end of year 3, you get to the $80 million. We track that very, very detailed -- Bob and I review it on a weekly basis. So those are the initiatives that are on track.

On that point, how much do you expect to realize this year, Stephan, if you're at liberty to say that?

No. I appreciate your asking, Adam. But we haven't broken it down by year.

Okay. No, fair enough. And then just also where we're at in the transformation, Stephan. Before your arrival, obviously, Pharma was always the rock and the other 2 segments were somewhat volatile quarter-to-quarter and year-to-year. Since you got here, obviously, core sales growth has accelerated dramatically across the board. But Beauty + Home and Food + Beverage continue to have profit fluctuations much more so than Pharma. Do you envision that changing post this transformation? Or do you still think that those 2 segments will be more vulnerable to profit volatility than your Pharma business?

Great question. I wouldn't say it's vulnerable. But the fact is, if you're in the consumer-facing businesses, the changes are happening more rapidly. You have a much higher velocity of new product introductions, new projects. That is our lifeblood, frankly. That's how we create value, by coming up with innovations that address emerging needs, being able to work with our customers to refresh their brands. So you have a constant churn in the business by bringing in new product which also allows you to reprice as customers look for ways to differentiate. That's the nature of the game. Also the footprint is a much broader footprint than the Pharma footprint, so you will have many more sites with things going on. Now again, to -- I'll be the first one to criticize transitory cost with my guys. But the fact is that if you have a fire and you restart a facility, that's not something you plan on, and the same for an acquisition ramp-up. But I will be the first one to say, you will always have some activity, some churn in those businesses. For Pharma, we are harvesting the things that have been put in place 5 years ago, and we're planting the seeds for what's going to drop to the bottom line 5 years in, which is a very different business from a cycle point of view even though a lot of the product technology is identical. I mean, as I've said so many times before, when you look at our Pharma operations, it's basically beauty operations with a clean room over it and put to Pharma quality standards. So the unit operations are very similar, but the timelines are completely different.

Our next follow-up question is a follow-up from Mr. Chip Dillon from Vertical Research.

Salvator Tiano again. Just I was wondering -- and you mentioned earlier out of the 7% core sales growth, 2% was pricing. Is there any chance you could provide a breakout by segment or at least some more color to understand whether that helped more or less?

I think the majority of that is going to be coming in the Beauty + Home segment on the pricing side. Certainly with the business waiting in Latin America, trending more towards Beauty + Home, that's where we saw a lot of the inflationary pass-throughs and then -- and slightly less in the Food + Beverage side.

I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to Mr. Tanda for any closing remarks.

Yes, thank you. Thanks, everybody, for joining us. We look forward to discussing more when we meet on the road.

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